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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 transaction
discussed below, 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. We consolidate the results of HEP and show the interest we
do not own as a minority interest in ownership and earnings. 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. The agreement provides
that we transport or terminal volumes on certain of HEP's initial facilities that results in revenues to HEP
that will equal or exceed a specified minimum revenue amount annually (which will initially be $35.4 million
and will adjust upward based on the producer price index) over the term of the agreement. HEP's assets, not
including the Alon assets acquired as discussed below, include:
Refined Product Pipelines:
- approximately 780 miles of refined product pipelines, including 340 miles of leased pipelines, that transport gasoline, diesel, and jet fuel from the Navajo Refinery in New Mexico to our customers in the metropolitan and rural areas of Texas, New Mexico, Arizona, Colorado, Utah and northern Mexico; 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:
- five refined product terminals (one of which is 50% owned) located in El Paso, Texas; Moriarty, Bloomfield and Albuquerque, New Mexico; and Tucson, Arizona with an aggregate capacity of approximately 1.1 million barrels that are integrated with HEP's refined product pipeline system;
- 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 514,000 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; and
- 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 at our Woods Cross Refinery near Salt Lake City, Utah that is permitted to load over 25,000 BPD of light refined products.
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. As a result of the closing of this transaction, we now own 47.9% of HEP, including the 2% general partner interest, and other investors in HEP own 52.1%. 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 $20.2 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 new HEP 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.
HEP has budgeted maintenance capital expenditures of $1.5 million for 2005, excluding approximately $0.5 million of maintenance capital expenditures anticipated with respect to the assets acquired from Alon.
For more information on Holly Energy Partners, see: www.hollyenergy.com
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