| Our operating results have been, and will continue to be, affected by a wide variety of risk factors, many of which are beyond our control, that could have adverse effects on profitability during any particular period |
| You should carefully consider the following risk factors together with all of the other information included in this Annual Report on Form 10-K, including the financial statements and related notes, when deciding to invest in us |
| Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations |
| If any of the following risks were to actually occur, our business, financial condition or results of operations could be materially and adversely affected |
| The prices of crude oil and refined products materially affect our profitability, and are dependent upon many factors that are beyond our control, including general market demand and economic conditions, seasonal and weather-related factors and governmental regulations and policies |
| Among these factors is the demand for crude oil and refined products, which is largely driven by the conditions of local and worldwide economies as well as by weather patterns and the taxation of these products relative to other energy sources |
| Governmental regulations and policies, particularly in the areas of taxation, energy and the environment, also have a significant impact on our activities |
| Operating results can be affected by these industry factors, by competition in the particular geographic areas that we serve and by factors that are specific to us, such as the success of particular marketing programs and the efficiency of our refinery operations |
| The demand for crude oil and refined products can also be reduced due to a local or national recession or other adverse economic condition that results in lower spending by businesses and consumers on gasoline and diesel fuel, higher gasoline prices due to higher crude oil prices, a shift by consumers to more fuel-efficient or alternative fuel vehicles or an increase in vehicle fuel economy |
| In addition, our profitability depends largely on the spread between market prices for refined petroleum products and crude oil prices |
| This margin is continually changing and may fluctuate significantly from time to time |
| Crude oil and refined products are commodities whose price levels are determined by market forces beyond our control |
| Additionally, due to the seasonality of refined products markets and refinery maintenance schedules, results of operations for any particular quarter of a fiscal year are not necessarily indicative of results for the full year |
| In general, prices for refined products are influenced by the price of crude oil |
| Although an increase or decrease in the price for crude oil generally results in a similar increase or decrease in prices for refined products, there may be a time lag in the realization of the similar increase or decrease in prices for refined products |
| The effect of changes in crude oil prices on operating results therefore depends in part on how quickly refined product prices adjust to reflect these changes |
| A substantial or prolonged increase in crude oil prices without a corresponding increase in refined product prices, a substantial or prolonged decrease in refined product prices without a corresponding decrease in crude oil prices, or a substantial or prolonged decrease in demand for refined products could have a significant negative effect on our earnings and cash flows |
| -23- _________________________________________________________________ [77]Table of Contents We may not be able to successfully execute our business strategies to grow our business |
| One of the ways we may grow our business is through the construction of new refinery processing units (or the purchase and refurbishment of used units from another refinery) and the expansion of existing ones |
| Projects are generally initiated to increase the yields of higher-value products, increase refinery production capacity, meet new governmental requirements, or maintain the operations of our existing assets |
| The construction process involves numerous regulatory, environmental, political, and legal uncertainties, most of which are not fully within our control |
| These projects may not be completed on schedule or at all or at the budgeted cost |
| In addition, our revenues may not increase immediately upon the expenditure of funds on a particular project |
| For instance, if we build a new refinery processing unit, the construction will occur over an extended period of time and we will not receive any material increases in revenues until after completion of the project |
| Moreover, we may construct facilities to capture anticipated future growth in demand for refined products in a region in which such growth does not materialize |
| As a result, new capital investments may not achieve our expected investment return, which could adversely affect our results of operations and financial condition |
| In addition, a component of our growth strategy is to selectively acquire complementary assets for our refining operations in order to increase earnings and cash flow |
| Our ability to do so will be dependent upon a number of 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 other factors beyond our control |
| We may not be successful in acquiring additional assets, and any acquisitions that we do consummate may not produce the anticipated benefits or may have adverse effects on our business and operating results |
| To successfully operate our petroleum refining facilities, we are required to expend significant amounts for capital outlays and operating expenditures |
| The refining business is characterized by high fixed costs resulting from the significant capital outlays associated with refineries, terminals, pipelines and related facilities |
| We are dependent on the production and sale of quantities of refined products at refined product margins sufficient to cover operating costs, including any increases in costs resulting from future inflationary pressures or market conditions and including recent significant increases in costs of fuel and power necessary in operating our facilities |
| Furthermore, future regulatory requirements or competitive pressures could result in additional capital expenditures, which may or may not produce the results intended |
| Such capital expenditures may require significant financial resources that may be contingent on our access to capital markets and commercial bank loans |
| Additionally, other matters, such as regulatory requirements or legal actions, may restrict our access to funds for capital expenditures |
| We may incur significant costs to comply with new or changing environmental, health and safety laws and regulations, and face potential exposure for environmental matters |
| Refinery and pipeline operations are subject to federal, state and local laws regulating the discharge of matter into the environment or otherwise relating to the protection of the environment |
| Permits are required under these laws for the operation of our refineries, pipelines and related operations, and these permits are subject to revocation, modification and renewal |
| Over the years, there have been and continue to be ongoing communications, including notices of violations, and discussions about environmental matters between us and federal and state authorities, some of which have resulted or will result in changes to operating procedures and in capital expenditures |
| Compliance with applicable environmental laws, regulations and permits will continue to have an impact on our operations, results of operations and capital requirements |
| As is the case with all companies engaged in industries similar to ours, we face potential exposure to future claims and lawsuits involving environmental matters |
| The matters include soil and water contamination, air pollution, personal injury and property damage allegedly caused by substances which we manufactured, handled, used, released or disposed of |
| We are and have been the subject of various state, federal and private proceedings relating to environmental regulations, conditions and inquiries |
| Current and future environmental regulations are expected to require additional expenditures, including expenditures for investigation and remediation, which may be significant, at our -24- _________________________________________________________________ [78]Table of Contents facilities |
| To the extent that future expenditures for these purposes are material and can be reasonably determined, these costs are disclosed and accrued |
| The EPA and the State of Utah have recently asserted that we have CAA 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 are currently assessing whether it will be feasible 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 EPA and Utah authorities have indicated that any such agreement in the case of the Woods Cross Refinery would likely involve undertakings by us to make specified capital investments and to make changes in operating procedures at the refinery as well as the payment of a penalty |
| 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 |
| At the date of this report, it is not possible to predict whether we will be able to reach a mutually acceptable agreement with the EPA and Utah environmental authorities, what the terms of any agreement would be, what the outcome would be if the matter were resolved in a lawsuit brought by the EPA and Utah authorities, or what portion of claims asserted by the EPA and the Utah authorities would ultimately be paid by ConocoPhillips |
| Our operations are also subject to various laws and regulations relating to occupational health and safety |
| We maintain safety, training and maintenance programs as part of our ongoing efforts to ensure compliance with applicable laws and regulations |
| Compliance with applicable health and safety laws and regulations has required and continues to require substantial expenditures |
| We cannot predict what additional health and environmental legislation or regulations will be enacted or become effective in the future or how existing or future laws or regulations will be administered or interpreted with respect to our operations |
| Compliance with more stringent laws or regulations or adverse changes in the interpretation of existing regulations by government agencies could have an adverse effect on the financial position and the results of our operations and could require substantial expenditures for the installation and operation of systems and equipment that we do not currently possess |
| We are currently monitoring an EPA initiative on gasoline that would impose further reductions in benzene content, volatility, sulfur, and other parameters |
| These new requirements, other requirements of the CAA, or other presently existing or future environmental regulations could cause us to expend substantial amounts to permit our refineries to produce products that meet applicable requirements |
| For addition information on regulations affecting our business, see “Regulation” under Items 1 and 2, “Business and Properties |
| ” Competition in the refining and marketing industry is intense, and an increase in competition in the markets in which we sell our products could adversely affect our earnings and profitability |
| We compete with a broad range of refining and marketing companies, including certain multinational oil companies |
| Because of their geographic diversity, larger and more complex refineries, integrated operations and greater resources, some of our competitors may be better able to withstand volatile market conditions, to obtain crude oil in times of shortage and to bear the economic risks inherent in all phases of the refining industry |
| We are not engaged in any significant petroleum exploration and production activities and do not produce any of the crude oil feedstocks used at our refineries |
| We do not have a retail business and therefore are dependent upon others for outlets for our refined products |
| Certain of our competitors, however, obtain a portion of their feedstocks from company-owned production and have retail outlets |
| Competitors that have their own production or extensive retail outlets, with brand-name recognition, are at times able to offset losses from refining operations with profits from producing or retailing operations, and may be better positioned to withstand periods of depressed refining margins or feedstock shortages |
| In addition, we compete with other industries that provide alternative means to satisfy the energy and fuel requirements of our industrial, commercial and individual consumers |
| If we are unable to compete effectively with these competitors, both within and outside of our industry, there could be material adverse effects on our business, financial condition and results of operations |
| -25- _________________________________________________________________ [79]Table of Contents In recent years there have been several refining and marketing consolidations or acquisitions between entities competing in our geographic market |
| These transactions could increase the future competitive pressures on us |
| We may not be able to retain existing customers or acquire new customers |
| The renewal or replacement of existing sales agreements with our customers depends on a number of factors outside our control, including competition from other refiners and the demand for refined products in the markets that we serve |
| Loss of, or reduction in amounts purchased by, our major customers 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 |
| A material decrease in the supply of crude oil available to our refineries could significantly reduce our production levels |
| In order to maintain or increase production levels at our refineries, we must continually contract for new crude oil supplies |
| A material decrease in crude oil production from the fields that supply our refineries, as a result of depressed commodity prices, lack of drilling activity, natural production declines or otherwise, could result in a decline in the volume of crude oil available to our refineries |
| Such an event could result in an overall decline in volumes of refined products processed at our refineries and therefore a corresponding reduction in our cash flow |
| In addition, the future growth of our operations will depend in part upon whether we can contract for additional supplies of crude oil at a greater rate than the rate of natural decline in our currently connected supplies |
| The potential operation of new refined product transportation pipelines or proration of existing pipelines could impact the supply of refined products to our existing markets, including El Paso, Albuquerque and Phoenix |
| The Longhorn Pipeline, which is owned by Longhorn Partners, is a new source of pipeline transportation from Gulf Coast refineries to El Paso |
| This pipeline is approximately 700 miles and runs from the Houston area of the Gulf Coast to El Paso, utilizing a direct route |
| Longhorn Partners has announced that it would use the pipeline initially to transport approximately 72cmam000 BPD of refined products from the Gulf Coast to El Paso and markets served from El Paso, with an ultimate maximum capacity of 225cmam000 BPD Since inception of Longhorn Pipeline operations in late 2005, it is our understanding that there have been some limited shipments (substantially under the 72cmam000 BPD rate) of refined products |
| Although the Longhorn Pipeline has had very limited impact on us to date, if the Longhorn Pipeline is ever able to operate as has been proposed and significantly increases the volumes of refined products it transports, downward pressure on wholesale refined products margins in El Paso and related markets could result |
| However, any effects on our markets in Tucson and Phoenix, Arizona and Albuquerque, New Mexico would be expected to be limited in the near-term because current common carrier pipelines from El Paso to these markets are now running at capacity and proration policies of these pipelines allocate only limited capacity to new shippers |
| Although ChevronTexaco has not announced any plans to expand their common carrier pipeline from El Paso to Albuquerque to address their capacity constraint, SFPP is currently expanding the capacity of its pipeline from El Paso to the Arizona market by between 45cmam000 and 50cmam000 BPD SFPP has announced an expected completion date of April 2006 for this first expansion |
| Additionally, SFPP announced a further planned expansion of the capacity of this pipeline from El Paso to the Arizona market by 23cmam000 BPD, with an expected completion date in the summer of 2007 |
| Although our results of operations might be adversely impacted by the Longhorn Pipeline and by the expansions of SFPP’s El Paso-to-Arizona pipeline, we are unable to predict at this time the extent to which we could be negatively affected |
| An additional factor that could affect some of our markets is excess pipeline capacity from the West Coast into our Arizona markets after the expansion in 1999 of the pipeline from the West Coast to Phoenix |
| If refined products become available on the West Coast in excess of demand in that market, additional products may be shipped into our Arizona markets with resulting possible downward pressure on refined product prices in these markets |
| In addition to the projects described above, other projects have been explored from time to time by refiners and other entities which if completed, could result in further increases in the supply of products to our markets |
| The common carrier pipelines we use to serve the Arizona and Albuquerque 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 -26- _________________________________________________________________ [80]Table of Contents have been able to deliver to these markets have been limited |
| The flow of additional products into El Paso for shipment to Arizona, either as a result of the Longhorn Pipeline or otherwise, could further exacerbate such constraints on our deliveries to Arizona |
| No assurances can be given that we will not experience future constraints on our ability to deliver products through the common carrier pipeline to Arizona |
| Any future constraints on our ability to transport refined products to Arizona could, if sustained, adversely affect our results of operations and financial condition |
| As mentioned above, SFPP has announced plans to expand the capacity of its pipeline from El Paso to the Arizona market |
| The proposed expansion would permit us to ship additional refined products to markets in Arizona, but pipeline tariffs would likely be higher and the expansion would also permit additional shipments by competing suppliers |
| The ultimate effects of SFPP’s proposed pipeline expansion on us cannot presently be estimated |
| In the case of the Albuquerque market, the common carrier pipeline we use to serve this 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 |
| However, through our relationship with HEP, we have access to pipelines running from near the Navajo Refinery to the Albuquerque vicinity and Bloomfield, New Mexico, that will permit us to deliver a total of up to 45cmam000 BPD of light products to these locations, thereby eliminating the risk of future pipeline constraints on shipments to Albuquerque |
| If needed, additional pump stations could further increase HEP’s pipeline capabilities |
| Any future constraints on our ability to transport refined products to Arizona or Albuquerque could, if sustained, adversely affect our results of operations and financial condition |
| For additional information on competition in our markets due to new product transportation pipelines or proration of existing pipelines, please see “Markets and Competition” under the “Navajo Refinery” discussion under Items 1 and 2, “Business and Properties” |
| We depend upon HEP for a substantial portion of the distribution network for our refined products and we own a significant equity interest in HEP We currently own a 45dtta0prca interest in HEP, including the 2prca general partner interest |
| 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, by leasing certain pipeline capacity to Alon, by charging fees for terminalling refined products and other hydrocarbons and storing and providing other services at its terminals |
| HEP serves our refineries in New Mexico and Utah under 15 year pipelines and terminals agreements expiring in 2019 and 2020 |
| The agreements provide that we transport or terminal volumes on certain of HEP’s facilities that result in revenues to HEP at least equal to specified minimum revenue amounts annually |
| Furthermore, through our 45prca ownership of HEP, we record our share of HEP’s earnings and receive distributions from HEP HEP is subject to its own operating and regulatory risks, including, but not limited to: • its reliance on it significant customers, including us, • competition from other pipelines, • environmental regulations affecting pipeline operations, • operational hazards and risks, • pipeline tariff regulations affecting the rates HEP can charge, • limitations on additional borrowings and other restrictions due to HEP’s debt covenants, and • other financial, operations and legal risks |
| The occurrence of any of these risks adversely impacting HEP could affect our distribution system or the earnings and cash flows we receive from HEP and thereby adversely affect our results of operations and financial condition |
| For additional information about HEP, see “Holly Energy Partners, LP” under Items 1 and 2, “Business and Properties |
| ” -27- _________________________________________________________________ [81]Table of Contents Our operations are subject to operational hazards and unforeseen interruptions for which we may not be adequately insured |
| Our operations are subject to operational hazards and unforeseen interruptions such as natural disasters, adverse weather, accidents, fires, explosions, hazardous materials releases, mechanical failures and other events beyond our control |
| These events might result in a loss of equipment or life, injury, or extensive property damage, as well as an interruption in our operations |
| We may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates |
| As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased, and could increase further |
| In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage |
| If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position |
| If we lose any of our key personnel, our ability to manage our business and continue our growth could be negatively impacted |
| Our future performance depends to a significant degree upon the continued contributions of our senior management team and key technical personnel |
| We do not currently maintain key man life insurance with respect to any member of our senior management team |
| The loss or unavailability to us of any member of our senior management team or a key technical employee could significantly harm us |
| We face competition for these professionals from our competitors, our customers and other companies operating in our industry |
| We may not be able to locate or employ such qualified personnel on acceptable terms, or at all |
| We are exposed to the credit risks of our key customers |
| We are subject to risks of loss resulting from nonpayment or nonperformance by our customers |
| If any of our key customers default on their obligations to us, our financial results could be adversely affected |
| Furthermore, some of our customers may be highly leveraged and subject to their own operating and regulatory risks |
| Appeals are pending that are expected to affect our lawsuit to recover amounts in dispute in connection with our prior sales of military jet fuel to the United States government |
| We have pending in the United States Court of Federal Claims a lawsuit against the Department of Defense relating to claims totaling approximately dlra299 million with respect to jet fuel sales by two subsidiaries in the years 1982 through 1999 |
| Our claims are similar to claims in a number of other cases also pending in the United States Court of Federal Claims brought by other refining companies concerning military fuel sales |
| In response to our request, the judge in our case issued in February 2006 an order continuing the stay of our case originally ordered in March 2004 |
| While the stay of our case is in effect we expect that further judicial proceedings in one or more other cases brought by other refining companies may clarify the legal standards that will apply to our case |
| It is not possible to predict the outcome of further proceedings in our case |
| Other legal proceedings that could affect future results are described in |