Holly Energy Partners

On March 15, 2004, we filed a registration statement on Form S-1 with the SEC relating to a proposed underwritten initial public offering of limited partnership interests in Holly Energy Partners, L.P. ("HEP"). HEP was formed to acquire, own and operate substantially all of our refined product pipeline and terminalling assets that support our refining and marketing operations in West Texas, New Mexico, Utah and Arizona and to own our 70% interest in Rio Grande. On July 13, 2004, HEP closed its initial public offering of 7,000,000 common units at a price of $22.25 per unit, which included a 900,000 unit over-allotment option that was exercised by the underwriters. Proceeds to HEP from the sale of the units were $145.5 million, net of underwriting commissions. Prior to the Alon and Holly intermediate pipeline transactions, we owned a 51% interest in HEP, including the general partner interest. The initial public offering represented the sale by us of a 49% interest in HEP. HEP's common units trade on the New York Stock Exchange under the symbol "HEP."

HEP operates a system of refined product pipelines and distribution terminals in Texas, New Mexico, Utah, Arizona, Idaho, Washington and Oklahoma. HEP generates revenues by charging tariffs for transporting refined products through its pipelines and by charging fees for terminalling refined products and other hydrocarbons, and storing and providing other services at its terminals. HEP does not take ownership of products that it transports or terminals and therefore is not directly exposed to changes in commodity prices. HEP serves our refineries in New Mexico and Utah under a 15 year pipelines and terminals agreement.

As of December 31, 2008, HEP's assets include:

Pipelines

approximately 820 miles of refined product pipelines, including 340 miles of leased pipelines, that transport gasoline, diesel and jet fuel principally from our Navajo Refinery in New Mexico to our customers in the metropolitan and rural areas of Texas, New Mexico, Arizona, Colorado, Utah and northern Mexico;
approximately 510 miles of refined product pipelines that transport refined products from Alon's Big Spring refinery in Texas to its customers in Texas and Oklahoma;
two parallel 65-mile pipelines that transport intermediate feedstocks and crude oil from our Lovington, New Mexico refinery facilities to our Artesia, New Mexico refining facilities;
approximately 860 miles of crude oil trunk, gathering and connection pipelines located in west Texas and New Mexico that deliver crude oil to our Navajo Refinery;
approximately 10 miles of crude oil and refined product pipelines that support our Woods Cross Refinery near Salt Lake City, Utah; and
a 70% interest in Rio Grande, a joint venture that owns a 249-mile refined product pipeline that transports liquid petroleum gases, or LPG's, from west Texas to the Texas/Mexico border near El Paso for further transport into northern Mexico.

Refined Product Terminals and Refinery Tankage:

four refined product terminals located in El Paso, Texas; Moriarty and Bloomfield, New Mexico; and Tucson, Arizona, with an aggregate capacity of approximately 1.0 million barrels, that are integrated with HEP's refined product pipeline system that serves our Navajo Refinery;
three refined product terminals (two of which are 50% owned), located in Burley and Boise, Idaho and Spokane, Washington, with an aggregate capacity of approximately 500,000 barrels, that serve third-party common carrier pipelines;
one refined product terminal near Mountain Home, Idaho with a capacity of 120,000 barrels, that serves a nearby United States Air Force Base;
two refined product terminals, located in Wichita Falls and Abilene, Texas, and one tank farm in Orla, Texas with aggregate capacity of 480,000 barrels, that are integrated with HEP's refined product pipelines that serve Alon's Big Spring, Texas refinery;
two refined product truck loading racks, one located within our Navajo Refinery that is permitted to load over 40,000 BPD of light refined products, and one located within our Woods Cross Refinery near Salt Lake City, Utah, that is permitted to load over 25,000 BPD of light refined products.
a Roswell, New Mexico jet fuel terminal leased through September 2011; and
on-site crude oil tankage at our Navajo and Woods Cross Refineries having an aggregate storage capacity of approximately 600,000 barrels.

HEP's pipelines transport light refined products (gasoline, diesel and jet fuel) from our Navajo Refinery in New Mexico to our customers in the metropolitan and rural areas of Texas, New Mexico, Arizona, Colorado, Utah, Idaho, Washington and northern Mexico. HEP also transports gasoline and diesel fuel for Alon from Orla, Texas to El Paso, Texas under a lease agreement providing for three long-term capacity lease arrangements. The substantial majority of HEP's business is devoted to providing transportation and terminalling services to us.

On February 28, 2005, HEP closed its acquisition from Alon of four refined products pipelines aggregating approximately 500 miles, an associated tank farm and two refined products terminals with aggregate storage capacity of approximately 347,000 barrels for $120.0 million in cash and 937,500 Class B subordinated units which, subject to certain conditions, will convert into an equal number of HEP common units in five years. These pipelines and terminals are located primarily in Texas and transport approximately 70% of the light refined products for Alon's 65,000 BPSD capacity refinery in Big Spring, Texas.

In connection with the Alon transaction, HEP entered into a 15-year pipelines and terminals agreement with Alon. Under this agreement, Alon will agree to transport on the pipelines and throughput volumes through the terminals, a volume of refined products that would result in minimum revenues to HEP of $22 million per year. The agreed upon tariffs at the minimum volume commitment will increase or decrease each year at a rate equal to the percentage change in the producer price index, but not below the initial tariffs. Alon's minimum volume commitment was calculated based on 90% of Alon's recent usage of these pipeline and terminals taking into account a 5,000 BPSD expansion of Alon's Big Spring Refinery completed in February 2005. At revenue levels above 105% of the base revenue amount, as adjusted for changes in the producer price index, Alon will receive an annual 50% discount on incremental revenues. Alon's obligations under the pipelines and terminals agreement may be reduced or suspended under certain circumstances. HEP granted Alon a second mortgage on the pipelines and terminals to secure certain of Alon's rights under the pipelines and terminals agreement. Alon will have a right of first refusal to purchase the pipelines and terminals if HEP decides to sell them in the future. Additionally, HEP entered into an environmental agreement with Alon with respect to pre-closing environmental costs and liabilities relating to the pipelines and terminals to be acquired from Alon, where Alon will indemnify HEP subject to a $100,000 deductible and a $20 million maximum liability cap. The assets acquired from Alon include:

a 105-mile light product pipeline from Alon's refinery in Big Spring, Texas to a product terminal in Abilene, Texas;
a 227-mile pipeline from Big Spring, Texas to a product terminal in Wichita Falls, Texas;
a 47-mile pipeline from Wichita Falls, Texas to a product terminal in Duncan, Oklahoma;
a 135-mile product pipeline from Midland, Texas to Orla, Texas where Alon connects into HEP's southern pipeline system which transports light products to El Paso, Texas. Also acquired at Orla, Texas is a 135,000 barrel refined product tank farm; and
terminalling assets including a 127,000 barrel light product terminal in Abilene, Texas and a 220,000 barrel light product terminal in Wichita Falls, Texas.

On July 8, 2005, Holly completed the sale of its two intermediate pipelines connecting the Navajo Refining facilities located at Lovington and Artesia, NM. Holly received $81.5 million for these pipelines in the form of cash and securities. As a result of this transaction, Holly’s ownership in HEP has declined to 45%, included Holly’s 2% general partner ownership interest.

In connection with this transaction, Holly has entered into a 15-year pipeline agreement with HEP whereby Holly has agreed to a 72,000 barrel per day minimum throughput commitment.

The minimum revenue commitment associated with this agreement is $13.3 million annually, and is subject to annual increases which are ties to the Producer Price Index (PPI).

There is an additional minimum revenue commitment associated with the original pipelines that were contributed by Holly Corporation at the time of the initial public offering. This revenue commitment is currently $41.2 million, and also increases annually tied to PPI.

In March 2008, HEP acquired additional pipelines and tankage assets from Holly for approximately $180 million. The purchase price of $180 million consists of approximately $171 million in cash and Holly Energy common units valued at approximately $9 million.

In connection with this transaction, Holly has entered into a 15-year crude oil pipeline and tankage agreement with HEP. The minimum revenue commitment associated with this agreement is $26.7 million, and also increases annually tied to PPI.

These assets 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, New Mexico jet fuel products pipeline and terminal (terminal leased through September 2011).

Woods Cross Refinery pipelines - Approximately 10 miles of crude oil and product pipelines.

For more information on Holly Energy Partners, see: www.hollyenergy.com

page last updated: 3/18/09