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

		For the quarterly period ended      March 31, 2007

OR

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

		For the transition period from                      to

Commission File Number     1-3876

HOLLY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		75-1056913
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer þ  Accelerated filer o  Non-accelerated filer 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                  

55,048,142 shares of Common Stock, par value $.01 per share, were outstanding on April 30, 2007.

 

 

HOLLY CORPORATION
INDEX

						Page
PART I.				FINANCIAL INFORMATION
		Forward-Looking Statements					3
		Definitions					4
		Item 1.		Financial Statements
				Consolidated Balance Sheets — (Unaudited) — March 31, 2007 and December 31, 2006			6
				Consolidated Statements of Income (Unaudited) — Three Months Ended March 31, 2007 and 2006			7
				Consolidated Statements of Cash Flows (Unaudited) — Three Months Ended March 31, 2007 and 2006			8
				Consolidated Statements of Comprehensive Income (Unaudited) — Three Months Ended March 31, 2007 and 2006			9
				Notes to Consolidated Financial Statements (Unaudited)			10
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			36
		Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles					36
		Item 4.		Controls and Procedures			42
PART II.				OTHER INFORMATION
		Item 1.		Legal Proceedings			43
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			45
		Item 6.		Exhibits			46
Signatures
							47
Agreement Concerning Payment of Benefits Under Retirement Restoration Plan
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

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.

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 “Additional Factors that May Affect Future Results” (including “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 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 on acceptable terms and to integrate any 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 in conjunction with 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, 2006 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 headings “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).

     “BPD” means the number of barrels per 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.

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

     “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.

     “MMBtu” or one million British thermal units, means for each unit, the amount of heat required to raise one pound of water one degree Fahrenheit at one atmosphere pressure.

     “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.

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

     “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.

     “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
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

		March 31,				December 31,
		2007				2006
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	151,179			$	154,117
Marketable securities			119,497				96,168
Accounts receivable:
Product and transportation			180,492				199,083
Crude oil resales			178,910				196,842
Related party receivable			3,390				2,198
			362,792				398,123
Inventories:
Crude oil and refined products			130,267				115,100
Materials and supplies			15,166				14,575
			145,433				129,675
Income taxes receivable			—				9,055
Prepayments and other			10,751				12,081
Assets of discontinued operations			—				355
Total current assets			789,652				799,574
Properties, plants and equipment, at cost			669,490				642,740
Less accumulated depreciation, depletion and amortization			(246,355	)			(237,270	)
			423,135				405,470
Marketable securities (long-term)			9,721				5,668
Other assets:
Turnaround costs (long-term)			10,307				12,061
Intangibles and other			14,227				15,096
			24,534				27,157
Total assets		$	1,247,042			$	1,237,869
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	481,023			$	507,566
Accrued liabilities			35,237				51,173
Income taxes payable			16,109				—
Liabilities of discontinued operations			—				654
Total current liabilities			532,369				559,393
Deferred income taxes			19,755				20,776
Other long-term liabilities			29,195				27,201
Commitments and contingencies			—				—
Distributions in excess of investment in Holly Energy Partners			166,494				164,405
Stockholders’ equity:
Preferred stock, $1.00 par value — 1,000,000 shares authorized; none issued			—				—
Common stock $.01 par value — 100,000,000 shares authorized; 72,169,371 and 71,825,960 shares issued as of March 31, 2007 and December 31, 2006, respectively			719				718
Additional capital			72,580				66,500
Retained earnings			807,969				745,994
Accumulated other comprehensive loss			(12,844	)			(11,358	)
Common stock held in treasury, at cost — 17,135,488 and 16,509,345 shares as of March 31, 2007 and December 31, 2006, respectively			(369,195	)			(335,760	)
Total stockholders’ equity			499,229				466,094
Total liabilities and stockholders’ equity		$	1,247,042			$	1,237,869

See accompanying notes.

HOLLY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)

		Three Months Ended
		March 31,
		2007				2006
Sales and other revenues		$	925,867			$	791,594
Operating costs and expenses:
Cost of products sold (exclusive of depreciation, depletion, and amortization)			751,714				675,485
Operating expenses (exclusive of depreciation, depletion, and amortization)			50,129				52,467
General and administrative expenses (exclusive of depreciation, depletion, and amortization)			15,847				13,516
Depreciation, depletion and amortization			11,451				8,024
Exploration expenses, including dry holes			152				127
Total operating costs and expenses			829,293				749,619
Income from operations			96,574				41,975
Other income (expense):
Equity in earnings of Holly Energy Partners			3,346				3,212
Interest income			2,560				1,735
Interest expense			(252	)			(275	)
			5,654				4,672
Income from continuing operations before income taxes			102,228				46,647
Income tax provision:
Current			34,758				14,806
Deferred			(72	)			681
			34,686				15,487
Income from continuing operations			67,542				31,160
Discontinued operations
Income from discontinued operations			—				1,387
Gain on sale of discontinued operations			—				14,257
Income from discontinued operations, net of taxes			—				15,644
Net income		$	67,542			$	46,804
Basic earnings per share:
Continuing operations		$	1.22			$	0.53
Discontinued operations			—				0.27
Net income		$	1.22			$	0.80
Diluted earnings per share:
Continuing operations		$	1.20			$	0.52
Discontinued operations			—				0.26
Net income		$	1.20			$	0.78
Cash dividends declared per common share		$	0.10			$	0.05
Average number of common shares outstanding:
Basic			55,189				58,458
Diluted			56,318				60,028

See accompanying notes.

HOLLY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

		Three Months Ended
		March 31,
		2007				2006
Cash flows from operating activities:
Net income		$	67,542			$	46,804
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization (includes discontinued operations)			11,451				8,574
Deferred income taxes (includes discontinued operations)			(72	)			(1,761	)
Equity based compensation expense			1,231				780
Distributions in excess of equity in earnings in HEP and joint ventures			2,089				1,601
Gain on sale of assets, before income taxes			—				(22,638	)
(Increase) decrease in current assets:
Accounts receivable			35,682				30,569
Inventories			(15,758	)			(53,423	)
Income taxes receivable			9,055				—
Prepayments and other			1,330				787
Increase (decrease) in current liabilities:
Accounts payable			(25,478	)			(35,712	)
Accrued liabilities			(16,552	)			(2,808	)
Income taxes payable			16,109				11,962
Turnaround expenditures			(198	)			(4,080	)
Other, net			(130	)			1,005
Net cash provided by (used for) operating activities			86,301				(18,340	)
Cash flows from investing activities:
Additions to properties, plants and equipment			(26,750	)			(32,235	)
Net cash proceeds from sale of Montana Refinery			—				48,872
Purchases of marketable securities			(89,165	)			(51,442	)
Sales and maturities of marketable securities			62,140				154,693
Net cash provided by (used for) investing activities			(53,775	)			119,888
Cash flows from financing activities:
Issuance of common stock upon exercise of options			263				1,401
Purchase of treasury stock			(35,837	)			(59,271	)
Cash dividends			(4,477	)			(2,957	)
Excess tax benefit from equity based compensation			4,587				4,826
Net cash used for financing activities			(35,464	)			(56,001	)
Cash and cash equivalents:
Increase (decrease) for the period			(2,938	)			45,547
Beginning of period			154,117				49,064
End of period		$	151,179			$	94,611
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest		$	14			$	176
Income taxes		$	5,006			$	9,812

See accompanying notes.

HOLLY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)

		Three Months Ended
		March 31,
		2007				2006
		(In thousands)
Net income		$	67,542			$	46,804
Other comprehensive income (loss):
Securities available for sale:
Unrealized gain on available for sale securities			378				229
Reclassification adjustment to net income on sale of equity securities			(21	)			(20	)
Total unrealized gain on available for sale securities			357				209
Retirement medical obligation adjustment			(2,792	)			—
Other comprehensive income (loss) before income taxes			(2,435	)			209
Income tax expense (benefit)			(949	)			81
Other comprehensive income (loss)			(1,486	)			128
Total comprehensive income		$	66,056			$	46,932

See accompanying notes.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.

     As of the close of business on March 31, 2007, we:

	•		owned and operated two 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 known as the “Navajo Refinery”), and a refinery in Woods Cross, Utah (“Woods Cross Refinery”);
	•		owned approximately 800 miles of crude oil pipelines located principally in west Texas and New Mexico;
	•		owned 100% of NK Asphalt Partners which manufactures and markets asphalt products from various terminals in Arizona and New Mexico and does business under the name of “Holly Asphalt Company;” and
	•		owned a 45.0% interest in Holly Energy Partners, L.P. (“HEP”) which includes our 2% general partner interest, which has logistic assets including approximately 1,700 miles of petroleum product pipelines located in Texas, New Mexico and Oklahoma (including 340 miles of leased pipeline); eleven refined product terminals; two refinery truck rack facilities, a refined products tank farm facility, and a 70% interest in Rio Grande Pipeline Company (“Rio Grande”).

On March 31, 2006 we sold our petroleum refinery in Great Falls, Montana (the “Montana Refinery”) to a subsidiary of Connacher Oil and Gas Limited (“Connacher”). Accordingly, the results of operations of the Montana Refinery and a net gain of $14.3 million on the sale are shown in discontinued operations (see Note 2).

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 March 31, 2007, the consolidated results of operations and comprehensive income for the three months ended March 31, 2007 and 2006 and consolidated cash flows for the three months ended March 31, 2007 and 2006 in accordance with the rules and regulations of the SEC. Although certain notes and other information required by accounting principles generally accepted in the United States 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, 2006 filed with the SEC.

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 and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation.

Our results of operations for the first three months of 2007 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications, which we determined to be immaterial, have been made to prior reported amounts to conform to current classifications.

New Accounting Pronouncements

SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115”
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No 115. SFAS No. 159, which amends SFAS No. 115, allows certain financial assets and liabilities to be recognized, at a company’s election, at fair market value, with any gains or losses for the period recorded in the statement of income. SFAS No. 159 includes available-for-sale securities in the assets eligible for this treatment. Currently, we record the gains or losses for the period as a component of comprehensive income and in the equity section of the balance sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, and interim periods in those fiscal years. While we are currently evaluating the provisions of SFAS No. 159, we do not expect the adoption of this statement to have a material impact on our financial condition, results of operations and cash flows.

Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. We adopted this standard effective January 1, 2007. As a result of the implementation of this standard, we recognized no material adjustment in the liability for unrecognized income tax benefits.

We are subject to U.S. federal income tax and to the income tax of multiple state jurisdictions. We have substantially concluded all U.S. federal, state and local income tax matters for fiscal years through July 31, 2002. In 2006, the Internal Revenue Service commenced examinations of our U.S. federal income tax returns for the tax years ended July 31, 2003 and December 31, 2003. To date, we do not anticipate that the resolution of this audit will result in a material change to our financial condition, results of operations or cash flows.

Our policy is to recognize potential interest and penalties related to income tax matters in income tax expense. We believe we have appropriate support for the income tax positions taken and to be taken on our income tax returns and that our accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.

SFAS No. 157 “Fair Value Measurements”
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This standard simplifies and codifies guidance on fair value measurements under generally accepted accounting principles. This standard defines fair value, establishes a framework for measuring fair value and prescribes expanded disclosures about fair value measurements. This standard is effective for fiscal years beginning after November 15, 2007. We do not anticipate that the adoption of this interpretation will have a material impact on our financial condition, results of operations and cash flows.

NOTE 2: Discontinued Operations

On March 31, 2006 we sold the Montana Refinery to Connacher. The net cash proceeds we received on the sale of the Montana Refinery amounted to $48.9 million, net of transaction fees and expenses. Additionally we received 1,000,000 shares of Connacher common stock valued at $4.3 million at March 31, 2006. In accounting for the sale, we recorded a pre-tax gain of $22.6 million. The Montana Refinery assets disposed of had a net book value at March 31, 2006 of $13.7 million for property, plant and equipment, $15.4 million for inventories and $2.1 million for other assets, with current liabilities assumed amounting to $0.3 million.

We retained certain quantities of finished product inventories that were not included in the sale to Connacher. These inventories were liquidated during the second quarter of 2006.

The following tables provide summarized income statement information related to discontinued operations:

		Three Months Ended March 31,
		2007				2006
		(In thousands)
Sales and other revenues from discontinued operations		$	—			$	33,183
Income from discontinued operations before income tax expense		$	—			$	2,202
Income tax expense			—				(815	)
Income from discontinued operations, net			—				1,387
Gain on sale of discontinued operations before income taxes			—				22,638
Income tax expense			—				(8,381	)
Gain on sale of discontinued operations, net			—				14,257
Income from discontinued operations, net		$	—			$	15,644

In accordance with the Montana Refinery sale agreement, we retained certain financial liabilities, including certain environmental liabilities related to required remediation and corrective action for environmental conditions that existed at the time of sale and for financial penalties for infractions that occurred prior to the sale. Based on our estimates, we had accruals of $1.3 million as of March 31, 2007 and December 31, 2006 related to such environmental liabilities which is included in our environmental liability accrual as discussed in Note 7.

NOTE 3: Investment in Holly Energy Partners

HEP is a publicly held master limited partnership that commenced operations July 13, 2004 upon the completion of its initial public offering. We currently have a 45% ownership interest in HEP, including our 2% general partner interest.

HEP serves our refineries in New Mexico and Utah under a 15-year pipelines and terminals agreement (“HEP PTA”) expiring in 2019 and a 15-year intermediate pipeline agreement expiring in 2020 (“HEP IPA”). Under the HEP PTA, we pay HEP fees to transport on their refined product pipelines or throughput in their terminals, volumes of refined products that will result in minimum annual payments to HEP, currently $38.5 million. Under the HEP IPA, we agreed to transport minimum volumes of intermediate products on the intermediate pipelines that will result in minimum annual payments to HEP, currently $12.4 million. Minimum payments for both agreements will adjust upward based on increases in the producer price index over the term of the agreements. Additionally, we agreed to indemnify HEP up to an aggregate amount of $17.5 million for any environmental noncompliance and remediation liabilities associated with the assets transferred to HEP and occurring or existing prior to the date of the transfers of ownership to HEP. Of this total, indemnification in excess of $15.0 million relates solely to the intermediate pipelines.

HEP is a variable interest entity (“VIE”) as defined under FIN 46, and following HEP’s acquisition of the intermediate feedstock pipelines in 2005, we have determined that our beneficial variable interest in HEP was less than 50%. We report our share of the earnings of HEP, including any incentive distributions paid through our general partner interest, using the equity method of accounting. HEP has risk associated with its operations. HEP has three major customers, of which we are one. If any of the customers fails to meet the desired shipping levels or terminates its contracts, HEP could suffer substantial losses unless a new customer is found. If HEP does suffer losses, we would recognize our percentage of those losses based on our ownership percentage in HEP at that time.

We hold 7,000,000 subordinated units and 70,000 common units of HEP as of March 31, 2007. Our rights as holder of subordinated units to receive distributions of cash from HEP are subordinated to the rights of the common unitholders to receive such distributions.

The following table sets forth the changes during the three months ended March 31, 2007 in our investment account balance with HEP:

Investment in HEP balance at December 31, 2006		$	(164,405	)
Equity in the earnings of HEP			3,346
Regular quarterly distributions from HEP			(5,435	)
Investment in HEP balance at March 31, 2007		$	(166,494	)

The following tables provide summary financial results for HEP.

		March 31,				December 31,
		2007				2006
		(In thousands)
Current assets		$	19,358			$	23,624
Properties and equipment, net			158,324				160,484
Transportation agreements and other			58,271				59,465
Total assets		$	235,953			$	243,573
Current liabilities		$	10,735			$	14,174
Long-term liabilities			182,312				182,210
Minority interest			11,390				10,963
Partners’ equity			31,516				36,226
Total liabilities and partners’ equity		$	235,953			$	243,573

		Three Months Ended March 31,
		2007				2006
		(In thousands)
Revenues		$	23,872			$	22,438
Operating costs and expenses			13,135				12,126
Operating income			10,737				10,312
Other expenses, net			(3,303	)			(3,177	)
Net income		$	7,434			$	7,135

We have related party transactions with HEP for pipeline and terminal expenses, certain employee costs, insurance costs, and administrative costs under the Holly PTA, Holly IPA and an Omnibus Agreement.

	•		Pipeline and terminal expenses paid to HEP were $13.8 million and $12.5 million for the three months ended March 31, 2007 and 2006, respectively.
	•		We charged HEP $0.5 million for three months ended March 31, 2007 and 2006 for general and administrative services under the Omnibus Agreement which we recorded as a reduction in expenses.
	•		HEP reimbursed us for costs of employees supporting their operations of $2.3 million and $1.9 million for the three months ended March 31, 2007 and 2006, respectively, which we recorded as a reduction in expenses.
	•		We reimbursed HEP $0.1 million for the three months ended March 31, 2007 and 2006 for certain costs paid on our behalf.
	•		We received as regular distributions on our subordinated units, common units and general partner interest, $5.4 million and $4.8 million for the three months ended March 31, 2007 and 2006, respectively. Our distributions for the three months ended March 31, 2007 and 2006 included $0.4 million and $0.2 million, respectively, in incentive distributions with respect to our general partner interest.

	•		We had a related party receivable from HEP of $3.4 million and $2.2 million at March 31, 2007 and December 31, 2006, respectively.
	•		We had accounts payable to HEP of $5.3 million and $5.7 million at March 31, 2007 and December 31, 2006, respectively.
	•		“Prepayments and other” includes $0.8 million and $0.2 million at March 31, 2007 and December 31, 2006, respectively, related to minimum payments under the HEP IPA which may be applied as credits against future billings from HEP if our shipments exceed the minimum volume commitments on the intermediate pipelines.

NOTE 4: 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 performance share units. The average number of shares of common stock outstanding and per share amounts have been adjusted to reflect the two-for-one stock split effective June 1, 2006. The following is a reconciliation of the denominators of the basic and diluted per share computations for income from continuing operations:

		Three Months Ended
		March 31,
		2007				2006
		(In thousands, except per share data)
Income from continuing operations		$	67,542			$	31,160
Average number of shares of common stock outstanding			55,189				58,458
Effect of dilutive stock options, variable restricted shares and performance share units			1,129				1,570
Average number of shares of common stock outstanding assuming dilution			56,318				60,028
Basic earnings per share from continuing operations		$	1.22			$	0.53
Diluted earnings per share from continuing operations		$	1.20			$	0.52

NOTE 5: Stock-Based Compensation

On March 31, 2007 we had three principal share-based compensation plans, which are described below. The compensation cost that has been charged against income for those plans was $4.4 million and $3.7 million for the three months ended March 31, 2007 and 2006, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $1.5 million and $1.4 million for the three months ended March 31, 2007 and 2006, respectively. It is currently our practice to issue new shares for settlement of option exercises, restricted stock grants or performance share units settled in stock. 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, which results in a higher expense in the earlier periods of the grants. At March 31, 2007, 2,508,409 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.

Previously awarded stock options and all other compensation arrangements based on the market value of our common stock have been adjusted to reflect the two-for-one stock split effective June 1, 2006.

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 of each option awarded was estimated using the Black-Scholes option pricing model.

A summary of option activity as of March 31, 2007, and changes during the three months ended March 31, 2007 is presented below:

										Weighted-Average
						Weighted-Average				Remaining				Aggregate Intrinsic
Options		Shares				Exercise Price				Contractual Term				Value ($000)
Outstanding at January 1, 2007			1,576,800			$	2.25
Exercised			(72,600	)			3.62
Forfeited or expired			—				—
Outstanding at March 31, 2007			1,504,200			$	2.18				2.9			$	85,914
Exercisable at March 31, 2007			1,504,200			$	2.18				2.9			$	85,914

The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006, was $3.6 million and $12.6 million, respectively.

At March 31, 2007 and December 31, 2006, all stock options granted were fully vested. The total fair value of shares vested during the three months ended March 31, 2006 was $0.3 million.

Cash received from option exercises under the stock option plans for the three months ended March 31, 2007 and 2006, was $0.3 million and $1.4 million, respectively. The actual tax benefit realized for the tax deductions from option exercises under the stock option plans totaled $1.4 million and $4.9 million for the three months ended March 31, 2007 and 2006, 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 have dividend rights on these shares from the date of grant. The vesting for certain key executives is contingent upon certain earnings per share 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 grant activity and changes during the three months ended March 31, 2007 is presented below:

						Weighted-Average
						Grant-Date Fair				Aggregate Intrinsic
Restricted Stock		Grants				Value				Value ($000)
Outstanding at January 1, 2007 (nonvested)			494,922			$	15.07
Vesting and transfer of ownership to recipients			(108,079	)			13.96
Granted			53,145				55.47
Forfeited			(2,150	)			16.94
Outstanding at March 31, 2007 (nonvested)			437,838			$	20.23			$	25,964

The total intrinsic value of restricted stock vested and transferred to recipients during the three months ended March 31, 2007 and 2006 was $6.4 million and $5.5 million, respectively. As of March 31, 2007, there was $4.9 million of total unrecognized compensation cost related to nonvested restricted stock grants. That cost is expected to be recognized over a weighted-average period of 1.3 years. The total fair value of shares vested during the three months ended March 31, 2007 and 2006 was $1.5 million and $1.0 million, respectively.

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 either cash or 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 either a “financial performance” or a “market performance” criteria.

During the 2007 first quarter, we granted 42,813 performance share units with a fair value based on our grant date closing stock price of $55.47. These units are payable in stock and are subject to certain financial performance criteria.

The fair value of each performance share unit award subject to the financial performance criteria and payable in stock 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 March 31, 2007, estimated share payouts for outstanding nonvested performance share unit awards ranged from 100% to 200%.

The fair value of each performance share unit award based on market performance criteria and payable in stock is computed based on an expected-cash-flow approach. The analysis utilizes the grant date closing stock price, dividend yield, historical total returns, expected total returns based on a capital asset pricing model methodology, standard deviation of historical returns and comparison of expected total returns with the peer group. The expected total return and historical standard deviation are applied to a lognormal expected return distribution in a Monte Carlo simulation model to identify the expected range of potential returns and probabilities of expected returns.

The fair value of each performance share unit award payable in cash is computed quarterly using an expected-cash-flow approach. The analysis utilizes the current stock price, dividend yield, historical total returns as of the measurement date, expected total returns based on a capital asset pricing model methodology, standard deviation of historical returns and comparison of expected total returns with the peer group. The expected total return and historical standard deviation are applied to a lognormal expected return distribution in a Monte Carlo simulation model to identify the expected range of potential returns and probabilities of expected returns.

At March 31, 2007, the price of our stock was $59.30, the latest quarterly dividend was $0.10, and the risk-free rate was 4.88%. The inputs affecting the expected total return for us and the peer group are based on a capital asset pricing model utilizing information available at the measurement date. The monthly standard deviation of returns is based on the standard deviation of historical return information. The expected return and standard deviation are presented below:

				Standard
Company		Expected Return on Equity		Deviation (Monthly)
Holly		12.1%		7.6%
Peer group		10.6% to 13.6%		6.5% to 11.0%

A summary of performance share units’ activity and changes during the three months ended March 31, 2007 is presented below:

										Financial
		Market Performance								Performance
		Payable in				Stock				Stock				Total
		Cash				Settled				Settled				Performance
Performance Share Units		Grants				Grants				Grants				Share Units
Outstanding at January 1, 2007 (nonvested)			227,350				125,774				74,928				428,052
Vesting and payment of benefit to recipients			(145,900	)			(75,500	)			—				(221,400	)
Granted			—				—				42,813				42,813
Forfeited			—				(900	)			(528	)			(1,428	)
Outstanding at March 31, 2007 (nonvested)			81,450				49,374				117,213				248,037

For the three months ended March 31, 2007 we paid $15.5 million and issued 75,500 shares of our common stock having a fair value of $3.6 million related to vested performance share units. As of March 31, 2007, the cash liability associated with nonvested performance share units was $7.1 million and is recorded in “Accrued liabilities” in our consolidated balance sheets. Based on the weighted average fair value at March 31, 2007 of $63.45, there was $8.3 million of total unrecognized compensation cost related to nonvested performance share units. That cost is expected to be recognized over a weighted-average period of 1.5 years.

NOTE 6: Cash and Cash Equivalents and Investments in Marketable Securities

Our investment portfolio consists of cash, cash equivalents, and investments in debt securities primarily issued by government entities. In addition, as part of the sale of the Montana Refinery, we received 1,000,000 shares of Connacher common stock.

We invest in highly-rated marketable debt securities, primarily issued by government entities that have maturities at the date of purchase of greater than three months. These securities include investments in variable rate demand notes (“VRDN”) and auction rate securities (“ARS”). Although VRDN and ARS may have long-term stated maturities, generally 15 to 30 years, we have designated these securities as available-for-sale and have classified them as current because we view them as available to support our current operations. Rates on VRDN are typically reset either daily or weekly. Rates on ARS are reset through a Dutch auction process at intervals between 35 and 90 days, depending on the terms of the security. VRDN and ARS may be liquidated at par on the rate reset date. We also invest in other marketable debt securities with the maximum maturity of any individual issue not greater than two years from the date of purchase. All of these instruments are classified as available-for-sale, and as a result, are reported at fair value. Interest income is recorded as earned. Unrealized gains and losses, net of related income taxes, are temporary and reported as a component of accumulated other comprehensive income. 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 at March 31, 2007:

		Available-for-Sale Securities
										Estimated
						Gross				Fair Value
						Unrealized				(Net Carrying
		Amortized Cost				Losses				Amount)
		(In thousands)
States and political subdivisions		$	125,937			$	(69	)		$	125,868
Equity securities			4,328				(978	)			3,350
Total marketable securities		$	130,265			$	(1,047	)		$	129,218

Interest income on our marketable debt securities for the three months ended March 31, 2007 and 2006 included $1.4 million and $2.0 million, respectively, of interest earned, $21,000 and $20,000, respectively, in realized losses and amortization of $0.3 million and $0.8 million, respectively, in net premiums paid related to our marketable debt securities. We had 53 and 115 sales and maturities during the three months ended March 31, 2007 and 2006, respectively, in which we received a total of $62.1 million and $154.7 million, respectively. The realized losses represent the difference between the purchase price, as amortized, and the market value on the maturity or sales date.

NOTE 7: Environmental

Consistent with our accounting policy for environmental remediation costs, we expensed $0.1 million and $2.3 million for the three months ended March 31, 2007 and 2006, respectively, for environmental remediation obligations. The accrued environmental liability reflected in the consolidated balance sheets was $7.5 million and $7.6 million at March 31, 2007 and December 31, 2006, respectively, of which $5.7 million and $6.1 million, respectively, were classified as other long-term liabilities. Costs of future expenditures for environmental remediation are not discounted to their present value.

NOTE 8: Debt

Credit Facility

We have a $175.0 million secured revolving credit facility with Bank of America as administrative agent and lender, with a term of four years and an option to increase the facility to $225.0 million subject to certain conditions. This credit facility expires in 2008 and may be used to fund working capital requirements, capital expenditures, acquisitions or other general corporate purposes. We were in compliance with all covenants at March 31, 2007. At March 31, 2007, we had outstanding letters of credit totaling $2.3 million, and no outstanding borrowings under our credit facility. At that level of usage, the unused commitment under our credit facility was $172.7 million at March 31, 2007.

We made cash interest payments of $14,000 and $0.2 million for the three months ended March 31, 2007 and 2006, respectively.

NOTE 9: Income Taxes

The effective tax rate for continuing operations for the first quarter of 2007 was 33.9%, as compared to 33.2% for the first quarter of 2006.

NOTE 10: Stockholders’ Equity

Two-For-One Stock Split: On May 11, 2006, we announced that our Board of Directors approved a two-for-one stock split payable in the form of a stock dividend of one share of common stock for each issued and outstanding share of common stock. The stock dividend was paid on June 1, 2006 to all holders of record of common stock at the close of business on May 22, 2006.

All references to the number of shares of common stock and per share amounts for all periods presented have been adjusted to reflect the split on a retrospective basis.

Common Stock Repurchases: Under our $300.0 million common stock repurchase program, common stock repurchases are being made from time to time in the open market or privately negotiated transactions based on market conditions, securities law limitations and other factors. During the three months ended March 31, 2007, we repurchased 545,439 shares at a cost of approximately $29.2 million (of which $0.6 million of the cash settlement was after March 31, 2007) or an average of $53.56 per share under this repurchase initiative. Since inception of this repurchase initiative in November 2005 through March 31, 2007, we have repurchased 5,991,646 shares at a cost of approximately $236.2 million or an average of $39.42 per share.

During the three months ended March 31, 2007, we repurchased at current market price from certain officers and key employees 80,704 shares of our common stock at a cost of approximately $4.2 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 11: Other Comprehensive Income

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

						Tax Expense
		Before-Tax				(Benefit)				After-Tax
		(In thousands)
For the three months ended March 31, 2007
Retirement medical obligation adjustment		$	(2,792	)		$	(1,086	)		$	(1,706	)
Unrealized gain on available-for-sale securities			357				137				220
Other comprehensive loss		$	(2,435	)		$	(949	)		$	(1,486	)
For the three months ended March 31, 2006
Unrealized gain on available-for-sale securities		$	209			$	81			$	128
Other comprehensive income		$	209			$	81			$	128

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

Accumulated other comprehensive loss in the equity section of our consolidated balance sheets include:

		March 31,				December 31,
		2007				2006
		(In thousands)
Pension obligation adjustment		$	(1,115	)		$	(1,115	)
Unrealized loss on available-for-sale securities			(636	)			(856	)
Adjustment to initially apply adoption of SFAS No. 158, net of income tax effect of $7,063			(11,093	)			(9,387	)
Accumulated other comprehensive loss		$	(12,844	)		$	(11,358	)

NOTE 12: 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 net periodic pension expense consisted of the following components:

		Three Months Ended
		March 31,
		2007				2006
		(In thousands)
Service cost		$	1,589			$	1,048
Interest cost			1,404				1,014
Expected return on assets			(1,566	)			(856	)
Amortization of prior service cost			63				65
Amortization of net loss			284				320
Net periodic benefit cost		$	1,774			$	1,591

The expected long-term annual rate of return on plan assets is 8.5%. This rate was used in measuring 2007 and 2006 net periodic benefit cost. We expect to contribute between zero and $10.0 million to the retirement plan during 2007. No contributions were made during the three months ended March 31, 2007.

NOTE 13: Contingencies

We have pending proceedings in the United States Court of Appeals for the District of Columbia Circuit with respect to rulings by the Federal Energy Regulatory Commission (“FERC”) in proceedings brought by us and other parties against 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 an SFPP pipeline to ship refined products from El Paso, Texas to Tucson and Phoenix, Arizona. Rulings by the FERC relating principally to the period from 1993 through July 2000 resulted in reparations payments from SFPP to us in 2003 totaling approximately $15.3 million. In 2004 the appeals court issued its opinion relating principally to the period from 1993 through July 2000, ruling in favor of our positions on most of the disputed issues that concern us, and remanded the case to the FERC for additional consideration of several issues, some of which are involved in our claims. In May 2005, the FERC issued a general policy statement on an issue concerning the treatment of income taxes in the calculation of allowable rates for pipelines operated by partnerships. The FERC in a later order applied this general policy statement to SFPP and such application is contrary to our position in this case. We and certain other refining companies have pending before the court of appeals petitions challenging the FERC policy on income taxes, decisions by the FERC in 2005 and early 2006 on certain of the remanded issues, and rulings by the FERC on some issues relating to periods after July 2000. In March 2006, SFPP submitted computations asserted to be based on the most recent determinations of the FERC in the case. In April 2006, we filed a protest and comments concerning a number of elements of these computations. One element of the computations, which is based on the FERC’s disputed 2005 policy on treatment of income taxes, would, if ultimately sustained, result in a requirement for us to repay to SFPP approximately $3.0 million of the $15.3 million reparations amount received by us from SFPP in 2003. Because proceedings in the FERC on remand have not been completed and our petitions for review to the court of appeals with respect to the FERC’s orders are pending, it is not possible to determine whether the amount of reparations actually due to us for the period from 1993 through July 2000 will be found to be less than or more than the $15.3 million we received in 2003. Although it is not possible at the date of this report to predict the final outcome of these proceedings, we believe that future proceedings are not likely to result in an obligation for us

to repay more than the amount now asserted in SFPP’s most recent computations (approximately $3.0 million) and that the more likely final result would be either a smaller repayment by us than is now asserted by SFPP or a payment to us of additional reparations. The ultimate amount of reparations payable to us will be determined only after further proceedings in the FERC on issues that have not been finally determined by the FERC, further proceedings in the appeals court with respect to determinations by the FERC, and possibly future petitions by one or more of the parties seeking United States Supreme Court review of issues in the case.

In discussions beginning in the last half of 2005, the EPA and the State of Utah have asserted that we have Federal Clean Air Act liabilities relating to our Woods Cross Refinery because of actions taken or not taken by prior owners of the Woods Cross Refinery, which we purchased from ConocoPhillips in June 2003. We have tentatively agreed with the EPA and the State of Utah to settle the issues presented by means of an agreement similar to the 2001 Consent Agreement we entered into for our Navajo Refinery and previously-owned Montana Refinery. The tentative settlement agreement, which has not yet been put into a final written agreement, includes proposed obligations for us to make specified additional capital investments expected to total up to approximately $10.0 million over several years and to make changes in operating procedures at the refinery. The agreements for the purchase of the Woods Cross Refinery provide that ConocoPhillips will indemnify us, subject to specified limitations, for environmental claims arising from circumstances prior to our purchase of the refinery. We believe that, in the present circumstances, the amount due to us from ConocoPhillips under the agreements for the purchase of the Woods Cross Refinery would be approximately $1.4 million with respect to the tentative settlement.

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Item 2 contains “forward-looking” statements. See “Forward-Looking Statements” at the beginning of Part I of this Quarterly Report on Form 10-Q. In this document, the words “we”, “our” 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.

OVERVIEW

We are principally an independent petroleum refiner operating two refineries in Artesia and Lovington, New Mexico (operated as one refinery and collectively known as the “Navajo Refinery”) and Woods Cross, Utah (the “Woods Cross Refinery”). Our profitability depends largely on the spread between market prices for refined petroleum products and crude oil prices. At March 31, 2007, we also owned a 45% interest in Holly Energy Partners, L.P. (“HEP”), which owns and operates pipeline and terminalling assets and owns a 70% interest in Rio Grande Pipeline Company (“Rio Grande”).

Our principal source of revenue is from the sale of high value light products such as gasoline, diesel fuel and jet fuel in markets in the southwestern and western United States. Our sales and other revenues for the three months ended March 31, 2007 were $925.9 million and our net income for the three months ended March 31, 2007 was $67.5 million. Our sales and other revenues and net income for the three months ended March 31, 2006 were $791.6 million and $46.8 million, respectively. Our principal expenses are costs of products sold and operating expenses. Our total operating costs and expenses for the three months ended March 31, 2007 were $829.3 million, an increase from $749.6 million for the three months ended March 31, 2006.

On March 31, 2006 we sold our petroleum refinery in Great Falls, Montana (the “Montana Refinery”) to a subsidiary of Connacher Oil and Gas Limited (“Connacher”). The net cash proceeds we received on the sale of the Montana Refinery amounted to $48.9 million, net of transaction fees and expenses. Additionally we received 1,000,000 shares of Connacher common stock valued at approximately $4.3 million. We have presented in discontinued operations the results of operations and a gain of $14.3 million on the sale.

Under our $300.0 million common stock repurchase program, common stock repurchases are being made from time to time in the open market or privately negotiated transactions based on market conditions, securities law limitations and other factors. During the three months ended March 31, 2007, we repurchased 545,439 shares at a cost of approximately $29.2 million (of which $0.6 million of the cash settlement was after March 31, 2007) or an average of $53.56 per share under this repurchase initiative. Since inception of this repurchase initiative in November 2005 through March 31, 2007, we have repurchased 5,991,646 shares at a cost of approximately $236.2 million or an average of $39.42 per share.

RESULTS OF OPERATIONS

Financial Data (Unaudited)

		Three Months Ended
		March 31,								Change from 2006
		2007				2006				Change				Percent
		(In thousands, except per share data)
Sales and other revenues		$	925,867			$	791,594			$	134,273				17.0	%
Operating costs and expenses:
Cost of products sold (exclusive of depreciation, depletion and amortization)			751,714				675,485				76,229				11.3
Operating expenses (exclusive of depreciation, depletion and amortization)			50,129				52,467				(2,338	)			(4.5	)
General and administrative expenses (exclusive of depreciation, depletion and amortization)			15,847				13,516				2,331				17.2
Depreciation, depletion and amortization			11,451				8,024				3,427				42.7
Exploration expenses, including dry holes			152				127				25				19.7
Total operating costs and expenses			829,293				749,619				79,674				10.6
Income from operations			96,574				41,975				54,599				130.1
Other income (expense):
Equity in earnings of HEP			3,346				3,212				134				4.2
Interest income			2,560				1,735				825				47.6
Interest expense			(252	)			(275	)			23				(8.4	)
			5,654				4,672				982				21.0
Income from continuing operations before income taxes			102,228				46,647				55,581				119.2
Income tax provision			34,686				15,487				19,199				124.0
Income from continuing operations			67,542				31,160				36,382				116.8
Income from discontinued operations, net of taxes			—				15,644				(15,644	)			(100.0	)
Net income		$	67,542			$	46,804			$	20,738				44.3	%
Basic earnings per share:
Continuing operations		$	1.22			$	0.53			$	0.69				130.2	%
Discontinued operations			—				0.27				(0.27	)			(100.0	)
Net income		$	1.22			$	0.80			$	0.42				52.5	%
Diluted earnings per share:
Continuing operations		$	1.20			$	0.52			$	0.68				130.8	%
Discontinued operations			—				0.26				(0.26	)			(100.0	)
Net income		$	1.20			$	0.78			$	0.42				53.8	%
Cash dividends declared per common share		$	0.10			$	0.05			$	0.05				100.0	%
Average number of common shares outstanding:
Basic			55,189				58,458				(3,269	)			(5.6	)%
Diluted			56,318				60,028				(3,710	)			(6.2	)%

Balance Sheet Data (Unaudited)

		March 31,				December 31,
		2007				2006
		(In thousands)
Cash, cash equivalents and investments in marketable securities		$	280,397			$	255,953
Working capital		$	257,283			$	240,181
Total assets		$	1,247,042			$	1,237,869
Stockholders’ equity		$	499,229			$	466,094

Other Financial Data (Unaudited)

		Three Months Ended
		March 31,
		2007				2006
		(In thousands)
Net cash provided by (used for) operating activities		$	86,301			$	(18,340	)
Net cash provided by (used for) investing activities		$	(53,775	)		$	119,888
Net cash used for financing activities		$	(35,464	)		$	(56,001	)
Capital expenditures		$	26,750			$	32,235
EBITDA from continuing operations (1)		$	111,371			$	53,211

Refining Operating Data (Unaudited)

     Our refinery operations include the Navajo Refinery and the Woods Cross Refinery. The following tables set forth information, including non-GAAP performance measures about our consolidated refinery operations. The cost of products and refinery gross margin do not include the effect of depreciation, depletion and amortization. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.

		Three Months Ended
		March 31,
		2007				2006
Navajo Refinery
Crude charge (BPD)(1)			76,820				72,520
Refinery production (BPD)(2)			86,100				81,110
Sales of produced refined products (BPD)			85,390				79,760
Sales of refined products (BPD)(3)			96,360				90,780
Refinery utilization (4)			92.6	%			96.7	%
Average per produced barrel (5)
Net sales		$	75.58			$	75.54
Cost of products (6)			59.04				62.85
Refinery gross margin			16.54				12.69
Refinery operating expenses (7)			4.18				4.39
Net operating margin		$	12.36			$	8.30
Feedstocks:
Sour crude oil			75	%			82	%
Sweet crude oil			10	%			5	%
Other feedstocks and blends			15	%			13	%
Total			100	%			100	%
Sales of produced refined products:
Gasolines			61	%			62	%
Diesel fuels			27	%			26	%
Jet fuels			3	%			5	%
Fuel oil			3	%			—	%
Asphalt			3	%			1	%
LPG and other			3	%			6	%
Total			100	%			100	%

		Three Months Ended
		March 31,
		2007				2006
Woods Cross Refinery
Crude charge (BPD)(1)			24,650				22,730
Refinery production (BPD)(2)			26,570				24,010
Sales of produced refined products (BPD)			28,120				23,290
Sales of refined products (BPD)(3)			28,550				24,490
Refinery utilization (4)			94.8	%			87.4	%
Average per produced barrel (5)
Net sales		$	71.61			$	69.64
Cost of products (6)			56.87				60.19
Refinery gross margin			14.74				9.45
Refinery operating expenses (7)			4.76				5.73
Net operating margin		$	9.98			$	3.72
Feedstocks:
Sour crude oil			—	%			6	%
Sweet crude oil			91	%			86	%
Other feedstocks and blends			9	%			8	%
Total			100	%			100	%
Sales of produced refined products:
Gasolines			63	%			61	%
Diesel fuels			25	%			26	%
Jet fuels			2	%			3	%
Fuel oil			6	%			6	%
LPG and other			4	%			4	%
Total			100	%			100	%
Consolidated
Crude charge (BPD)(1)			101,470				95,250
Refinery production (BPD)(2)			112,670				105,120
Sales of produced refined products (BPD)			113,510				103,050
Sales of refined products (BPD)(3)			124,910				115,270
Refinery utilization (4)			93.1	%			94.3	%
Average per produced barrel (5)
Net sales		$	74.59			$	74.21
Cost of products (6)			58.50				62.25
Refinery gross margin			16.09				11.96
Refinery operating expenses (7)			4.32				4.70
Net operating margin		$	11.77			$	7.26
Feedstocks:
Sour crude oil			58	%			64	%
Sweet crude oil			28	%			24	%
Other feedstocks and blends			14	%			12	%
Total			100	%			100	%

Sales of produced refined products:
Gasolines			61	%			62	%
Diesel fuels			27	%			26	%
Jet fuels			3	%			4	%
Fuel oil			4	%			2	%
Asphalt			2	%			1	%
LPG and other			3	%			5	%
Total			100	%			100	%

Results of Operations — Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

Income from continuing operations was $67.5 million ($1.22 per basic and $1.20 per diluted share) for the three months ended March 31, 2007, compared to income from continuing operations of $31.2 million ($.53 per basic and $.52 per diluted share) for the three months ended March 31, 2006. Income from continuing operations increased $36.4 million for the first quarter of 2007, an increase of 117%, as compared to the first quarter of 2006 principally due to improved refined product margins experienced in the current year’s first quarter and an increase in volume of produced refined products sold. These favorable factors were partially offset by the effects of higher depreciation, depletion and amortization costs and general and administrative expenses incurred in the first quarter of 2007, partially offset by a decrease in operating expenses. Overall refinery production levels from continuing operations increased by 7% for the first quarter of 2007 as compared to the same period in 2006 primarily due to increased production following the completion of our Navajo Refinery’s 8,000 BPSD capacity expansion in the latter half of 2006, partially offset by the effects of unplanned downtime of certain units at our Navajo Refinery in the first quarter of 2007. Overall refinery gross margins from continuing operations were $16.09 per produced barrel for the first quarter of 2007 compared to refinery gross margins from continuing operations of $11.96 per produced barrel for the first quarter of 2006.

Sales and other revenues from continuing operations increased 17% from $791.6 million for the three months ended March 31, 2006 to $925.9 million for the three months ended March 31, 2007 due principally to an increase in volumes of produced refined products sold. The total volume of refined products sold increased 8% for the three months ended March 31, 2007 as compared to the three months ended March 31, 2006. Additionally, the first quarter of 2007 included $61.7 million of revenues attributable to certain direct crude oil sales that were previously netted against the corresponding purchases and presented in cost of products sold prior to our adoption of new accounting guidance effective April 1, 2006.

Cost of products sold increased 11% from $675.5 million in the first quarter of 2006 to $751.7 million in the first quarter of 2007 due principally to an increase in volumes of produced refined products sold and the inclusion of $61.9 million of costs attributable to direct crude oil sales, partially offset by a per unit decrease in cost of produced refined products sold. The total volume of refined products sold increased 8% for the three months ended March 31, 2007 as compared to the three months ended March 31, 2006. The average price we paid per barrel of crude oil and

feedstocks purchased and the transportation costs of moving the finished products to the market place decreased 6% from $62.25 in the first quarter of 2006 to $58.50 in the first quarter of 2007.

Gross refining margin per produced barrel increased 35% from $11.96 in the first quarter of 2006 to $16.09 in the first quarter of 2007. Gross refinery margin does not include the effects of depreciation, depletion and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part 1 of this Form 10-Q for a reconciliation to the income statement of prices of refined products sold and cost of products purchased.

Operating expenses, exclusive of depreciation, depletion and amortization, decreased 5% from $52.5 million in the first quarter of 2006 to $50.1 million in the first quarter of 2007 due principally to lower utility and environmental costs, partially offset by higher refinery maintenance costs.

General and administrative expenses increased 17% from $13.5 million in the first quarter of 2006 to $15.8 million in the first quarter of 2007 due primarily to increased equity-based incentive compensation expense which is affected by increases in our stock price.

Depreciation, depletion and amortization increased 43% from $8.0 million in the first quarter of 2006 to $11.5 million in the first quarter of 2007 due to capitalized refinery improvement projects in 2006.

Our equity in earnings of HEP was $3.3 million for the three months ended March 31, 2007 as compared to $3.2 million for the three months ended March 31, 2006.

Interest income for the first quarter of 2007 was $2.6 million compared to $1.7 million for the first quarter of 2006. The increase in interest income was principally due to a higher interest rate environment.

Interest expense was $0.3 million for the first quarter of 2007 and 2006.

Income taxes increased 124% from $15.5 million for the first quarter of 2006 to $34.7 million for the first quarter of 2007 due to significantly higher pre-tax earnings during the 2007 first quarter as compared to the 2006 first quarter. The effective tax rate for the first quarter of 2007 was 33.9%, as compared to 33.2% for the first quarter of 2006. The slight increase in our effective tax rate was principally due to an increase in our pre-tax income for the first quarter of 2007 as compared to the first quarter of 2006.

We had no income from discontinued operations for the first quarter of 2007 as our Montana Refinery operations have ceased. Income from discontinued operations was $15.6 million for the first quarter of 2006 which included the gain on the sale of the Montana Refinery of $14.3 million, net of $8.4 million in income taxes. The Montana Refinery generated operating income of $1.3 million for the first quarter of 2006.

LIQUIDITY AND CAPITAL RESOURCES

We consider all highly-liquid instruments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are stated at cost, which approximates market value, and are invested primarily in conservative, highly-rated instruments issued by financial institutions or government entities with strong credit standings. We also invest available cash in highly-rated marketable debt securities primarily issued by government entities that have maturities greater than three months. These securities include investments in variable rate demand notes (“VRDN”) and auction rate securities (“ARS”). Although VRDN and ARS may have long-term stated maturities, generally 15 to 30 years, we have designated these securities as available-for-sale and have classified them as current because we view them as available to support our current operations. Rates on VRDN are typically reset either daily or weekly. Rates on ARS are reset through a Dutch auction process at intervals between 35 and 90 days, depending on the terms of the security. VRDN and ARS may be liquidated at par on the rate reset date. We also invest in other marketable debt securities with the maximum maturity of any individual issue not greater than two years from the date of purchase. All of these instruments are classified as available-for-sale, and as a result, are reported at fair value. Unrealized gains and losses, net of related income taxes, are reported as a component of accumulated other comprehensive income or loss. As of March 31, 2007, we had cash and cash equivalents of $151.2 million, marketable securities with maturities under one year of $119.5 million and marketable securities with maturities greater than one year, but less than two years, of $9.7 million.

Cash and cash equivalents decreased by $2.9 million during the three months ended March 31, 2007. The combined cash used for investing activities of $53.8 million and for financing activities of $35.4 million exceeded cash provided by operating activities of $86.3 million. Working capital increased during the three months ended March 31, 2007 by $17.1 million.

We have a $175.0 million secured revolving credit facility with Bank of America as administrative agent and a lender, with a term of four years through 2008 and an option to increase the facility to $225.0 million subject to certain conditions. The credit facility may be used to fund working capital requirements, capital expenditures, acquisitions and other general corporate purposes. As of March 31, 2007, we had letters of credit outstanding under our revolving credit facility of $2.3 million and had no borrowings outstanding. We were in compliance with all covenants at March 31, 2007.

Under our $300.0 million common stock repurchase program, common stock repurchases are being made from time to time in the open market or privately negotiated transactions based on market conditions, securities law limitations and other factors. During the three months ended March 31, 2007, we repurchased under this repurchase initiative 545,439 shares at a cost of approximately $29.2 million (of which $0.6 million of the cash settlement was after March 31, 2007) or an average of $53.56 per share. Since inception of this repurchase initiative in November 2005 through March 31, 2007, we have repurchased 5,991,646 shares at a cost of approximately $236.2 million or an average of $39.42 per share.

We believe our current cash, cash equivalents and marketable securities, along with future internally generated cash flow and funds available under our credit facility provide sufficient resources to fund currently planned capital projects and our liquidity needs for the foreseeable future as well as allow us to continue payment of quarterly dividends and the repurchase of additional common stock under our common stock repurchase program. In addition, components of our growth strategy may include construction of new refinery processing units and the expansion of existing units at our facilities and selective acquisition of complementary assets for our refining operations intended to increase earnings and cash flow. Our ability to acquire complementary assets will be dependent upon several factors, including our ability to identify attractive acquisition candidates, consummate acquisitions on favorable terms, successfully integrate acquired assets and obtain financing to fund acquisitions and to support our growth, and many other factors beyond our control.

Cash Flows — Operating Activities

Net cash flows provided by operating activities were $86.3 million for the three months ended March 31, 2007 compared to cash used of $18.3 million for the three months ended March 31, 2006, an increase of $104.6 million. Net income for the three months ended March 31, 2007 was $67.5 million, an increase of $20.7 million from net income of $46.8 million for the three months ended March 31, 2006. Additionally, the non-cash adjustments to net income of depreciation and amortization, deferred taxes, equity-based compensation and gain on an asset sale resulted in an increase of cash flows of $27.7 million for the 2007 first quarter over the 2006 first quarter. Distributions in excess of equity in earnings of HEP increased by $0.5 million for the three months ended March 31, 2007 from the three months ended March 31, 2006. Changes in working capital items increased cash flows by $4.4 million during the three months ended March 31, 2007, as compared to a decrease of $48.6 million for the three months ended March 31, 2006, resulting mainly from an increase in inventories during the first quarter of 2006. For the first three months of 2007, inventories increased by only $15.8 million, as compared to an increase of $53.4 million for the first three months of 2006. Also impacting the working capital items was a $23.7 decrease in net assets of discontinued operations during the first quarter of 2006, due to the sale of the Montana Refinery assets on March 31, 2006. Additionally, in the first three months of 2007, turnaround expenditures amounted to $0.2 million, as opposed to $4.0 million in the first three months of 2006.

Cash Flows — Investing Activities and Capital Projects

Net cash flows used for investing activities were $53.8 million for the three months ended March 31, 2007, as compared to net cash flows provided by investing activities of $119.9 million for the three months ended March 31, 2006, a net change of $173.7 million. Cash expenditures for property, plant and equipment for the first three months of 2007 totaled $26.8 million as compared to $32.2 million for the same period of 2006. On March 31, 2006 we sold our Montana Refinery to Connacher. The net cash proceeds we received on the sale of the Montana Refinery were $48.9 million, net of transaction fees and expenses. We also invested $89.2 million in marketable securities and received proceeds of $62.1 million from the sale or maturity of marketable securities during the three months ended March 31, 2007. For the three months ended March 31, 2006, we invested $51.4 million in marketable securities and received proceeds of $154.7 million from the sale or maturity of marketable securities.