Holly Corp.: Wells of Potential

Expansion and growth aren't necessarily the same thing. For Dallas-based Holly Corp., the last of IndustryWeek's 50 Best Manufacturers for 2007, its third-straight record setting year in 2006 could have been enough to click its growth model onto cruise control. Instead, the company opted to push the envelope even further. But as part of its continued expansion, the company made an important move to make sure sustainable growth keeps following close behind.

In February, Holly Corp. announced a definitive agreement with Dallas-based Holly Energy Partners, L.P., which provides petroleum product transportation and terminal services to the petroleum industry (including Holly Corp., which currently owns a 45% interest in the partnership). The announcement stated that Holly Energy will acquire certain pipeline and tankage assets from Holly Corp. for approximately $180 million.

In connection with the closing of the transaction, the two entities will enter into a 15-year pipelines and tankage agreement containing minimum annual revenue commitments from Holly Corp. In total, the assets being acquired consist of:

• The Navajo Refinery crude oil delivery system -- approximately 136 miles of crude oil trunk lines delivering crude to the Navajo refining facility in Southeast New Mexico.
• Western Permian Basin crude gathering lines plus lease connection lines -- approximately 725 miles of gathering and connection pipelines located in West Texas and New Mexico. These lines primarily connect to the acquired crude oil refinery delivery system.
• Refinery on-site crude tankage located within the Navajo and Woods Cross refinery complexes, with approximately 600,000 barrels per day of storage capacity.
• Artesia to Roswell, N.M., jet fuel products pipeline and terminal (terminal leased through September 2011).
• Woods Cross Refinery pipelines -- approximately 10 miles of crude oil and product pipelines.

"This acquisition fits well into Holly Energy's strategy of disciplined growth through the addition or expansion of steady income generating assets," Matt Clifton, chairman and CEO of Holly Corp. and Holly Energy, said in a statement. "As with all of Holly Energy's existing assets, this acquisition consists of assets generating 100% fee-based transportation and terminal revenues. We expect this transaction will be immediately positive for Holly Energy's distributable cash flow."

Holly Corp. also reported its fourth quarter 2007 earnings in February, posting record net income of $334.1 million for the year, an increase of more than 25% from 2006. Net income for the quarter was $49.8 compared to $47.7 million a year earlier. Clifton said higher gross margins at our Woods Cross Refinery, record overall refinery production levels and lower per barrel operating expenses resulted in significantly improved financial results.

However, lower refinery gross margins at Holly's Navajo Refinery had a hand in offsetting the company's record year. Gross margins at the refinery fell to $7.95 per produced barrel from $11.30. As a result, Holly's overall refinery gross margin fell over 18% from 2006, dropping to $9.83 per produced barrel from $12.08. Gross margins at the Navajo Refinery were negatively impacted during the fourth quarter of 2007 by lower West Coast gasoline prices. This indirectly affected prices in Phoenix, one of Navajo's primary markets.

During the last year, Holly Corp. made significant progress on expansion projects at both its Woods Cross and Navajo refineries, in addition to crude flexibility capital projects. Each of these projects remains on budget, as does the company's Salt Lake City to Las Vegas joint venture pipeline, which is expected to be operational in mid-2009.

"We are extremely pleased with our 2007 results," noted Clifton. "Higher gross margins at our Woods Cross Refinery, record overall refinery production levels and lower per barrel operating expenses resulted in significantly improved financial results. It was our fourth consecutive record year, with net income from continuing operations increasing 35% over our previous 2006 record results."

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