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Article by DailyStocks_admin    (02-04-08 04:52 AM)

The Daily Magic Formula Stock for 02/03/2008 is Holly Corp. According to the Magic Formula Investing Web Site, the ebit yield is 20% and the EBIT ROIC is 75-100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

COMPANY 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.
We are principally an independent petroleum refiner which produces high value light products such as gasoline, diesel fuel and jet fuel. 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 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 web site 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. On April 26, 2004, our stock began trading on the New York Stock Exchange under the trading symbol “HOC”. Our stock formerly traded on the American Stock Exchange.
In July 2004, we completed the initial public offering of limited partnership interests in Holly Energy Partners, L.P. (“HEP”), a Delaware limited partnership that also trades on the New York Stock Exchange under the trading symbol “HEP”. HEP was formed to acquire, own and operate substantially all of the refined product pipeline and terminalling assets that support our refining and marketing operations in west Texas, New Mexico, Utah and Arizona and a 70% interest in Rio Grande Pipeline Company (“Rio Grande”). We initially consolidated the results of HEP and showed the interest we did not own as a minority interest in ownership and earnings. On July 8, 2005, we closed on a transaction for HEP to acquire our two 65-mile parallel intermediate feedstock pipelines which connect our Lovington and Artesia, New Mexico facilities, which reduced our ownership interest in HEP to 45.0%. Under the provision of the Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 46 (revised), “Consolidation of Variable Interest Entities,” we deconsolidated HEP effective July 1, 2005. The deconsolidation has been presented from July 1, 2005 forward, and our share of the earnings of HEP from July 1, 2005 is reported using the equity method of accounting.
As of December 31, 2006, we:
• owned and operated two refineries consisting of a petroleum refinery in Artesia, New Mexico that is operated in conjunction with crude oil distillation and vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively known as the “Navajo Refinery”), and a refinery in Woods Cross, Utah (“Woods Cross Refinery”);

• owned approximately 800 miles of crude oil pipelines located principally in west Texas and New Mexico;

• owned 100% of NK Asphalt Partners, which manufactures and markets asphalt products from various terminals in Arizona and New Mexico and does business under the name of “Holly Asphalt Company;” and

• owned a 45% interest in HEP (which includes our 2% general partnership interest), which has logistics assets including approximately 1,700 miles of petroleum product pipelines located in Texas, New Mexico and Oklahoma (including 340 miles of leased pipeline); eleven refined product terminals; two refinery truck rack facilities; a refined products tank farm facility; and a 70% interest in Rio Grande.
Navajo Refining Company, L.P., one of our wholly-owned subsidiaries, owns the Navajo Refinery. The Navajo Refinery has a crude capacity of 83,000 BPSD of sour and sweet crude oils, can process up to approximately 90% sour crude oils, and serves markets in the southwestern United States and northern Mexico. In June 2003, we acquired the Woods Cross refining facility from ConocoPhillips. The Woods Cross Refinery, located just north of Salt Lake City, has a crude capacity of 26,000 BPSD and is operated by Holly Refining & Marketing Company Woods Cross, one of our wholly-owned subsidiaries. This facility is a high conversion refinery that processes regional sweet and Canadian sour crude oils. In conjunction with the refining operations, we own approximately 800 miles of crude oil pipelines that serve primarily as the supply network for our New Mexico refinery operations.
On March 31, 2006 we sold our petroleum refinery in Great Falls, Montana (the “Montana Refinery”) to a subsidiary of Connacher Oil and Gas Limited (“Connacher”). The net cash proceeds we received on the sale of the Montana Refinery amounted to $48.9 million, net of transaction fees and expenses. Additionally we received 1,000,000 shares of Connacher common stock valued at approximately $4.3 million at March 31, 2006. Accordingly, the results of operations of the Montana Refinery and a gain of $14.0 million, net of income taxes of $8.3 million, are shown in discontinued operations.
Our operations are currently organized into one business division, Refining. The Refining business division includes the Navajo Refinery, Woods Cross Refinery and Holly Asphalt Company. Prior to our deconsolidation of HEP on July 1, 2005 our operations were organized into two business divisions, which were Refining and HEP. Our operations that are not included in either the Refining or HEP (prior to its deconsolidation) business divisions include the operations of Holly Corporation, the parent company, a small-scale oil and gas exploration and production program, and prior to the deconsolidation of HEP, the elimination of the revenue and costs associated with HEP’s pipeline transportation services for us as well as the recognition of the minority interests’ income of HEP.
REFINERY OPERATIONS
Our refinery operations include the Navajo Refinery and the Woods Cross Refinery. The following table sets forth information, including performance measures about our refinery operations that are not calculations based upon U.S. generally accepted accounting principles (“GAAP”). The cost of products and refinery gross margin do not include the effect of depreciation, depletion and amortization.

The petroleum refining business is highly competitive. Among our competitors are some of the world’s largest integrated petroleum companies, which have their own crude oil supplies and distribution and marketing systems. We also compete with other independent refiners. Competition in a particular geographic area is affected primarily by the amount of refined products produced by refineries located in that area and by the availability of refined products and the cost of transportation to that area from refineries located outside the area. Projects have been explored from time to time by refiners and other entities which projects, if completed, could result in further increases in the supply of products to some or all of our markets. In recent years, there have been several refining and marketing consolidations or acquisitions between competitors in our geographic markets. These transactions could increase future competitive pressures on us.

We have several significant customers, none of which accounts for more than 10% of our business. Our principal customers for gasoline include other refiners, convenience store chains, independent marketers, an affiliate of Petróleos Mexicanos (“PEMEX”), the government-owned energy company of Mexico, and retailers. Diesel fuel is sold to other refiners, truck stop chains, wholesalers and railroads. Jet fuel is sold primarily for military use. 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. Loss of, or reduction in amounts purchased by, our major customers that purchase for their retail operations could have an adverse effect on us to the extent that, because of market limitations or transportation constraints, we are not able to correspondingly increase sales to other purchasers.
In order to maintain or increase production levels at our refineries, we must continually enter into contracts for new crude oil supplies. The primary factors affecting our ability to contract for new crude oil supplies are our ability to connect new supplies of crude oil to our gathering systems or to our other crude oil receiving lines, our success in contracting for and receiving existing crude oil supplies that are currently being purchased by other refineries and the level of drilling activity near our gathering systems or our other crude oil receiving lines.
Navajo Refinery
Facilities
The Navajo Refinery has a crude oil capacity of 83,000 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 2006, gasoline, diesel fuel and jet fuel (excluding volumes purchased for resale) represented 60%, 28% and 4%, respectively, of the Navajo Refinery’s sales volumes.

Navajo Refining’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, isomerization, sulfur recovery and product blending units. Other supporting infrastructure includes approximately 1.8 million barrels of feedstock and product tankage at the site, 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 an integrated 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 and associated vacuum distillation units which were originally constructed after 1970. The facility also has an additional 1.1 million barrels of feedstock and product tankage. The Lovington facility processes crude oil into intermediate products, which are transported to Artesia by means of two intermediate pipelines owned by HEP and which are then upgraded into finished products at the Artesia facility. The combined crude oil capacity of the two facilities is 83,000 BPSD and typically processes or blends an additional 10,000 BPSD of natural gasoline, butane, gas oil and naphtha.

We have approximately 800 miles of crude gathering pipelines transporting crude oil to the Artesia and Lovington facilities from various points in southeastern New Mexico and west Texas, 66 crude oil trucks and 67 trailers in addition to over 600 , 000 barrels of related tankage.
We distribute refined products from the Navajo Refinery to markets in Arizona, New Mexico and west Texas primarily through two of HEP’s owned pipelines that extend from Artesia, New Mexico to El Paso, Texas. In addition, we use a pipeline 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 Albuquerque, Artesia, Moriarty and Bloomfield, New Mexico.
In 2000, we formed a joint venture, NK Asphalt Partners, with a subsidiary of Koch Materials Company (“Koch”) to manufacture and market asphalt and asphalt products in Arizona and New Mexico under the name “Koch Asphalt Solutions – Southwest.” We contributed our asphalt terminal and asphalt blending and modification assets in Arizona to NK Asphalt Partners and Koch contributed its New Mexico and Arizona asphalt manufacturing and marketing assets to NK Asphalt Partners. On January 1, 2002, we sold a 1% equity interest in NK Asphalt Partners to Koch, thereby reducing our equity interest from 50% to 49%. In February 2005, we purchased the 51% interest owned by Koch in NK Asphalt Partners for $16.9 million plus working capital of approximately $5.0 million. This purchase increased our ownership in NK Asphalt Partners from 49% to 100%. Following the purchase of the 51% interest from Koch, NK Asphalt Partners does business under the name “Holly Asphalt Company.”
Markets and Competition
The Navajo Refinery primarily serves the growing southwestern United States market, 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 All American Pipeline, L.P. (“Plains”) and from El Paso to Tucson and Phoenix via a products pipeline system owned by Kinder Morgan’s SFPP, L.P. (“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 leased pipeline running from Chaves County to San Juan County, New Mexico.
El Paso Market
The El Paso market for refined products is currently supplied by a number of refiners and pipelines. Refiners include Navajo, ConocoPhillips, Valero, Alon and Western. Pipelines serving this market include Longhorn, Magellan, and HEP pipelines. We currently supply approximately 11,000 BPD to the El Paso market, which accounts for approximately 18% of the refined products consumed in that 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 west coast. We currently supply approximately 47,000 BPD of refined products into the Arizona market, comprised primarily of Phoenix and Tucson, which accounts for approximately 16% of the refined products consumed in that market.
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, Giant, Alon and ConocoPhillips. We currently supply approximately 21,000 BPD of refined products to the New Mexico market, which accounts for approximately 20% of the refined products consumed in that market.
The common carrier pipelines we use to serve the Arizona and New Mexico markets are currently operated at or near capacity and are subject to proration. As a result, the volumes of refined products that we and other shippers have been able to deliver to these markets have been limited. In 2006, SFPP completed an expansion of its pipeline from El Paso to the Arizona market. Additionally, SFPP has announced a further planned expansion of the capacity of this pipeline from El Paso to the Arizona market, with an expected completion date of late 2007. We expect to maintain our market share of the 2007 SFPP expansion and ship additional volume to Arizona when additional capacity is available. However, we cannot presently predict the ultimate effects on us of SFPP’s proposed further pipeline expansion.
The common carrier pipeline we use to serve the Albuquerque market out of El Paso currently operates at or near capacity with resulting limitations on the amount of refined products that we and other shippers can deliver. In addition, HEP leases from Enterprise Products Partners, L.P. a pipeline between White Lakes, New Mexico and the Albuquerque vicinity and Bloomfield, New Mexico (the “Leased Pipeline”). 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 provide a total of up to 45,000 BPD of light products to the growing Albuquerque and Santa Fe, New Mexico areas. If needed, additional pump stations could further increase the Leased Pipeline’s capabilities.
The Longhorn Pipeline (“Longhorn”) was recently purchased by Flying J Inc. (“Flying J”) and is transporting refined products from gulf coast refineries to El Paso. This pipeline is approximately 700 miles long and runs from the Houston area to El Paso, utilizing a direct route. The previous owner, Longhorn Partners Pipeline, L.P., had announced that it would use the pipeline initially to transport approximately 72,000 BPD of refined products from the gulf coast to El Paso and markets served from El Paso, with an ultimate maximum capacity of 225,000 BPD. Since inception of Longhorn operations in late 2005, it is our understanding that there have been some shipments (substantially under the 72,000 BPD rate) of refined products. Since the purchase by Flying J, volumes shipped on Longhorn have been increasing. We understand Flying J is expanding the truck rack at its El Paso terminal to increase truck loading capacity and has a large fleet of trucks serving markets as far away as Arizona. Flying J has significantly increased the volume of gulf coast refined products shipped into El Paso and is actively exploring options to ship additional product on the SFPP system into Arizona, the Plains system into New Mexico, and into Mexico.
An additional factor that could affect some of our markets is excess pipeline capacity from the west coast into our Arizona markets. If refined products become available on the west coast in excess of demand in that market, additional products could be shipped into our Arizona markets with resulting possible downward pressure on refined product prices in these markets.
Crude Oil and Feedstock Supplies
The Navajo Refinery is situated near the Permian Basin in an area which historically has had abundant supplies of crude oil available both for regional users, such as us, and for export to other areas. We purchase crude oil from producers in nearby southeastern New Mexico and west Texas and from major oil companies. Crude oil is gathered both through our pipelines and tank trucks and through third party crude oil pipeline systems. In March 2003, we sold our Iatan crude oil gathering system located in west Texas to Plains for a purchase price of $24.0 million in cash. In connection with the transaction, we have entered into a six and a half year agreement with Plains that commits us to transport on that gathering system any crude oil we purchase in the relevant area of the Iatan system at an agreed upon tariff. Crude oil acquired in locations distant from the refinery is exchanged for crude oil that is transportable to the refinery.
We also purchase isobutane, natural gasoline, and other feedstocks to supply the Navajo Refinery. In 2006, approximately 4,700 BPD of isobutane and 3,500 BPD of natural gasoline used in the Navajo Refinery’s operations were purchased from other oil companies in the region, as well as, volumes purchased from the mid-continent area and delivered to our region on an Enterprise common carrier pipeline. Ultimately all volumes of these products are shipped to the Artesia refining facilities on HEP’s two parallel 65-mile pipelines running from Lovington to Artesia. From time to time, we also purchase gas oil and naphtha from other oil companies for use as feedstock.
Principal Products and Customers
Set forth below is information regarding the principal products produced at the Navajo Refinery:

Light products are shipped by product pipelines or are made available at various points by exchanges with others. Light products are also made available to customers through truck loading facilities at the refinery and at terminals.
Our principal customers for gasoline include other refiners, convenience store chains, independent marketers, an affiliate of PEMEX and retailers. Our gasoline produced at the Navajo Refinery is marketed in the southwestern United States, including the metropolitan areas of El Paso, Phoenix, Albuquerque, Bloomfield, and Tucson, and in portions of northern Mexico. The composition of gasoline differs, because of local regulatory requirements, depending on the area in which gasoline is to be sold. Diesel fuel is sold to other refiners, truck stop chains, wholesalers, and railroads. Jet fuel is sold primarily for military use. All asphalt produced at the Navajo Refinery and third-party purchased asphalt is marketed through Holly Asphalt Company to governmental entities or contractors. LPG’s are sold to LPG wholesalers and LPG retailers and carbon black oil is sold for further processing.
Military jet fuel is sold to the Defense Energy Support Center, a part of the United States Department of Defense (the “DESC”), under a series of one-year contracts that can vary significantly from year to year. We sold approximately 3,100 BPD of jet fuel to the DESC in 2006. We have had a military jet fuel supply contract with the United States Government for each of the last 37 years. Our size in terms of employees and refining capacity allows us to bid for military jet fuel sales contracts under a small business set-aside program. In September 2006, DESC awarded us contracts for sales of military jet fuel for the period October 1, 2006 through September 30, 2007. Our total contract award, which is subject to adjustment based on actual needs of the DESC for military jet fuel, was approximately 52 million gallons as compared to the total award for the 2005-2006 contract year of approximately 79 million gallons. The loss of our military jet fuel contract with the United States Government could have an adverse effect on our results of operations if alternate commercial jet fuel or additional diesel fuel sales could not be secured.
Capital Improvement Projects
We have invested significant amounts in capital expenditures in recent years to expand and enhance the Navajo Refinery and expand our supply and distribution network.
In December 2005, we finished the installation of a refurbished 4,500 BPSD ROSE asphalt unit at the Navajo Refinery at a total cost of $17.1 million. This unit allows us to upgrade asphalt to higher valued gasoline and diesel.
In 2006 we completed our ULSD project and an expansion of the crude capacity at the Navajo Refinery. These projects included the expansion and conversion of the distillate hydrotreater to gas oil service, the conversion of the gas oil hydrotreater to ULSD service, the expansion of the continuous catalytic reformer, the expansion and conversion of the kerosene hydrotreater to naphtha service, the installation of additional sulfur recovery capacity, and the installation of a 10 million standard cubic feet (“mmscf’) per day hydrogen plant. The completion of these projects has allowed us to produce all of our diesel fuel as ULSD and has expanded our crude oil processing capabilities from 75,000 BPSD to 83,000 BPSD. The total cost of these projects was approximately $75.0 million, which was approved in the prior year’s capital budget. We plan to further increase crude capacity to 85,000 BPSD by the end of 2007 by relocating some heat exchangers and replacing some pumps in the Artesia crude unit at an estimated cost of $1.0 million.
Our Board of Directors approved a capital budget for 2007 of $24.7 million for refining improvement projects for the Navajo Refinery, not including the capital projects approved in prior years or our expansion and feedstock flexibility projects described below.

As announced in December 2006 we will be installing a new 15,000 BPD hydrocracker and a new 28 mmscf hydrogen plant at a budgeted cost of approximately $125.0 million. The addition of these units is expected to increase liquid volume recovery, increase the refinery’s capacity to process outside feedstocks, and increase yields of high valued products, as well as enabling the refinery to meet new low sulfur gasoline specifications required by the Environmental Protection Agency (“EPA”). The hydrocracker and hydrogen plant projects will provide improved heavy crude oil processing flexibility.
As announced in February 2007, we will be revamping an existing crude unit which will increase crude capacity at the Navajo Refinery to approximately 100,000 BPD. Additionally, our Board of Directors has approved a revamp of its second crude unit and a new solvent de-asphalter unit. The newly approved components, combined with the above described components approved in December, bring the total budgeted amount for this expansion and heavy crude oil processing project to $225.0 million. It is currently anticipated that the expansion portion of the overall project consisting of the initial crude unit revamp, the new hydrocracker and the new hydrogen plant will be completed and operational by the fourth quarter of 2008. The completion of the heavy crude oil processing portion of the overall project, including the second crude unit revamp and the installation of the new solvent de-asphalter, will be targeted to coincide with the development of future pipeline access to the Navajo Refinery for heavy Canadian crude oil and other foreign heavy crude oils transported from the Cushing, Oklahoma area. We plan to explore with HEP the most economical manner to obtain this needed pipeline access.
Also at the Navajo Refinery, a project to install an additional 100 ton per day sulfur recovery unit included in the 2006 capital budget is currently underway at an estimated cost of $26.0 million. Approximately $2.0 million was spent on this project in 2006. This new sulfur recovery unit will permit our Navajo Refinery to process 100% sour crude and is planned for start-up in the third quarter of 2008. It is anticipated that the projects that will be completed by the fourth quarter of 2008 will also enable the Navajo Refinery, without significant additional investment, to comply with LSG specifications required by the end of 2010.
Woods Cross Refinery
On June 1, 2003 we acquired the Woods Cross Refinery, located near Salt Lake City, Utah, and related assets, from ConocoPhillips. The purchase also included a refined products terminal in Spokane, Washington, a 50% ownership interest in refined products terminals in Boise and Burley, Idaho, 25 retail service stations located in Utah and Wyoming, and a 10-year exclusive license to market fuels under the Phillips 66 brand in the states of Utah, Wyoming, Idaho and Montana. The total cash purchase price, including inventory and related expenses and liabilities assumed was $58.3 million. In accounting for the purchase, we recorded inventory of $35.5 million, property, plant and equipment of $25.6 million, intangible assets of $1.6 million and recorded a $4.4 million liability, principally for pension obligations. In August 2003, we sold the 25 retail service stations for $7.0 million, less our prorated share of property taxes and certain transaction expenses, plus $1.8 million for inventories, resulting in net cash proceeds of $8.5 million. We continue to supply the retail stations with fuel from our Woods Cross Refinery under a long-term supply agreement.
Facilities
The Woods Cross Refinery is being operated by Holly Refining & Marketing Company – Woods Cross, one of our wholly owned subsidiaries. Beginning in January 2005 the crude oil capacity of the refinery was increased from 25,000 BPSD to 26,000 BPSD as a result of continued improvements and advancements at the refinery. The Woods Cross Refinery is located in Woods Cross, Utah and processes regional sweet and black wax crude as well as Canadian sour crude oils into high value light products. For 2006, gasoline, diesel and jet fuel (excluding volumes purchased for resale) represented 63%, 28% and 2%, respectively, of the Woods Cross Refinery’s sales volumes.
The following table sets forth information about the Woods Cross Refinery operations, including non-GAAP performance measures about our refinery operations. The cost of products and refinery gross margin do not include the effect of depreciation, depletion and amortization. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Under Generally Accepted Accounting Principles” following Item 7A of Part II of this Form 10-K.


MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW
We are principally an independent petroleum refiner operating two refineries in Artesia and Lovington, New Mexico (operated as one refinery) and Woods Cross, Utah. Our profitability depends largely on the spread between market prices for refined petroleum products and crude oil prices. At December 31, 2006, we also owned a 45% interest in HEP, which owns and operates pipeline and terminalling assets and owns a 70% interest in 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. Additionally, starting April 1, 2006, we began recording direct sales of crude oil as revenues with the related acquisition costs included in cost of products, as required by recent accounting guidance (see “New Accounting Pronouncements” under “Critical Accounting Policies” below for additional discussion on this new accounting guidance). Prior to April 1, 2006, sales and cost of sales attributable to such crude oil direct sales were netted and presented in cost of products sold. During the year ended December 31, 2006, we recorded crude oil sales under this new guidance of $323.0 million with a corresponding cost of $323.3 million. Our total sales and other revenues for the year ended December 31, 2006 were $4,023.2 million and our net income for the year ended December 31, 2006 was $266.6 million. Our sales and other revenues and net income for the year ended December 31, 2005 were $3,046.3 million and $167.7 million, respectively. Our principal expenses are costs of products sold and operating expenses. Our total operating costs and expenses for the year ended December 31, 2006 were $3,661.3 million, an increase from $2,783.6 million for the year ended December 31, 2005.
On March 31, 2006 we sold our Montana Refinery to Connacher. The net cash proceeds we received on the sale of the Montana Refinery amounted to $48.9 million, net of transaction fees and expenses. Additionally we received 1,000,000 shares of Connacher common stock valued at $4.3 million at March 31, 2006. Accordingly, the results of operations of the Montana Refinery and a gain on the sale of $14.0 million, net of income taxes of $8.3 million, are shown in discontinued operations.
On May 11, 2006, we announced that our Board of Directors had approved a two-for-one stock split payable in the form of a stock dividend of one share of common stock for each issued and outstanding share of common stock. The stock dividend was paid on June 1, 2006 to all holders of record of common stock at the close of business on May 22, 2006. All references to the number of shares of common stock (other than authorized shares and other than issued shares and treasury shares at December 31, 2005 shown on our Consolidated Balance Sheets) and per share amounts for all periods presented have been adjusted to reflect the split on a retrospective basis.
On October 30, 2006, we announced that our Board of Directors had authorized a $100.0 million increase in our $200.0 million common stock repurchase program announced in November 2005, increasing the authorized repurchase limit under the stock repurchase program from $200.0 million to $300.0 million. Repurchases are being made from time to time in the open market or privately negotiated transactions based on market conditions, securities law limitations and other factors. During the year ended December 31, 2006, we repurchased under this repurchase initiative 4,458,607 shares at a cost of $177.0 million (of which $3.0 million of the cash settlement was after December 31, 2006) or an average of $39.70 per share. Since inception of this repurchase initiative through December 31, 2006, we have repurchased 5,446,207 shares at a cost of $207.0 million or an average of $38.00 per share.

Our sole reportable business segment is Refining after the deconsolidation of HEP effective July 1, 2005. From the closing of the initial public offering of HEP on July 13, 2004 until this deconsolidation, our segments reflected two business divisions, Refining and HEP. The Refining segment for the year ended December 31, 2004 includes the results of operations involving the assets included in HEP prior to the contribution on July 13, 2004. The HEP segment did not have any activity prior to HEP’s formation on July 13, 2004 or subsequent to the deconsolidation effective July 1, 2005.

Refining Operating Data
Our refinery operations include the Navajo Refinery and the Woods Cross Refinery. The following tables set forth information, including non-GAAP performance measures about our consolidated refinery operations. The cost of products and refinery gross margin do not include the effect of depreciation, depletion and amortization. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 7A of Part II of this Form 10-K.

Results of Operations – Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Summary
Income from continuing operations for the year ended December 31, 2006 was $246.9 million ($4.24 per diluted share) compared to $164.0 million ($2.59 per diluted share) for the year ended December 31, 2005. Income from continuing operations for 2006 as compared to 2005 increased 51% or $82.9 million, principally due to the higher refined product margins experienced throughout much of 2006. Our 2006 earnings also benefited from higher valued refinery yields due to the December 2005 start-up of our ROSE unit, which converts a significant portion of lower value asphalt into high value transportation fuels and the production of all our diesel fuel at both refineries as higher priced Ultra Low Sulfur Diesel (“ULSD”) beginning in July 2006, upon completion of our ULSD capital projects. Furthermore, revenues for the year ended December 31, 2006 include sales of sulfur credits which were generated because our Navajo Refinery is producing gasoline with a substantially lower sulfur content than applicable EPA requirements. These favorable factors were partially offset by the effects of higher operating costs and expenses incurred throughout most of 2006. Refinery production levels from continuing operations were relatively flat for the year ended December 31, 2006 as compared to 2005 primarily due to the offset of reduced production levels during the implementation of our ULSD and expansion projects against higher post-expansion production levels during the latter half of the year. Company-wide refinery margins from continuing operations were $15.78 per produced barrel for the year ended December 31, 2006 compared to refinery margins of $12.62 per produced barrel for the year ended December 31, 2005.
Sales and Other Revenues
Sales and other revenues from continuing operations increased 32% from $3,046.3 million for the year ended December 31, 2005 to $4,023.2 million for the year ended December 31, 2006, due principally to higher refined product sales prices experienced throughout much of 2006 combined with the recording of direct sales of crude oil as revenues effective April 1, 2006. The average sales price we received per produced barrel sold increased 16% from $69.12 for the year ended December 31, 2005 to $80.21 for the year ended December 31, 2006. The increase in sales and other revenues for the year ended December 31, 2006 also includes $323.0 million of revenues attributable to certain direct crude oil sales that were previously netted against the corresponding purchases and presented in cost of products sold prior to our adoption of new accounting guidance effective April 1, 2006. Additionally, revenues increased by the sales of $15.9 million for sulfur credits generated because our Navajo Refinery is producing gasoline with a substantially lower sulfur content than applicable EPA requirements.
Cost of Products Sold
Cost of products sold increased 34% from $2,498.8 million in 2005 to $3,349.4 million in 2006 due principally to the higher costs of purchased crude oil and the inclusion of costs attributable to direct crude oil sales. 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 14% from $56.50 in 2005 to $64.43 in 2006. Also, cost of products sold for the year ended December 31, 2006 increased by $323.3 million due to the inclusion of costs attributable to certain excess crude oil sales that were previously netted against the corresponding revenues and included in cost of products sold prior to our adoption of new accounting guidance effective April 1, 2006.
We recognized $4.2 million and $3.0 million in income in 2006 and 2005, respectively, resulting from the liquidations of certain last-in, first-out (“LIFO”) inventory quantities that were carried at lower costs compared to current costs. During 2005, we entered into hedges totaling 1,505,000 barrels covering forecasted diesel fuel sales from November 2005 to February 2006. The positions were liquidated in 2005 resulting in a gain of $3.2 million during 2005, which was recorded as a decrease in cost of products sold.
Refinery Gross Margin
Refining gross margin per produced barrel increased 25% from $12.62 in 2005 to $15.78 in 2006. Refinery gross margin does not include the effects of depreciation, depletion 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 statements of prices of refined products sold and costs of products purchased.

Operating Expenses
Operating expenses increased 9% from $192.1 million in 2005 to $208.5 million in 2006 due principally to higher utility costs throughout most of the year and refinery maintenance, partially offset by the exclusion of HEP’s operating costs in 2006 due to the deconsolidation of HEP effective July 1, 2005.
General and Administrative Expenses
General and administrative expenses increased 22% from $51.7 million in 2005 to $63.3 million in 2006 due primarily to increased equity-based incentive compensation.
Depreciation, Depletion and Amortization Expenses
Depreciation, depletion and amortization decreased 2% from $40.5 million in 2005 to $39.7 million in 2006 due primarily to the exclusion of HEP’s depreciation resulting from the deconsolidation of HEP, partially offset by an increase in depreciation arising from capitalized refinery improvement projects in 2006.
Equity in Earnings of HEP and Minority Interests
Our equity in earnings of HEP was $12.9 million and $6.5 million for the years ended December 31, 2006 and 2005, respectively. Prior to July 1, 2005, HEP was a consolidated subsidiary, with the then minority interest partners’ share of HEP’s earnings reported as minority interest. Minority interests in income of HEP for the year ended December 31, 2005 reduced income by $6.7 million.
Equity in Earnings of Joint Ventures
There was no equity in earnings of joint ventures for the year ended December 31, 2006 as all previously owned interests in joint ventures have been consolidated in our financials or have been sold. Equity in earnings of joint ventures for the year ended December 31, 2005 was a loss of $0.7 million, reflecting our interest in the NK Asphalt joint venture prior to our acquisition of the other partner’s interest.
Interest Income
Interest income for the year ended December 31, 2006 was $9.8 million compared to $6.9 million for the year ended December 31, 2005. The increase in interest income was principally due to the effects of a higher interest rate environment on increased internally generated cash throughout 2006.
Interest Expense
Interest expense was $1.1 million for the year ended December 31, 2006 as compared to $5.1 million for the year ended December 31, 2006. The decrease for 2006 as compared to 2005 was principally due to the exclusion of HEP’s interest expense in 2006 due to the deconsolidation of HEP effective July 1, 2005.
Income Taxes
Income taxes increased 37% from $99.6 million in 2005 to $136.6 million in 2006 due to significantly higher pre-tax earnings in 2006 as compared to 2005, partially offset by a lower effective tax rate. The effective tax rate for 2006 was 35.6%, as compared to 37.8% for 2005. The reduction in the effective tax rate was primarily due to income tax credits available to small business refiners. The Company’s effective tax rate decreased in 2006 as compared to 2005 primarily due to the impact of the American Jobs Creation Act of 2004, which provides tax incentives for small business refiners incurring costs to produce ultra low sulfur diesel fuel.
Discontinued Operations
Income from discontinued operations was $19.7 million for the year ended December 31, 2006 as compared to $3.0 million for the year ended December 31, 2005. Included in income for the year ended December 31, 2006 was the gain on the sale of the Montana Refinery of $14.0 million, net of $8.3 million in income taxes. The operations of the Montana Refinery generated $5.7 million of earnings in 2006 as compared to $3.0 million in 2005. The increase in earnings from discontinued operations was also due in part to the liquidation in 2006 of retained finished product inventories relating to the Montana Refinery that had been carried at lower costs as compared to current values.

Results of Operations – Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Summary
Income from continuing operations for the year ended December 31, 2005 was $164.0 million ($2.59 per diluted share) compared to $82.9 million ($1.29 diluted share) for the year ended December 31, 2004. Income from continuing operations for 2005, as compared to 2004 increased 98% or $81.1 million principally due to higher refined product margins experienced in 2005. Additionally impacting earnings favorably were increased refinery production volumes, offset by higher refinery operating costs and expenses. In 2004, we received 100% of the benefit of the refined product pipelines and terminals contributed to HEP prior to its initial public offering in July 2004, whereas from July 2004 through 2005, approximately half of the income from HEP’s refined product pipelines and terminals was attributable to other owners. Overall refinery production levels from continuing operations increased 3% to a total production level of 106,040 BPD in 2005 due to increased production at both refineries. Company-wide refinery margins from continuing operations were $12.62 per barrel in 2005 compared to margins of $9.20 per barrel in 2004.
Sales and Other Revenues
Sales and other revenues increased 44% from $2,116.2 million in 2004 to $3,046.3 million in 2005 due principally to higher refined product sales prices, and to a lesser degree, increased volumes sold at our refineries. The average sales price we received per produced barrel sold increased 34% from $51.40 in 2004 to $69.12 in 2005. The total volume of refined products we sold increased 6% in 2005 as compared to 2004. Additionally impacting sales were increases in 2005 due to the inclusion of the NK Asphalt Partners joint venture in the 2005 consolidated financial statements following our February 2005 purchase of the other partner’s interest, and the inclusion of revenues from HEP’s assets acquired from Alon for the period March through June 2005.
Cost of Products Sold
Cost of products sold increased 45% from $1,728.5 million in 2004 to $2,498.8 million in 2005 due principally to higher costs of crude oil, and to a lesser degree, increased volumes sold. The average price we paid per barrel of crude oil purchased increased 34% from $42.20 in 2004 to $56.50 in 2005. Additionally impacting cost of sales were increases in 2005 due to the inclusion of the NK Asphalt Partners joint venture in the 2005 consolidated financial statements.
We recognized $3.0 million and $4.9 million in income in 2005 and 2004, respectively, resulting from the liquidations of certain last-in, first-out (“LIFO”) inventory quantities that were carried at lower costs compared to current costs. During 2005, we entered into hedges totaling 1,505,000 barrels covering forecasted diesel fuel sales from November 2005 to February 2006. The positions were liquidated in 2005 resulting in a gain of $3.2 million, which was recorded as a decrease in cost of products sold.
Refinery Gross Margin
Refining gross margin per produced barrel increased 37% from $9.20 in 2004 to $12.62 in 2005. Refinery gross margin does not include the effects of depreciation, depletion 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 statements of prices of refined products sold and costs of products purchased.
Operating Expenses
Operating expenses increased 24% from $154.9 million in 2004 to $192.1 million in 2005 due to the higher production levels, increased utility and catalyst costs, operating costs associated with the assets HEP acquired from Alon for the period March to June 2005 prior to the HEP deconsolidation and the inclusion of the NK Asphalt Partners joint venture in the 2005 consolidated financial statements, while reduced by the operating costs of HEP in the 2005 third and fourth quarters which are no longer consolidated in the Company’s results. The increase in utility costs was mainly due to price increases during 2005 for purchased natural gas.
General and Administrative Expenses
General and administrative expenses increased 2% from $50.7 million in 2004 to $51.7 million in 2005 due primarily to an increase in non-share based incentive compensation, offset by a decrease in share-based compensation expense and reduced legal fees for 2005 as compared to 2004.

Depreciation, Depletion and Amortization Expenses
Depreciation, depletion and amortization increased 8% from $37.5 million in 2004 to $40.5 million in 2005 due to depreciation on the assets HEP acquired from Alon for the period March to June 2005, the inclusion of the NK Asphalt Partners joint venture in the 2005 consolidated statements and increased depreciation and amortization on other capital assets placed in service in 2004 and 2005. These factors were partially offset by the absence of depreciation on HEP’s assets for the third and fourth quarters of 2005 after the deconsolidation of HEP effective July 1, 2005.
Equity in Earnings of HEP
As part of the deconsolidation of HEP effective July 1, 2005, we now show equity in earnings in HEP for our ownership percentage of HEP, currently 45.0%, including any incentive distributions paid with respect to our general partner interest. Equity in earnings of HEP in 2005 was $6.5 million, which represents our 45.0% of HEP’s earnings for the last six months of 2005. There was no equity in earnings of HEP for 2004 as HEP was a consolidated subsidiary from its commencement of operations.
Equity in Earnings of Joint Ventures and Minority Interests
Equity in earnings of joint ventures in 2005 included a loss of $0.7 million from our interest in NK Asphalt Partners joint venture for the period prior to the increase in our ownership to 100% in February 2005. Minority interests in income of partnerships in 2005 was a reduction in income of $6.7 million which represented the minority interest partners’ 52.1% ownership share of HEP’s income prior to July 2005 (49% prior to HEP’s asset acquisition from Alon on February 28, 2005). As of July 1, 2005, minority interests are no longer being recognized due to the deconsolidation of HEP. Equity in earnings of joint ventures in 2004 included a loss of $0.1 million from our interest in NK Asphalt Partners joint venture. Minority interests in income of partnerships in 2004 resulted in a reduction of income of $7.6 million. This represented the minority interest partners’ 49% ownership of HEP (subsequent to HEP’s July 2004 initial public offering) and the minority owner’s 30% ownership share of the Rio Grande joint venture’s income (prior to HEP’s initial public offering).
Interest Income
Interest income for 2005 was $6.9 million compared to $4.4 million for 2004. Interest income in 2005 represents interest earned on our investible funds resulting from the receipt of proceeds from the initial public offering of HEP, sale of intermediate pipelines to HEP and internally generated cash flows. The interest income in 2004 resulted from the $2.2 million accrued interest received with $25.0 million of principal from Longhorn Partners Pipeline, L.P. on July 1, 2004 and the interest earned on the proceeds from the initial public offering of HEP in July 2004.
Interest Expense
Interest expense was $5.1 million for 2005 as compared to $3.5 million for 2004. The increase for 2005 as compared to 2004 was principally due to higher interest costs associated with the 6.25% senior notes of HEP due 2015 (“HEP Senior Notes”) through June 30, 2005 prior to deconsolidation.
Income Taxes
Income taxes increased 84% from $54.0 million in 2004 to $99.6 million in 2005 due principally to the higher earnings during 2005 as compared to 2004. The effective tax rate for 2005 was 37.8%, as compared to 39.4% for 2004. Our effective tax rate decreased in 2005 as compared to 2004 primarily due to the impact of the domestic production activities deduction enacted under the American Jobs Creation Act of 2004. In 2005, the current tax provision increased approximately $15.0 million due to the tax gain associated with the acquisition by HEP of the intermediate feedstock pipelines, an amount which was partially offset by the approximately $10.0 million reduction in current tax resulting from the immediate deduction allowed for 75% of certain capital costs paid or incurred in complying with the ULSD standards. The high current tax provision in 2004 reflects approximately $26.0 million associated with the tax gain on assets contributed upon the formation of HEP in July 2004.
Cumulative Effect of Accounting Change
With the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised), we recorded a cumulative effect of a change in accounting principle in 2005 relating to our performance units, due to the initial effect of measuring these awards at fair value, where previously they were measured at intrinsic value. The total cumulative effect of this change in accounting principle recorded upon adoption was a gain of approximately $0.7 million, net of approximately $0.4 million of deferred tax expense.

Discontinued Operations
Income from discontinued operations was $3.0 million for the year ended December 31, 2005 as compared to $0.9 million for the year ended December 31, 2004. During 2005, the Montana Refinery realized higher refined product margins as well as increased volumes of refined products sold.
LIQUIDITY AND CAPITAL RESOURCES
We consider all highly-liquid instruments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are stated at cost, which approximates market value, and are invested primarily in conservative, highly-rated instruments issued by financial institutions or government entities with strong credit standings. We also invest available cash in highly-rated marketable debt securities primarily issued by government entities that have maturities greater than three months. These securities include investments in variable rate demand notes (“VRDN”) and auction rate securities (“ARS”). Although VRDN and ARS may have long-term stated maturities, generally 15 to 30 years, we have designated these securities as available-for-sale and have classified them as current because we view them as available to support our current operations. Rates on VRDN are typically reset either daily or weekly. Rates on ARS are reset through a Dutch auction process at intervals between 35 and 90 days, depending on the terms of the security. VRDN and ARS may be liquidated at par on the rate reset date. We also invest in other marketable debt securities with the maximum maturity of any individual issue not greater than two years from the date of purchase. All of these instruments are classified as available-for-sale, and as a result, are reported at fair value. Unrealized gains and losses, net of related income taxes, are reported as a component of accumulated other comprehensive income or loss. As of December 31, 2006, we had cash and cash equivalents of $154.1 million, marketable securities with maturities under one year of $96.2 million and marketable securities with maturities greater than one year, but less than two years, of $5.7 million.
Cash and cash equivalents increased by $105.1 million during 2006. The combined cash provided by operating activities and investing activities of $245.2 million and $35.8 million, respectively, exceeded cash used by financing activities of $175.9 million. Working capital increased during 2006 by $37.4 million.
On July 1, 2004, we entered into a $175.0 million secured revolving credit facility with Bank of America as administrative agent and a lender, with a term of four years and an option to increase it to $225.0 million subject to certain conditions. The credit facility may be used to fund working capital requirements, capital expenditures, acquisitions and other general corporate purposes. As of December 31, 2006, we had letters of credit outstanding under our revolving credit facility of $2.3 million and had no borrowings outstanding. We were in compliance with all covenants at December 31, 2006.
On October 30, 2006, we announced that our Board of Directors had authorized a $100.0 million increase to our $200.0 million common stock repurchase program increasing the authorized stock repurchase limit from $200.0 million to $300.0 million. During 2006, we repurchased 4,458,607 shares at a cost of $177.0 million or an average of $39.70 per share under this repurchase initiative. As of December 31, 2006, a total of 5,446,207 shares costing $207.0 million or an average of $38.00 per share had been repurchased under this initiative since its inception in November 2005.
We believe our current cash, cash equivalents and marketable securities, along with future internally generated cash flow and funds available under our credit facility provide sufficient resources to fund currently planned capital projects and our liquidity needs for the foreseeable future as well as allow us to continue payment of quarterly dividends and the repurchase of additional common stock under our common stock repurchase program. In addition, components of our growth strategy may include construction of new refinery processing units and the expansion of existing units at our facilities and selective acquisition of complementary assets for our refining operations intended to increase earnings and cash flow. Our ability to acquire complementary assets will be dependent upon several factors, including our ability to identify attractive acquisition candidates, consummate acquisitions on favorable terms, successfully integrate acquired assets and obtain financing to fund acquisitions and to support our growth and many other factors beyond our control.

Since HEP is no longer consolidated in our financial statements effective July 1, 2005, we no longer include the accounts of HEP in our consolidated financial statements, and our share of the earnings of HEP is now reported using the equity method of accounting. Accordingly, the HEP Senior Notes are not recorded on our accompanying consolidated balance sheet at December 31, 2006. Navajo Pipeline Co., L.P., one of our subsidiaries, has agreed to indemnify HEP’s general partner to the extent it makes any payment in satisfaction of $35.0 million of the principal amount of the HEP Senior Notes.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

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 September 30, 2007, our refineries had a combined crude capacity of 111,000 BPSD. Our profitability depends largely on the spread between market prices for refined petroleum products and crude oil prices. At September 30, 2007, we also owned a 45% interest in Holly Energy Partners, L.P. (“HEP”), which owns and operates pipeline and terminalling assets and owns a 70% interest in Rio Grande Pipeline Company (“Rio Grande”).
Our principal source of revenue is from the sale of high value light products such as gasoline, diesel fuel and jet fuel in markets in the southwestern and western United States. Our sales and other revenues and net income for the nine months ended September 30, 2007 were $3,351.5 million and $284.3 million, respectively. Our sales and other revenues and net income for the nine months ended September 30, 2006 were $3,085.1 million and $218.9 million, respectively. Our principal expenses are costs of products sold and operating expenses. Our total operating costs and expenses for the nine months ended September 30, 2007 were $2,950.8 million, as compared to $2,791.8 million for the nine months ended September 30, 2006.
On March 31, 2006 we sold our petroleum refinery in Great Falls, Montana (the “Montana Refinery”) to a subsidiary of Connacher Oil and Gas Limited (“Connacher”). The net cash proceeds we received on the sale of the Montana Refinery amounted to $48.9 million, net of transaction fees and expenses. Additionally we received 1,000,000 shares of Connacher common stock valued at approximately $4.3 million at March 31, 2006. We have presented in discontinued operations the results of operations and a net gain of $13.8 million on the sale.
On August 9, 2007, we announced that our Board of Directors had authorized a $100.0 million increase to our current common stock repurchase program increasing the authorized stock repurchase limit from $300.0 million to $400.0 million. Common stock repurchases are being made from time to time in the open market or privately negotiated transactions based on market conditions, securities law limitations and other factors. During the nine months ended September 30, 2007, we repurchased under this repurchase initiative 1,327,090 shares at a cost of $79.0 million or an average of $59.55 per share. Since inception of this repurchase initiative in November 2005 through September 30, 2007, we have repurchased 6,773,297 shares at a cost of $286.0 million or an average of $42.22 per share.

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

Results of Operations — Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
Summary
Income from continuing operations was $58.1 million ($1.06 per basic and $1.04 per diluted share) for the third quarter of 2007, compared to income from continuing operations of $79.2 million ($1.40 per basic and $1.37 per diluted share) for the third quarter of 2006. Income from continuing operations decreased $21.1 million for the third quarter of 2007, a decrease of 27%, as compared to the third quarter of 2006, due principally to a decline in refined product margins in the current year’s third quarter. Also affecting income from continuing operations were the effects of increased general and administrative expenses and depreciation, depletion and amortization, partially offset by a decrease in operating costs. Overall sales of produced refined products from continuing operations were relatively flat for the third quarter of 2007 as compared to the same period in 2006 due to a decrease in refinery production during the current year’s third quarter. Overall refinery gross margins from continuing operations were $12.84 per produced barrel for the third quarter of 2007 compared to refinery gross margins from continuing operations of $17.75 per produced barrel for the third quarter of 2006.
During August 2007, certain units at our Navajo Refinery were down for 10 days of unscheduled repairs as a result of damage incurred from a power outage. This combined with downtime at our Woods Cross Refinery during the third quarter of 2007 resulted in a 3% decrease in refinery production levels from continuing operations for the three months ended September 30, 2007 as compared to the same period in 2006.
Sales and Other Revenues
Sales and other revenues from continuing operations increased 3% from $1,172.7 million for the third quarter of 2006 to $1,208.7 million for the third quarter of 2007, due principally to higher refined product sales prices. The average sales price we received per produced barrel sold increased 3% from $86.96 for the third quarter of 2006 to $89.56 for the third quarter of 2007. The total volume of produced refined products sold was relatively flat for the third quarter of 2007 as compared to the third quarter of 2006.
Cost of Products Sold
Cost of products sold increased 8% from $979.3 million for the third quarter of 2006 to $1,059.5 million for the third quarter of 2007, due principally to a per unit increase in the cost of produced refined products sold. The total volume of produced refined products sold for the third quarter of 2007 was relatively flat as compared to the third quarter of 2006. The average price we paid per barrel of crude oil and feedstocks purchased and the transportation costs of moving the finished products to the market place increased 11% from $69.21 for the third quarter of 2006 to $76.72 for the third quarter of 2007.
Gross Refinery Margins
Gross refining margin per produced barrel decreased 28% from $17.75 for the third quarter of 2006 to $12.84 for the third quarter of 2007 due to the combined effects of an increase in the average price we paid per barrel of crude oil and feedstocks purchased and an increase in the average sales price we received per produced barrel sold. Gross refinery margin does not include the effects of depreciation, depletion and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part 1 of this Form 10-Q for a reconciliation to the income statement of prices of refined products sold and cost of products purchased.
Operating Expenses
Operating expenses, exclusive of depreciation, depletion and amortization, decreased 4% from $54.1 million for the third quarter of 2006 to $52.2 million for the third quarter of 2007, due principally to lower utility costs.
General and Administrative Expenses
General and administrative expenses increased 50% from $12.6 million for the third quarter of 2006 to $18.8 million for the third quarter of 2007, due principally to increased equity-based incentive compensation expense and software implementation costs. The increase in our equity-based compensation expense was due to an increase in our stock price and the accelerated vesting of certain outstanding restricted stock awards.

Depreciation, Depletion and Amortization Expenses
Depreciation, depletion and amortization increased 11% from $9.5 million for the third quarter of 2006 to $10.5 million for the third quarter of 2007 due to capitalized refinery improvement projects in 2006.
Equity in Earnings of HEP
Our equity in earnings of HEP was $5.6 million for the third quarter of 2007 as compared to $3.6 million for the third quarter of 2006. The increase in our equity in earnings of HEP was due principally to an increase in HEP’s earnings in the third quarter of 2007 as compared to the third quarter of 2006.
Interest Income
Interest income for the third quarter of 2007 was $4.4 million as compared to $2.7 million for the third quarter of 2006. The increase in interest income was due principally to the effects of a higher interest rate environment combined with increased investments in marketable debt securities.
Interest Expense
Interest expense was $0.3 million for the third quarter of 2007 and 2006.
Income Taxes
Income taxes decreased 57% from $44.0 million for the third quarter of 2006 to $19.1 million for the third quarter of 2007, due to lower pre-tax earnings during the 2007 third quarter as compared to the 2006 third quarter. The effective tax rate for the third quarter of 2007 was 24.8%, as compared to 35.7% for the third quarter of 2006. The decrease in our effective tax rate was due principally to a statutory increase in the federal tax deduction for domestic manufacturing activities, an increase in the amount of the low sulfur diesel fuel production tax credit and the effects of a higher estimated effective tax rate during the first half of 2007 as compared to the nine months ended September 30, 2007.
Discontinued Operations
We had no income from discontinued operations for the third quarter of 2007 as our Montana Refinery operations have ceased. We realized a loss of $0.2 million from discontinued operations for the third quarter of 2006, which was largely due to the wind down of operations resulting from the sale of our Montana Refinery on March 31, 2006.
Results of Operations — Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Summary
Income from continuing operations was $284.3 million ($5.17 per basic and $5.08 per diluted share) for the nine months ended September 30, 2007, compared to income from continuing operations of $198.1 million ($3.45 per basic and $3.38 per diluted share) for the nine months ended September 30, 2006. Income from continuing operations increased $86.2 million for the nine months ended September 30, 2007, an increase of 44%, as compared to the nine months ended September 30, 2006, principally due to improved refined product margins experienced in the current year and an increase in volume of produced refined products sold. These favorable factors were partially offset by the effects of higher depreciation, depletion and amortization costs and general and administrative expenses incurred in the current year. Overall sales of produced refined products from continuing operations increased by 11% for the nine months ended September 30, 2007 as compared to the same period in 2006 due to an increase in refinery production during the nine months ended September 30, 2007. Overall refinery gross margins from continuing operations were $19.32 per produced barrel for the nine months ended September 30, 2007 compared to refinery gross margins from continuing operations of $17.23 per produced barrel for the nine months ended September 30, 2006.
The large increase in volume of produced refined products sold for the nine months ended September 30, 2007, as compared to the same period in 2006 is attributable to increased production levels during the current year. Our production levels were lower for the nine months ended September 30, 2006 due to planned downtime at our Navajo and Woods Cross Refineries during the second quarter of 2006. To meet this requirement, we completed certain ULSD projects at both refineries during the second quarter of 2006. In conjunction with these ULSD projects, we timed other refinery maintenance projects and an expansion at our Navajo Refinery. Downtime incurred from these capital projects was the principal factor in our reduced production levels during the nine-months ended September 30, 2006. Also

contributing to our production increase for the nine months ended September 30, 2007 is an increase in production levels at our Navajo Refinery following an 8,000 BPSD refinery expansion in mid-year 2006 combined with an additional 2,000 BPSD expansion in mid-year 2007. This increase was partially offset by a decrease in production during the third quarter of 2007 due to unplanned downtime at our Navajo and Woods Cross Refineries. For the nine months ended September 30, 2007, refinery production from continuing operations increased by 10%, as compared to the same period in 2006.
Sales and Other Revenues
Sales and other revenues from continuing operations increased 9% from $3,085.1 million for the nine months ended September 30, 2006 to $3,351.5 million for the nine months ended September 30, 2007, due principally to higher refined product sales prices and an increase in volumes of produced refined products sold. The average sales price we received per produced barrel sold increased 3% from $83.74 for the nine months ended September 30, 2006 to $86.07 for the nine months ended September 30, 2007. The total volume of produced refined products sold increased by 11% for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006.
Cost of Products Sold
Cost of products sold increased 6% from $2,562.8 million for the nine months ended September 30, 2006 to $2,708.4 million for the nine months ended September 30, 2007, due principally to an increase in volumes of produced refined products sold. The average price we paid per barrel of crude oil and feedstocks purchased and the transportation costs of moving the finished products to the market place increased slightly from $66.51 for the nine months ended September 30, 2006 to $66.75 for the nine months ended September 30, 2007.
Gross Refinery Margins
Gross refining margin per produced barrel increased 12% from $17.23 for the nine months ended September 30, 2006 to $19.32 for the nine months ended September 30, 2007 due to an increase in the average sales price we received per produced barrel sold. Gross refinery margin does not include the effects of depreciation, depletion and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part 1 of this Form 10-Q for a reconciliation to the income statement of prices of refined products sold and cost of products purchased.
Operating Expenses
Operating expenses, exclusive of depreciation, depletion and amortization decreased 2% from $155.7 million for the nine months ended September 30, 2006 to $153.4 million for the nine months ended September 30, 2007, due principally to lower utility costs.
General and Administrative Expenses
General and administrative expenses increased 25% from $44.8 million for the nine months ended September 30, 2006 to $56.0 million for the nine months ended September 30, 2007, due principally to increased equity-based incentive compensation expense and software implementation costs. The increase in our equity-based compensation expense was due to an increase in our stock price and the accelerated vesting of certain outstanding restricted stock awards.
Depreciation, Depletion and Amortization Expenses
Depreciation, depletion and amortization increased 16% from $28.2 million for the nine months ended September 30, 2006 to $32.6 million for the nine months ended September 30, 2007 due to capitalized refinery improvement projects in 2006.

Equity in Earnings of HEP
Our equity in earnings of HEP was $13.9 million for the nine months ended September 30, 2007 as compared to $8.3 million for the nine months ended September 30, 2006. The increase in our equity in earnings of HEP was due principally to an increase in HEP’s earnings for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006.
Interest Income
Interest income for the nine months ended September 30, 2007 was $10.5 million compared to $6.9 million for the nine months ended September 30, 2006. The increase in interest income was due principally to the effects of a higher interest rate environment combined with increased investments in marketable debt securities.
Interest Expense
Interest expense was $0.8 million for the nine months ended September 30, 2007 and 2006.
Income Taxes
Income taxes increased 28% from $109.6 million for the nine months ended September 30, 2006 to $140.0 million for the nine months ended September 30, 2007 due to higher pre-tax earnings during the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006. The effective tax rate for the nine months ended September 30, 2007 was 33.0%, as compared to 35.6% for the nine months ended September 30, 2006. The decrease in our effective tax rate was due principally to a statutory increase in the federal tax deduction for domestic manufacturing activities and an increase in the amount of the low sulfur diesel fuel production tax credit. The low sulfur diesel production tax credit became effective June 1, 2006 and was available to us for the entire nine months ended September 30, 2007 as compared four months of the nine months ended September 30, 2006.
Discontinued Operations
We had no income from discontinued operations for the nine months ended September 30, 2007 as our Montana Refinery operations have ceased. Income from discontinued operations was $20.8 million for the nine months ended September 30, 2006 which consisted of a $13.8 million gain on the sale of the Montana Refinery, net of $8.2 million in income taxes, and $7.0 million of earnings which was largely due to the liquidation of certain retained quantities of inventories that were not included in the sale of our Montana Refinery on March 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
We consider all highly-liquid instruments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are stated at cost, which approximates market value, and are invested primarily in conservative, highly-rated instruments issued by financial institutions or government entities with strong credit standings. We also invest available cash in highly-rated marketable debt securities primarily issued by government entities that have maturities greater than three months. These securities include investments in variable rate demand notes (“VRDN”) and auction rate securities (“ARS”). Although VRDN and ARS may have long-term stated maturities, generally 15 to 30 years, we have designated these securities as available-for-sale and have classified them as current because we view them as available to support our current operations. Rates on VRDN are typically reset either daily or weekly. Rates on ARS are reset through a Dutch auction process at intervals between 35 and 90 days, depending on the terms of the security. VRDN and ARS may be liquidated at par on the rate reset date. We also invest in other marketable debt securities with the maximum maturity of any individual issue not greater than two years from the date of purchase. All of these instruments are classified as available-for-sale, and as a result, are reported at fair value. Unrealized gains and losses, net of related income taxes, are reported as a component of accumulated other comprehensive income or loss. As of September 30, 2007, we had cash and cash equivalents of $39.0 million, marketable securities with maturities under one year of $184.8 million and marketable securities with maturities greater than one year, but less than two years, of $85.9 million.
Cash and cash equivalents decreased by $115.1 million during the nine months ended September 30, 2007. The combined cash used for investing activities of $280.6 million and for financing activities of $91.2 million exceeded cash provided by operating activities of $256.7 million. Working capital increased during the nine months ended September 30, 2007 by $39.0 million.

We have a $175.0 million secured revolving credit facility with Bank of America as administrative agent and a lender, with a term of four years through July 2008 and an option to increase the facility to $225.0 million subject to certain conditions. The credit facility may be used to fund working capital requirements, capital expenditures, acquisitions and other general corporate purposes. As of September 30, 2007, we had letters of credit outstanding under our revolving credit facility of $2.5 million and had no borrowings outstanding. We were in compliance with all covenants at September 30, 2007.
On August 9, 2007, we announced that our Board of Directors had authorized a $100.0 million increase to our current common stock repurchase program increasing the authorized stock repurchase limit from $300.0 million to $400.0 million. Common stock repurchases are being made from time to time in the open market or privately negotiated transactions based on market conditions, securities law limitations and other factors. During the nine months ended September 30, 2007, we repurchased under this repurchase initiative 1,327,090 shares at a cost of $79.0 million or an average of $59.55 per share. Since inception of this repurchase initiative in November 2005 through September 30, 2007, we have repurchased 6,773,297 shares at a cost of $286.0 million or an average of $42.22 per share.
We believe our current cash, cash equivalents and marketable securities, along with future internally generated cash flow and funds available under our credit facility provide sufficient resources to fund currently planned capital projects and our liquidity needs for the foreseeable future as well as allow us to continue payment of quarterly dividends and the repurchase of additional common stock under our common stock repurchase program. In addition, components of our growth strategy may include construction of new refinery processing units and the expansion of existing units at our facilities and selective acquisition of complementary assets for our refining operations intended to increase earnings and cash flow. Our ability to acquire complementary assets will be dependent upon several factors, including our ability to identify attractive acquisition candidates, consummate acquisitions on favorable terms, successfully integrate acquired assets and obtain financing to fund acquisitions and to support our growth, and many other factors beyond our control.
Cash Flows — Operating Activities
Net cash flows provided by operating activities were $256.7 million for the nine months ended September 30, 2007 compared to $208.3 million for the nine months ended September 30, 2006, an increase of $48.4 million. Net income for the nine months ended September 30, 2007 was $284.3 million, an increase of $65.4 million from net income of $218.9 million for the nine months ended September 30, 2006. Additionally, the non-cash adjustments to net income of depreciation and amortization, deferred taxes, equity-based compensation and gain on sale of assets resulted in an increase to operating cash flows of $52.4 million for the nine months ended September 30, 2007 as compared to $16.0 million for the nine months ended September 30, 2006. Distributions in excess of equity in earnings of HEP for the nine months ended September 30, 2007 decreased to $3.0 million as compared to $6.7 million for the nine months ended September 30, 2006. Changes in working capital items decreased cash flows by $68.6 million for the nine months ended September 30, 2007, as compared to a decrease of $19.6 million for the nine months ended September 30, 2006, resulting mainly from an increase in inventories and accounts receivable, partially offset by an increase in accounts payable during the first nine months of 2007. For the first nine months of 2007, inventories increased by $50.1 million, as compared to an increase of $8.4 million for the first nine months of 2006. Also for the first nine months of 2007, accounts receivable increased by $184.9 million, as compared to a decrease of $13.5 million for the first nine months of 2006 and accounts payable increased by $171.8 million, as compared to a decrease of $17.3 million for the first nine months of 2006. Additionally, for the first nine months of 2007, there were no turnaround expenditures, as opposed to $7.1 million for the first nine months of 2006.
Cash Flows — Investing Activities and Capital Projects
Net cash flows used for investing activities were $280.6 million for the nine months ended September 30, 2007, as compared to net cash flows provided by investing activities of $73.3 million for the nine months ended September 30, 2006, a net change of $353.9 million. Cash expenditures for property, plant and equipment for the first nine months of 2007 totaled $113.2 million as compared to $89.2 million for the same period in 2006. On March 31, 2006 we sold our Montana Refinery to Connacher. The cash proceeds we received on the sale of the Montana Refinery were

$48.9 million, net of transaction fees and expenses. We also invested $561.8 million in marketable securities and received proceeds of $394.4 million from the sale or maturity of marketable securities during the nine months ended September 30, 2007. For the nine months ended September 30, 2006, we invested $172.3 million in marketable securities and received proceeds of $285.9 million from the sale or maturity of marketable securities.
Planned Capital Expenditures
Each year our Board of Directors approves in our annual capital budget capital projects that our management is authorized to undertake. Additionally, at times when conditions warrant or as new opportunities arise, other special projects may be approved. The funds allocated for a particular capital project may be expended over a period of several years, depending on the time required to complete the project. Therefore, our planned capital expenditures for a given year consist of expenditures approved for capital projects included in the current year’s capital budget as well as, in certain cases, expenditures approved for capital projects in capital budgets for prior years. Our total capital budget for 2007 is approximately $42.1 million, not including the capital projects approved in prior years and our expansion and feedstock flexibility projects at the Navajo and Woods Cross refineries and pipeline projects as described below. The 2007 capital budget is comprised of $24.7 million for refining improvement projects for the Navajo Refinery, $9.7 million for projects at the Woods Cross Refinery, $3.2 million for transportation projects, $0.5 million for marketing-related projects, $2.8 million for asphalt plant projects and $1.2 million for information technology and other miscellaneous projects.
At the Navajo Refinery, we will be installing an additional 100 ton per day sulfur recovery unit at an estimated cost of $26.0 million that will permit Navajo to process 100% sour crude. The sulfur recovery unit is planned for start-up in the first quarter of 2009. Also, we will be installing a new 15,000 BPSD hydrocracker and a new 28 MMSCFSD hydrogen plant at a budgeted cost of $134.0 million. The addition of these units is expected to increase liquid volume recovery, increase the refinery’s capacity to process outside feedstocks, increase yields of high-valued products and enable the refinery to meet the EPA’s new low sulfur gasoline specifications. Engineering / procurement of this project is approximately 60% complete. Construction is currently awaiting approval of environmental permits in the state of New Mexico.
As announced in February 2007, we will be revamping the Lovington crude unit at the Navajo Refinery which will increase crude capacity to approximately 100,000 BPSD. In addition, our Board of Directors has approved a revamp of the Artesia crude unit and the installation of a new 20,000 BPSD ROSE unit, which combined with the hydrogen plant and the new hydrocracker and sulfur recovery units, will allow the Navajo Refinery to process approximately 40,000 BPSD of heavy Canadian crude oil. The estimated cost of the combined crude expansion and heavy Canadian crude oil processing project is $240.0 million. It is currently anticipated that the expansion portion of the overall project consisting of the initial crude unit revamp, the new hydrocracker and the new hydrogen plant will be completed in the first quarter of 2009. The completion of the heavy crude oil processing portion of the overall project, including the second crude unit revamp and the installation of the new solvent de-asphalter, will be targeted to coincide with development of future pipeline access to the Navajo Refinery for heavy Canadian crude oil and other foreign heavy crude oils transported from the Cushing, Oklahoma area. We plan to explore with HEP the most economical manner to obtain this needed pipeline access.
At the Woods Cross Refinery, we will be adding a new 15,000 BPSD hydrocracker along with sulfur recovery and desalting equipment. The budgeted cost of these additions is approximately $100.0 million. These additions will expand the Woods Cross Refinery’s crude processing capabilities from 26,000 BPSD to 31,000 BPSD while enabling the refinery to process up to 10,000 BPSD of high-value low-priced black wax crude oil and up to 5,000 BPSD of low-priced heavy Canadian crude oils. The Woods Cross Refinery expansion project as approved involves a higher capital investment than had originally been estimated, principally because of the substitution of a complex hydrocracker in place of certain desulfurization and expanded bottoms-processing modifications that had been included in preliminary planning. The substitution of the complex hydrocracker is expected to provide increased capabilities to process significantly more black wax crude oils, which have recently been priced at substantial discounts to West Texas Intermediate crude oil, while yielding substantially higher value products than the discounted heavy Canadian crudes that were a more significant part of the original plan. These additions would also increase the refinery’s capacity to process low-cost feedstocks and provide the necessary infrastructure for future expansions of crude oil refining capacity at the Woods Cross Refinery while enabling the refinery to meet the EPA’s new low sulfur gasoline specifications. Hydrogen for this project will be supplied by a third party supplier under a contract for the next 15 years. The approved projects for the Woods Cross Refinery are expected to be completed during the third quarter of 2008.
In 2007, we expect to expend an estimated total of $179.0 million on currently approved refinery capital projects, which amount consists of certain carryovers of capital projects from previous years, less carryovers to subsequent years of certain of the currently approved capital projects.
To fully take advantage of the economics on the Woods Cross expansion project, additional crude pipeline capacity will be required to move Canadian crude to the Woods Cross Refinery. In February 2007, HEP entered into a letter of intent with Plains All American Pipeline, L.P. (“Plains”) under which HEP will own a 25% interest in a new 95 mile intrastate pipeline system, now being constructed by Plains, capable of shipping up to 120,000 BPD of crude oil into the Salt Lake City area.
As previously announced, we have entered into a Memorandum of Understanding with Sinclair Transportation Company (“Sinclair”) to jointly build a 12-inch pipeline 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”). Subject to the execution of definitive agreements, we will own a 75% interest and Sinclair will own a 25% interest in the project. We have an understanding with HEP that they will be the operator and will have an option to purchase our interest in the project, effective for a 180-day period commencing when the UNEV Pipeline becomes operational, at a purchase price equal to our share of actual costs, plus interest at 7% per annum. The initial capacity of the pipeline will be 62,000 BPD, with the capacity for further expansion to 120,000 BPD. The cost of the pipeline is expected to be $225.0 million, and the total cost of the project including terminals is expected to be approximately $300.0 million. Construction of this project is currently expected to be completed and operational in early 2009.
In October 2004, the American Jobs Creation Act of 2004 (“2004 Act”) was signed into law. Among other things, the 2004 Act created tax incentives for small business refiners incurring costs to produce ULSD. The 2004 Act provided an immediate deduction of 75% of certain costs paid or incurred to comply with the ULSD standards, and a tax credit based on ULSD production of up to 25% of those costs. We estimate the tax savings that we derive from planned capital expenditures associated with the 2004 Act will result in a reduction in our income tax expense of $15.6 million in 2007, representing the difference between the value of allowed credits under the 2004 Act as compared to the value of depreciating the investments. In August 2005, the Energy Policy Act of 2005 (“2005 Act”) was signed into law. Among other things, the 2005 Act created tax incentives for refiners by providing for an immediate deduction of 50% of certain refinery capacity expansion costs when the expansion assets are placed in service. We believe the capacity expansion projects at the Navajo and Woods Cross Refineries will qualify for this deduction.
The above mentioned regulatory compliance items, including the ULSD and LSG requirements, or other presently existing or future environmental regulations could cause us to make additional capital investments beyond those described above and incur additional operating costs to meet applicable requirements.
Cash Flows — Financing Activities
Net cash flows used for financing activities were $91.2 million for the nine months ended September 30, 2007, as compared to $136.0 million for the nine months ended September 30, 2006, a decrease of $44.8 million. Under our common stock repurchase program, we purchased treasury stock of $79.0 million during the nine months ended September 30, 2007 and $137.0 million during the nine months ended September 30, 2006. Our treasury stock purchases for the nine months ended September 30, 2007 and 2006, include $5.1 million and $1.4 million, respectively, in common stock purchased from certain officers and other key employees, at market prices, made under the terms of restricted stock agreements to provide funds for the payment of payroll and income taxes due at the vesting of restricted shares in the case of executives who did not elect to satisfy such taxes by other means. During the nine months ended September 30, 2007, we paid $16.7 million in dividends, received $0.6 million for common stock issued upon exercise of stock options, and recognized $8.9 million in excess tax benefits on our equity based compensation. During the nine months ended September 30, 2006, we paid $10.5 million in dividends, received $2.4 million for common stock issued upon exercise of stock options and recognized $10.4 million in excess tax benefits on our equity based compensation.
Contractual Obligations and Commitments
HEP serves our refineries in New Mexico and Utah under a 15-year pipelines and terminals agreement (“HEP PTA”) expiring in 2019 and a 15-year intermediate pipeline agreement expiring in 2020 (“HEP IPA”). Under the HEP PTA, we pay HEP fees to transport on HEP’s refined product pipelines or throughput in HEP’s terminals a volume of refined products that will result in minimum annual payments to HEP. Following the July 1, 2007 producer price index (“PPI”) rate adjustment, minimum payments under the HEP PTA will be $39.6 million for the twelve months ending June 30, 2008. Under the HEP IPA, we agreed to transport volumes of intermediate products on the intermediate pipelines that will result in minimum annual payments to HEP. Following the July 1, 2007 PPI rate adjustment, minimum payments under the HEP IPA will be $12.8 million for the twelve months ending June 30, 2008. Minimum revenues for both agreements will adjust upward based on increases in the producer price index over the term of the agreements. Additionally, we agreed to indemnify HEP up to an aggregate amount of $17.5 million for any environmental noncompliance and remediation liabilities associated with the assets transferred to HEP and occurring or existing prior to the date of the transfers of ownership to HEP. Of this total, indemnification in excess of $15.0 million relates solely to the intermediate pipelines.
On October 15, 2007, we entered into an agreement with HEP that amends the HEP PTA under which HEP has agreed to expand their refined products pipeline system between Artesia, New Mexico and El Paso, Texas (the “South System”). The amendment also provides for a tariff increase, effective May 1, 2008, on our shipments on HEP’s refined product pipelines and monetary incentives to HEP for the early completion of the South System expansion, currently targeted for January 31, 2009.
HEP financed the Alon transaction through a private offering of $150.0 million principal amount of HEP Senior Notes. HEP increased these notes to $185.0 million as part of the purchase of our intermediate pipelines. The $185.0 million HEP Senior Notes are not recorded on our accompanying consolidated balance sheets at September 30, 2007 or December 31, 2006. Navajo Pipeline Co., L.P., one of our subsidiaries, has agreed to indemnify HEP’s general partner to the extent it makes any payment in satisfaction of $35.0 million of the principal amount of the HEP Senior Notes.
In discussions beginning in the last half of 2005, the EPA and the State of Utah have asserted that we have Federal Clean Air Act liabilities relating to our Woods Cross Refinery because of actions taken or not taken by prior owners of the Woods Cross Refinery, which we purchased from ConocoPhillips in June 2003. We have tentatively agreed with the EPA and the State of Utah to settle the issues presented by means of an agreement similar to the 2001 Consent Agreement we entered into for our Navajo and Montana refineries. The tentative settlement agreement, which has not yet been put into a final written agreement, includes proposed obligations for us to make specified additional capital investments expected to total up to approximately $10.0 million over several years and to make changes in operating procedures at the refinery. The agreements for the purchase of the Woods Cross Refinery provide that ConocoPhillips will indemnify us, subject to specified limitations, for environmental claims arising from circumstances prior to our purchase of the refinery. We believe that, in the present circumstances, the amount due to us from ConocoPhillips under the agreements for the purchase of the Woods Cross Refinery would be approximately $1.4 million with respect to the tentative settlement. With respect to the 2001 Consent Agreement we entered into for our Navajo and Montana refineries, following the sale of the Montana Refinery in March 2006 our remaining commitment relates to the Navajo Refinery and, with the investments made to date, our outstanding required investments are no longer significant.



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