Description
Filed with the SEC from May 19 to May 25:
Holly (HOC)
Turtle Creek owns 7,463,359 (14.0%) after the sale of 197,400 shares from March 21 to May 10 at prices ranging from $55.73 to $65.17 each.
BUSINESS OVERVIEW
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 Annual Report on Form 10-K 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 where there are transactions or obligations between HEP and Holly Corporation or its other subsidiaries. This document contains certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of Holly Corporation. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.
We are principally an independent petroleum refiner that produces high value light products such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. We were incorporated in Delaware in 1947 and maintain our principal corporate offices at 100 Crescent Court, Suite 1600, Dallas, Texas 75201-6915. Our telephone number is 214-871-3555 and our internet website address is www.hollycorp.com . The information contained on our website does not constitute part of this Annual Report on Form 10-K. A print copy of this Annual Report on Form 10-K will be provided without charge upon written request to the Vice President, Investor Relations at the above address. A direct link to our filings at the SEC website is available on our website on the Investors page. Also available on our website are copies of our Corporate Governance Guidelines, Audit Committee Charter, Compensation Committee Charter, Nominating / Corporate Governance Committee Charter and Code of Business Conduct and Ethics, all of which will be provided without charge upon written request to the Vice President, Investor Relations at the above address. Our Code of Business Conduct and Ethics applies to all of our officers, employees and directors, including our principal executive officer, principal financial officer and principal accounting officer. Our common stock is traded on the New York Stock Exchange under the trading symbol “HOC.”
On June 1, 2009, we acquired an 85,000 BPSD refinery located in Tulsa, Oklahoma (the “Tulsa Refinery west facility”) from an affiliate of Sunoco, Inc. (“Sunoco”) for $157.8 million in cash, including crude oil, refined product and other inventories valued at $92.8 million. The refinery produces fuel products including gasoline, diesel fuel and jet fuel and serves markets in the Mid-Continent region of the United States and also produces specialty lubricant products that are marketed throughout North America and are distributed in Central and South America. On October 20, 2009, we sold to an affiliate of Plains All American Pipeline, L.P. (“Plains”) a portion of the crude oil petroleum storage tanks and certain refining-related crude oil receiving pipeline facilities, that were acquired as part of the refinery assets for $40 million.
On December 1, 2009, we acquired a 75,000 BPSD refinery from an affiliate of Sinclair Oil Company (“Sinclair”) also located in Tulsa, Oklahoma (the “Tulsa Refinery east facility”) for $183.3 million, including crude oil, refined product and other inventories valued at $46.4 million. The total purchase price consisted of $109.3 million in cash and 2,789,155 shares of our common stock having a value of $74 million. Additionally, we reimbursed Sinclair $8.4 million upon their completion of certain environmental projects at the refinery in July 2010. The refinery also produces gasoline, diesel fuel and jet fuel products and serves markets in the Mid-Continent region of the United States. We are in the process of integrating the operations of both Tulsa Refinery facilities (collectively, the “Tulsa Refinery”). This will result in the Tulsa Refinery having an integrated crude processing rate of 125,000 BPSD.
On February 29, 2008, we sold certain crude pipelines and tankage assets to HEP for $180 million. The assets consisted of crude oil trunk lines that deliver crude oil to our refinery in southeast New Mexico, gathering and connection pipelines located in west Texas and New Mexico, on-site crude tankage located within the Woods Cross and Navajo Refinery complexes, a jet fuel products pipeline and leased terminal between Artesia and Roswell, New Mexico and crude oil and product pipelines that support our refinery in Woods Cross, Utah. HEP is a variable interest entity (“VIE”) as defined under U.S. generally accepted accounting principles (“GAAP”). Under GAAP, HEP’s acquisition of these 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%. Therefore, we reconsolidated HEP effective March 1, 2008. Intercompany transactions with HEP are eliminated in our consolidated financial statements.
HEP made a number of acquisitions in 2010 and 2009. Information on these acquisitions can be found under the “Holly Energy Partners, L.P.” section provided later in this discussion of Items 1 and 2, “Business and Properties.”
As of December 31, 2010, we:
• owned and operated three refineries consisting of a petroleum refinery in Artesia, New Mexico that is operated in conjunction with crude oil distillation and vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the “Navajo Refinery”), a refinery in Woods Cross, Utah (the “Woods Cross Refinery”) and the Tulsa Refinery;
• owned and operated Holly Asphalt Company (“Holly Asphalt”) which manufactures and markets asphalt products from various terminals in Arizona, New Mexico and Texas;
• owned a 75% interest in a 12-inch refined products pipeline project from Salt Lake City, Utah to Las Vegas, Nevada, together with terminal facilities in the Cedar City, Utah and North Las Vegas areas (the “UNEV Pipeline”); and
• owned a 34% interest in HEP (which includes our 2% general partnership interest), which owns and operates logistics assets including approximately 2,500 miles of petroleum product and crude oil pipelines located principally in west Texas and New Mexico; ten refined product terminals; a jet fuel terminal; eight refinery loading rack facilities; a refined products tank farm facility; on-site crude oil tankage at our Navajo, Woods Cross and Tulsa Refineries, on-site refined product tankage at our Tulsa Refinery and a 25% interest in a 95-mile, crude oil pipeline joint venture (the “SLC Pipeline”).
Navajo Refining Company, L.L.C., one of our wholly-owned subsidiaries, owns the Navajo Refinery. The Navajo Refinery has a crude capacity of 100,000 BPSD, can process up to 100% sour crude oil and serves markets in the southwestern United States and northern Mexico. Our Woods Cross Refinery, located just north of Salt Lake City, Utah has a crude capacity of 31,000 BPSD and is operated by Holly Refining & Marketing Company — Woods Cross, one of our wholly-owned subsidiaries. The Woods Cross Refinery processes regional sweet and Canadian sour crude oils and serves markets in Utah, Idaho, Nevada, Wyoming and eastern Washington. Our Tulsa Refinery located in Tulsa, Oklahoma has a crude capacity of 125,000 BPSD and is owned and operated by Holly Refining & Marketing Company — Tulsa LLC, one of our wholly-owned subsidiaries. The Tulsa Refinery primarily processes sweet crude oils, however, has the capability to process sour crude oils when economics dictate, and serves the Mid-Continent region of the United States.
Our operations are currently organized into two reportable segments, Refining and HEP. The Refining segment includes the operations of our Navajo, Woods Cross and Tulsa Refineries and Holly Asphalt. Information regarding Holly Asphalt can be found under the “Refinery Operations” section provided below. The HEP segment involves all of the operations of HEP effective March 1, 2008 (date of reconsolidation).
Recent Developments
On February 21, 2011, we entered into a merger agreement providing for a “merger of equals” business combination of us and Frontier Oil Corporation (the “Merger”). Frontier Oil Corporation (“Frontier”) operates a 135,000 bpd refinery located in El Dorado, Kansas, and a 52,000 bpd refinery located in Cheyenne, Wyoming, and markets its refined products principally along the eastern slope of the Rocky Mountains and in other neighboring plains states.
Subject to the terms and conditions of the merger agreement which has been approved unanimously by both our and Frontier’s board of directors, Frontier shareholders will receive 0.4811 shares of Holly common stock for each share of Frontier common stock if the Merger is completed.
Completion of the Merger is subject to certain conditions, including, among others, (i) approval by our stockholders of the issuance of our common stock to Frontier’s stockholders in connection with the Merger, (ii) adoption of the merger agreement by Frontier’s stockholders, (iii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iv) the registration statement on Form S-4 used to register the common stock to be issued as consideration for the Merger having been declared effective by the SEC and (v) the entry into a new credit facility for the combined company.
The foregoing description of the merger agreement is not a complete description of all the parties’ rights and obligations under the merger agreement and is qualified in its entirety by reference to the merger agreement, which is filed as Exhibit 2.1 to our Current Report on Form 8-K as filed with the SEC on February 22, 2011.
REFINERY OPERATIONS
Our refinery operations include the operations of our three refineries. The following table sets forth information, including performance measures about our refinery operations that are not calculations based upon GAAP. 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 7A of Part II of this Form 10-K.
(1) Crude charge represents the barrels per day of crude oil processed at our refineries.
(2) Refinery throughput represents the barrels per day of crude and other refinery feedstocks input to the crude units and other conversion units at our refineries.
(3) Refinery production represents the barrels per day of refined products yielded from processing crude and other refinery feedstocks through the crude units and other conversion units at our refineries.
(4) Includes refined products purchased for resale.
(5) Represents crude charge divided by total crude capacity (BPSD). Our consolidated crude capacity was increased by 15,000 BPSD effective April 1, 2009 (our Navajo Refinery expansion), 85,000 BPSD effective June 1, 2009 (our Tulsa Refinery west facility acquisition) and 40,000 BPSD effective December 1, 2009 (our Tulsa Refinery east facility acquisition), increasing our consolidated crude capacity to 256,000 BPSD.
(6) Represents average per barrel amount for produced refined products sold, which is a non-GAAP measure. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 7A of Part II of this Form 10-K.
(7) Transportation, terminal and refinery storage costs billed from HEP are included in cost of products.
(8) Represents operating expenses of our refineries, exclusive of depreciation and amortization.
We have several significant customers, one of which accounted for more than 10% of our business in 2010. For the year ended December 31, 2010, Sinclair accounted for $1,616 million or 19% of our revenues. In connection with our refinery acquisition from Sinclair in 2009, we entered into a refined products purchase agreement, or offtake agreement, with an affiliate of Sinclair. Information on this offtake agreement can be found under our discussion of the Tulsa Refinery provided later in this section of “Refinery Operations.” Our principal customers for gasoline include other refiners, convenience store chains, independent marketers, and retailers. Diesel fuel is sold to other refiners, truck stop chains, wholesalers and railroads. Jet fuel is sold for military and commercial airline use. Specialty lubricant products are sold in both commercial and specialty markets. Asphalt is sold to governmental entities or contractors. LPG’s are sold to LPG wholesalers and LPG retailers and carbon black oil is sold for further processing or blended into fuel oil.
Navajo Refinery
Facilities
The Navajo Refinery has a crude oil capacity of 100,000 BPSD and has the ability to process sour crude oils into high value light products such as gasoline, diesel fuel and jet fuel. The Navajo Refinery converts approximately 92% of its raw materials throughput into high value light products. For 2010, gasoline, diesel fuel and jet fuel (excluding volumes purchased for resale) represented 57%, 32% and 3%, respectively, of the Navajo Refinery’s sales volumes.
The following table sets forth information about the Navajo Refinery operations, including non-GAAP performance measures. 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 7A of Part II of this Form 10-K.
The Navajo Refinery’s Artesia, New Mexico facility is located on a 561-acre site and is a fully integrated refinery with crude distillation, vacuum distillation, FCC, ROSE (solvent deasphalter), HF alkylation, catalytic reforming, hydrodesulfurization, mild hydrocracking, isomerization, sulfur recovery and product blending units. Other supporting infrastructure includes approximately 2 million barrels of feedstock and product tankage at the site of which 0.2 million barrels of tankage are owned by HEP, maintenance shops, warehouses and office buildings. The operating units at the Artesia facility include newly constructed units, older units that have been relocated from other facilities and upgraded and re-erected in Artesia, and units that have been operating as part of the Artesia facility (with periodic major maintenance) for many years, in some very limited cases since before 1970. The Artesia facility is operated in conjunction with a refining facility located in Lovington, New Mexico, approximately 65 miles east of Artesia. The principal equipment at the Lovington facility consists of a crude distillation unit and associated vacuum distillation units that were constructed after 1970. The facility also has an additional 1.1 million barrels of feedstock and product tankage of which 0.2 million barrels of tankage are owned by HEP. The Lovington facility processes crude oil into intermediate products that are transported to Artesia by means of three intermediate pipelines owned by HEP. These products are then upgraded into finished products at the Artesia facility. The combined crude oil capacity of the Navajo Refinery facilities is 100,000 BPSD and it typically processes or blends an additional 10,000 BPSD of natural gasoline, butane, gas oil and naphtha. The Navajo Refinery completed a major maintenance turnaround in February 2010 .
We distribute refined products from the Navajo Refinery to markets in Arizona, New Mexico, west Texas and northern Mexico primarily through two of HEP’s pipelines that extend from Artesia, New Mexico to El Paso, Texas and from El Paso to Albuquerque and to Mexico via products pipeline systems owned by Plains and from El Paso to Tucson and Phoenix via a products pipeline system owned by Kinder Morgan’s subsidiary, SFPP, L.P. (“SFPP”). In addition, we use pipelines owned and leased by HEP to transport petroleum products to markets in central and northwest New Mexico. We have refined product storage through our pipelines and terminals agreement with HEP at terminals in El Paso, Texas; Tucson, Arizona; and Artesia, Moriarty and Bloomfield, New Mexico.
Markets and Competition
The Navajo Refinery primarily serves the southwestern United States market, which has historically experienced a high growth rate, including El Paso, Texas; Albuquerque, Moriarty and Bloomfield, New Mexico; Phoenix and Tucson, Arizona; and the northern Mexico market. Our products are shipped through HEP’s pipelines from Artesia, New Mexico to El Paso, Texas and from El Paso to Albuquerque and to Mexico via products pipeline systems owned by Plains and from El Paso to Tucson and Phoenix via a products pipeline system owned by SFPP. In addition, the Navajo Refinery transports petroleum products to markets in northwest New Mexico and to Moriarty, New Mexico, near Albuquerque, via HEP’s pipelines running from Artesia to San Juan County, New Mexico.
El Paso Market
The El Paso market for refined products is currently supplied by a number of area and gulf coast refiners and pipelines. Area refiners include Navajo, WRB Refining, LLC (“WRB”) (a joint venture between ConocoPhillips and EnCana Corp.), Valero, Alon USA, Inc. (“Alon”), and Western Refining. Pipelines serving this market are owned by Magellan Midstream Partners, L.P. (“Magellan”), NuStar Energy L.P. and HEP. Refined products from the Gulf Coast are transported via Magellan pipelines, including Magellan’s Longhorn Pipeline acquired in 2009. We supply approximately 17% — 20% of the refined products consumed in the El Paso market.
Arizona Market
The Arizona market for refined products is currently supplied by a number of refiners via pipelines and trucks. Refiners include companies located in west Texas, eastern New Mexico, northern New Mexico, the Gulf Coast and the West Coast. We supply approximately 17% — 20% of the refined products consumed in the Arizona market, comprised primarily of Phoenix and Tucson, via the SFPP Pipeline.
New Mexico Markets
The Artesia, Albuquerque, Moriarty and Bloomfield markets are supplied by a number of refiners via pipelines and trucks. Refiners include Navajo, Valero, Western Refining, Alon and WRB. We supply approximately 18% — 20% of the refined products consumed in the New Mexico market.
We use a common carrier pipeline out of El Paso to serve the Albuquerque market. In addition, HEP leases from Mid-America Pipeline Company, L.L.C., a pipeline between White Lakes, New Mexico and the Albuquerque vicinity and Bloomfield, New Mexico. The lease agreement currently runs through 2017, and HEP has options to renew for two ten-year periods. HEP owns and operates a 12-inch pipeline from the Navajo Refinery to the leased pipeline as well as terminalling facilities in Bloomfield, New Mexico, which is located in the northwest corner of New Mexico, and in Moriarty, which is 40 miles east of Albuquerque. These facilities permit us to ship light products to the Albuquerque and Santa Fe, New Mexico areas, which have historically experienced high growth rates. If needed, additional pump stations could further increase the pipeline’s capabilities.
Magellan’s Longhorn Pipeline is a 72,000 BPD common carrier pipeline that delivers refined products utilizing a direct route from the Texas Gulf Coast to El Paso and, through interconnections with third-party common carrier pipelines, into the Arizona market.
An additional factor that could affect some of our markets is the presence of pipeline capacity from El Paso and the West Coast into our Arizona markets. Additional increases in shipments of refined products from El Paso and the West Coast into our Arizona markets could result in additional downward pressure on refined product prices in these markets.
MANAGEMENT DISCUSSION FROM LATEST 10K
This Item 7 contains “forward-looking” statements. See “Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K. 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 HEP effective March 1, 2008, the words “we,” “our,” “ours” and “us” generally include HEP and its subsidiaries as consolidated subsidiaries of Holly Corporation with certain exceptions where there are transactions or obligations between HEP and Holly Corporation or its other subsidiaries. This document contains certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of Holly Corporation. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.
OVERVIEW
We are principally an independent petroleum refiner operating three refineries in Artesia and Lovington, New Mexico (operated as one refinery), Woods Cross, Utah and Tulsa, Oklahoma. As of December 31, 2010, our refineries had a combined crude capacity of 256,000 BPSD. Our profitability depends largely on the spread between market prices for refined petroleum products and crude oil prices. At December 31, 2010, we also owned a 34% interest in HEP, a consolidated VIE, which owns and operates pipeline and terminalling assets.
Our principal source of revenue is from the sale of high value light products such as gasoline, diesel fuel, jet fuel and specialty and modified asphalt in markets in the Southwest, Rocky Mountain and Mid-Continent regions of the United States and northern Mexico. We also produce specialty lubricant products that are marketed throughout North America and are distributed in Central and South America. Sales and other revenues from continuing operations and net income attributable to Holly Corporation stockholders were $8,322.9 million and $104 million, $4,834.3 million and $19.5 million, and $5,860.4 million and $120.6 million for the years ended December 31, 2010, 2009 and 2008, respectively. Our principal expenses are costs of products sold and operating expenses. Our total operating costs and expenses were $8,059.9 million, $4,754 million and $5,664.7 million for the years ended December 31, 2010, 2009 and 2008, respectively.
On June 1, 2009, we acquired the Tulsa Refinery west facility, an 85,000 BPSD refinery located in Tulsa, Oklahoma from Sunoco for $157.8 million including crude oil, refined product and other inventories valued at $92.8 million. The refinery produces fuel products including gasoline, diesel fuel and jet fuel and serves markets in the Mid-Continent region of the United States and also produces specialty lubricant products that are marketed throughout North America and are distributed in Central and South America.
On December 1, 2009, we acquired the Tulsa Refinery east facility, a 75,000 BPSD refinery from Sinclair also located in Tulsa, Oklahoma for $183.3 million, including crude oil, refined product and other inventories valued at $46.4 million. The refinery produces gasoline, diesel fuel and jet fuel products and also serves markets in the Mid-Continent region of the United States. We are in the process of integrating the operations of both Tulsa Refinery facilities. Upon completion, the Tulsa Refinery will have an integrated crude processing rate of 125,000 BPSD.
Separately, HEP, also a party to the December 1, 2009 transaction with Sinclair, acquired certain logistics and storage assets located at the Tulsa Refinery east facility. See “Holly Energy Partners, L.P. — 2009 Acquisitions” under Items 1 and 2, “Business and Properties” for additional information on this transaction as well as HEP’s 2010 and other 2009 asset acquisitions from us.
Also on December 1, 2009, HEP sold its 70% interest in Rio Grande to a subsidiary of Enterprise Products Partners LP for $35 million. Results of operations of Rio Grande and the $14.5 million gain on the sale are presented in discontinued operations.
On February 29, 2008, we sold certain crude pipelines and tankage assets to HEP for $180 million. The assets consisted of crude oil trunk lines that deliver crude oil to our 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 and leased terminal between Artesia and Roswell, New Mexico and crude oil and product pipelines that support our refinery in Woods Cross, Utah. HEP is a VIE as defined under GAAP. Under GAAP, HEP’s purchase of these 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%. Therefore, we reconsolidated HEP effective March 1, 2008. Intercompany transactions with HEP are eliminated in our consolidated financial statements.
Recent Developments
On February 21, 2011, we entered into a merger agreement providing for a “merger of equals” business combination of us and Frontier. Subject to the terms and conditions of the merger agreement which has been approved unanimously by both our and Frontier’s board of directors, Frontier shareholders will receive 0.4811 shares of Holly common stock for each share of Frontier common stock if the Merger is completed. See “Recent Developments” in Company Overview section under Items 1 and 2, “Business and Properties” for additional information on the Merger.
(1) Earnings before interest, taxes, depreciation and amortization, which we refer to as (“EBITDA”), is calculated as net income plus (i) interest expense, net of interest income, (ii) income tax provision, and (iii) depreciation and amortization. EBITDA is not a calculation provided for under GAAP; however, the amounts included in the EBITDA calculation are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies. EBITDA is presented here because it is a widely used financial indicator used by investors and analysts to measure performance. EBITDA is also used by our management for internal analysis and as a basis for financial covenants. EBITDA presented above is reconciled to net income under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 7A of Part II of this Form 10-K.
(1) The Refining segment includes the operations of our Navajo, Woods Cross and Tulsa Refineries and Holly Asphalt and involves the purchase and refining of crude oil and wholesale and branded marketing of refined products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. The petroleum products are primarily marketed in the Southwest, Rocky Mountain and Mid-Continent regions of the United States and northern Mexico. Additionally, specialty lubricant products produced at our Tulsa Refinery are marketed throughout North America and are distributed in Central and South America. Holly Asphalt manufactures and markets asphalt and asphalt products in Arizona, New Mexico, Oklahoma, Kansas, Missouri, Texas and northern Mexico.
(2) 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 and refinery tankage in Texas, New Mexico, Oklahoma and Utah, and distribution terminals in Texas, New Mexico, Arizona, Utah, Idaho, Oklahoma and Washington. Revenues are generated by charging tariffs for transporting petroleum products and crude oil through its pipelines and by charging fees for terminalling petroleum products and other hydrocarbons, and storing and providing other services at its storage tanks and terminals. Additionally, HEP owns a 25% interest in the SLC Pipeline that services refineries in the Salt Lake City, Utah area. Revenues from the HEP segment are earned through transactions with unaffiliated parties for pipeline transportation, rental and terminalling operations as well as revenues relating to pipeline transportation services provided for our refining operations.
Refining Operating Data
Our refinery operations include the Navajo, Woods Cross and Tulsa Refineries. 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 7A of Part II of this Form 10-K.
(1) Crude charge represents the barrels per day of crude oil processed at our refineries.
(2) Refinery throughput represents the barrels per day of crude and other refinery feedstocks input to the crude units and other conversion units at our refineries.
(3) Refinery production represents the barrels per day of refined products yielded from processing crude and other refinery feedstocks through the crude units and other conversion units at our refineries.
(4) Includes refined products purchased for resale.
(5) Represents crude charge divided by total crude capacity (BPSD). Our consolidated crude capacity was increased from 111,000 BPSD to 116,000 BPSD in the fourth quarter of 2008 (our 2008 Woods Cross Refinery expansion). During 2009, we increased our consolidated crude capacity by 15,000 BPSD effective April 1, 2009 (our Navajo Refinery expansion), by 85,000 BPSD effective June 1, 2009 (our Tulsa Refinery west facility acquisition) and by 40,000 BPSD effective December 1, 2009 (our Tulsa Refinery east facility acquisition), increasing our consolidated crude capacity to 256,000 BPSD.
(6) Represents average per barrel amount for produced refined products sold, which is a non-GAAP measure. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 7A of Part II of this Form 10-K.
(7) Transportation costs billed from HEP are included in cost of products.
(8) Represents operating expenses of the refineries, exclusive of depreciation and amortization.
Results of Operations — Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Summary
Net income attributable to Holly Corporation stockholders for the year ended December 31, 2010 was $104 million ($1.95 per basic and $1.94 per diluted share) an $84.4 million increase compared to $19.5 million ($0.39 per basic and diluted share) for the year ended December 31, 2009. Net income increased due principally to increased sales volumes of produced refined products combined with higher refinery gross margins during 2010. Overall refinery gross margins for the year ended December 31, 2010 were $8.79 per produced barrel compared to $7.21 for the year ended December 31, 2009.
Overall production levels for the year ended December 31, 2010 increased by 49% over 2009 due to production from our Tulsa Refinery facilities acquired in June and December 2009 combined with production increases at our Navajo and Woods Cross Refineries. Additionally, 2009 levels reflect lower production during the first quarter of 2009 due to scheduled downtime during a planned major maintenance turnaround at our Navajo Refinery.
Sales and Other Revenues
Sales and other revenues from continuing operations increased 72% from $4,834.3 million for the year ended December 31, 2009 to $8,322.9 million for the year ended December 31, 2010, due principally to the effects of a 51% increase in year-over-year volumes of produced refined products sold combined with increased sales prices of produced refined products. The average sales price we received per produced barrel sold increased 23% from $74.06 for the year ended December 31, 2009 to $91.06 for the year ended December 31, 2010. Sales and other revenues for the years ended December 31, 2010 and 2009, include $35.7 million and $45.2 million, respectively, in HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties.
Cost of Products Sold
Cost of products sold increased 74% from $4,238 million for the year ended December 31, 2009 to $7,367.1 million for the year ended December 31, 2010, due principally to higher crude oil costs combined with a 51% increase in volumes of produced refined products sold. The average price we paid per barrel of crude oil and feedstocks used in production and the transportation costs of moving the finished products to the market place increased 23% from $66.85 for the year ended December 31, 2009 to $82.27 for the year ended December 31, 2010.
Gross Refinery Margins
Gross refining margin per produced barrel increased 22% from $7.21 for the year ended December 31, 2009 to $8.79 for the year ended December 31, 2010, due to an increase in the average sales price we received per produced barrel sold, partially offset by an increase in the average price we paid per produced barrel of crude oil and feedstocks. Gross refining margin does not include the effects of depreciation or amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 7A of Part II of this Form 10-K for a reconciliation to the income statement of prices of refined products sold and costs of products purchased.
Operating Expenses
Operating expenses, exclusive of depreciation and amortization increased 41% from $356.9 million for the year ended December 31, 2009 to $504.4 million for the year ended December 31, 2010, due principally to costs attributable to the operations of our Tulsa Refinery facilities acquired in June and December 2009 and higher refinery utility costs. For the years ended December 2010 and 2009, operating expenses include $52.4 million and $43.5 million, respectively, in costs attributable to HEP operations.
General and Administrative Expenses
General and administrative expenses increased 17% from $60.3 million for the year ended December 31, 2009 to $70.8 million for the year ended December 31, 2010, due principally to costs associated with the support and integration of our Tulsa Refinery operations and increased payroll costs. For the years ended December 31, 2010 and 2009, general and administrative expenses include $5.4 million and $5.3 million, respectively, in costs attributable to HEP operations.
Depreciation and Amortization Expenses
Depreciation and amortization increased 19% from $98.8 million for the year ended December 31, 2009 to $117.5 million for the year ended December 31, 2010. The increase was due principally to depreciation and amortization attributable to our Tulsa Refinery facilities and capitalized refinery improvement projects in 2009 and 2010. For the years ended December 31, 2010 and 2009, depreciation and amortization expenses include $29.1 million and $26.5 million, respectively, in costs attributable to HEP operations.
Interest Income
Interest income for the year ended December 31, 2010 was $1.2 million compared to $5 million for the year ended December 31, 2009. Interest income was higher for the year ended December 31, 2009 due to interest received on income tax refunds and investments in higher yield marketable debt securities.
Interest Expense
Interest expense was $74.2 million for the year ended December 31, 2010 compared to $40.3 million for the year ended December 31, 2009. The increase was due principally to interest incurred on our $300 million 9.875% senior notes issued in 2009 and HEP’s 8.25% senior notes issued in March 2010. For the years ended December 31, 2010 and 2009, interest expense included $36.3 million and $23.8 million, respectively, in costs attributable to HEP operations.
Income Taxes
Income taxes increased from $7.5 million for the year ended December 31, 2009 to $59.3 million for the year ended December 31, 2010 due to significantly higher pre-tax earnings for the year ended December 31, 2010 compared to 2009. Our effective tax rate, before consideration of earnings attributable to noncontrolling interests was 30.8% for the year ended December 31, 2010 compared to 17% for the year ended December 31, 2009. Our effective tax rate for GAAP disclosure purposes reflects the inclusion of non-taxable earnings attributable to noncontrolling interest holders in the denominator of our effective tax rate computation. Our actual tax rate for income tax purposes did not increase.
Discontinued Operations
On December 1, 2009, HEP sold its 70% interest in Rio Grande resulting in a $14.5 million gain. Rio Grande operations generated net earnings of $4.4 million for the year ended December 31, 2009 before taking into account HEP’s noncontrolling interest in the discontinued operations.
Results of Operations — Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Summary
Net income attributable to Holly Corporation stockholders for the year ended December 31, 2009 was $19.5 million ($0.39 per basic and diluted share) a $101 million decrease compared to $120.6 million ($2.40 per basic and $2.38 per diluted share) for the year ended December 31, 2008. Net income decreased due principally to an overall decrease in refined gross margins in the second half of 2009. Overall refinery gross margins for the year ended December 31, 2009 were $7.21 per produced barrel compared to $10.96 for the year ended December 31, 2008.
Overall production levels for the year ended December 31, 2009 increased by 37% over 2008 due to production from our Tulsa Refinery facilities acquired in June and December 2009 and production gains resulting from our recent Navajo and Woods Cross Refinery capacity expansions. Also impacting production levels was scheduled downtime for major maintenance turnarounds at the Navajo Refinery in the first quarter of 2009 and the Woods Cross Refinery in the third quarter of 2008. During the first quarter of 2009, we timed our Navajo Refinery turnaround to coincide with the completion of its 15,000 BPSD capacity expansion, increasing refining capacity to 100,000 BPSD.
Sales and Other Revenues
Sales and other revenues from continuing operations decreased 18% from $5,860.4 million for the year ended December 31, 2008 to $4,834.3 million for the year ended December 31, 2009, due principally to significantly lower refined product sales prices, partially offset by the effects of a 29% increase in volumes of refined products sold. The average sales price we received per produced barrel sold decreased 32% from $108.83 for the year ended
December 31, 2008 to $74.06 for the year ended December 31, 2009. Additionally, direct sales of excess crude oil also decreased in 2009 compared to 2008. Sales and other revenues for the years ended December 31, 2009 and 2008, include $45.2 million and $19.3 million, respectively, in HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties.
Cost of Products Sold
Cost of products sold decreased 20% from $5,280.7 million in 2008 to $4,238 million in 2009, due principally to the effects of significantly lower crude oil costs, partially offset by the effects of a 29% increase in volumes of refined products sold. The average price we paid per barrel of crude oil and feedstocks used in production and the transportation costs of moving the finished products to the market place decreased 32% from $97.87 for the year ended December 31, 2008 to $66.85 for the year ended December 31, 2009.
Gross Refinery Margins
Gross refining margin per produced barrel decreased 34% from $10.96 for the year ended December 31, 2008 to $7.21 for the year ended December 31, 2009, due to a decrease in the average sales price we received per produced barrel sold, partially offset by the effects of a decrease in the average price we paid per produced barrel of crude oil and feedstocks. Gross refining margin does not include the effects of depreciation or amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 7A of Part II of this Form 10-K for a reconciliation to the income statement of prices of refined products sold and costs of products purchased.
Operating Expenses
Operating expenses, exclusive of depreciation and amortization increased 34% from $265.7 million for the year ended December 31, 2008 to $356.9 million for the year ended December 31, 2009, due principally to costs attributable to the operations of our Tulsa Refinery facilities acquired in June and December 2009 and the inclusion of HEP operating expense for a full twelve-month period in 2009 compared to ten months in 2008 due to our reconsolidation of HEP effective March 1, 2008. Additionally, there were certain increased costs at our existing facilities following the recently completed expansions, which were partially offset by lower utility costs. For the years ended December 2009 and 2008, operating expenses included $43.5 million and $33.4 million, respectively, in costs attributable to HEP operations.
General and Administrative Expenses
General and administrative expenses increased 9% from $55.3 million for the year ended December 31, 2008 to $60.3 million for the year ended December 31, 2009, due principally to costs associated with the support and integration of our Tulsa Refinery operations, increased payroll costs and increased professional fees and services. Additionally, general and administrative expenses for the years ended December 31, 2009 and 2008 include $5.3 million and $3.7 million, respectively, in costs attributable to HEP operations.
Depreciation and Amortization Expenses
Depreciation and amortization increased 57% from $63 million for the year ended December 31, 2008 to $98.8 million for the year ended December 31, 2009. The increase was due principally to depreciation and amortization attributable to our Tulsa Refinery facilities, capitalized refinery improvement projects in 2008 and 2009 and the inclusion of HEP depreciation expense for a full twelve-month period during 2009 compared to ten months in 2008. For the years ended December 31, 2009 and 2008, depreciation and amortization expenses included $26.5 million and $18.4 million, respectively, in costs attributable to HEP operations.
Interest Income
Interest income for the year ended December 31, 2009 was $5 million compared to $10.8 million for the year ended December 31, 2008. The decrease was due principally to the effects of a decrease in cash balances and investments in marketable debt securities that was partially offset by interest on income tax refunds received in 2009.
Interest Expense
Interest expense was $40.3 million for the year ended December 31, 2009 compared to $24 million for the year ended December 31, 2008. The increase was due principally to interest attributable to increased long-term debt, including the Holly 9.875% Senior Notes issued in 2009, and the inclusion of HEP interest expense for a full twelve-
month period during 2009 compared to ten months in 2008. For the years ended December 31, 2009 and 2008, interest expense included $23.8 million and $21.5 million, respectively, in costs attributable to HEP operations.
Acquisition Costs — Tulsa Refineries
During the year ended December 31, 2009, we incurred $3.1 million in acquisition costs related to our June 1, 2009 Tulsa Refinery west facility and our December 1, 2009 Tulsa Refinery east facility acquisitions.
Impairment of Equity Securities
For the year ended December 31, 2008, we recorded an impairment loss of $3.7 million that related to our 1,000,000 shares of Connacher common stock that we received in connection with our sale of the Montana refinery in 2006. This loss represents an other-than-temporary decline in the fair value of these equity securities during the year ended December 31, 2008.
Gain on Sale of HPI
We sold substantially all of the oil and gas properties of Holly Petroleum, Inc. (“HPI”), a subsidiary that previously conducted a small-scale oil and gas exploration and production program, in 2008 for $6 million, resulting in a gain of $6 million.
Equity in Earnings of HEP
Effective March 1, 2008, we reconsolidated HEP and no longer account for our investment in HEP under the equity method of accounting. Our equity in earnings of HEP for the year ended December 31, 2008 was $3 million representing our pro-rata share of earnings in HEP from January 1 through February 29, 2008.
Income Taxes
Income taxes decreased 88% from $64 million for the year ended December 31, 2008 to $7.5 million for the year ended December 31, 2009 due to significantly lower pre-tax earnings for the year ended December 31, 2009 compared to 2008. Our effective tax rate, before consideration of earnings attributable to noncontrolling interests was 17% for the year ended December 31, 2009 compared to 34.1% for 2008. Our effective tax rate for GAAP disclosure purposes reflects the inclusion of non-taxable earnings attributable to noncontrolling interest holders in the denominator of our effective tax rate computation. Our actual tax rate for income tax purposes did not decline.
Discontinued Operations
On December 1, 2009, HEP sold its 70% interest in Rio Grande resulting in a $14.5 million gain. Rio Grande operations generated net earnings of $4.4 million for the year ended December 31, 2009 compared to $2.9 million for the year ended December 31, 2008. This is presented before taking into account HEP’s noncontrolling interest in the discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
Holly Credit Agreement
We have a $400 million senior secured credit agreement expiring in March 2013 (the “Holly Credit Agreement”) with Bank of America, N.A. as administrative agent and one of a syndicate of lenders. The Holly Credit Agreement may be used to fund working capital requirements, capital expenditures, permitted acquisitions or other general corporate purposes. We were in compliance with all covenants at December 31, 2010. At December 31, 2010, we had no outstanding borrowings and outstanding letters of credit totaling $71 million under the Holly Credit Agreement. At that level of usage, the unused commitment was $329 million. We entered into an amendment to the Holly Credit Agreement on May 6, 2010 that changed certain financial covenants and provided other enhancements to the agreement.
If any particular lender under the Holly Credit Agreement could not honor its commitment, we believe the unused capacity that would be available from the remaining lenders would be sufficient to meet our borrowing needs. Additionally, publicly available information on our lenders is reviewed in order to monitor their financial stability and assess their ongoing ability to honor their commitments under the Holly Credit Agreement. We have not experienced, nor do we expect to experience, any difficulty in the lenders’ ability to honor their respective commitments, and if it were to become necessary, we believe there would be alternative lenders or options available.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
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. The words “we,” “our,” “ours” and “us” generally include Holly Energy Partners, L.P. (“HEP”) and its subsidiaries as consolidated subsidiaries of Holly Corporation with certain exceptions where there are transactions or obligations between HEP and Holly Corporation or its other subsidiaries. This document contains certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of Holly Corporation. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.
OVERVIEW
We are principally an independent petroleum refiner that produces high value light products such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. Navajo Refining Company, L.L.C., one of our wholly-owned subsidiaries, owns a petroleum refinery in Artesia, New Mexico, which operates in conjunction with crude, vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the “Navajo Refinery”). The Navajo Refinery can process sour (high sulfur) crude oils and serves markets in the southwestern United States and northern Mexico. Our refinery located just north of Salt Lake City, Utah (the “Woods Cross Refinery”) is operated by Holly Refining & Marketing Company — Woods Cross, one of our wholly-owned subsidiaries. This facility is a high conversion refinery that primarily processes regional sweet (lower sulfur) and sour Canadian crude oils. Our refinery located in Tulsa, Oklahoma (the “Tulsa Refinery”) is comprised of two facilities, the Tulsa Refinery west and east facilities.
At March 31, 2011, we owned a 34% interest in HEP, a consolidated variable interest entity (“VIE”), which includes our 2% general partner interest. HEP has logistic assets including petroleum product and crude oil pipelines located in Texas, New Mexico, Oklahoma and Utah; ten refined product terminals; a jet fuel terminal; loading rack facilities at each of our three refineries, a refined products tank farm facility and on-site crude oil tankage at our Navajo, Woods Cross and Tulsa Refineries. Additionally, HEP owns a 25% interest in SLC Pipeline LLC (“SLC Pipeline”), a new 95-mile intrastate pipeline system that serves refineries in the Salt Lake City area.
On February 21, 2011, we entered into a merger agreement providing for a “merger of equals” business combination of us and Frontier Oil Corporation (“Frontier”). Subject to the terms and conditions of the merger agreement which has been approved unanimously by both our and Frontier’s board of directors, Frontier shareholders will receive 0.4811 shares of our common stock for each share of Frontier common stock if the merger is completed. Completion of the merger is subject to certain conditions, including, among others, (i) approval by our stockholders of the issuance of our common stock to Frontier’s stockholders in connection with the merger, (ii) adoption of the merger agreement by Frontier’s stockholders, (iii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iv) the registration statement on Form S-4 used to register the common stock to be issued as consideration for the merger having been declared effective by the SEC and (v) the entry into a new credit facility for the combined company. In March 2011, the Federal Trade Commission (“FTC”) granted early termination of its Hart-Scott-Rodino antitrust review of the proposed merger.
Our principal source of revenue is from the sale of high value light products such as gasoline, diesel fuel, jet fuel and asphalt products in markets in the Southwest, Rocky Mountain and Mid-Continent regions of the United States and northern Mexico. We also produce specialty lubricant products that are marketed throughout North America and are distributed in Central and South America. For the three months ended March 31, 2011, sales and other revenues were $2,326.6 million and net income attributable to Holly Corporation stockholders was $84.7 million. For the three months ended March 31, 2010, sales and other revenues were $1,874.3 million and the net loss attributable to Holly Corporation stockholders was $28.1 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, 2011 were $2,167.5 million compared to $1,897 million for the three months ended March 31, 2010.
(1) Earnings before interest, taxes, depreciation and amortization, which we refer to as (“EBITDA”), is calculated as net income plus (i) interest expense, net of interest income, (ii) income tax provision, and (iii) depreciation and amortization. EBITDA is not a calculation provided for under GAAP; however, the amounts included in the EBITDA calculation are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies. EBITDA is presented here because it is a widely used financial indicator used by investors and analysts to measure performance. EBITDA is also used by our management for internal analysis and as a basis for financial covenants. EBITDA presented above is reconciled to net income under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.
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 Eliminations.
(1) The Refining segment includes the operations of our Navajo, Woods Cross and Tulsa Refineries and Holly Asphalt Company (“Holly Asphalt”) and involves the purchase and refining of crude oil and wholesale and branded marketing of refined products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. The petroleum products are primarily marketed in the Southwest, Rocky Mountain and Mid-Continent regions of the United States and northern Mexico. Additionally, specialty lubricant products produced at our Tulsa Refinery are marketed throughout North America and are distributed in Central and South America. Holly Asphalt manufactures and markets asphalt and asphalt products in Arizona, New Mexico, Oklahoma, Kansas, Missouri, Texas and northern Mexico.
(2) The HEP segment involves all of the operations of HEP which owns and operates a system of petroleum product and crude gathering pipelines and refinery tankage in Texas, New Mexico, Oklahoma and Utah, and distribution terminals in Texas, New Mexico, Arizona, Utah, Idaho, Oklahoma and Washington. Revenues are generated by charging tariffs for transporting petroleum products and crude oil through its pipelines and by charging fees for
terminalling petroleum products and other hydrocarbons, and storing and providing other services at its storage tanks and terminals. Additionally, HEP owns a 25% interest in the SLC Pipeline that services refineries in the Salt Lake City, Utah area. Revenues from the HEP segment are earned through transactions with unaffiliated parties for pipeline transportation, rental and terminalling operations as well as revenues relating to pipeline transportation services provided for our refining operations.
Refining Operating Data (Unaudited)
Our refinery operations include the Navajo, Woods Cross and Tulsa Refineries. 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.
Results of Operations — Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
Summary
Net income attributable to Holly Corporation stockholders for the three months ended March 31, 2011 was $84.7 million ($1.59 per basic and $1.58 per diluted share), a $112.8 million increase compared to $28.1 million net loss ($(0.53) per basic and diluted share) for the three months ended March 31, 2010. Net income increased due principally to higher refinery gross margins during the three months ended March 31, 2011. This was partially offset by a decrease in volumes of produced refined products sold. Overall refinery gross margins for the three months ended March 31, 2011 increased to $15.72 per produced barrel compared to $5.56 for the three months ended March 31, 2010.
Overall production levels for the three months ended March 31, 2010 decreased by 3% over the same period of 2010 due to the effects of production downtime at the Navajo Refinery during the current year first quarter that was partially offset by current year production increases at our Tulsa Refinery facilities. The Navajo Refinery experienced a plant-wide power outage in late January 2010. Inclement weather delayed the process of restoring production to planned operating levels during the month of February.
Sales and Other Revenues
Sales and other revenues increased 24% from $1,874.3 million for the three months ended March 31, 2010 to $2,326.6 million for the three months ended March 31, 2011, due principally to the effects of increased sales prices of produced refined products sold that was partially offset by a decrease in year-over-year first quarter volumes of produced refined products sold. The average sales price we received per produced barrel sold increased 30% from $87.40 for the three months ended March 31, 2010 to $113.28 for the three months ended March 31, 2011. Sales and other revenues for the three months ended March 31, 2011 and 2010, include $10.9 million and $7.1 million, respectively, in HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties.
Cost of Products Sold
Cost of products sold increased 15% from $1,723.9 million for the three months ended March 31, 2010 to $1,984.6 million for the three months ended March 31, 2011, due principally to higher crude oil costs, offset by a 3% decrease in volumes of produced refined products sold. The average price we paid per barrel for crude oil and feedstocks and the transportation costs of moving the finished products to the market place increased 19% from $81.84 for the three months ended March 31, 2010 to $97.56 for the three months ended March 31, 2011.
Gross Refinery Margins
Gross refinery margin per produced barrel increased 183% from $5.56 for the three months ended March 31, 2010 to $15.72 for the three months ended March 31, 2011 due to the effects of an increase in the average sales price we received per barrel of produced refined products sold, partially offset by an increase in the average per barrel price we paid for crude oil and feedstocks. Our processing of 100% lower priced West Texas Intermediate related crude oil combined with strong diesel and unseasonably high gasoline margins at all of our refineries helped fuel this margin improvement. Gross refinery margin does not include the effects of depreciation 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
Operating expenses, exclusive of depreciation and amortization, increased 6% from $127.5 million for the three months ended March 31, 2010 to $134.7 million for the three months ended March 31, 2011, due principally to increased repair and maintenance costs during the current year first quarter.
General and Administrative Expenses
General and administrative expenses decreased 6% from $17.9 million for the three months ended March 31, 2010 to $16.8 million for the three months ended March 31, 2011, due principally to lower equity based compensation costs and fees for professional services.
Depreciation and Amortization Expenses
Depreciation and amortization increased 13% from $27.8 million for the three months ended March 31, 2010 to $31.3 million for the three months ended March 31, 2011. The increase was due principally to depreciation and amortization attributable to capitalized improvement projects in 2010.
Interest Expense
Interest expense was $16.2 million for the three months ended March 31, 2011 compared to $17.7 million for the three months ended March 31, 2010. The decrease was due principally to interest capitalized on the UNEV Pipeline project. For the three months ended March 31, 2011 and 2010, interest expense included $9.1 million and $8.1 million, respectively, in interest costs attributable to HEP operations.
Income Taxes
For the three months ended March 31, 2011 we recorded income tax expense of $49 million compared to an income tax benefit of $16.7 million for the three months ended March 31, 2010.
LIQUIDITY AND CAPITAL RESOURCES
Holly Credit Agreement
We have a $400 million senior secured credit agreement expiring in March 2013 (the “Holly Credit Agreement”) with Bank of America, N.A. as administrative agent and one of a syndicate of lenders. The Holly Credit Agreement may be used to fund working capital requirements, capital expenditures, permitted acquisitions or other general corporate purposes. We were in compliance with all covenants at March 31, 2011. At March 31, 2011, we had no outstanding borrowings and outstanding letters of credit totaling $70 million under the Holly Credit Agreement. At that level of usage, the unused commitment was $330 million.
If any particular lender could not honor its commitment, we believe the unused capacity that would be available from the remaining lenders would be sufficient to meet our borrowing needs. Additionally, we have reviewed publicly available information on our lenders in order to review and monitor their financial stability and assess their ongoing ability to honor their commitments under the Holly Credit Agreement. We have not experienced, nor do we expect to experience, any difficulty in the lenders’ ability to honor their respective commitments, and if it were to become necessary, we believe there would be alternative lenders or options available.
HEP Credit Agreement
HEP has a $275 million senior secured revolving Credit Agreement (the “HEP Credit Agreement”) that is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. In February 2011, HEP amended its previous credit agreement (expiring in August 2011), slightly, reducing the size of the credit facility from $300 million to $275 million. The size was reduced based on management’s review of past and forecasted utilization of the facility. The HEP Credit Agreement expires in February 2016; however, in the event that the 6.25% HEP Senior Notes (discussed later) are not repurchased, refinanced, extended or repaid prior to September 1, 2014, the HEP Credit Agreement will expire on that date. At March 31, 2011, HEP had outstanding borrowings totaling $182 million under the HEP Credit Agreement, with unused borrowing capacity of $93 million.
HEP’s obligations under the HEP Credit Agreement are collateralized by substantially all of HEP’s assets (presented parenthetically in our Consolidated Balance Sheets). Indebtedness under the HEP Credit Agreement is recourse to HEP Logistics Holdings, L.P., its general partner, and guaranteed by HEP’s wholly-owned subsidiaries. Any recourse to the general partner would be limited to the extent of HEP Logistics Holdings, L.P.’s assets, which other than its investment in HEP, are not significant. HEP’s creditors have no other recourse to our assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries.
If any particular lender could not honor its commitment under the HEP Credit agreement, HEP believes the unused capacity that would be available from the remaining lenders would be sufficient to meet its borrowing needs. Additionally, publicly available information on these lenders is reviewed in order to monitor their financial stability and assess their ongoing ability to honor their commitments under the HEP Credit Agreement.
CONF CALL
Neale Hickerson
Thanks Barbara and good morning to everyone. I’d like to welcome you to our fourth quarter and full-year 2008 earnings conference call. I’m Neale Hickerson, Vice President of Investor Relations at Holly. With us this morning are Matt Clifton, Chairman and CEO of Holly Corporation; Dave Lamp, President; Bruce Shaw, Senior Vice President and Chief Financial Officer; and Scott Surplus, Vice President and Controller.
We issued a press release this morning announcing our fourth quarter and full year 2008 results. This press release can be found on our website at www.hollycorp.com. For this morning’s call we’ll begin with Bruce, who has prepared remarks and detail around our financial performance. Matt will then have comments on our year and then will provide an update on the capital projects that we have underway. At the conclusion of these remarks, we will take your questions as time permits.
Before we move to our financial results and comments, please note the following Safe Harbor disclosure statement, which falls under the Private Securities Litigation Reform Act of 1995. Also, please note the Safe Harbor statement in our earnings press release this morning.
The statements in this earnings call related to matters that are not historical facts are forward-looking statements. They are based on management’s belief and assumptions using currently available information and expectations and these statements are not guarantees of future performance and do involve certain risk and uncertainties, including those contained in our filings from time to time with the Securities and Exchange Commission.
Although the company believes these statements are reasonable, it cannot give any assurances that these expectations will prove to be correct. Actual outcomes and results could differ from what is expressed, implied or forecast. The company assumes no duty to publicly update or revise such statements whether as a result of new information, future events or otherwise.
Lastly, please note that information presented on today’s call, speaks only as of today, February 17, 2009 and any time sensitive information provided may no longer be accurate at the time of any replay or rereading of our transcript of this call.
Now I’d like to turn things over to Bruce Shaw.
Bruce Shaw
Thank you Neale and good morning everyone. My remarks this morning will cover four areas: First, a reminder of Holly’s reconsolidation of HEP on March 1, 2008; second, our earnings for the fourth quarter and full year 2008; third, a few balance sheet comments and an update on capital spending; and forth, a summary of our ownership value in Holly Energy Partners.
First, I’d like to remind you that Holly reconsolidated Holly Energy Partners as of March 1, 2008. When HEP acquired the pipeline and tankage assets from Holly on March 1, GAAP rules required Holly to reconsider its beneficial interest in HEP. As background, HEP is a publicly traded MLP, in which Holly owns approximately 46%, including our 2% general partner interest.
So effective March 1, 2008, we no longer account for Holly’s interest in HEP under the equity accounting method. Instead, HEP balance sheet items including debt, and HEP revenue and expenses, except for inter company transactions, are included in Holly’s consolidated financial segment.
Accordingly, we have recorded non-Holly interest in HEP as minority interest starting March 1. You will note that we’ve included segment information in our press release that allows you to see the impact of the reconsolidation on key balance sheet and income statement accounts. In addition, we’ll cover more detail in our 10-Q and 10-K filings.
Second, a few comments about our fourth quarter earnings and full year earnings. Earnings for the fourth quarter were $50.6 million or $1.01 per diluted share, as compared to $49.8 million or $0.90 per diluted share for the fourth quarter of 2007. Our pretax income of $79.1 million was up $3.9 million versus the fourth quarter of ‘07. This small increase resulted primarily from a higher gross margin on our Navajo refinery that was offset by higher sulfur credit sales that benefited last year’s fourth quarter.
Navajo’s gross margin per barrel averaged $10.88 per barrel for the quarter, versus $7.95 per barrel for the same quarter last year. For our Woods Cross Refinery, our gross margin per barrel averaged $16.62 in the quarter versus $17.28 per barrel for the same quarter last year.
Though Woods Cross processed approximately 6,000 barrels a day of black wax crude oil during the quarter and close to 7,000 barrels a day of black wax in December, the benefit realized per barrel was smaller relative to the fourth quarter of ‘07 and the first three quarters of 2008 since the discount is a straight percentage of a lower WTI price.
The increase in our operating expenses was $5.7 million quarter-to-quarter. If you exclude HEP’s operating expense of approximately $10.5 million, operating expense decreased by about $4.8 million, due primarily to lower utility expenses including a one-time refund receipt. The increases in G&A and DD&A expenses, relative to those incurred in the fourth quarter of ‘07 were mainly due to inclusion of expenses for HEP.
For the year, net income was $121 million and EBITDA was $262 million. This was significantly lower than the $334 million of net income and $529 million of EBITDA we generated in a record year in 2007. The decrease was due to lower gross margins in the first half of 2008 and lower volumes processed in 2008 versus 2007. I do want to point out however that we finished the year strong with over 75% of our net income and EBITDA generated in the second half of the year.
January has given 2009 a stronger start than we saw last year, as higher gasoline cracks have supported higher gross margins, especially in our West Coast related markets. Our preliminary January estimates show Navajo gross margins stronger than we experienced on average in the fourth quarter, and Woods Cross gross margins somewhat weaker given the typical seasonal demand slowdown for the refined products in its markets and a lower realized spreads on black wax crude given the low price of WTI.
I do want to remind you that we are currently completing the plant maintenance turnaround at the Navajo refinery this month. During this turnaround, we are also finishing phase one of the Navajo project work and expect the refinery to be able to run up to 100,000 barrels a day of WTS, after tie-in and commissioning of the new units. Matt will have an update on capital projects later in his remarks.
Third, let me cover a few balance sheet items and update you on capital spending. At the end of the fourth quarter, we had $96 million of cash and marketable securities, including $5 million for HEP, and no Holly debt and no drawings under Holly’s $175 million revolving credit facility.
The main driver of our change in cash for the quarter versus the third quarter of 2008 was the change in payables, net of receivables balance, given the rapid fall in refined product and crude oil prices from September through December.
WTI decreased in price by roughly 60% during this period from over $100 a barrel in September, to about $40 a barrel in December and our float on payables, net of receivables, decreased by a similar percentage. This resulted in an approximate $120 million decrease in cash. Receivables as a percentage of payables remained relatively constant period-to-period.
Our capital expenditures for the quarter were $111 million net of HEP CapEx and taking in to account contributions from our UNEV joint venture partner. Assuming the UNEV construction stays on schedule, we continue to project our capital spending for 2009 to be in the $350 million range. As you know, the UNEV project is in the final stage of the BLM permitting process.
Since we anticipate that the permit to proceed will now be received some time during the second quarter of 2009, we are evaluating whether to maintain the current completion schedule for UNEV of early 2010 or whether from a commercial perspective it would be better to delay completion until the fall of 2010. If we choose to delay it could shift $75 million to $100 million of CapEx from 2009 to 2010.
Though currently we have adequate liquidity with cash generated from operations, cash on hand, and our un-drawn credit facility, we will be monitoring margins and capital spending closely and take appropriate action to provide additional liquidity if needed.
Please recall that HEP has an option to purchase our interest in the UNEV pipeline once completed and we expect to grant a similar option to HEP on the crude pipelines. If HEP chooses to exercise these options then its decisions will depend in large part on the state of the capital markets at the time and Holly would get over $300 million of this CapEx back.
Last, a few highlights of our HEP ownership. With HEP units trading at $28 per unit or in that range, our subordinated and common units are worth about $200 million. This doesn’t include the value of our general partner interest. On February 13, HEP paid its recently announced distribution of $0.765 per unit, for which Holly received $5.6 million for its common and subordinated units, plus approximately $1.3 million for its GP interest, which includes $1.1 million of incentive distributions.
With that, I will turn things over to Matt for an update on major projects and other overall comments.
Matt Clifton
Thanks Bruce and thanks everybody for listing in. Looking back over 2008, we like the entire industry had an extremely challenging first half, as rapid and unprecedented rise in crude oil depressed gasoline demand and gas cracks, while creating deep negative spreads for non-transportation products. These negative effects more than offset the positive impact of high diesel cracks throughout the year to dramatically pull down financial results for the first half.
In the second half of the year as crude oil plunged, cracks for non-transportation products dramatically improved, increasing capture rates, while diesel cracks remained strong and improved gasoline cracks in the fall added value to lift gross margin and to correspondingly, significantly improve our financial results.
Looking forward, as Bruce said we not only start 2009 with better cracks than the beginning of 2008, but we should benefit from our recently completed profitability improvement projects at Woods Cross and our soon to be completed similar projects at the Navajo refinery.
At Woods Cross we finished our expansion and our feedstock flexibility project and are now optimizing the operation of our new units. This positions us to increase ultra low sulfur diesel fuel production from approximately 30% to over 40%, double our capacity to run lower priced, black wax and heavy Canadian crude oils, and expand our overall production by almost 20%.
At our Navajo refinery, we will be completing our major turnaround this week. We are in our expansion, and phase one process additions and upgrades are being tied in. We expect to be at 100,000 barrels a day of capacity after the startup of our new hydrocracker, hydrogen plant and sulfur recovery unit in March. These upgrades again increase our ultra low sulfur diesel production from around 33% to well over 40%, allow us to run 100% West Texas sour type crudes and expand our capacity by 15,000 barrels a day.
From a refinery project standpoint, this leaves only the completion of our new sulfur de-asphalting unit and some upgrades to our smaller crude unit in Navajo. These remain on schedule with a target mechanical completion date of late third quarter 2009. These enhancements to the Navajo refinery will provide the capability to run up to 40,000 barrels a day of heavier, lower priced oils such as Canadian heavy crudes.
A pipeline project to build a new 75 mile, 16 inch pipeline to provide direct pipeline access to crude oil from cushioning also remains on budget with a Q4 2009 completion date. Pipe has been ordered, engineering is complete, and write-aways have been substantially secured.
The above described 2009 upgrades and additions will provide added profit potential and position our Navajo, Woods Cross refineries as top tier competitors in the markets that they serve. On our Salt Lake to Las Vegas pipeline project, as Bruce said, we are in our final stages of our permit approval process. We currently are constructing new terminals in Cedar City, Utah and North Las Vegas. Our pipe has been delivered at various staging locations along the pipeline route, and we have secured virtually all of the required runaways.
With the expectation of a late spring permit approval, we are evaluating moving the construction of the pipeline to early spring of 2010 rather than the summer of 2009 for commercial reasons and to ensure an adequate build season. This removes $75 million to $100 million of CapEx from 2009 to 2010, while only moving the startup date from early 2010 to the fall of 2010.
With most of our oil refinery enhancements complete by the end of Q1 2009, a strong balance sheet, and further feedstock flexibility and accessibility improvements coming online by the end of 2009, we believe we are well positioned to meet today’s challenges.
With that, I’ll turn it back to Neale.
Neale Hickerson
And I’d like to turn things back to Barbara to repeat the procedure to ask questions. We are ready to move into that phase of our call.
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Fund Letters
