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, 2009

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

For the transition period from                     to                     

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 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes o No o

The registrant has not yet been phased in to the Interactive Data File requirements.

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):

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

50,101,768 shares of Common Stock, par value $.01 per share, were outstanding on April 30, 2009.

 

 

HOLLY CORPORATION
INDEX

				Page
PART I.		FINANCIAL INFORMATION
Forward-Looking Statements					3
Definitions					4
Item 1.		Financial Statements			6
		Consolidated Balance Sheets March 31, 2009 (Unaudited) and December 31, 2008			6
		Consolidated Statements of Income (Unaudited) Three Months Ended March 31, 2009 and 2008			7
		Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2009 and 2008			8
		Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended March 31, 2009 and 2008			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			38
Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles					38
Item 4.		Controls and Procedures			44
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			45
Item 6.		Exhibits			47
Signatures					49
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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. For periods after our reconsolidation of Holly Energy Partners, L.P. (“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. Our consolidated 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.

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 future acquired operations;
	•		our ability to complete the acquisition of the Tulsa refinery and successfully integrate its operations into our business;
	•		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, 2008 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 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 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.

     “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.

     “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 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,
		2009				2008
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	53,878			$	40,805
Marketable securities			587				49,194
Accounts receivable: Product and transportation			133,489				128,337
Crude oil resales			170,198				161,427
			303,687				289,764
Inventories:                Crude oil and refined products			145,513				107,811
Materials and supplies			17,411				17,924
			162,924				125,735
Income taxes receivable			5,841				6,350
Prepayments and other			18,281				18,775
Total current assets			545,198				530,623
Properties, plants and equipment, at cost			1,604,508				1,509,701
Less accumulated depreciation			(319,263	)			(304,379	)
			1,285,245				1,205,322
Marketable securities (long-term)			—				6,009
Other assets:                   Turnaround costs			60,277				34,309
Goodwill			27,542				27,542
Intangibles and other			95,605				70,420
			183,424				132,271
Total assets		$	2,013,867			$	1,874,225
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	415,592			$	391,142
Accrued liabilities			41,987				42,016
Short-term debt — Holly Corporation			55,000				—
Short-term debt — Holly Energy Partners			—				29,000
Total current liabilities			512,579				462,158
Long-term debt — Holly Energy Partners			411,485				341,914
Deferred income taxes			71,328				69,491
Other long-term liabilities			67,391				64,330
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; 73,543,873 and 73,543,873 shares issued as of March 31, 2009 and December 31, 2008, respectively			735				735
Additional capital			119,365				121,298
Retained earnings			1,159,881				1,145,388
Accumulated other comprehensive loss			(35,289	)			(35,081	)
Common stock held in treasury, at cost — 23,442,105 and 23,600,653 shares as of March 31, 2009 and December 31, 2008, respectively			(685,931	)			(690,800	)
Total Holly Corporation stockholders’ equity			558,761				541,540
Noncontrolling interest			392,323				394,792
Total equity			951,084				936,332
Total liabilities and equity		$	2,013,867			$	1,874,225

     See accompanying notes.

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

		Three Months Ended
		March 31,
		2009				2008
Sales and other revenues		$	650,823			$	1,479,984
Operating costs and expenses:
Cost of products sold (exclusive of depreciation and amortization)			511,654				1,383,437
Operating expenses (exclusive of depreciation and amortization)			67,202				60,708
General and administrative expenses (exclusive of depreciation and amortization)			11,747				12,937
Depreciation and amortization			20,321				13,309
Total operating costs and expenses			610,924				1,470,391
Income from operations			39,899				9,593
Other income (expense):
Equity in earnings of SLC Pipeline			175				—
Interest income			2,196				3,555
Interest expense			(6,239	)			(1,992	)
Equity in earnings of Holly Energy Partners			—				2,990
			(3,868	)			4,553
Income from operations before income taxes			36,031				14,146
Income tax provision:
Current			10,160				6,318
Deferred			1,971				(1,623	)
			12,131				4,695
Net income			23,900				9,451
Less net income attributable to noncontrolling interest			1,955				802
Net income attributable to Holly Corporation stockholders		$	21,945			$	8,649
Net income per share attributable to Holly Corporation stockholders — basic		$	0.44			$	0.17
Net income per share attributable to Holly Corporation stockholders — diluted		$	0.44			$	0.17
Cash dividends declared per common share		$	0.15			$	0.15
Average number of common shares outstanding:
Basic			50,042				51,165
Diluted			50,171				51,515

See accompanying notes.

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

		Three Months Ended
		March 31,
		2009				2008
Cash flows from operating activities:
Net income		$	23,900			$	9,451
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			20,321				13,309
Deferred income taxes			1,971				(1,623	)
Equity based compensation expense			1,447				178
Equity in earnings of SLC Pipeline			(175	)			—
Distributions in excess of equity in earnings in Holly Energy Partners			—				3,067
Change in fair value — interest rate swaps			216				—
(Increase) decrease in current assets:
Accounts receivable			(15,423	)			(49,717	)
Inventories			(37,189	)			5,626
Income taxes receivable			509				2,905
Prepayments and other			494				1,855
Increase (decrease) in current liabilities:
Accounts payable			9,597				125,125
Accrued liabilities			14,797				(9,989	)
Turnaround expenditures			(26,983	)			(1,398	)
Other, net			4,203				61
Net cash provided by (used for) operating activities			(2,315	)			98,850
Cash flows from investing activities:
Additions to properties, plants and equipment — Holly Corporation			(88,658	)			(69,508	)
Additions to properties, plants and equipment — Holly Energy Partners			(10,570	)			(3,253	)
Investment in joint venture — Holly Energy Partners			(25,500	)			—
Purchases of marketable securities			(128,707	)			(207,557	)
Sales and maturities of marketable securities			183,096				185,772
Proceeds from sale of crude pipeline and tankage assets			—				171,000
Increase in cash due to consolidation of Holly Energy Partners			—				7,295
Investment in Holly Energy Partners			—				(290	)
Net cash provided by (used for) investing activities			(70,339	)			83,459
Cash flows from financing activities:
Net borrowings under credit agreement — Holly Corporation			55,000				—
Net borrowings under credit agreement — Holly Energy Partners			40,000				10,000
Purchase of treasury stock			(1,214	)			(102,850	)
Dividends			(7,502	)			(6,410	)
Distributions to noncontrolling interest			(6,916	)			—
Contribution from joint venture partner			4,750				19
Issuance of common stock upon exercise of options			45				254
Excess tax benefit from equity based compensation			2,180				3,225
Purchase of units for restricted grants — Holly Energy Partners			(616	)			—
Deferred financing costs			—				(365	)
Net cash provided by (used for) financing activities			85,727				(96,127	)
Cash and cash equivalents:
Increase (decrease) for the period			13,073				86,182
Beginning of period			40,805				94,369
End of period		$	53,878			$	180,551
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest		$	8,774			$	5,080
Income taxes		$	3,457			$	298

See accompanying notes.

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

		Three Months Ended
		March 31,
		2009				2008
		(In thousands)
Net income		$	23,900			$	9,451
Other comprehensive income (loss):
Securities available for sale:
Unrealized gain (loss) on available-for-sale securities			(463	)			826
Reclassification adjustment to net income on sale of marketable securities			236				(1,307	)
Total unrealized gain (loss) on available-for-sale securities			(227	)			(481	)
Other comprehensive loss of Holly Energy Partners:
Change in fair value of cash flow hedge			(250	)			(4,349	)
Other comprehensive loss before income taxes			(477	)			(4,830	)
Income tax benefit			(133	)			(885	)
Other comprehensive loss			(344	)			(3,945	)
Total comprehensive income			23,556				5,506
Less comprehensive income (loss) attributable to noncontrolling interest			1,819				(1,557	)
Comprehensive income attributable to Holly Corporation stockholders		$	21,737			$	7,063

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. For periods after our reconsolidation of Holly Energy Partners, L.P. (“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. Our consolidated 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 the close of business on March 31, 2009, 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 and operated Holly Asphalt Company which manufactures and markets asphalt products from various terminals in Arizona and New Mexico; and
	•		owned a 46% interest in Holly Energy Partners, L.P. (“HEP”) which includes our 2% general partner interest, which has logistic assets including approximately 2,600 miles of petroleum product and crude oil pipelines located principally in west Texas and New Mexico; ten refined product terminals; a jet fuel terminal; two refinery truck rack facilities; a refined products tank farm facility; on-site crude oil tankage at both our Navajo and Woods Cross Refineries and a 70% interest in Rio Grande Pipeline Company (“Rio Grande”).

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, 2009, the consolidated results of operations and comprehensive income for the three months ended March 31, 2009 and 2008 and consolidated cash flows for the three months ended March 31, 2009 and 2008 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, 2008 filed with the SEC.

Our results of operations for the three months ended March 31, 2009 are not necessarily indicative of the results to be expected for the full year.

Our accounts receivable consist of amounts due from customers which 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 letters of credit or guarantees, is required. Credit losses are charged to income when accounts are deemed uncollectible and historically have been minimal. At March 31, 2009 our allowance for doubtful accounts reserve was $2.5 million.

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

Statement of Financial Accounting Standard (“SFAS”) No. 160 “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of Accounting Research Bulletin (“ARB”) No. 51"
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160 which changes the classification of non-controlling interests, also referred to as minority interests, in the consolidated financial statements. We adopted this standard effective January 1, 2009. As a result, all previous references to “minority interest” within this document have been replaced with “noncontrolling interest.” Additionally, net income attributable to the non-controlling interest in our HEP subsidiary is now presented as an adjustment to net income to arrive at “Net income attributable to Holly Corporation stockholders” in our Consolidated Statements of Income. Prior to our adoption of this standard, this amount was presented as “Minority interests in earnings of Holly Energy Partners,” a non-operating expense item before “Income before income taxes.” Additionally, equity attributable to noncontrolling interests is now presented as a separate component of total equity in our Consolidated Financial Statements. We have adopted this standard on a retroactive basis. While this presentation differs from previous GAAP requirements, this standard did not affect our net income and equity attributable to Holly stockholders.

SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of SFAS No. 133” In March 2008, the FASB issued SFAS No. 161 which amends and expands the disclosure requirements of SFAS 133 to include disclosure of the objectives and strategies related to an entity’s use of derivative instruments, disclosure of how an entity accounts for its derivative instruments and disclosure of the financial impact including effect on cash flows associated with derivative activity. We adopted this standard effective as of January 1, 2009. See Note 8 for disclosure of HEP’s derivative instruments and hedging activity.

NOTE 2: 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. At March 31, 2009, we held 7,000,000 subordinated units and 290,000 common units of HEP, representing a 46% ownership interest in HEP, including our 2% general partner interest.

HEP is a variable interest entity (“VIE”) as defined under Financial Accounting Standards Board Interpretation (“FIN”) No. 46R. Under the provisions of FIN No. 46R, HEP’s acquisition of the Crude Pipelines and Tankage Assets (discussed below) qualified as a reconsideration event whereby we reassessed whether HEP continued to qualify as a VIE. Following this transfer, we determined that HEP continued to qualify as a VIE, and furthermore, we determined that our beneficial interest in HEP exceeded 50%. Accordingly, we reconsolidated HEP effective March 1, 2008 and no longer account for our investment in HEP under the equity method of accounting. As a result, our consolidated financial statements include the results of HEP.

On February 29, 2008, we closed on the sale of certain crude pipelines and tankage assets (the “Crude Pipelines and Tankage Assets”) to HEP for $180.0 million. The assets consisted of crude oil trunk lines that deliver crude oil to our Navajo Refinery in southeast New Mexico, gathering and connection pipelines located in west Texas and New Mexico, on-site crude tankage located within the Navajo and Woods Cross Refinery complexes, a jet fuel products pipeline between Artesia and Roswell, New Mexico, a leased jet fuel terminal in Roswell, New Mexico and crude oil and product pipelines that support our Woods Cross Refinery. Consideration received consisted of $171.0 million in cash and 217,497 HEP common units having a value of $9.0 million.

HEP serves our refineries in New Mexico and Utah under three 15-year pipeline, terminal and tankage agreements. The majority of HEP’s business is devoted to providing transportation, storage and terminalling services to us. We have an agreement that relates to the pipelines and terminals contributed to HEP by us at the time of their initial public offering in 2004 and expires in 2019 (the “HEP PTA”). Our second agreement relates to the intermediate pipelines sold to HEP in July 2005 and expires in 2020 (the “HEP IPA”). Our third agreement relates to the Crude Pipelines and Tankage Assets sold to HEP as discussed above and expires in February 2023 (the “HEP CPTA”).

Under these agreements, we agreed to transport and store volumes of refined product and crude oil on HEP’s pipelines and terminal and tankage facilities that result in minimum annual payments to HEP. These minimum

annual payments are adjusted each year at a percentage change equal to 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 equal to the percentage change in the PPI or the Federal Energy Regulatory Commission (“FERC”) index, but 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 which is reviewed periodically.

The balance sheet impact of our reconsolidation of HEP on March 1, 2008 was an increase in cash of $7.3 million, an increase in other current assets of $5.9 million, an increase in property, plant and equipment of $336.9 million, an increase in goodwill, intangibles and other assets of $81.5 million, an increase in current liabilities of $19.6 million, an increase in long-term debt of $338.5 million, a decrease in other long-term liabilities of $0.5 million, an increase in minority interest of $389.1 million and a decrease in distributions in excess of investment in HEP of $315.1 million.

HEP closed on a public offering of 2,000,000 common units priced at $27.80 per common unit on May 8, 2009. In connection with the offering, HEP granted the underwriters a 30-day option to purchase up to 300,000 additional common units. Proceeds from the offering will be used to repay bank debt and for general partnership purposes. In addition, we made a capital contribution to HEP to maintain our 2% general partner interest.

NOTE 3: Earnings Per Share

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

		Three Months Ended
		March 31,
		2009				2008
		(In thousands, except per share data)
Net Income attributable to Holly Corporation stockholders		$	21,945			$	8,649
Average number of shares of common stock outstanding			50,042				51,165
Effect of dilutive stock options, variable restricted shares and performance share units			129				350
Average number of shares of common stock outstanding assuming dilution			50,171				51,515
Net income per share attributable to Holly Corporation stockholders — basic		$	0.44			$	0.17
Net income per share attributable to Holly Corporation stockholders — diluted		$	0.44			$	0.17

NOTE 4: Stock-Based Compensation

Holly Corporation

On March 31, 2009, we had three principal share-based compensation plans (“Long-Term Incentive Compensation Plan”) which are described below. The compensation cost that has been charged against income for these plans was $1.3 million and $1.9 million for the three months ended March 31, 2009 and 2008, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $0.5 million and $0.7 million for the three months ended March 31, 2009 and 2008, 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 March 31, 2009, 2,158,118 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 for the three months ended March 31, 2009 and 2008 was $0.4 million and $0.1 million, 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 following 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 and changes during the three months ended March 31, 2009 is presented below:

										Weighted-
						Weighted				Average				Aggregate
						Average				Remaining				Intrinsic
						Exercise				Contractual				Value
Options		Shares				Price				Term				($000)
Outstanding at January 1, 2009			85,200			$	2.98
Exercised			(15,000	)			2.98
Outstanding and exercisable at March 31, 2009			70,200			$	2.98				1.9			$	1,279

The total intrinsic value of options exercised during the three months ended March 31, 2009 and 2008, was $0.3 million and $3.1 million, respectively.

Cash received from option exercises under the stock option plans was zero and $0.3 million for the three months ended March 31, 2009 and 2008, respectively. The actual tax benefit realized for the tax deductions from option exercises under the stock option plans totaled $0.1 million and $1.2 million for the three months ended March 31, 2009 and 2008, 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, 2009 is presented below:

						Weighted
						Average				Aggregate
						Grant-Date				Intrinsic Value
Restricted Stock		Grants				Fair Value				($000)
Outstanding at January 1, 2009 (nonvested)			235,310			$	35.86
Vesting and transfer of ownership to recipients			(127,252	)			26.63
Granted			142,473				22.71
Forfeited			(2,412	)			35.04
Outstanding at March 31, 2009 (nonvested)			248,119			$	33.06			$	5,260

The total fair value of restricted stock vested and transferred to recipients during the three months ended March 31, 2009 and 2008 was $3.4 million and $2.7 million, respectively. As of March 31, 2009, there was $4.3 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 1.2 years.

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 three months ended March 31, 2009, we granted 115,356 performance share units with a fair value based on our grant date closing stock price of $22.86. 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 March 31, 2009, estimated share payouts for outstanding nonvested performance share unit awards ranged from 120% to 170%.

A summary of performance share unit activity and changes during the three months ended March 31, 2009 is presented below:

Performance Share Units		Grants
Outstanding at January 1, 2009 (non-vested)			169,669
Vesting and payment of benefit to recipients			(72,059	)
Granted			115,356
Forfeited			(4,995	)
Outstanding at March 31, 2009 (non-vested)			207,971

For the three months ended March 31, 2009, we issued 110,971 shares of our common stock (representing a 154% share payout) having a fair value of $2.2 million related to vested performance share units. Based on the weighted average grant date fair value of $35.44, there was $3.1 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 1.4 years.

NOTE 5: Cash and Cash Equivalents and Investments in Marketable Securities

Our investment portfolio consists of cash and cash equivalents at March 31, 2009. In addition, we own 1,000,000 shares of Connacher Oil and Gas Limited common stock that was received as partial consideration upon the sale of our Montana Refinery in 2006.

We also 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”). Although VRDN 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. VRDN 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 including investments in equity securities are classified as available-for-sale, and as a result, are reported at fair value using quoted market prices (level 1 inputs). Interest income is recorded as earned. Unrealized gains and losses, net

of related income taxes, are considered temporary and are 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, 2009:

Available-for-Sale Securities

Gross

Estimated

Unrealized

Fair Value

Amortized

Gain

(Net Carrying

Cost

(Loss)

Amount)

(In thousands)

Equity securities

$

604

$

(17

)

$

587

For the three months ended March 31, 2009 and 2008 we received a total of $183.1 million and $185.8 million, respectively, related to sales and maturities of our marketable debt securities.

NOTE 6: Inventories

Inventory consists of the following components:

		March 31,				December 31,
		2009				2008
		(In thousands)
Crude oil		$	27,977			$	22,897
Other raw materials and unfinished products (1)			23,706				12,286
Finished products (2)			93,830				72,628
Process chemicals (3)			3,634				3,800
Repairs and maintenance supplies and other			13,777				14,124
		$	162,924			$	125,735

NOTE 7: Environmental

Consistent with our accounting policy for environmental remediation costs, we expensed $2.6 million and zero for the three months ended March 31, 2009 and 2008, respectively, for environmental remediation obligations. The accrued environmental liability reflected in the consolidated balance sheets was $9.4 million and $7.3 million at March 31, 2009 and December 31, 2008, respectively, of which $5.9 million and $4.2 million, respectively, was 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

At March 31, 2009, we had a $175.0 million senior secured revolving credit agreement (the “Credit Agreement”) with Bank of America as administrative agent and lender. The Credit Agreement has a term of five years and an option to increase the facility to $300.0 million subject to certain conditions. This credit facility expires in 2013 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, 2009. At March 31, 2009, we had outstanding

borrowings of $55.0 million and letters of credit totaling $9.8 million under the Credit Agreement. At that level of usage, the unused commitment under the Credit Agreement was $110.2 million at March 31, 2009.

In April 2009, we amended the Credit Agreement increasing the size from $175.0 million to $300.0 million (the “Amended Credit Agreement”). The Amended Credit Agreement expires in March 2013 and has an option to increase the facility to $450.0 million subject to certain conditions. The general terms of the Amended Credit Agreement did not change.

HEP has a $300.0 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 or other general partnership purposes. HEP’s obligations under the HEP Credit Agreement are collateralized by substantially all of HEP’s assets. HEP assets that are included in our Consolidated Balance Sheets at March 31, 2009 consist of $4.3 million in cash and cash equivalents, $4.1 million in trade accounts receivable and other current assets, $359.3 million in property, plant and equipment, net and $108.5 million in intangible and other assets. 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. Navajo Pipeline Co., L.P., Navajo Refining Company, L.L.C. and Woods Cross Refining Company, L.L.C., three of our subsidiaries, have agreed to indemnify HEP’s controlling partner to the extent it makes any payment in satisfaction of debt service due on up to a $171.0 million aggregate principal amount of borrowings under the HEP Credit Agreement.

HEP Senior Notes Due 2015

The HEP senior notes maturing March 1, 2015 are registered with the SEC and bear interest at 6.25% (“HEP Senior Notes”). 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. 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. Navajo Pipeline Co., L.P., one of our subsidiaries, has agreed to indemnify HEP’s controlling partner to the extent it makes any payment in satisfaction of debt service on up to $35.0 million of the principal amount of the HEP Senior Notes.

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

		March 31,				December 31,
		2009				2008
		(In thousands)
HEP Credit Agreement		$	240,000			$	200,000
HEP Senior Notes
Principal			185,000				185,000
Unamortized discount			(15,566	)			(16,223	)
Unamortized premium — de-designated fair value hedge			2,051				2,137
			171,485				170,914
Total debt			411,485				370,914
Less short-term borrowings under HEP Credit Agreement(1)			—				29,000
Total long-term debt(1)		$	411,485			$	341,914

Interest Rate Risk Management

HEP uses interest rate derivatives to manage their exposure to interest rate risk. As of March 31, 2009, HEP had three interest rate swap contracts.

HEP has an interest rate swap that hedges their exposure to the cash flow risk caused by the effects of LIBOR changes on their $171.0 million credit agreement advance that was used to finance their purchase of the Crude Pipelines and Tankage Assets in February 2008. This interest rate swap effectively converts their $171.0 million 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 March 31, 2009. The maturity of this swap contract is February 28, 2013. HEP intends to renew the HEP Credit Agreement prior to its expiration in August 2011 and continue to finance the $171.0 million balance until the swap matures.

HEP has designated this interest rate swap as a cash flow hedge. Based on their assessment of effectiveness using the change in variable cash flows method, HEP determined that the interest rate swap is effective in offsetting the variability in interest payments on the $171.0 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 their swap against the expected future interest payments on their $171.0 million variable rate debt. Any ineffectiveness is reclassified from accumulated other comprehensive income to interest expense. As of March 31, 2009, HEP had no ineffectiveness on their cash flow hedge.

HEP also has an interest rate swap contract that effectively converts interest expense associated with $60.0 million of the HEP 6.25% Senior Notes from fixed to variable rate debt (“Variable Rate Swap”). Under this swap contract, interest on the $60.0 million notional amount is computed using the three-month LIBOR plus a spread of 1.1575%, which equaled an effective interest rate of 2.42% as of March 31, 2009. The maturity of the swap contract is March 1, 2015, matching the maturity of the HEP Senior Notes.

In October 2008, HEP entered into an additional interest rate swap contract, effective December 1, 2008, that effectively unwinds the effects of the Variable Rate Swap discussed above, converting $60.0 million of their hedged long-term debt back to fixed rate debt (“Fixed Rate Swap”). Under the Fixed Rate Swap, interest on a notional amount of $60.0 million is computed at a fixed rate of 3.59% versus three-month LIBOR which when added to the 1.1575% spread on the Variable Rate Swap results in an effective fixed interest rate of 4.75%. The maturity date of this swap contract is December 1, 2013.

Prior to the execution of HEP’s Fixed Rate Swap, the Variable Rate Swap was designated as a fair value hedge of $60.0 million in outstanding principal under the HEP Senior Notes. HEP de-designated this hedge in October 2008. At this time, the carrying balance of the HEP Senior Notes included a $2.2 million premium due to the application of hedge accounting until the de-designation date. This premium is being amortized as a reduction to interest expense over the remaining term of the Variable Rate Swap.

HEP’s interest rate swaps not having a “hedge” designation are measured quarterly at fair value either as an asset or a liability in the consolidated balance sheets with the offsetting fair value adjustment to interest expense. For the three months ended March 31, 2009, HEP recognized $0.2 million in interest expense attributable to fair value adjustments to its interest rate swaps.

HEP records interest expense equal to the variable rate payments under the swaps. Receipts under the swap agreements are recorded as a reduction to interest expense.

The interest rate swaps are valued using level 2 inputs. Additional information on HEP’s interest rate swaps is as follows:

		Balance Sheet								Location of
Interest Rate Swaps		Location				Fair Value				Offsetting Balance				Offsetting Amount
										(In thousands)
Asset
Fixed-to-variable interest rate swap — $60 million of HEP 6.25% Senior Notes		Other assets				$	3,762			Long-term debt - HEP				$	(2,051	)
										Equity					(1,942	)(1)
										Interest expense					231	(2)
						$	3,762							$	(3,762	)
Liability
Cash flow hedge — $171 million LIBOR based debt		Other long-term liabilities				$	(13,117	)		Accumulated other comprehensive loss				$	13,117
Variable-to-fixed interest rate swap — $60 million		Other long-term liabilities								Equity					4,166	(1)
							(4,064	)		Interest expense					(102	)
						$	(17,181	)						$	17,181

NOTE 9: Income Taxes

Our effective tax rate for the first quarter of 2009 and 2008 was 33.7% and 33.2%, respectively.

NOTE 10: Stockholders’ Equity

During the three months ended March 31, 2009, we repurchased at current market price from certain officers and key employees 59,934 shares of our common stock at a cost of approximately $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 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, 2009
Unrealized loss on available-for-sale securities		$	(227	)		$	(89	)		$	(138	)
Unrealized loss on HEP cash flow hedge			(250	)			(44	)			(206	)
Other comprehensive loss			(477	)			(133	)			(344	)
Less other comprehensive loss attributable to noncontrolling interest			(136	)			—				(136	)
Other comprehensive loss attributable to Holly Corporation stockholders		$	(341	)		$	(133	)		$	(208	)
For the three months ended March 31, 2008
Unrealized loss on available-for-sale securities		$	(481	)		$	(187	)		$	(294	)
Unrealized loss on HEP cash flow hedge			(4,349	)			(698	)			(3,651	)
Other comprehensive loss			(4,830	)			(885	)			(3,945	)
Less other comprehensive loss attributable to noncontrolling interest			(2,359	)			—				(2,359	)
Other comprehensive loss attributable to Holly Corporation stockholders		$	(2,471	)		$	(885	)		$	(1,586	)

The temporary unrealized gain (loss) 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 includes:

		March 31,				December 31,
		2009				2008
		(In thousands)
Pension obligation adjustment		$	(29,409	)		$	(29,409	)
Retiree medical obligation adjustment			(2,202	)			(2,202	)
Unrealized loss on available-for-sale securities			(10	)			128
Unrealized loss on HEP cash flow hedge			(3,668	)			(3,598	)
Accumulated other comprehensive loss		$	(35,289	)		$	(35,081	)

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.

Effective January 1, 2007, the retirement plan was frozen to new employees not covered by collective bargaining agreements with labor unions. To the extent an 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.

The net periodic pension expense consisted of the following components:

		Three Months Ended
		March 31,
		2009				2008
		(In thousands)
Service cost		$	1,088			$	1,090
Interest cost			1,231				1,193
Expected return on assets			(1,002	)			(1,144	)
Amortization of prior service cost			98				98
Amortization of net loss			19				351
Net periodic benefit cost		$	1,434			$	1,588

The expected long-term annual rate of return on plan assets is 8.5%. This rate was used in measuring 2009 and 2008 net periodic benefit cost. We expect to contribute between $5.0 million and $15.0 million to the retirement plan in 2009.

NOTE 13: 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. 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 income tax issue and the other remaining issues relating to SFPP’s obligations to shippers are being handled by the

FERC in a single compliance proceeding covering the period from 1992 through May 2006. We currently estimate that, as a result of the May 2007 Court of Appeals decision and prior rulings by the Court of Appeals and the FERC in these proceedings, a net amount will be due from SFPP to us for the period January 1992 through May 2006 in addition to the $15.3 million we received in 2003 from SFPP as reparations for the period from 1992 through July 2000. Because proceedings in the FERC following the Court of Appeals decision have not been completed and final action by the FERC could be subject to further court proceedings, it is not possible at this time to determine what will be the net amount payable to us at the conclusion of these proceedings. We and other shippers have been engaged in settlement discussions with SFPP on remaining issues in the FERC proceedings. 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 approximately $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 Commission approved the settlement on January 29, 2009. The settlement will reduce SFPP’s current rates and require SFPP to make additional payments to us of approximately $2.0 million. On May 1, 2009, SFPP notified us that it may seek to invoke its rights to terminate the October 22, 2008, settlement rates and to file higher prospective rates. We and other shippers have begun discussions with SFPP to discuss its notification and possible alternatives to the termination of the settlement. We are not in a position to predict the outcome of these negotiations.

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 14: 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 Refinery, Woods Cross Refinery and Holly Asphalt Company. The Refining segment involves the purchase and refining of crude oil and wholesale and branded marketing of refined products, such as gasoline, diesel fuel and jet fuel, and includes our Navajo and Woods Cross Refineries. The petroleum products produced by the Refining segment are marketed in Texas, New Mexico, Arizona, Utah, Wyoming, Idaho, Washington and northern Mexico. The Refining segment also includes Holly Asphalt Company which manufactures and markets asphalt and asphalt products in Arizona, New Mexico, Texas and northern Mexico.

HEP is a VIE as defined under FIN No. 46R. Under the provisions of FIN No. 46R, HEP’s purchase of the Crude Pipelines and Tankage Assets qualified as a reconsideration event whereby we reassessed our beneficial interest in HEP. Following this transaction, we determined that our beneficial interest in HEP exceeded 50%. Accordingly, we reconsolidated HEP effective March 1, 2008 and no longer account for our investment in HEP under the equity method of accounting.

The HEP segment involves all of the operations of HEP effective March 1, 2008 (date of reconsolidation). HEP 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 and Utah. 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 70% interest in Rio Grande which provides petroleum products transportation services. 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 and from HEP’s interest in Rio Grande. 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, 2008.

										Corporate				Consolidations
										and				and
		Refining				HEP(1)				Other				Eliminations				Consolidated Total
		(In thousands)
Three Months Ended March 31, 2009
Sales and other revenues		$	636,910			$	32,125			$	99			$	(18,311	)		$	650,823
Depreciation and amortization		$	11,951			$	7,174			$	1,196			$	—			$	20,321
Income (loss) from operations		$	38,705			$	12,830			$	(11,636	)		$	—			$	39,899
Capital expenditures		$	88,238			$	10,570			$	420			$	—			$	99,228
Three Months Ended March 31, 2008
Sales and other revenues		$	1,477,376			$	9,942			$	401			$	(7,735	)		$	1,479,984
Depreciation and amortization		$	10,281			$	2,010			$	1,018			$	—			$	13,309
Income (loss) from operations		$	18,884			$	3,734			$	(13,025	)		$	—			$	9,593
Capital expenditures		$	68,816			$	3,252			$	693			$	—			$	72,761

										Corporate				Consolidations
										and				and
		Refining				HEP				Other				Eliminations				Consolidated Total
		(In thousands)
March 31, 2009
Cash, cash equivalents and investments in marketable securities		$	—			$	4,321			$	50,144			$	—			$	54,465
Total assets		$	1,447,571			$	488,311			$	96,543			$	(18,558	)		$	2,013,867
December 31, 2008
Cash, cash equivalents and investments in marketable securities		$	—			$	5,269			$	90,739			$	—			$	96,008
Total assets		$	1,288,211			$	458,049			$	141,768			$	(13,803	)		$	1,874,225

Note 15: Subsequent Event

On April 16, 2009, we entered into a definitive agreement with Sunoco Inc. (R&M) (“Sunoco”) to acquire their 85,000 barrel per day (“bpd”) refinery located in Tulsa, Oklahoma and associated businesses (the “Tulsa Refinery”) for $65.0 million. Under the terms of the agreement, we will also purchase related inventory which will be valued at market prices at closing. Additionally, we will receive an assignment of the Sunoco specialty lubricant product trademarks in North America and a license to use the same in Central and South America. The transaction, which is expected to close by June 1, 2009, is subject to approval by certain regulatory agencies as well as other usual and customary closing conditions.

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,” “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. For periods after our reconsolidation of Holly Energy Partners, L.P. (“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. This Quarterly Report on Form 10-Q 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.

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”). As of March 31, 2009, our refineries had a combined crude capacity of 131,000 BPSD. Our profitability depends largely on the spread between market prices for refined petroleum products and crude oil prices. At March 31, 2009, we also owned a 46% interest in 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. For the three months ended March 31, 2009, sales and other revenues were $650.8 million and net income attributable to Holly Corporation stockholders was $21.9 million. For the three months ended March 31, 2008, sales and other revenues were $1,480.0 million and net income attributable to Holly corporation stockholders was $8.6 million. Our principal expenses are costs of products sold and operating expenses. Our total operating costs and expenses for the three months ended March 31, 2009 were $610.9 million, a decrease from $1,470.4 million for the three months ended March 31, 2008.

On February 29, 2008, we closed on the sale of certain crude pipelines and tankage assets (the “Crude Pipelines and Tankage Assets”) to HEP for $180.0 million. The assets consisted of crude oil trunk lines that deliver crude oil to our Navajo Refinery in southeast New Mexico, gathering and connection pipelines located in west Texas and New Mexico, on-site crude tankage located within the Navajo and Woods Cross Refinery complexes, a jet fuel products pipeline between Artesia and Roswell, New Mexico and a jet fuel terminal in Roswell, New Mexico. Consideration received consisted of $171.0 million in cash and 217,497 HEP common units having a value of $9.0 million.

HEP is a variable interest entity (“VIE”) as defined under Financial Accounting Standards Board Interpretation (“FIN”) No. 46R. Under the provisions of FIN No. 46R, HEP’s purchase of the Crude Pipelines and Tankage Assets qualified as a reconsideration event whereby we reassessed our beneficial interest in HEP. Following this transaction, we determined that our beneficial interest in HEP exceeded 50%. Accordingly, we reconsolidated HEP effective March 1, 2008 and no longer account for our investment in HEP under the equity method of accounting.

RESULTS OF OPERATIONS

Financial Data (Unaudited)

		Three Months Ended
		March 31,								Change from 2008
		2009				2008				Change				Percent
		(In thousands, except per share data)
Sales and other revenues		$	650,823			$	1,479,984			$	(829,161	)			(56.0	)%
Operating costs and expenses:
Cost of products sold (exclusive of depreciation, depletion and amortization)			511,654				1,383,437				(871,783	)			(63.0	)
Operating expenses (exclusive of depreciation, depletion and amortization)			67,202				60,708				6,494				10.7
General and administrative expenses (exclusive of depreciation, depletion and amortization)			11,747				12,937				(1,190	)			(9.2	)
Depreciation, depletion and amortization			20,321				13,309				7,012				52.7
Total operating costs and expenses			610,924				1,470,391				(859,467	)			(58.5	)
Income from operations			39,899				9,593				30,306				315.9
Other income (expense):
Equity in earnings of SLC Pipeline			175				—				175				—
Interest income			2,196				3,555				(1,359	)			(38.2	)
Interest expense			(6,239	)			(1,992	)			(4,247	)			213.2
Equity in earnings of HEP			—				2,990				(2,990	)			(100.0	)
			(3,868	)			4,553				(8,421	)			(185.0	)
Income from operations before income taxes			36,031				14,146				21,885				154.7
Income tax provision			12,131				4,695				7,436				158.4
Net income(1)			23,900				9,451				14,449				152.9	%
Less noncontrolling interest in net income(1)			1,955				802				1,153				143.8
Net income attributable to Holly Corporation stockholders(1)		$	21,945			$	8,649			$	13,296				153.7	%
Net income per share attributable to Holly Corporation stockholders — basic		$	0.44			$	0.17			$	0.27				158.8	%
Net income per share attributable to Holly Corporation stockholders — diluted		$	0.44			$	0.17			$	0.27				158.8	%
Cash dividends declared per common share		$	0.15			$	0.15			$	—				—	%
Average number of common shares outstanding:
Basic			50,042				51,165				(1,123	)			(2.2	)%
Diluted			50,171				51,515				(1,344	)			(2.6	)%

Balance Sheet Data (Unaudited)

		March 31,				December 31,
		2009				2008
		(In thousands)
Cash, cash equivalents and investments in marketable securities		$	54,465			$	96,008
Working capital		$	32,619			$	68,465
Total assets		$	2,013,867			$	1,874,225
Long-term debt — HEP		$	411,485			$	341,914
Total equity(1)		$	951,084			$	936,332

Other Financial Data (Unaudited)

		Three Months Ended
		March 31,
		2009				2008
		(In thousands)
Net cash provided by (used for) operating activities		$	(2,315	)		$	98,850
Net cash provided by (used for) investing activities		$	(70,339	)		$	83,459
Net cash provided by (used for) financing activities		$	85,727			$	(96,127	)
Capital expenditures		$	99,228			$	72,761
EBITDA (2)		$	58,440			$	25,090

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

		Three Months Ended
		March 31,
		2009				2008
		(In thousands)
Sales and other revenues
Refining(3)		$	636,910			$	1,477,376
HEP(4)			32,125				9,942
Corporate and Other			99				401
Consolidations and Eliminations			(18,311	)			(7,735	)
Consolidated		$	650,823			$	1,479,984
Operating Income (loss)
Refining(3)		$	38,705			$	18,884
HEP(4)			12,830				3,788
Corporate and Other			(11,636	)			(13,025	)
Consolidations and Eliminations			—				(54	)
Consolidated		$	39,899			$	9,593

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 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,
		2009				2008
Navajo Refinery
Crude charge (BPD) (1)			57,685				83,200
Refinery production (BPD) (2)			63,061				94,640
Sales of produced refined products (BPD)			62,147				94,050
Sales of refined products (BPD) (3)			71,138				105,410
Refinery utilization (4)			67.9	%			97.9	%
Average per produced barrel (5)
Net sales		$	57.37			$	103.26
Cost of products(6)			44.92				96.83
Refinery gross margin			12.45				6.43
Refinery operating expenses (7).			6.17				4.39
Net operating margin		$	6.28			$	2.04
Feedstocks:
Sour crude oil			87	%			80	%
Sweet crude oil			8	%			8	%
Other feedstocks and blends			5	%			12	%
Total			100	%			100	%
Sales of produced refined products:
Gasolines			61	%			58	%
Diesel fuels			31	%			32	%
Jet fuels			1	%			1	%
Fuel oil			1	%			3	%
Asphalt			3	%			3	%
LPG and other			3	%			3	%
Total			100	%			100	%

		Three Months Ended
		March 31,
		2009				2008
Woods Cross Refinery
Crude charge (BPD) (1)			23,309				24,960
Refinery production (BPD) (2)			23,286				25,440
Sales of produced refined products (BPD)			27,024				25,300
Sales of refined products (BPD) (3)			27,664				27,530
Refinery utilization (4)			75.2	%			96.0	%
Average per produced barrel (5)
Net sales		$	50.31			$	102.96
Cost of products(6)			39.57				90.42
Refinery gross margin			10.74				12.54
Refinery operating expenses (7)			6.92				6.26
Net operating margin		$	3.82			$	6.28
Feedstocks:
Sour crude oil			3	%			3	%
Sweet crude oil			66	%			76	%
Black wax crude oil			29	%			16	%
Other feedstocks and blends			2	%			5	%
Total			100	%			100	%
Sales of produced refined products:
Gasolines			68	%			68	%
Diesel fuels			23	%			23	%
Jet fuels			1	%			—	%
Fuel oil			4	%			5	%
Asphalt			1	%			—	%
LPG and other			3	%			4	%
Total			100	%			100	%
Consolidated
Crude charge (BPD) (1)			80,994				108,160
Refinery production (BPD) (2)			86,347				120,080
Sales of produced refined products (BPD)			89,171				119,350
Sales of refined products (BPD) (3)			98,802				132,940
Refinery utilization (4)			69.8	%			97.4	%
Average per produced barrel (5)
Net sales		$	55.23			$	103.20
Cost of products(6)			43.30				95.48
Refinery gross margin			11.93				7.72
Refinery operating expenses (7)			6.40				4.78
Net operating margin		$	5.53			$	2.94
Feedstocks:
Sour crude oil			64	%			63	%
Sweet crude oil			24	%			23	%
Black wax crude oil			8	%			4	%
Other feedstocks and blends			4	%			10	%
Total			100	%			100	%