UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-3876

HOLLY CORPORATION

 

(Exact name of registrant as specified in its charter)

Delaware		75-1056913
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
100 Crescent Court, Suite 1600
Dallas, Texas		75201-6915
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (214) 871-3555

Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

53,210,016 shares of Common Stock, par value $.01 per share, were outstanding on July 30, 2010.

 

 

HOLLY CORPORATION
INDEX

		Page
PART I. FINANCIAL INFORMATION
Forward-Looking Statements			3
Definitions			4
Item 1. Financial Statements
Consolidated Balance Sheets June 30, 2010 (Unaudited) and December 31, 2009			6
Consolidated Statements of Income (Unaudited) Three and Six Months Ended June 30, 2010 and 2009			7
Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2010 and 2009			8
Consolidated Statements of Comprehensive Income (Unaudited) Three and Six Months Ended June 30, 2010 and 2009			9
Notes to Consolidated Financial Statements (Unaudited)			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosures About Market Risk			48
Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles			48
Item 4. Controls and Procedures			55
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			56
Item 6. Exhibits			59
Signatures			60
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

FORWARD-LOOKING STATEMENTS

References herein to Holly Corporation include Holly Corporation and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s (“SEC”) “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words “we,” “our,” “ours” and “us” refer only to Holly Corporation and its consolidated subsidiaries or to Holly Corporation or an individual subsidiary and not to any other person with certain exceptions where there are transactions or obligations between Holly Energy Partners, L.P. (“HEP”) and Holly Corporation or its other subsidiaries. For periods after our reconsolidation of HEP effective March 1, 2008, the words “we,” “our,” “ours” and “us” generally include HEP and its subsidiaries as consolidated subsidiaries of Holly Corporation with certain exceptions where there are transactions or obligations between HEP and Holly Corporation or its other subsidiaries. This document contains certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of Holly Corporation. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact included in this Form 10-Q, including, but not limited to, those under “Results of Operations,” “Liquidity and Capital Resources” and “Risk Management” in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I and those in Item 1 “Legal Proceedings” in Part II, are forward-looking statements. These statements are based on management’s beliefs and assumptions using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks and uncertainties. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that our expectations will prove to be correct. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in these statements. Any differences could be caused by a number of factors including, but not limited to:

	•		risks and uncertainties with respect to the actions of actual or potential competitive suppliers of refined petroleum products in our markets;
	•		the demand for and supply of crude oil and refined products;
	•		the spread between market prices for refined products and market prices for crude oil;
	•		the possibility of constraints on the transportation of refined products;
	•		the possibility of inefficiencies, curtailments or shutdowns in refinery operations or pipelines;
	•		effects of governmental and environmental regulations and policies;
	•		the availability and cost of our financing;
	•		the effectiveness of our capital investments and marketing strategies;
	•		our efficiency in carrying out construction projects;
	•		our ability to acquire refined product operations or pipeline and terminal operations on acceptable terms and to integrate any existing or future acquired operations;
	•		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.

Cautionary statements identifying important factors that could cause actual results to differ materially from our expectations are set forth in this Form 10-Q, including without limitation, the forward-looking statements included in this Form 10-Q that are referred to above. This summary discussion should be read in conjunction with the discussion of risk factors and other cautionary statements under the heading “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009 and in conjunction with the discussion in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Liquidity and Capital Resources.” All forward-looking statements included in this Form 10-Q and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

DEFINITIONS

Within this report, the following terms have these specific meanings:

     “Alkylation” means the reaction of propylene or butylene (olefins) with isobutane to form an iso-paraffinic gasoline (inverse of cracking).

     “Aromatic oil” is long chain oil that is highly aromatic in nature that is used to manufacture tires and in the production of asphalt.

     “BPD” means the number of barrels per calendar day of crude oil or petroleum products.

     “BPSD” means the number of barrels per stream day (barrels of capacity in a 24 hour period) of crude oil or petroleum products.

     “Black wax crude oil” is a low sulfur, low gravity crude oil produced in the Uintah Basin in Eastern Utah that has certain characteristics that require specific facilities to transport, store and refine into transportation fuels.

     “Catalytic reforming” means a refinery process which uses a precious metal (such as platinum) based catalyst to convert low octane naphtha to high octane gasoline blendstock and hydrogen. The hydrogen produced from the reforming process is used to desulfurize other refinery oils and is the primary source of hydrogen for the refinery.

     “Cracking” means the process of breaking down larger, heavier and more complex hydrocarbon molecules into simpler and lighter molecules.

     “Crude distillation” means the process of distilling vapor from liquid crudes, usually by heating, and condensing slightly above atmospheric pressure the vapor back to liquid in order to purify, fractionate or form the desired products.

     “Delayed coker unit” is a refinery unit that removes carbon from the bottom cuts of crude oil to produce unfinished light transportation fuels and petroleum coke.

     “Ethanol” means a high octane gasoline blend stock that is used to make various grades of gasoline.

     “FCC,” or fluid catalytic cracking, means a refinery process that breaks down large complex hydrocarbon molecules into smaller more useful ones using a circulating bed of catalyst at relatively high temperatures.

     “Hydrocracker” means a refinery unit that breaks down large complex hydrocarbon molecules into smaller more useful ones using a fixed bed of catalyst at high pressure and temperature with hydrogen.

     “Hydrodesulfurization” means to remove sulfur and nitrogen compounds from oil or gas in the presence of hydrogen and a catalyst at relatively high temperatures.

     “Hydrogen plant” means a refinery unit that converts natural gas and steam to high purity hydrogen, which is then used in the hydrodesulfurization, hydrocracking and isomerization processes.

     “HF alkylation,” or hydrofluoric alkylation, means a refinery process which combines isobutane and C3/C4 olefins using HF acid as a catalyst to make high octane gasoline blend stock.

     “Isomerization” means a refinery process for rearranging the structure of C5/C6 molecules without changing their size or chemical composition and is used to improve the octane of C5/C6 gasoline blendstocks.

     “LPG” means liquid petroleum gases.

     “LSG,” or low sulfur gasoline, means gasoline that contains less than 30 PPM of total sulfur.

     “Lube extraction unit” is a unit used in the lube process that separates aromatic oils from paraffinic oils using furfural as a solvent.

     “Lubricant” or “lube” means a solvent neutral paraffinic product used in passenger and commercial vehicle engine oils, specialty products for metal working or heat transfer applications and other industrial applications.

     “MEK” means a lube process that separates waxy oil from non-waxy oils using methyl ethyl ketone as a solvent.

     “MMSCFD” means one million standard cubic feet per day.

     “MTBE” means methyl tertiary butyl ether, a high octane gasoline blend stock that is used to make various grades of gasoline.

     “Natural gasoline” means a low octane gasoline blend stock that is purchased and used to blend with other high octane stocks produced to make various grades of gasoline.

     “PPM” means parts-per-million.

     “Parafinnic oil” is a high paraffinic, high gravity oil produced by extracting aromatic oil and waxes from gas oil and is used in producing high-grade lubricating oils.

     “Refinery gross margin” means the difference between average net sales price and average product costs per produced barrel of refined products sold. This does not include the associated depreciation and amortization costs.

     “Reforming” means the process of converting gasoline type molecules into aromatic, higher octane gasoline blend stocks while producing hydrogen in the process.

     “Roofing flux” is produced from the bottom cut of crude oil and is the base oil used to make roofing shingles for the housing industry.

     “ROSE,” or “Solvent deasphalter / residuum oil supercritical extraction,” means a refinery unit that uses a light hydrocarbon like propane or butane to extract non-asphaltene heavy oils from asphalt or atmospheric reduced crude. These deasphalted oils are then further converted to gasoline and diesel in the FCC process. The remaining asphaltenes are either sold, blended to fuel oil or blended with other asphalt as a hardener.

     “Scanfiner” is a refinery unit that removes sulfur from gasoline to produce low sulfur gasoline blendstock.

     “Sour crude oil” means crude oil containing quantities of sulfur greater than 0.4 percent by weight, while “sweet crude oil” means crude oil containing quantities of sulfur equal to or less than 0.4 percent by weight.

     “ULSD,” or ultra low sulfur diesel, means diesel fuel that contains less than 15 PPM of total sulfur.

     “Vacuum distillation” means the process of distilling vapor from liquid crudes, usually by heating, and condensing below atmospheric pressure the vapor back to liquid in order to purify, fractionate or form the desired products.

Item 1. Financial Statements

HOLLY CORPORATION

(In thousands, except share data)

		June 30,				December 31,
		2010				2009
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (HEP: $2,806 and $2,508, respectively)		$	140,212			$	124,596
Marketable securities			1,216				1,223
Accounts receivable: Product and transportation (HEP: $23,089 and $18,767, respectively)			299,209				292,310
Crude oil resales			463,560				470,145
			762,769				762,455
Inventories: Crude oil and refined products			375,555				259,582
Materials and supplies (HEP: $182 and $165, respectively )			45,591				43,931
			421,146				303,513
Income taxes receivable			—				38,072
Prepayments and other (HEP: $757 and $574, respectively)			59,785				50,957
Current assets of discontinued operations (HEP: $2,195)			—				2,195
Total current assets			1,385,128				1,283,011
Properties, plants and equipment, at cost (HEP: $535,436 and $491,999, respectively)			2,081,558				2,001,855
Less accumulated depreciation (HEP: $(46,374) and $(33,478), respectively)			(411,913	)			(371,885	)
			1,669,645				1,629,970
Other assets: Turnaround costs			52,820				53,463
Goodwill (HEP: $81,602 and $81,602)			81,602				81,602
Intangibles and other (HEP: $74,057 and $77,443, respectively)			94,384				97,893
			228,806				232,958
Total assets		$	3,283,579			$	3,145,939
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable (HEP: $6,340 and $6,211, respectively)		$	1,010,097			$	975,155
Accrued liabilities (HEP: $20,203 and $13,594, respectively)			55,398				49,957
Total current liabilities			1,065,495				1,025,112
Long-term debt (HEP: $476,976 and $379,198, respectively)			805,336				707,458
Deferred income taxes			107,783				124,585
Other long-term liabilities (HEP: $11,984 and $12,349, respectively)			84,209				81,003
Equity:
Holly Corporation stockholders’ equity:
Preferred stock, $1.00 par value - 1,000,000 shares authorized; none issued			—				—
Common stock $.01 par value - 160,000,000 shares authorized; 76,346,432 and 76,359,006 shares issued as of June 30, 2010 and December 31, 2009, respectively			764				764
Additional capital			189,267				195,565
Retained earnings			1,156,427				1,134,341
Accumulated other comprehensive loss			(25,483	)			(25,700	)
Common stock held in treasury, at cost - 23,136,416 and 23,292,737 shares as of June 30, 2010 and December 31, 2009, respectively			(678,092	)			(685,931	)
Total Holly Corporation stockholders’ equity			642,883				619,039
Noncontrolling interest			577,873				588,742
Total equity			1,220,756				1,207,781
Total liabilities and equity		$	3,283,579			$	3,145,939

Parenthetical amounts represent asset and liability balances attributable to Holly Energy Partners, L.P. (“HEP”) as of June 30, 2010 and December 31, 2009. HEP is a consolidated variable interest entity.

See accompanying notes.

HOLLY CORPORATION

(Unaudited)

(In thousands, except per share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Sales and other revenues		$	2,145,860			$	1,035,778			$	4,020,150			$	1,683,808
Operating costs and expenses:
Cost of products sold (exclusive of depreciation and amortization)			1,848,212				879,926				3,572,076				1,391,580
Operating expenses (exclusive of depreciation and amortization)			120,831				78,053				248,375				144,801
General and administrative expenses (exclusive of depreciation and amortization)			15,829				15,088				33,698				26,844
Depreciation and amortization			28,824				25,260				56,581				45,341
Total operating costs and expenses			2,013,696				998,327				3,910,730				1,608,566
Income from operations			132,164				37,451				109,420				75,242
Other income (expense):
Equity in earnings of SLC Pipeline			544				488				1,025				663
Interest income			635				134				694				2,330
Interest expense			(21,023	)			(7,203	)			(38,745	)			(13,442	)
Tulsa Refinery acquisition costs			—				(1,610	)			—				(1,610	)
			(19,844	)			(8,191	)			(37,026	)			(12,059	)
Income from continuing operations before income taxes			112,320				29,260				72,394				63,183
Income tax provision:
Current			34,561				(6,888	)			39,922				2,990
Deferred			5,093				16,210				(16,940	)			18,181
			39,654				9,322				22,982				21,171
Income from continuing operations			72,666				19,938				49,412				42,012
Income from discontinued operations, net of taxes of $253 and $536, respectively			—				1,206				—				2,537
Net income			72,666				21,144				49,412				44,549
Less net income attributable to noncontrolling interest			6,504				6,539				11,344				7,999
Net income attributable to Holly Corporation stockholders		$	66,162			$	14,605			$	38,068			$	36,550
Earnings attributable to Holly Corporation stockholders:
Income from continuing operations		$	66,162			$	14,248			$	38,068			$	35,801
Income from discontinued operations			—				357				—				749
Net income		$	66,162			$	14,605			$	38,068			$	36,550
Earnings per share attributable to Holly Corporation stockholders — basic:
Income from continuing operations		$	1.24			$	0.28			$	0.72			$	0.71
Income from discontinued operations			—				0.01				—				0.02
Net income		$	1.24			$	0.29			$	0.72			$	0.73
Earnings per share attributable to Holly Corporation stockholders — diluted:
Income from continuing operations		$	1.24			$	0.28			$	0.71			$	0.71
Income from discontinued operations			—				0.01				—				0.02
Net income		$	1.24			$	0.29			$	0.71			$	0.73
Cash dividends declared per common share		$	0.15			$	0.15			$	0.30			$	0.30
Average number of common shares outstanding:
Basic			53,206				50,170				53,152				50,106
Diluted			53,408				50,226				53,375				50,189

See accompanying notes.

HOLLY CORPORATION

(Unaudited)

(In thousands)

		Six Months Ended
		June 30,
		2010				2009 (1)
Cash flows from operating activities:
Net income		$	49,412			$	44,549
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			56,581				45,821
SLC Pipeline earnings, net of distributions			100				(598	)
Deferred income taxes			(16,940	)			18,181
Equity based compensation expense			5,440				4,337
Change in fair value — interest rate swaps			1,464				(628	)
Noncontrolling interest in earnings of Rio Grande Pipeline Company			—				922
(Increase) decrease in current assets:
Accounts receivable			(314	)			(316,436	)
Inventories			(117,633	)			(39,579	)
Income taxes receivable			38,072				509
Prepayments and other			(16,828	)			(7,614	)
Current assets of discontinued operations			2,195				—
Increase (decrease) in current liabilities:
Accounts payable			34,863				413,420
Accrued liabilities			5,441				383
Turnaround expenditures			(8,723	)			(31,069	)
Other, net			5,216				9,352
Net cash provided by operating activities			38,346				141,550
Cash flows from investing activities:
Additions to properties, plants and equipment — Holly Corporation			(72,043	)			(127,367	)
Additions to properties, plants and equipment — Holly Energy Partners			(4,487	)			(56,026	)
Acquisition of Tulsa Refinery west facility — Holly Corporation			—				(157,814	)
Investment in SLC Pipeline — Holly Energy Partners			—				(25,500	)
Purchases of marketable securities			—				(165,892	)
Sales and maturities of marketable securities			—				220,281
Net cash used for investing activities			(76,530	)			(312,318	)
Cash flows from financing activities:
Borrowings under credit agreement — Holly Corporation			310,000				94,000
Repayments under credit agreement — Holly Corporation			(310,000	)			(94,000	)
Borrowings under credit agreement — Holly Energy Partners			39,000				99,000
Repayments under credit agreement — Holly Energy Partners			(90,000	)			(81,000	)
Proceeds from issuance of senior notes — Holly Corporation			—				187,925
Proceeds from issuance of senior notes — Holly Energy Partners			147,540				—
Proceeds from issuance of common units — Holly Energy Partners			—				58,355
Repayments under financing obligation — Holly Corporation			(415	)			—
Purchase of treasury stock			(1,308	)			(1,214	)
Contribution from joint venture partner			5,000				8,950
Dividends			(15,901	)			(15,022	)
Distributions to noncontrolling interest			(23,933	)			(14,529	)
Excess tax benefit (expense) from equity based compensation			(1,313	)			2,110
Purchase of units for restricted grants — Holly Energy Partners			(2,276	)			(616	)
Deferred financing costs			(2,655	)			(5,193	)
Other			61				(115	)
Net cash provided by financing activities			53,800				238,651
Cash and cash equivalents:
Increase for the period			15,616				67,883
Beginning of period			124,596				40,805
End of period		$	140,212			$	108,688
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	31,449			$	13,008
Income taxes		$	1,043			$	11,929

⁽¹⁾    Includes cash flows attributable to discontinued operations.

See accompanying notes.

HOLLY CORPORATION

(Unaudited)

(In thousands)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Net income		$	72,666			$	21,144			$	49,412			$	44,549
Other comprehensive income (loss):
Securities available for sale:
Unrealized gain (loss) on available-for-sale securities			(251	)			205				(7	)			(258	)
Reclassification adjustment to net income on sale of marketable securities			—				—				—				236
Total unrealized gain (loss) on available-for-sale securities			(251	)			205				(7	)			(22	)
Other comprehensive income (loss) of Holly Energy Partners:
Change in fair value of cash flow hedge			(1,696	)			4,417				(3,057	)			4,167
Reclassification adjustment to net income on partial settlement of cash flow hedge			1,076				—				1,076				—
Other comprehensive income (loss) of Holly Energy Partners			(620	)			4,417				(1,981	)			4,167
Other comprehensive income (loss) before income taxes			(871	)			4,622				(1,988	)			4,145
Income tax expense (benefit)			(180	)			866				138				733
Other comprehensive income (loss)			(691	)			3,756				(2,126	)			3,412
Total comprehensive income			71,975				24,900				47,286				47,961
Less noncontrolling interest in comprehensive income			6,097				8,935				9,001				10,259
Comprehensive income attributable to Holly Corporation stockholders		$	65,878			$	15,965			$	38,285			$	37,702

See accompanying notes.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: Description of Business and Presentation of Financial Statements

References herein to Holly Corporation include Holly Corporation and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s (“SEC”) “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words “we,” “our,” “ours” and “us” refer only to Holly Corporation and its consolidated subsidiaries or to Holly Corporation or an individual subsidiary and not to any other person with certain exceptions where there are transactions or obligations between Holly Energy Partners, L.P. (“HEP”) and Holly Corporation or its other subsidiaries. For periods after our reconsolidation of HEP effective March 1, 2008, the words “we,” “our,” “ours” and “us” generally include HEP and its subsidiaries as consolidated subsidiaries of Holly Corporation with certain exceptions where there are transactions or obligations between HEP and Holly Corporation or its other subsidiaries. These financial statements contain certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of Holly Corporation. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.

As of June 30, 2010, we:

	•		owned and operated three refineries consisting of a petroleum refinery in Artesia, New Mexico that is operated in conjunction with crude oil distillation and vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the “Navajo Refinery”), a refinery in Woods Cross, Utah (the “Woods Cross Refinery”) and our two refinery facilities located in Tulsa, Oklahoma (collectively, operated as the “Tulsa Refinery”);
	•		owned and operated Holly Asphalt Company (“Holly Asphalt”) which manufactures and markets asphalt products from various terminals in Arizona, New Mexico and Texas;
	•		owned a 75% interest in a 12-inch refined products pipeline project from Salt Lake City, Utah to Las Vegas, Nevada, together with terminal facilities in the Cedar City, Utah and North Las Vegas areas (the “UNEV Pipeline”); and
	•		owned a 34% interest in HEP (which includes our 2% general partnership interest), which owns and operates logistics assets including approximately 2,500 miles of petroleum product and crude oil pipelines located principally in west Texas and New Mexico; ten refined product terminals; a jet fuel terminal; eight refinery loading rack facilities; a refined products tank farm facility; on-site crude oil tankage at our Navajo, Woods Cross and Tulsa Refineries, on-site refined product tankage at our Tulsa Refinery and a 25% interest in a 95-mile, crude oil pipeline joint venture (the “SLC Pipeline”).

We have prepared these consolidated financial statements without audit. In management’s opinion, these consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of our consolidated financial position as of June 30, 2010, the consolidated results of operations and comprehensive income for the three and six months ended June 30, 2010 and 2009 and consolidated cash flows for the six months ended June 30, 2010 and 2009 in accordance with the rules and regulations of the SEC. Although certain notes and other information required by generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC.

Our results of operations for the first six months of 2010 are not necessarily indicative of the results to be expected for the full year.

Accounts Receivable

Our accounts receivable consist of amounts due from customers that are primarily companies in the petroleum industry. Credit is extended based on our evaluation of the customer’s financial condition and in certain

circumstances, collateral, such as a letter of credit or guarantee, is required. Credit losses are charged to income when accounts are deemed uncollectible and historically have been minimal. At June 30, 2010, our allowance for doubtful accounts reserve was $1.7 million.

Inventories

We use the last-in, first-out (“LIFO”) method of valuing inventory. Under the LIFO method, an actual valuation of inventory can only be made at the end of each year based on the inventory levels at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final year-end LIFO inventory valuation.

New Accounting Pronouncements

Variable Interest Entities

On January 1, 2010, new accounting standards became effective that replace the previous quantitative-based risk and rewards calculation provided under GAAP with a qualitative approach in determining whether an entity is the primary beneficiary of a variable interest entity (“VIE”). Additionally, these standards require an entity to assess on an ongoing basis whether it is the primary beneficiary of a VIE and enhance disclosure requirements with respect to an entity’s involvement in a VIE. See Note 3 for additional information on our involvement with HEP, a consolidated VIE.

NOTE 2: Tulsa Refinery Acquisition

On June 1, 2009, we acquired an 85,000 BPSD refinery located in Tulsa, Oklahoma (the “Tulsa Refinery west facility”) from an affiliate of Sunoco, Inc. (“Sunoco”) for $157.8 million in cash, including crude oil, refined product and other inventories valued at $92.8 million. The refinery produces fuel products including gasoline, diesel fuel and jet fuel, serves markets in the Mid-Continent region of the United States and also produces specialty lubricant products that are marketed throughout North America and are distributed in Central and South America. On October 20, 2009, we sold to an affiliate of Plains All American Pipeline, L.P. (“Plains”) a portion of the crude oil petroleum storage, and certain refining-related crude oil receiving pipeline facilities that were acquired as part of the refinery assets for $40 million. Due to our continuing involvement in these assets, this transaction has been accounted for as a financing transaction. See Note 10 for additional information.

On December 1, 2009, we acquired a 75,000 BPSD refinery that is also in Tulsa, Oklahoma (the “Tulsa Refinery east facility”) from an affiliate of Sinclair Oil Company (“Sinclair”) for $183.3 million, including crude oil, refined product and other inventories valued at $46.4 million. The total purchase price consisted of $109.3 million in cash and 2,789,155 shares of our common stock having a value of $74 million. Additionally, we reimbursed Sinclair $8.4 million upon their completion of certain environmental projects at the refinery in July 2010. The refinery produces gasoline, diesel fuel and jet fuel products and also serves markets in the Mid-Continent region of the United States. We are in the process of integrating the operations of both Tulsa Refinery facilities. This will result in the Tulsa Refinery having an integrated crude processing rate of 125,000 BPSD.

In accounting for these combined acquisitions, we recorded $20.6 million in materials and supplies, $139.2 million in crude oil and refined products inventory, $203.8 million in property, plants and equipment, $8.2 million in prepayments and other, $6.3 million in accrued liabilities and $24.4 million in other long-term liabilities. The acquired liabilities primarily relate to environmental and asset retirement obligations. Additionally, we incurred $3.1 million in costs directly related to these acquisitions that were expensed as acquisition costs in 2009.

NOTE 3: Holly Energy Partners

HEP, a VIE, is a publicly held master limited partnership that was formed to acquire, own and operate the petroleum product and crude oil pipeline and terminal, tankage and loading rack facilities that support our

refining and marketing operations in west Texas, New Mexico, Utah, Oklahoma, Idaho and Arizona. HEP also owns and operates refined product pipelines and terminals, located primarily in Texas, that service Alon USA, Inc.’s (“Alon”) refinery in Big Spring, Texas.

As of June 30, 2010, we owned a 34% interest in HEP, including the 2% general partner interest. As the general partner of HEP, we have the sole ability to direct the activities of HEP that most significantly impact HEP’s economic performance. Additionally, since our obligation to absorb losses and receive benefits from HEP are significant to HEP, we are HEP’s primary beneficiary and therefore we consolidate HEP. See Note 16 for supplemental guarantor/non-guarantor financial information, including HEP balances included in these consolidated financial statements. All intercompany transactions with HEP are eliminated in our consolidated balances.

HEP has two primary customers (including us) and generates revenues by charging tariffs for transporting petroleum products and crude oil though its pipelines, by charging fees for terminalling refined products and other hydrocarbons, and storing and providing other services at its storage tanks and terminals. Under our long-term transportation agreements with HEP (discussed further below), we accounted for 82% of HEP’s total revenues for the six months ended June 30, 2010. We do not provide financial or equity support through any liquidity arrangements and /or guarantees to HEP.

HEP has outstanding debt under a senior secured revolving credit agreement and its senior notes. With the exception of the assets of HEP Logistics Holdings, L.P., one of our wholly-owned subsidiaries and HEP’s general partner, HEP’s creditors have no recourse to our assets. Any recourse to HEP’s general partner would be limited to the extent of HEP Logistics Holdings, L.P.’s assets, which other than its investment in HEP, are not significant. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries. See Note 10 for a description of HEP’s debt obligations.

HEP has risk associated with its operations. If a major shipper of HEP were to terminate its contracts or fail to meet desired shipping levels for an extended period time, revenue would be reduced and HEP could suffer substantial losses to the extent that a new customer is not found. In the event that HEP incurs a loss, our operating results will reflect HEP’s loss, net of intercompany eliminations, to the extent of our ownership interest in HEP at that point in time.

2010 Acquisitions

Tulsa East / Lovington Storage Asset Transaction

On March 31, 2010, HEP acquired from us certain storage assets for $93 million, consisting of hydrocarbon storage tanks having approximately 2 million barrels of storage capacity, a rail loading rack and a truck unloading rack located at our Tulsa Refinery east facility and an asphalt loading rack facility located at our Navajo Refinery facility located in Lovington, New Mexico.

2009 Acquisitions

Sinclair Logistics and Storage Assets Transaction

On December 1, 2009, HEP acquired from Sinclair storage tanks having approximately 1.4 million barrels of storage capacity and loading racks at its refinery located in Tulsa, Oklahoma for $79.2 million. The purchase price consisted of $25.7 million in cash, including $4.2 million in taxes and 1,373,609 of HEP’s common units having a fair value of $53.5 million.

With respect to this purchase, HEP recorded $30.2 million in properties and equipment, $49.1 million in goodwill and $0.2 million in other long-term liabilities.

Roadrunner / Beeson Pipelines Transaction

Also on December 1, 2009, HEP acquired our two newly constructed pipelines for $46.5 million, consisting of a 65-mile, 16-inch crude oil pipeline (the “Roadrunner Pipeline”) that connects our Navajo Refinery Lovington facility to a terminus of Centurion Pipeline L.P.’s pipeline extending between west Texas and Cushing, Oklahoma and a 37-mile, 8-inch crude oil pipeline that connects HEP’s New Mexico crude oil gathering system to our Navajo Refinery Lovington facility (the “Beeson Pipeline”).

Tulsa West Loading Racks Transaction

On August 1, 2009, HEP acquired from us certain truck and rail loading/unloading facilities located at our Tulsa Refinery west facility for $17.5 million. The racks load refined products and lube oils produced at the Tulsa Refinery onto rail cars and/or tanker trucks.

Lovington-Artesia Pipeline Transaction

On June 1, 2009, HEP acquired our newly constructed, 16-inch intermediate pipeline for $34.2 million that runs 65 miles from our Navajo Refinery’s crude oil distillation and vacuum facilities in Lovington, New Mexico to its petroleum refinery located in Artesia, New Mexico.

SLC Pipeline Joint Venture Interest

On March 1, 2009, HEP acquired a 25% joint venture interest in the SLC Pipeline, a new 95-mile intrastate pipeline system jointly owned with Plains. HEP’s capitalized joint venture contribution was $25.5 million.

Discontinued Operations

On December 1, 2009, HEP sold its 70% interest in Rio Grande Pipeline Company (“Rio Grande”) to a subsidiary of Enterprise Products Partners LP for $35 million. Results of operations of Rio Grande are presented in discontinued operations.

In accounting for the sale, HEP recorded a gain of $14.5 million and a receivable of $2.2 million representing its final distribution from Rio Grande. The recorded net asset balance of Rio Grande at December 1, 2009, was $22.7 million, consisting of cash of $3.1 million, $29.9 million in properties and equipment, net and $10.3 million in equity, representing BP, Plc’s 30% noncontrolling interest.

Cash flows from discontinued operations have been combined with cash flows from continuing operations for presentation purposes in the Consolidated Statements of Cash Flows. For the six months ended June 30, 2009, net cash flows provided by discontinued Rio Grande operations were $4.1 million.

Transportation Agreements

HEP serves our refineries in New Mexico, Utah and Oklahoma under the following long-term pipeline and terminal, tankage and throughput agreements:

	•		HEP PTA (pipelines and terminals throughput agreement expiring in 2019 that relates to the pipelines and terminal assets that we contributed to HEP upon its initial public offering in 2004);
	•		HEP IPA (intermediate pipelines throughput agreement expiring in 2024 that relates to the intermediate pipelines sold to HEP in 2005 and 2009);
	•		HEP CPTA (crude pipelines and tankage throughput agreement expiring in 2023 that relates to the crude pipelines and tankage assets sold to HEP in 2008);
	•		HEP PTTA (pipeline, tankage and loading rack throughput agreement expiring in 2024 that relates to the Tulsa east storage tank and loading rack facilities acquired in 2009 and 2010);
	•		HEP RPA (pipeline throughput agreement expiring in 2024 that relates to the Roadrunner Pipeline sold to HEP in 2009);
	•		HEP ETA (equipment and throughput agreement expiring in 2024 that relates to the Tulsa west loading rack facilities sold to HEP in 2009); and
	•		HEP ATA (loading rack throughput agreement expiring in 2025 that relates to the Lovington asphalt loading rack facility sold to HEP in March 2010).

Under these agreements, we pay HEP fees to transport, store and throughput volumes of refined product and crude oil on HEP’s pipeline and terminal, tankage and loading rack facilities that result in minimum annual payments to HEP. These minimum annual payments are adjusted each year at a percentage change based upon the change in the Producer Price Index (“PPI”) but will not decrease as a result of a decrease in the PPI. Under

these agreements, the agreed upon tariff rates are adjusted each year on July 1 at a rate based upon the percentage change in PPI or Federal Energy Regulatory Commission (“FERC”) index, but with the exception of the HEP IPA, generally will not decrease as a result of a decrease in the PPI or FERC index. The FERC index is the change in the PPI plus a FERC adjustment factor that is reviewed periodically. Following the July 1, 2010 PPI adjustment, these agreements will result in minimum annualized payments to HEP of $132.4 million.

HEP Equity Offerings

In November 2009, HEP issued 2,185,000 of its common units priced at $35.78 per unit. Aggregate net proceeds of $74.9 million were used to fund the cash portion of HEP’s December 1, 2009 asset acquisitions, to repay outstanding borrowings under HEP’s credit agreement and for general partnership purposes.

Additionally in May 2009, HEP issued 2,192,400 of its common units priced at $27.80 per unit. Net proceeds of $58.4 million were used to repay outstanding borrowings under HEP’s credit agreement and for general partnership purposes.

NOTE 4: Financial Instruments

Our financial instruments consist of cash and cash equivalents, investments in marketable securities, accounts receivable, accounts payable, debt and an interest rate swap. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments.

Debt consists of outstanding principal under HEP’s revolving credit agreement, our 9.875% senior notes due 2017 (the “Holly 9.875% Senior Notes”), HEP’s 6.25% senior notes due 2015 (the “HEP 6.25% Senior Notes”) and HEP’s 8.25% senior notes due 2018 (the “HEP 8.25% Senior Notes”). The $155 million carrying amount of outstanding debt under HEP’s credit agreement approximates fair value as interest rates are reset frequently using current interest rates. At June 30, 2010, the estimated fair value of the Holly 9.875% Senior Notes, HEP 6.25% Senior Notes and HEP 8.25% Senior Notes were $313.5 million, $173.9 million and $148.5 million, respectively. These fair value estimates are based on market quotes provided from a third-party bank. See Note 10 for additional information on these debt instruments.

Fair value measurements are derived using inputs (assumptions that market participants would use in pricing an asset or liability, including assumptions about risk). GAAP categorizes inputs used in fair value measurements into three broad levels as follows:

	•		(Level 1) Quoted prices in active markets for identical assets or liabilities.
	•		(Level 2) Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for similar assets and liabilities in markets that are not active or inputs that can be corroborated by observable market data.
	•		(Level 3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes valuation techniques that involve significant unobservable inputs.

Our investments in marketable securities are measured at fair value using quoted market prices, a Level 1 input. See Note 7 for additional information on our investments in marketable securities, including fair value measurements.

HEP has an interest rate swap that is measured at fair value on a recurring basis using Level 2 inputs. With respect to this instrument, fair value is based on the net present value of expected future cash flows related to both variable and fixed rate legs of its interest rate swap agreement. The measurements are computed using the forward London Interbank Offered Rate (“LIBOR”) yield curve, a market-based observable input. See Note 10 for additional information on this interest rate swap, including fair value measurements.

NOTE 5: Earnings Per Share

Basic earnings per share from continuing operations is calculated as income from continuing operations divided by the average number of shares of common stock outstanding. Diluted earnings per share from continuing operations assumes, when dilutive, the issuance of the net incremental shares from stock options, variable restricted shares and variable performance shares. The following is a reconciliation of the denominators of the basic and diluted per share computations for income from continuing operations:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(In thousands, except per share data)
Earnings attributable to Holly Corporation stockholders:
Income from continuing operations		$	66,162			$	14,248			$	38,068			$	35,801
Average number of shares of common stock outstanding			53,206				50,170				53,152				50,106
Effect of dilutive stock options, variable restricted shares and performance share units			202				56				223				83
Average number of shares of common stock outstanding assuming dilution			53,408				50,226				53,375				50,189
Basic earnings per share from continuing operations		$	1.24			$	0.28			$	0.72			$	0.71
Diluted earnings per share from continuing operations		$	1.24			$	0.28			$	0.71			$	0.71

NOTE 6: Stock-Based Compensation

Holly Corporation

On June 30, 2010, we had three principal share-based compensation plans that are described below (collectively, the “Long-Term Incentive Compensation Plan”). The compensation cost that has been charged against income for these plans was $2.2 million and $2.5 million for the three months ended June 30, 2010 and 2009, respectively, and $4.1 million and $3.8 million for the six months ended June 30, 2010 and 2009, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $0.8 million and $1 million for the three months ended June 30, 2010 and 2009, respectively, and $1.6 million and $1.5 million for the six months ended June 30, 2010 and 2009, respectively. Our current accounting policy for the recognition of compensation expense for awards with pro-rata vesting (substantially all of our awards) is to expense the costs pro-rata over the vesting periods. At June 30, 2010, 1,585,756 shares of common stock were reserved for future grants under the current Long-Term Incentive Compensation Plan, which reservation allows for awards of options, restricted stock or other performance awards.

Additionally, HEP maintains share-based compensation plans for HEP directors and select Holly Logistic Services, L.L.C. executives and employees. Compensation cost attributable to HEP’s share-based compensation plans was $0.3 million and $0.4 million for the three months ended June 30, 2010 and 2009, respectively, and $1.3 million and $0.9 million for the six months ended June 30, 2010 and 2009, respectively.

Stock Options

Under our Long-Term Incentive Compensation Plan and a previous stock option plan, we have granted stock options to certain officers and other key employees. All the options have been granted at prices equal to the market value of the shares at the time of the grant and normally expire on the tenth anniversary of the grant date. These awards generally vest 20% at the end of each of the five years after the grant date. There have been no options granted since December 2001. The fair value on the date of grant for each option awarded was estimated using the Black-Scholes option pricing model.

A summary of option activity and changes during the six months ended June 30, 2010 is presented below:

										Weighted-
						Weighted-				Average				Aggregate
						Average				Remaining				Intrinsic
						Exercise				Contractual				Value
Options		Shares				Price				Term				($000)
Outstanding and exercisable at January 1, 2010			40,200			$	2.98
Exercised			(20,700	)			2.98
Outstanding and exercisable at June 30, 2010			19,500			$	2.98			6 months				$	460

The total intrinsic value of options exercised during the six months ended June 30, 2010 and 2009, was $0.5 million and $0.3 million, respectively.

Cash received from option exercises under the stock option plans was $61,000 and $45,000 for the six months ended June 30, 2010 and 2009, respectively. The actual tax benefit realized for the tax deductions from option exercises under the stock option plans totaled $199,000 and $123,000 for the six months ended June 30, 2010 and 2009, respectively.

Restricted Stock

Under our Long-Term Incentive Compensation Plan, we grant certain officers, other key employees and outside directors restricted stock awards with substantially all awards vesting generally over a period of one to five years. Although ownership of the shares does not transfer to the recipients until after the shares vest, recipients generally have dividend rights on these shares from the date of grant. The vesting for certain key executives is contingent upon certain performance targets being realized. The fair value of each share of restricted stock awarded, including the shares issued to the key executives, was measured based on the market price as of the date of grant and is being amortized over the respective vesting period.

A summary of restricted stock activity and changes during the six months ended June 30, 2010 is presented below:

						Weighted-
						Average Grant				Aggregate
						Date Fair				Intrinsic Value
Restricted Stock		Grants				Value				($000)
Outstanding at January 1, 2010 (non-vested)			284,450			$	31.82
Vesting and transfer of ownership to recipients			(123,307	)			33.84
Granted			192,248				28.44
Forfeited			(2,714	)			28.38
Outstanding at June 30, 2010 (non-vested)			350,677			$	29.29			$	9,321

The total fair value of restricted stock vested and transferred to recipients during the six months ended June 30, 2010 and 2009 was $4.2 million and $3.9 million, respectively. As of June 30, 2010, there was $4.5 million of total unrecognized compensation cost related to non-vested restricted stock grants. That cost is expected to be recognized over a weighted-average period of 1 year.

Performance Share Units

Under our Long-Term Incentive Compensation Plan, we grant certain officers and other key employees performance share units, which are payable in stock upon meeting certain criteria over the service period, and generally vest over a period of one to three years. Under the terms of our performance share unit grants, awards are subject to financial performance criteria.

During the six months ended June 30, 2010, we granted 110,489 performance share units having a fair value based on our grant date closing stock price of $29.17. These units are payable in stock and are subject to certain financial performance criteria.

The fair value of each performance share unit award is computed using the grant date closing stock price of each respective award grant and will apply to the number of units ultimately awarded. The number of shares ultimately issued for each award will be based on our financial performance as compared to peer group companies over the performance period and can range from zero to 200%. As of June 30, 2010, estimated share payouts for outstanding non-vested performance share unit awards ranged from 125% to 130%.

A summary of performance share unit activity and changes during the six months ended June 30, 2010 is presented below:

Performance Share Units		Grants
Outstanding at January 1, 2010 (non-vested)			215,170
Vesting and transfer of ownership to recipients			(38,653	)
Granted			110,489
Forfeited			(3,720	)
Outstanding at June 30, 2010 (non-vested)			283,286

For the six months ended June 30, 2010, we issued 66,483 shares of our common stock having a fair value of $2.2 million related to vested performance share units, representing a 172% payout. Based on the weighted average grant date fair value of $3.2 million, there was $5.4 million of total unrecognized compensation cost related to non-vested performance share units. That cost is expected to be recognized over a weighted-average period of 1.7 years.

NOTE 7: Cash and Cash Equivalents and Investments in Marketable Securities

Our investment portfolio consisted of cash and cash equivalents at June 30, 2010. In addition, we own 1,000,000 shares of Connacher Oil and Gas Limited common stock that were received as partial consideration upon our sale of our Montana refinery in 2006.

At times we also invest available cash in highly-rated marketable debt securities, primarily issued by government entities that have maturities at the date of purchase of greater than three months.

Our investments in marketable securities are classified as available-for-sale, and as a result, are reported at fair value using quoted market prices. Unrealized gains and losses, net of related income taxes, are considered temporary and are reported as a component of accumulated other comprehensive income. For investments in an unrealized loss position that are determined to be other than temporary, unrealized losses are reclassified out of accumulated other comprehensive income and into earnings as an impairment loss. Upon sale, realized gains and losses on the sale of marketable securities are computed based on the specific identification of the underlying cost of the securities sold and the unrealized gains and losses previously reported in other comprehensive income are reclassified to current earnings.

The following is a summary of our available-for-sale securities:

		Available-for-Sale Securities
										EstimatedFair
						Gross				Value
						Unrealized				(Net Carrying
		Amortized Cost				Gain				Amount)
		(In thousands)
June 30, 2010
Equity securities		$	604			$	612			$	1,216
December 31, 2009
Equity securities		$	604			$	619			$	1,223

There were no sales and maturities of marketable securities for the six months ended June 30, 2010. For the six months ended June 30, 2009, we received $220.3 million related to sales and maturities of marketable debt securities.

NOTE 8: Inventories

Inventory consists of the following components:

		June 30,				December 31,
		2010				2009
		(In thousands)
Crude oil		$	115,201			$	60,874
Other raw materials and unfinished products (1)			49,487				42,783
Finished products (2)			210,867				155,925
Process chemicals (3)			22,620				22,823
Repairs and maintenance supplies and other			22,971				21,108
Total inventory		$	421,146			$	303,513

NOTE 9: Environmental

Consistent with our accounting policy for environmental remediation costs, we expensed $0.1 million and $1.6 million for the three months ended June 30, 2010 and 2009, respectively, and $1.5 million and $4.1 million for the six months ended June 30, 2010 and 2009, respectively for environmental remediation obligations. The accrued environmental liability reflected in the consolidated balance sheets was $30.1 million and $30.4 million at June 30, 2010 and December 31, 2009, respectively, of which $23.6 million and $24.2 million, respectively, were classified as other long-term liabilities. These liabilities include $22.3 million of environmental obligations that we assumed in connection with our Tulsa Refinery west facility acquired on June 1, 2009 and our Tulsa Refinery east facility acquired on December 1, 2009. Costs of future expenditures for environmental remediation that are expected to be incurred over the next several years are not discounted to their present value.

NOTE 10: Debt

Credit Facilities

We have a $400 million senior secured credit agreement expiring in March 2013 (the “Holly Credit Agreement”) with Bank of America, N.A. as administrative agent and one of a syndicate of lenders. In June 2010, the agreement was upsized by $30 million pursuant to the accordion feature. The Holly Credit Agreement may be used to fund working capital requirements, capital expenditures, permitted acquisitions or other general corporate purposes. We were in compliance with all covenants at June 30, 2010. At June 30, 2010, we had no outstanding borrowings and letters of credit totaling $65.2 million under the Holly Credit Agreement. At that level of usage, the unused commitment was $334.8 million at June 30, 2010. We entered into an amendment to the Holly Credit Agreement on May 6, 2010 that changed certain financial covenants and provided other enhancements to the agreement.

HEP has a $300 million senior secured revolving credit agreement expiring in August 2011 (the “HEP Credit Agreement”). The HEP Credit Agreement is available to fund capital expenditures, acquisitions and working capital and for other general partnership purposes. At June 30, 2010, HEP had outstanding borrowings totaling $155 million under the HEP Credit Agreement, with unused borrowing capacity of $145 million. HEP’s obligations under the HEP Credit Agreement are collateralized by substantially all of HEP’s assets (presented parenthetically in our Consolidated Balance Sheets). Indebtedness under the HEP Credit Agreement is recourse to HEP Logistics Holdings, L.P., its general partner, and guaranteed by HEP’s wholly-owned subsidiaries. Any recourse to the general partner would be limited to the extent of HEP Logistics Holdings, L.P.’s assets, which other than its investment in HEP, are not significant. During the first quarter of 2010, our previous agreements to

indemnify HEP’s controlling partner to the extent it makes any payment in satisfaction of debt service due on up to a $171 million aggregate principal amount of borrowings under the HEP Credit Agreement were terminated.

Holly Senior Notes Due 2017

In June 2009, we issued $200 million in aggregate principal amount of the Holly 9.875% Senior Notes. A portion of the $187.9 million in net proceeds received was used for post-closing payments for inventories of crude oil and refined products acquired from Sunoco following the closing of the Tulsa Refinery west facility purchase on June 1, 2009. In October 2009, we issued an additional $100 million aggregate principal amount as an add-on offering to the Holly 9.875% Senior Notes that was used to fund the cash portion of our acquisition of Sinclair’s 75,000 BPSD refinery located in Tulsa, Oklahoma.

The $300 million aggregate principal amount of Holly 9.875% Senior Notes mature on June 15, 2017. The Holly 9.875% Senior Notes are unsecured and impose certain restrictive covenants, including limitations on our ability to incur additional debt, incur liens, enter into sale-and-leaseback transactions, pay dividends, enter into mergers, sell assets and enter into certain transactions with affiliates. At any time when the Holly 9.875% Senior Notes are rated investment grade by both Moody’s and Standard & Poor’s and no default or event of default exists, we will not be subject to many of the foregoing covenants. Additionally, we have certain redemption rights under the Holly 9.875% Senior Notes.

HEP Senior Notes Due 2018 and 2015

In March 2010, HEP issued $150 million in aggregate principal amount of HEP 8.25% Senior Notes maturing March 15, 2018. A portion of the $147.5 million in net proceeds received was used to fund HEP’s $93 million purchase of certain storage assets at our Tulsa Refinery east facility and Navajo Refinery Lovington facility on March 31, 2010. Additionally, HEP used a portion to repay $42 million in outstanding HEP Credit Agreement borrowings, with the remaining proceeds available for general partnership purposes, including working capital and capital expenditures.

The HEP 6.25% Senior Notes having an aggregate principal amount of $185 million mature March 1, 2015 and are registered with the SEC. The HEP 6.25% Senior Notes and HEP 8.25% Senior Notes (collectively, the “HEP Senior Notes”) are unsecured and impose certain restrictive covenants, including limitations on HEP’s ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. At any time when the HEP Senior Notes are rated investment grade by both Moody’s and Standard & Poor’s and no default or event of default exists, HEP will not be subject to many of the foregoing covenants. Additionally, HEP has certain redemption rights under the HEP Senior Notes.

Indebtedness under the HEP Senior Notes is recourse to HEP Logistics Holdings, L.P., its general partner, and guaranteed by HEP’s wholly-owned subsidiaries. However, any recourse to the general partner would be limited to the extent of HEP Logistics Holdings, L.P.’s assets, which other than its investment in HEP, are not significant. During the first quarter of 2010, our previous agreement to indemnify HEP’s controlling partner to the extent it makes any payment in satisfaction of debt service due on up to $35 million of the principal amount of the HEP 6.25% Senior Notes was terminated.

Holly Financing Obligation

In October 2009, we sold to Plains a portion of the crude oil petroleum storage, and certain refining-related crude oil receiving pipeline facilities located at our Tulsa Refinery east facility. In connection with this transaction, we entered into a 15-year lease agreement with Plains, whereby we agreed to pay a fixed monthly fee for the exclusive use of this tankage as well as a fee for volumes received at the receiving facilities purchased by Plains. Additionally, we have a margin sharing agreement with Plains under which we will equally share contango profits with Plains for crude oil purchased by them and delivered to our Tulsa Refinery west facility for storage. Due to our continuing involvement in these assets, this transaction has been accounted for as a financing obligation. As a result, we retained these assets on our books and recorded a liability representing the $40 million in proceeds received.

The carrying amounts of long-term debt are as follows:

		June 30,				December 31,
		2010				2009
		(In thousands)
Holly 9.875% Senior Notes
Principal		$	300,000			$	300,000
Unamortized discount			(11,035	)			(11,549	)
			288,965				288,451
Holly Financing Obligation
Principal			39,395				39,809
Total Holly long-term debt			328,360				328,260
HEP Credit Agreement			155,000				206,000
HEP 6.25% Senior Notes
Principal			185,000				185,000
Unamortized discount			(12,277	)			(13,593	)
Unamortized premium — dedesignated fair value hedge			1,617				1,791
			174,340				173,198
HEP 8.25% Senior Notes
Principal			150,000				—
Unamortized discount			(2,364	)			—
			147,636				—
Total HEP long-term debt			476,976				379,198
Total long-term debt		$	805,336			$	707,458

Interest Rate Risk Management

HEP uses interest rate swaps (derivative instruments) to manage its exposure to interest rate risk.

As of June 30, 2010, HEP has an interest rate swap that hedges its exposure to the cash flow risk caused by the effects of LIBOR changes on a $155 million HEP Credit Agreement advance. This interest rate swap effectively converts $155 million of LIBOR based debt to fixed rate debt having an interest rate of 3.74% plus an applicable margin, currently 1.75%, which equaled an effective interest rate of 5.49% as of June 30, 2010. The maturity date of this swap contract is February 28, 2013.

HEP designated this interest rate swap as a cash flow hedge. Based on its assessment of effectiveness using the change in variable cash flows method, HEP determined that this interest rate swap is effective in offsetting the variability in interest payments on the $155 million variable rate debt resulting from changes in LIBOR. Under hedge accounting, HEP adjusts the cash flow hedge on a quarterly basis to its fair value with the offsetting fair value adjustment to accumulated other comprehensive income. Also on a quarterly basis, HEP measures hedge effectiveness by comparing the present value of the cumulative change in the expected future interest to be paid or received on the variable leg of the swap against the expected future interest payments on the $155 million variable rate debt. Any ineffectiveness is reclassified from accumulated other comprehensive income to interest expense. As of June 30, 2010, HEP had no ineffectiveness on its cash flow hedge.

In May 2010, HEP repaid $16 million of the HEP Credit Agreement debt and HEP also settled a corresponding portion of its interest rate swap agreement having a notional amount of $16 million for $1.1 million. Upon payment, HEP reduced its swap liability and reclassified a $1.1 million charge from accumulated other comprehensive loss to interest expense, representing the application of hedge accounting prior to settlement.

Additional information on HEP’s interest rate swap at June 30, 2010 is as follows:

Balance Sheet

Location of Offsetting

Offsetting

Interest Rate Swap

Location

Fair Value

Balance

Amount

(In thousands)

Liability

Cash flow hedge - $155 million LIBOR based debt

Other long-term liabilities

$

11,122

Accumulated other comprehensive loss

$

11,122

In the first quarter of 2010, HEP settled two interest rate swaps. HEP had an interest rate swap contract that effectively converted interest expense associated with $60 million of the HEP 6.25% Senior Notes from fixed to variable rate debt (“Variable Rate Swap”). HEP had an additional interest rate swap contract that effectively unwound the effects of the Variable Rate Swap, converting $60 million of the previously hedged long-term debt back to fixed rate debt (“Fixed Rate Swap”), effectively fixing interest at a 4.75% rate. Upon settlement of the Variable Rate and Fixed Rate Swaps, HEP received $1.9 million and paid $3.6 million, respectively.

For the six months ended June 30, 2010, HEP recognized a $1.5 million charge to interest expense as a result of fair value adjustments to its interest rate swaps. For the six months ended June 30, 2009, fair value adjustments resulted in a $0.6 million decrease to interest expense.

HEP has a deferred hedge premium that relates to the application of hedge accounting to the Variable Rate Swap prior to its hedge dedesignation in 2008. This deferred hedge premium having a balance of $1.6 million at June 30, 2010, is being amortized as a reduction to interest expense over the remaining term of the HEP 6.25% Senior Notes.

NOTE 11: Equity

Changes to equity during the six months ended June 30, 2010 are presented below:

		Holly Corporation
		Stockholders’				Noncontrolling				Total
		Equity				Interest				Equity
		(In thousands)
Balance at December 31, 2009		$	619,039			$	588,742			$	1,207,781
Net income			38,068				11,344				49,412
Dividends			(15,982	)			—				(15,982	)
Distributions to noncontrolling interest holders			—				(23,933	)			(23,933	)
Other comprehensive income (loss)			217				(2,343	)			(2,126	)
Contribution from joint venture partner			—				5,000				5,000
Issuance of common stock upon exercise of stock options			61				—				61
Tax benefit from stock options			199				—				199
Equity based compensation			4,101				1,339				5,440
Tax expense from equity based compensation arrangements			(1,512	)			—				(1,512	)
Purchase of HEP units for restricted grants			—				(2,276	)			(2,276	)
Purchase of treasury stock (1)			(1,308	)			—				(1,308	)
Balance at June 30, 2010		$	642,883			$	577,873			$	1,220,756

During the six months ended June 30, 2010, we repurchased at market price from certain executives and employees 44,475 shares of our common stock at a cost of $1.2 million. These purchases were made under the terms of restricted stock and performance share unit agreements to provide funds for the payment of payroll and income taxes due at the vesting of restricted shares in the case of officers and employees who did not elect to satisfy such taxes by other means.

NOTE 12: Other Comprehensive Income (Loss)

The components and allocated tax effects of other comprehensive income (loss) are as follows:

						Tax
						Expense
		Before-Tax				(Benefit)				After-Tax
		(In thousands)
Three Months Ended June 30, 2010
Unrealized loss on available-for-sale securities		$	(251	)		$	(98	)		$	(153	)
Unrealized loss on HEP cash flow hedge			(620	)			(82	)			(538	)
Other comprehensive loss			(871	)			(180	)			(691	)
Less other comprehensive loss attributable to noncontrolling interest			(407	)			—				(407	)
Other comprehensive income attributable to Holly stockholders		$	(464	)		$	(180	)		$	(284	)
Three Months Ended June 30, 2009
Unrealized gain on available-for-sale securities		$	205			$	80			$	125
Unrealized gain on HEP cash flow hedge			4,417				786				3,631
Other comprehensive income			4,622				866				3,756
Less other comprehensive income attributable to noncontrolling interest			2,396				—				2,396
Other comprehensive income attributable to Holly stockholders		$	2,226			$	866			$	1,360
Six Months Ended June 30, 2010
Unrealized loss on available-for-sale securities		$	(7	)		$	(4	)		$	(3	)
Unrealized loss on HEP cash flow hedge			(1,981	)			142				(2,123	)
Other comprehensive loss			(1,988	)			138				(2,126	)
Less other comprehensive loss attributable to noncontrolling interest			(2,343	)			—				(2,343	)
Other comprehensive income attributable to Holly stockholders		$	355			$	138			$	217
Six Months Ended June 30, 2009
Unrealized loss on available-for-sale securities		$	(22	)		$	(9	)		$	(13	)
Unrealized gain on HEP cash flow hedge			4,167				742				3,425
Other comprehensive income			4,145				733				3,412
Less other comprehensive income attributable to noncontrolling interest			2,260				—				2,260
Other comprehensive income attributable to Holly stockholders		$	1,885			$	733			$	1,152

The temporary unrealized gain (loss) on available-for-sale securities is due to changes in market prices of securities.

Accumulated other comprehensive loss in the equity section of our Consolidated Balance Sheets includes:

		June 30,				December 31,
		2010				2009
		(In thousands)
Pension obligation adjustment		$	(21,774	)		$	(21,774	)
Retiree medical obligation adjustment			(1,749	)			(1,749	)
Unrealized gain on available-for-sale securities			376				379
Unrealized loss on HEP cash flow hedge, net of noncontrolling interest			(2,336	)			(2,556	)
Accumulated other comprehensive loss		$	(25,483	)		$	(25,700	)

NOTE 13: Retirement Plan

We have a non-contributory defined benefit retirement plan that covers most of our employees who were hired prior to January 1, 2007. Our policy is to make contributions annually of not less than the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Benefits are based on the employee’s years of service and compensation.

The retirement plan is closed to employees hired subsequent to 2006 and not covered by collective bargaining agreements with labor unions. To the extent a non-union employee was hired prior to January 1, 2007, and elected to participate in automatic contributions features under our defined contribution plan, their participation in future benefits of the retirement plan was frozen.

Effective July 1, 2010, the retirement plan was closed to all new employees covered by collective bargaining agreements with labor unions. To the extent a union employee was hired prior to July 1, 2010, the employee may elect to continue their participation in the retirement plan or to participate in our defined contribution plan whereby their participation in future benefits of the retirement plan will be frozen.

The net periodic pension expense consisted of the following components:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
						(In thousands)
Service cost — benefit earned during the period		$	1,156			$	990			$	2,298			$	2,079
Interest cost on projected benefit obligations			1,291				1,189				2,577				2,420
Expected return on plan assets			(1,164	)			(922	)			(2,288	)			(1,924	)
Amortization of prior service cost			98				97				195				195
Amortization of net loss			474				1,818				1,098				1,837
Net periodic pension expense		$	1,855			$	3,172			$	3,880			$	4,607

The expected long-term annual rate of return on plan assets is 8.5%. This rate was used in measuring 2010 and 2009 net periodic benefit cost. We contributed $5.4 million the retirement plan in July 2010.

NOTE 14: Contingencies

In May 2007, the United States Court of Appeals for the District of Columbia Circuit (“Court of Appeals”) issued its decision on petitions for review, brought by us and other parties, concerning rulings by the FERC in proceedings brought by us and other parties against SFPP, L.P. (“SFPP”). These proceedings relate to tariffs of common carrier pipelines, which are owned and operated by SFPP, for shipments of refined products from El Paso, Texas to Tucson and Phoenix, Arizona and from points in California to points in Arizona. We are one of several refiners that regularly utilize the SFPP pipeline to ship refined products from El Paso, Texas to Tucson and Phoenix, Arizona on SFPP’s East Line. The Court of Appeals in its May 2007 decision approved a FERC position, which is adverse to us, on the treatment of income taxes in the calculation of allowable rates for pipelines operated by partnerships and ruled in our favor on an issue relating to our rights to reparations when it is determined that certain tariffs we paid to SFPP in the past were too high. The case was remanded to FERC and consolidated with other cases that together addressed SFPP’s rates for the period from January 1992 through May 2006. In 2003 we received an initial payment of $15.3 million from SFPP as reparations for the period from 1992 through July 2000. On April 16, 2010, a settlement among us, SFPP, and other shippers was filed with FERC for its approval. FERC approved the settlement on May 28, 2010. Pursuant to the settlement, we received an additional settlement payment of $8.6 million. This settlement finally resolves the amount of additional payments SFPP owes us for the period January 1992 through May 2006.

We and other shippers also engaged in settlement discussions with SFPP relating to East Line service in the FERC proceedings that address periods after May 2006. A partial settlement covering the period June 2006 through November 2007, which became final in February 2008, resulted in a payment from SFPP to us of $1.3 million in April 2008. On October 22, 2008, we and other shippers jointly filed at the FERC with SFPP a settlement covering the period from December 2008 through November 2010. The FERC approved the settlement on January 29, 2009. The settlement reduced SFPP’s current rates and required SFPP to make additional payments to us of $2.9 million, which were received on May 18, 2009.

On June 2, 2009, SFPP notified us that it would terminate the October 22, 2008 settlement, as provided under the settlement, effective August 31, 2009. On July 31, 2009, SFPP filed substantial rate increases for East Line service to become effective September 1, 2009. We and several other shippers filed protests at the FERC challenging the rate increase and asking the FERC to suspend the effectiveness of the increased rates. On August 31, 2009, the FERC issued an order suspending the effective date of the rate increase until January 1, 2010, on which date the rate increase was placed into effect subject to refund, and setting the rate increase for a full evidentiary hearing to be held in 2010. We are not in a position to predict the ultimate outcome of the rate proceeding.

We are a party to various other litigation and proceedings which we believe, based on advice of counsel, will not either individually or in the aggregate have a materially adverse impact on our financial condition, results of operations or cash flows.

NOTE 15: Segment Information

Our operations are currently organized into two reportable segments, Refining and HEP. Our operations that are not included in the Refining and HEP segments are included in Corporate and Other. Intersegment transactions are eliminated in our consolidated financial statements and are included in Consolidations and Eliminations.

The Refining segment includes the operations of our Navajo, Woods Cross, and Tulsa Refineries and Holly Asphalt and involves the purchase and refining of crude oil and wholesale and branded marketing of refined products, such as gasoline, diesel fuel and jet fuel. These petroleum products are primarily marketed in the Southwest, Rocky Mountain and Mid-Continent regions of the United States and northern Mexico. Additionally, the Refining segment includes specialty lubricant products produced at our Tulsa Refinery that are marketed throughout North America and are distributed in Central and South America. Holly Asphalt manufactures and markets asphalt and asphalt products in Arizona, New Mexico, Texas and northern Mexico.

HEP, a consolidated VIE, owns and operates a system of petroleum product and crude gathering pipelines in Texas, New Mexico, Oklahoma and Utah, distribution terminals in Texas, New Mexico, Arizona, Utah, Idaho, and Washington and refinery tankage in New Mexico, Utah and Oklahoma. Revenues are generated by charging tariffs for transporting petroleum products and crude oil through its pipelines, by leasing certain pipeline capacity to Alon USA, Inc., by charging fees for terminalling refined products and other hydrocarbons and storing and providing other services at its storage tanks and terminals. The HEP segment also includes a 25% interest in SLC Pipeline that services refineries in the Salt Lake City, Utah area. Revenues from the HEP segment are earned through transactions with unaffiliated parties for pipeline transportation, rental and terminalling operations as well as revenues relating to pipeline transportation services provided for our refining operations. Our revaluation of HEP’s assets and liabilities at March 1, 2008 (date of reconsolidation) resulted in basis adjustments to our consolidated HEP balances. Therefore, our reported amounts for the HEP segment may not agree to amounts reported in HEP’s periodic public filings.

The accounting policies for our segments are the same as those described in the summary of significant accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2009.

														Consolidations
										Corporate				and				Consolidated
		Refining				HEP (1)				and Other				Eliminations				Total
		(In thousands)
Three Months Ended June 30, 2010
Sales and other revenues		$	2,137,360			$	45,483			$	151			$	(37,134	)		$	2,145,860
Depreciation and amortization		$	20,599			$	7,187			$	1,333			$	(295	)		$	28,824
Income (loss) from operations		$	124,548			$	22,888			$	(15,110	)		$	(162	)		$	132,164
Capital expenditures		$	42,492			$	2,576			$	364			$	—			$	45,432

														Consolidations
										Corporate				and				Consolidated
		Refining				HEP (1)				and Other				Eliminations				Total
		(In thousands)
Three Months Ended June 30, 2009
Sales and other revenues		$	1,019,919			$	37,999			$	2,979			$	(25,119	)		$	1,035,778
Depreciation and amortization		$	17,832			$	6,242			$	1,186			$	—			$	25,260
Income (loss) from operations		$	29,530			$	19,329			$	(11,408	)		$	—			$	37,451
Capital expenditures		$	38,229			$	45,456			$	480			$	—			$	84,165
Six Months Ended June 30, 2010
Sales and other revenues		$	4,004,534			$	86,172			$	217			$	(70,773	)		$	4,020,150
Depreciation and amortization		$	41,325			$	13,992			$	1,854			$	(590	)		$	56,581
Income (loss) from operations		$	99,969			$	41,149			$	(30,877	)		$	(821	)		$	109,420
Capital expenditures		$	70,764			$	4,487			$	1,279			$	—			$	76,530
Six Months Ended June 30, 2009
Sales and other revenues		$	1,656,829			$	67,331			$	3,078			$	(43,430	)		$	1,683,808
Depreciation and amortization		$	29,783			$	11,820			$	3,738			$	—			$	45,341
Income (loss) from operations		$	68,235			$	31,407			$	(24,400	)		$	—			$	75,242
Capital expenditures		$	126,467			$	56,026			$	900			$	—			$	183,393
June 30, 2010
Cash, cash equivalents and investments in marketable securities		$	—			$	2,806			$	138,622			$	—			$	141,428
Total assets		$	2,267,727			$	671,555			$	375,987			$	(31,690	)		$	3,283,579
December 31, 2009
Cash, cash equivalents and investments in marketable securities		$	—			$	2,508			$	123,311			$	—			$	125,819
Total assets		$	2,142,317			$	641,775			$	392,007			$	(30,160	)		$	3,145,939