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 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.

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 Woods Cross Refinery facility is located on a 200 acre site and is a fully integrated refinery with crude distillation, solvent deasphalter, FCC, HF alkylation, catalytic reforming, hydrodesulfurization, isomerization, sulfur recovery, and product blending units. Other supporting infrastructure includes approximately 1.5 million barrels of feedstock and product tankage, maintenance shops, warehouses and office buildings. The operating units at the Woods Cross facility include newly constructed units, older units that have been relocated from other facilities, upgraded and re-erected in Woods Cross, and units that have been operating as part of the Woods Cross facility (with periodic major maintenance) for many years, in some very limited cases since before 1950. The crude oil capacity of the Woods Cross facility is 26,000 BPSD and the facility typically processes or blends an additional 2,000 BPSD of natural gasoline, butane, and gas oil.

We operate approximately 5 miles of crude, refined products and hydrogen pipelines that allow us to connect our Woods Cross Refinery to common carrier pipeline systems and to a hydrogen plant located at Chevron's Salt Lake Refinery.

Back to Top

Crude Oil and Feedstock Supplies

The Woods Cross Refinery currently obtains its supply of crude oil primarily from suppliers in Canada, Wyoming, Utah and Colorado via common carrier pipelines, which originate in Canada, Wyoming and Colorado.

On February 27, 2007, we entered into a definitive agreement with Berry Petroleum Company to purchase black wax crude oil for six years, effective July 1, 2007. We have committed to purchase an initial volume of 3,200 BPD, increasing to 5,000 BPD upon completion of certain capacity expansion projects at our Woods Cross Refinery. Pricing will be calculated at a discount from then-prevailing market rates.

Back to Top

Principal Markets, Products and Customers

The Woods Cross Refinery's primary markets include Utah, Idaho, Nevada and Wyoming. Approximately 65% of the gasoline and diesel fuel produced by our Woods Cross Refinery is sold through a network of Phillip 66 branded The Woods Cross Refinery's primary markets include Utah, Idaho, Nevada and Wyoming. Approximately 65% of the gasoline and diesel fuel produced by our Woods Cross Refinery is sold through a network of Phillip 66 branded marketers.

Our principal customers for gasoline include other refiners, convenience store chains, independent marketers and retailers. The composition of gasoline differs, due to local regulatory requirements, depending on the area in which gasoline is to be sold. Diesel fuel is sold to other refiners, truck stop chains, and wholesalers. Jet fuel is sold primarily for military use. All asphalt produced is blended to fuel oil and sold locally, railed to the gulf coast or marketed through Holly Asphalt Company to governmental entities or contractors. LPG's are sold to LPG wholesalers and LPG retailers. Military jet fuel is sold to the DESC under a series of one-year contracts that can vary significantly from year to year.

Back to Top

Capital Improvement Projects

In 2006 we completed a clean fuels project at the Woods Cross Refinery. The project included the construction of a diesel hydrotreater unit, at an approximate cost of $35.0 million, which was approved in prior years, and entered into a long-term hydrogen supply contract that has enabled the Woods Cross Refinery to produce ULSD.

Our approved capital budget for 2007 capital projects at the Woods Cross Refinery is $9.7 million not including the major projects described below or other capital projects approved in prior years.

As announced in December 2006, we will be adding a new 15,000 BPD hydrocracker along with sulfur recovery and desalting equipment at our Woods Cross Refinery. 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 BPD to 31,000 BPD while enabling the refinery to process up to 10,000 BPD of high-value low-priced black wax crude oil and up to 5,000 BPD of low-priced heavy Canadian crude oils. This 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. The approved projects for the Woods Cross refinery are expected to be completed during the fourth quarter of 2008.

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 under which HEP will own a 25% interest in a new 95 mile intrastate pipeline system, now being constructed by Plains, which will have the capacity to ship up to 120,000 BPD of crude oil into the Salt Lake City area.

Additionally, we are also working with HEP to evaluate a refined products pipeline from Salt Lake City to Las Vegas. The current estimated cost of this pipeline is expected to be approximately $235.0 million, and the total cost of the project including terminals is expected to be approximately $300.0 million.