| You should carefully consider the following risk factors together with all of the other information included in this Annual Report on Form 10K, 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 |
| We depend upon Holly and particularly its Navajo Refinery for a majority of our revenues; and if those revenues were reduced or if Holly’s financial condition materially deteriorated, there would be a material adverse effect on our results of operations |
| For the year ended December 31, 2005, Holly accounted for 52prca of the revenues of our petroleum products pipelines and 70prca of the revenues of our terminals and truck loading racks |
| We expect to continue to derive a majority of our revenues from Holly for the foreseeable future |
| If Holly satisfies only its minimum obligations under the Holly PTA and Holly IPA or is unable to meet its minimum revenue commitment for any reason, including due to prolonged downtime or a shutdown at the Navajo Refinery or the Woods Cross Refinery, our revenues would decline |
| Any significant curtailing of production at the Navajo Refinery could, by reducing throughput in our pipelines and terminals, result in our realizing materially lower levels of revenues and cash flow for the duration of the shutdown |
| For the year ended December 31, 2005, production from the Navajo Refinery accounted for 50prca of the throughput volumes transported by our refined product pipelines |
| The Navajo Refinery also received 100prca of the petroleum products shipped on our Intermediate Pipelines |
| Operations at the Navajo Refinery could be partially or completely shut down, temporarily or permanently, as the result of: • competition from other refineries and pipelines that may be able to supply Holly’s end-user markets on a more cost-effective basis; • operational problems such as catastrophic events at the refinery, labor difficulties or environmental proceedings or other litigation that compel the cessation of all or a portion of the operations at the refinery; • increasingly stringent environmental laws and regulations, such as the Environmental Protection Agency’s gasoline and diesel sulfur control requirements that limit the concentration of sulfur in motor gasoline and diesel fuel for both on-road and non-road usage as well as various state and federal emission requirements that may affect the refinery itself; • an inability to obtain crude oil for the refinery at competitive prices; or - 13 - _________________________________________________________________ [67]Table of Contents • a general reduction in demand for refined products in the area 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, higher taxes or stricter environmental laws or regulations; or — a shift by consumers to more fuel-efficient or alternative fuel vehicles or an increase in fuel economy, whether as a result of technological advances by manufacturers, legislation either mandating or encouraging higher fuel economy or the use of alternative fuel or otherwise |
| The magnitude of the effect on us of any shutdown would depend on the length of the shutdown and the extent of the refinery operations affected by the shutdown |
| We have no control over the factors that may lead to a shutdown or the measures Holly may take in response to a shutdown |
| Holly makes all decisions at the Navajo Refinery concerning levels of production, regulatory compliance, refinery turnarounds (planned shutdowns of individual process units within the refinery to perform major maintenance activities), labor relations, environmental remediation and capital expenditures; is responsible for all related costs; and is under no contractual obligation to us to maintain operations at the Navajo Refinery |
| Furthermore, Holly’s obligations under the Holly PTA and Holly IPA would be temporarily suspended during the occurrence of a force majeure that renders performance impossible with respect to an asset for at least 30 days |
| If such an event were to continue for a year, we or Holly could terminate the agreements |
| The occurrence of any of these events could reduce our revenues and cash flows |
| We depend on Alon and particularly its Big Spring Refinery for a substantial portion of our revenues; and if those revenues were significantly reduced, there would be a material adverse effect on our results of operations |
| During the 10 months of 2005 that we owned the assets acquired from Alon on February 28, 2005, Alon generated 33prca of our revenues for that time period, including revenues we received from Alon under a capacity lease agreement |
| A decline in production at Alon’s Big Spring Refinery would materially reduce the volume of refined products we transport and terminal for Alon |
| As a result, our revenues would be materially adversely affected |
| The Big Spring Refinery could partially or completely shut down its operations, temporarily or permanently, due to factors affecting its ability to produce refined products |
| Such factors would include the factors discussed above under the discussion of risk factors for the Navajo Refinery |
| The magnitude of the effect on us of any shutdown would depend on the length of the shutdown and the extent of the refinery operations affected |
| We have no control over the factors that may lead to a shutdown or the measures Alon may take in response to a shutdown |
| Alon makes all decisions and is responsible for all costs at the Big Spring Refinery concerning levels of production, regulatory compliance, refinery turnarounds, labor relations, environmental remediation and capital expenditures |
| In addition, under the Alon PTA, if we are unable to transport or terminal refined products that Alon is prepared to ship, then Alon has the right to reduce its minimum volume commitment to us during the period of interruption |
| If a force majeure event occurs beyond the control of either of us, we or Alon could terminate the Alon pipelines and terminals agreement after the expiration of certain time periods |
| The occurrence of any of these events could reduce our revenues and cash flows |
| - 14 - _________________________________________________________________ [68]Table of Contents 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 |
| As stated above, we receive substantial revenues from both Holly and Alon under their respective pipelines and terminals agreements |
| In addition, a subsidiary of BP is the only shipper on the Rio Grande Pipeline, a joint venture in which we own a 70prca interest and from which we derived 11prca of our revenues for the year ended December 31, 2005 |
| 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 |
| Competition from other pipelines that may be able to supply our shippers’ customers with refined products at a lower price could cause us to reduce our rates or could reduce our revenues |
| We and our shippers could face increased competition if other pipelines are able to competitively supply our shippers’ end-user markets with refined products |
| The Longhorn Pipeline is a common carrier pipeline that is capable of delivering refined products utilizing a direct route from the Texas Gulf Coast to El Paso and, through interconnections with third-party common carrier pipelines, into the Arizona market |
| Since inception of Longhorn Pipeline operations in late 2005, little impact has been seen on the operations of Holly, Alon, or HEP However, if the Longhorn Pipeline is ever able to operate as has been proposed and significantly increases the volumes of refined products it transports, it could result in downward pressure on wholesale refined product prices and refined product margins in El Paso and related markets |
| Additionally, an increased supply of refined products from Gulf Coast refiners entering the El Paso and Arizona markets on this pipeline and a resulting increase in the demand for shipping product on the interconnecting common carrier pipelines, which are currently capacity constrained, could cause a decline in the demand for refined product from Holly or Alon |
| For Holly, this eventuality could ultimately result in a reduction in Holly’s minimum revenue commitment to us under the Holly PTA and Holly IPA; and while our pipelines and terminals agreement with Alon does not provide for a reduction in Alon’s minimum volume commitment obligation in these circumstances, such eventuality could reduce our opportunity to earn revenue from Alon in excess of Alon’s minimum volume commitment obligation |
| An additional factor that could affect some of Holly’s and Alon’s markets is excess pipeline capacity from the West Coast into our shippers’ Arizona markets on 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 could be shipped into our shippers’ Arizona markets with resulting possible downward pressure on refined products shipments by Holly and Alon to these markets |
| A material decrease in the supply, or a material increase in the price, of crude oil available to Holly’s and Alon’s refineries, could materially reduce our revenues |
| The volume of refined products we transport in our refined products pipelines depends on the level of production of refined products from Holly’s and Alon’s refineries, which, in turn, depends on the availability of attractively-priced crude oil produced in the areas accessible to those refineries |
| In order to maintain or increase production levels at their refineries, our shippers must continually contract for new crude oil supplies |
| A material decrease in crude oil production from the fields that supply their 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 our shippers refine, absent the availability of transported crude oil to offset such declines |
| Such an event would result in an overall decline in volumes of refined products transported through our pipelines and therefore a corresponding reduction in our cash flow |
| In addition, the future growth of our shippers’ operations will depend in part upon whether our shippers can contract for additional supplies of crude oil at a greater rate than the rate of natural decline in their currently connected supplies |
| Fluctuations in crude oil prices can greatly affect production rates and investments by third parties in the development of new oil reserves |
| We and our shippers have no control over the level of drilling activity in the areas of operations, the amount of - 15 - _________________________________________________________________ [69]Table of Contents reserves underlying the wells and the rate at which production from a well will decline, or producers or their production decisions, which are affected by, among other things, prevailing and projected energy prices, demand for hydrocarbons, geological considerations, governmental regulation and the availability and cost of capital |
| Similarly, a material increase in the price of crude oil supplied to our shippers’ refineries without an increase in the value of the products produced by the refineries, either temporary or permanent, which caused a reduction in the production of refined products at the refineries, would cause a reduction in the volumes of refined products we transport, and our cash flow could be adversely affected |
| We may not be able to retain existing customers or acquire new customers |
| The renewal or replacement of existing contracts with our customers at rates sufficient to maintain current revenues and cash flows depends on a number of factors outside our control, including competition from other pipelines and the demand for refined products in the markets that we serve |
| Alon’s obligations to lease capacity on the Artesia-Orla-El Paso pipeline have remaining terms ranging from three to six years |
| BP’s agreement to ship on the Rio Grande Pipeline expires in 2007 |
| Our pipelines and terminals agreements with Holly and Alon expire in 2019 and 2020 |
| Our operations are subject to federal, state, and local laws and regulations relating to environmental protection and operational safety that could require us to make substantial expenditures |
| Our pipelines and terminal operations are subject to increasingly strict environmental and safety laws and regulations |
| The transportation and storage of refined products produces a risk that refined products and other hydrocarbons may be suddenly or gradually released into the environment, potentially causing substantial expenditures for a response action, significant government penalties, liability to government agencies for natural resources damages, personal injury or property damages to private parties and significant business interruption |
| We own or lease a number of properties that have been used to store or distribute refined products for many years |
| Many of these properties have also been operated by third parties whose handling, disposal, or release of hydrocarbons and other wastes were not under our control |
| If we were to incur a significant liability pursuant to environmental laws or regulations, it could have a material adverse effect on us |
| 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 escalate 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 |
| Any reduction in the capacity of, or the allocations to, our shippers in interconnecting, third-party pipelines could cause a reduction of volumes transported in our pipelines and through our terminals |
| Holly, Alon and the other users of our pipelines and terminals are dependent upon connections to third-party pipelines to receive and deliver crude oil and refined products |
| Any reduction of capacities of these interconnecting pipelines due to testing, line repair, reduced operating pressures, or other causes could result in reduced volumes transported in our pipelines or through our terminals |
| Similarly, if additional shippers begin transporting volumes of refined products over interconnecting pipelines, the allocations to existing shippers in these pipelines would be reduced, which could also reduce volumes transported in our pipelines or through our terminals |
| For example, the common carrier pipelines used by Holly to serve - 16 - _________________________________________________________________ [70]Table of Contents the Arizona and Albuquerque markets are currently operated at or near capacity and are subject to proration |
| The flow of additional products into El Paso for shipment to Arizona, could further exacerbate such constraints on deliveries to Arizona |
| Any reduction in volumes transported in our pipelines or through our terminals could adversely affect our revenues and cash flows |
| If our assumptions concerning population growth are inaccurate or if Holly’s growth strategy is not successful, our ability to grow may be adversely affected |
| Our growth strategy is dependent upon: • the accuracy of our assumption that many of the markets that we serve in the Southwestern and Rocky Mountain regions of the United States will experience population growth that is higher than the national average; and • the willingness and ability of Holly to capture a share of this additional demand in its existing markets and to identify and penetrate new markets in the Southwestern and Rocky Mountain regions of the United States |
| If our assumptions about growth in market demand prove incorrect, Holly may not have any incentive to increase refinery capacity and production or shift additional throughput to our pipelines, which would adversely affect our growth strategy |
| Furthermore, Holly is under no obligation to pursue a growth strategy |
| If Holly chooses not to, or is unable to, gain additional customers in new or existing markets in the Southwestern and Rocky Mountain regions of the United States, our growth strategy would be adversely affected |
| Moreover, Holly may not make acquisitions that would provide acquisition opportunities to us; or, if those opportunities arise, they may not be on terms attractive to us |
| Finally, Holly also will be subject to integration risks with respect to any new acquisitions it chooses to make |
| Growing our business by constructing new pipelines and terminals, or expanding existing ones, subjects us to construction risks |
| One of the ways we may grow our business is through the construction of new pipelines and terminals or the expansion of existing ones |
| The construction of a new pipeline or the expansion of an existing pipeline, by adding horsepower or pump stations or by adding a second pipeline along an existing pipeline, involves numerous regulatory, environmental, political, and legal uncertainties, most of which are beyond 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 pipeline, 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 facilities may not be able to attract enough throughput to achieve our expected investment return, which could adversely affect our results of operations and financial condition |
| Rate regulation may not allow us to recover the full amount of increases in our costs |
| The primary rate-making methodology of the FERC is price indexing |
| We use this methodology in all of our interstate markets |
| The indexing method allows a pipeline to increase its rates by a percentage equal to the change in the producer price index for finished goods |
| If the index falls, we will be required to reduce our rates that are based on the FERC’s price indexing methodology if they exceed the new maximum allowable rate |
| In addition, changes in the index might not be large enough to fully reflect actual increases in our costs |
| The FERC’s rate-making methodologies may limit our ability to set rates based on our true costs or may delay the use of rates that reflect increased costs |
| Any of the foregoing would adversely affect our revenues and cash flow |
| - 17 - _________________________________________________________________ [71]Table of Contents If our interstate or intrastate tariff rates are successfully challenged, we could be required to reduce our tariff rates, which would reduce our revenues |
| Under the Energy Policy Act adopted in 1992, our interstate pipeline rates were deemed just and reasonable or “grandfathered |
| ” As that Act applies to our rates, a person challenging a grandfathered rate must, as a threshold matter, establish that a substantial change has occurred since the date of enactment of the Act, in either the economic circumstances or the nature of the service that formed the basis for the rate |
| If the FERC were to find a substantial change in circumstances, then our existing rates could be subject to detailed review |
| If our rates were found to be in excess of levels justified by our cost of service, the FERC could order us to reduce our rates |
| In addition, a state commission could also investigate our intrastate rates or our terms and conditions of service on its own initiative or at the urging of a shipper or other interested party |
| If a state commission found that our rates exceeded levels justified by our cost of service, the state commission could order us to reduce our rates |
| Any such reductions would result in lower revenues and cash flows |
| Holly and Alon have agreed not to challenge, or to cause others to challenge or assist others in challenging, our tariff rates in effect during the terms of their respective pipelines and terminals agreements |
| These agreements do not prevent other current or future shippers from challenging our tariff rates |
| Potential changes to current petroleum pipeline rate-making methods and procedures may impact the federal and state regulations under which we will operate in the future |
| If the FERC’s petroleum pipeline rate-making methodology changes, the new methodology could result in tariffs that generate lower revenues and cash flow |
| Terrorist attacks, and the threat of terrorist attacks, have resulted in increased costs to our business |
| Continued hostilities in the Middle East or other sustained military campaigns may adversely impact our results of operations |
| The long-term impact of terrorist attacks, such as the attacks that occurred on September 11, 2001, and the threat of future terrorist attacks, on the energy transportation industry in general, and on us in particular, is not known at this time |
| Increased security measures taken by us as a precaution against possible terrorist attacks have resulted in increased costs to our business |
| Uncertainty surrounding continued hostilities in the Middle East or other sustained military campaigns may affect our operations in unpredictable ways, including disruptions of crude oil supplies and markets for refined products, and the possibility that infrastructure facilities could be direct targets of, or indirect casualties of, an act of terror |
| Changes in the insurance markets attributable to terrorist attacks may make certain types of insurance more difficult for us to obtain |
| Moreover, the insurance that may be available to us may be significantly more expensive than our existing insurance coverage |
| Instability in the financial markets as a result of terrorism or war could also affect our ability to raise capital including our ability to repay or refinance debt |
| Our leverage may limit our ability to borrow additional funds, comply with the terms of our indebtedness or capitalize on business opportunities |
| As of December 31, 2005, our total outstanding long-term debt was dlra180dtta7 million |
| Various limitations in our Credit Agreement and the indenture for our Senior Notes may reduce our ability to incur additional debt, to engage in some transactions and to capitalize on business opportunities |
| Any subsequent refinancing of our current indebtedness or any new indebtedness could have similar or greater restrictions |
| Our leverage could have important consequences |
| We will require substantial cash flow to meet our payment obligations with respect to our indebtedness |
| Our ability to make scheduled payments, to refinance our obligations with respect to our indebtedness or our ability to obtain additional financing in the future will depend on our financial and operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors |
| We believe that we will have sufficient - 18 - _________________________________________________________________ [72]Table of Contents cash flow from operations and available borrowings under our Credit Agreement to service our indebtedness |
| However, a significant downturn in our business or other development adversely affecting our cash flow could materially impair our ability to service our indebtedness |
| If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to refinance all or a portion of our debt or sell assets |
| We cannot assure you that we would be able to refinance our existing indebtedness or sell assets on terms that are commercially reasonable |
| The instruments governing our debt contain restrictive covenants that may prevent us from engaging in certain beneficial transactions |
| The agreements governing our debt generally require us to comply with various affirmative and negative covenants including the maintenance of certain financial ratios and restrictions on incurring additional debt, entering into mergers, consolidations and sales of assets, making investments and granting liens |
| Additionally, our contribution agreement with Alon restricts us from selling the pipelines and terminals acquired from Alon and from prepaying more than dlra30 million of the Senior Notes for ten years, subject to certain limited exceptions |
| Our leverage may adversely affect our ability to fund future working capital, capital expenditures and other general partnership requirements, future acquisition, construction or development activities, or to otherwise fully realize the value of our assets and opportunities because of the need to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness or to comply with any restrictive terms of our indebtedness |
| Our leverage may also make our results of operations more susceptible to adverse economic and industry conditions by limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate and may place us at a competitive disadvantage as compared to our competitors that have less debt |
| Our growth through acquisitions may be limited by future market considerations |
| Future business or asset acquisitions may be dependent upon financial market conditions |
| Increases in our average cost of capital resulting from increases in interest rates or changes in our bond rating or from increased cost of equity capital may prevent us from making accretive acquisitions and thus limit our growth opportunities |