Summary of HOLLY CORP - Yahoo! Finance

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Item 2 contains "forward-looking" statements. See "Forward-Looking Statements" at the beginning of Part I of this Quarterly Report on Form 10-Q. In this document, the words "we," "our," "ours" and "us" refer only to Holly Corporation and its consolidated subsidiaries or to Holly Corporation or an individual subsidiary and not to any other person with certain exceptions. For periods prior to our reconsolidation of Holly Energy Partners, L.P. ("HEP") effective March 1, 2008, the words "we," "our," "ours" and "us" exclude HEP and its subsidiaries as consolidated subsidiaries of Holly Corporation. This Quarterly Report on Form 10-Q contains certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of Holly Corporation. When used in descriptions of agreements and transactions, "HEP" refers to HEP and its consolidated subsidiaries.
OVERVIEW
We are principally an independent petroleum refiner operating three refineries in Artesia and Lovington, New Mexico (operated as one refinery and collectively known as the "Navajo Refinery"), Woods Cross, Utah (the "Woods Cross Refinery") and Tulsa, Oklahoma (the "Tulsa Refinery"). As of September 30, 2009, our refineries had a combined crude capacity of 216,000 BPSD. Our profitability depends largely on the spread between market prices for refined petroleum products and crude oil prices. At September 30, 2009, we also owned a 41% interest in HEP, which owns and operates pipeline and terminalling assets, and owns a 70% interest in Rio Grande Pipeline Company ("Rio Grande") and a 25% interest in SLC Pipeline LLC ("SLC Pipeline").
Our principal source of revenue is from the sale of high value light products such as gasoline, diesel fuel, jet fuel and specialty lubricant products in markets in the southwest, rocky mountain and mid-continent regions of the United States and in northern Mexico. For the nine months ended September 30, 2009, sales and other revenues were $3,179.6 million and net income attributable to Holly Corporation stockholders was $60 million. For the nine months ended September 30, 2008, sales and other revenues were $4,943.7 million and net income attributable to Holly Corporation stockholders was $70 million. Our principal expenses are costs of products sold and operating expenses. Our total operating costs and expenses for the nine months ended September 30, 2009 were $3,043.5 million compared to $4,830.9 million for the nine months ended September 30, 2008.
On June 1, 2009, we acquired the Tulsa Refinery from Sunoco, Inc. ("Sunoco") for $157.8 million, including crude oil, refined product and other inventories totaling $92.8 million. The Tulsa Refinery is located on an approximate 750-acre site in Tulsa, Oklahoma and has a total crude oil throughput capacity of 85,000 BPSD. The refinery produces fuel products including gasoline, diesel fuel and jet fuel and serves markets in the mid-continent region of the United States and also produces specialty lubricant products that are marketed throughout North America and are distributed in Central and South America.
On June 10, 2009, we issued $200 million in aggregate principal amount of 9.875% senior notes due 2017 (the "Holly Senior Notes"). A portion of the $188 million in net proceeds received was used for post-closing payments for inventories of crude oil and refined products from Sunoco following the closing of the Tulsa Refinery purchase on June 1, 2009. On October 26, 2009 we issued $100 million aggregate principal amount of our senior notes as an add-on offering to the Holly Senior Notes that we intend to use to fund the cash portion of our pending acquisition of Sinclair Oil Company's ("Sinclair") 75,000 BPD refinery located in Tulsa, Oklahoma (see discussion under "planned capital expenditures"). HEP is a variable interest entity ("VIE") as defined under Accounting Standards Codification ("ASC") Topic "Variable Interest Entities" (previously Financial Accounting Standards Board ("FASB") Interpretation 46(R)). Under the provisions of this topic, HEP's purchase of our crude pipelines and tankage assets in 2008 (the "Crude Pipelines and Tankage Assets") qualified as a reconsideration event whereby we reassessed our beneficial interest in HEP. Following this transaction, we determined that our beneficial interest in HEP exceeded 50%. Accordingly, we reconsolidated HEP effective March 1, 2008 and no longer account for our investment in HEP under the equity method of accounting.

-32-

Table of Contents

RESULTS OF OPERATIONS
Financial Data (Unaudited)

                                                    Three Months Ended
                                                      September 30,                      Change from 2008
                                                 2009               2008              Change          Percent
                                                           (In thousands, except per share data)

Sales and other revenues                      $ 1,490,429        $ 1,719,920        $ (229,491 )         (13.3 )%
Operating costs and expenses:
Cost of products sold (exclusive of
depreciation and amortization)                  1,295,438          1,534,776          (239,338 )         (15.6 )
Operating expenses (exclusive of
depreciation and amortization)                     97,063             71,130            25,933            36.5
General and administrative expenses
(exclusive of depreciation and
amortization)                                      16,728             14,298             2,430            17.0
Depreciation and amortization                      24,267             16,740             7,527            45.0

Total operating costs and expenses              1,433,496          1,636,944          (203,448 )         (12.4 )


Income from operations                             56,933             82,976           (26,043 )         (31.4 )
Other income (expense):
Equity in earnings of SLC Pipeline                    646                  -               646               -
Interest income                                       231              1,896            (1,665 )         (87.8 )
Interest expense                                  (12,405 )           (7,376 )          (5,029 )          68.2
Acquisition costs - Tulsa refineries                 (378 )                -              (378 )             -

                                                  (11,906 )           (5,480 )          (6,426 )         117.3


Income before income taxes                         45,027             77,496           (32,469 )         (41.9 )
Income tax provision                               13,680             25,750           (12,070 )         (46.9 )

Net income(1)                                      31,347             51,746           (20,399 )         (39.4 )
Less noncontrolling interest in net
income(1)                                           7,863              1,847             6,016           325.7


Net income attributable to Holly
Corporation stockholders(1)                   $    23,484        $    49,899        $  (26,415 )         (52.9 )%


Net income per share attributable to
Holly Corporation stockholders - basic        $      0.47        $      1.00        $    (0.53 )         (53.0 )%


Net income per share attributable to
Holly Corporation stockholders - diluted      $      0.47        $      1.00        $    (0.53 )         (53.0 )%


Cash dividends declared per common share      $      0.15        $      0.15        $        -               - %


Average number of common shares
outstanding:
Basic                                              50,244             49,717               527             1.1 %
Diluted                                            50,327             50,032               295             0.6 %

-33-

Table of Contents

                                                    Nine Months Ended
                                                      September 30,                       Change from 2008
                                                 2009               2008               Change           Percent
                                                            (In thousands, except per share data)

Sales and other revenues                      $ 3,179,633        $ 4,943,726        $ (1,764,093 )         (35.7 )%
Operating costs and expenses:
Cost of products sold (exclusive of
depreciation and amortization)                  2,687,018          4,538,763          (1,851,745 )         (40.8 )
Operating expenses (exclusive of
depreciation and amortization)                    242,773            206,013              36,760            17.8
General and administrative expenses
(exclusive of depreciation and
amortization)                                      43,583             40,177               3,406             8.5
Depreciation and amortization                      70,088             45,978              24,110            52.4

Total operating costs and expenses              3,043,462          4,830,931          (1,787,469 )         (37.0 )


Income from operations                            136,171            112,795              23,376            20.7
Other income (expense):
Equity in earnings of SLC Pipeline                  1,309                  -               1,309               -
Interest income                                     2,561              9,277              (6,716 )         (72.4 )
Interest expense                                  (25,849 )          (15,619 )           (10,230 )          65.5
Acquisition costs - Tulsa refineries               (1,988 )                -              (1,988 )             -
Equity in earnings of HEP                               -              2,990              (2,990 )        (100.0 )

                                                  (23,967 )           (3,352 )           (20,615 )         615.0


Income before income taxes                        112,204            109,443               2,761             2.5
Income tax provision                               35,386             36,301                (915 )          (2.5 )

Net income(1)                                      76,818             73,142               3,676             5.0
Less noncontrolling interest in net
income(1)                                          16,784              3,142              13,642           434.2


Net income attributable to Holly
Corporation stockholders(1)                   $    60,034        $    70,000        $     (9,966 )         (14.2 )%


Net income per share attributable to
Holly Corporation stockholders - basic        $      1.20        $      1.39        $      (0.19 )         (13.7 )%


Net income per share attributable to
Holly Corporation stockholders - diluted      $      1.19        $      1.38        $      (0.19 )         (13.8 )%


Cash dividends declared per common share      $      0.45        $      0.45        $          -               - %


Average number of common shares
outstanding:
Basic                                              50,153             50,339                (186 )          (0.4 )%
Diluted                                            50,272             50,717                (445 )          (0.9 )%


Balance Sheet Data (Unaudited)

                                                                       September 30,         December 31,
                                                                           2009                  2008
                                                                                 (In thousands)
Cash, cash equivalents and investments in marketable securities       $      99,553          $    96,008
Working capital                                                       $     177,847          $    68,465
Total assets                                                          $   2,698,098          $ 1,874,225
Long-term debt - Holly Corporation                                    $     188,204          $         -
Long-term debt - Holly Energy Partners                                $     417,628          $   341,914
Total equity(1)                                                       $   1,047,356          $   936,332

(1) During the first quarter of 2009, we adopted accounting standards under ASC Topic "Noncontrolling Interest in a Subsidiary" (previously Statement of Financial Accounting Standard
("SFAS") No. 160). As a result, net income attributable to the noncontrolling interest in our HEP subsidiary is now presented as an adjustment to net income to arrive at "Net income attributable to Holly Corporation stockholders" in our Consolidated Statements of Income. Prior to our adoption of these standards, this amount was presented as "Minority interest in earnings of HEP," a non-operating expense item before "Income before income taxes." Additionally, equity attributable to noncontrolling interests is now presented as a separate component of total equity in our consolidated financial statements. We have adopted these standards on a retrospective basis. While this presentation differs from previous requirements under generally accepted accounting principles in the United States ("GAAP"), it did not affect our net income and equity attributable to Holly Corporation stockholders.

-34-

Table of Contents

Other Financial Data (Unaudited)

                                                      Three Months Ended                     Nine Months Ended
                                                        September 30,                          September 30,
                                                   2009               2008                2009                2008
                                                                            (In thousands)
Net cash provided by operating activities       $  38,102          $  46,081          $  179,652          $  160,694
Net cash provided by (used for) investing
activities                                      $ (62,628 )        $ (46,076 )        $ (374,946 )        $   25,408
Net cash provided by (used for) financing
activities                                      $  14,365          $ (18,768 )        $  253,016          $ (144,463 )
Capital expenditures                            $  62,628          $  92,649          $  246,021          $  291,433
EBITDA (1)                                      $  73,605          $  97,869          $  188,796          $  158,621

(1) Earnings before interest, taxes, depreciation and amortization, which we refer to as ("EBITDA"), is calculated as net income attributable to Holly Corporation stockholders plus
(i) interest expense, net of interest income,
(ii) income tax provision, and

(iii) depreciation and amortization. EBITDA is not a calculation provided for under accounting principles generally accepted in the United States; however, the amounts included in the EBITDA calculation are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies.
EBITDA is
presented here
because it is a
widely used
financial
indicator used
by investors and
analysts to
measure
performance.
EBITDA is also
used by our
management for
internal
analysis and as
a basis for
financial
covenants.
EBITDA presented
above is
reconciled to
net income under
"Reconciliations
to Amounts
Reported Under
Generally
Accepted
Accounting
Principles"
following Item 3
of Part I of
this Form 10-Q.

Our operations are currently organized into two reportable segments, Refining and HEP. Our operations that are not included in the Refining and HEP segment are included in Corporate and Other. Intersegment transactions are eliminated in our consolidated financial statements and are included in Consolidations and Eliminations.

                                      Three Months Ended               Nine Months Ended
                                         September 30,                   September 30,
                                     2009            2008            2009            2008
                                                        (In thousands)
Sales and other revenues
Refining(1)                       $ 1,476,304     $ 1,711,445     $ 3,133,133     $ 4,925,022
HEP(2)                                 42,743          30,518         115,470          67,234
Corporate and Other                       229             570           3,307           1,857
Consolidations and Eliminations       (28,847 )       (22,613 )       (72,277 )       (50,387 )

Consolidated                      $ 1,490,429     $ 1,719,920     $ 3,179,633     $ 4,943,726


Operating income (loss)
Refining(1)                       $    50,584     $    84,302     $   118,819     $   125,922
HEP(2)                                 23,231          11,845          58,634          24,789
Corporate and Other                   (16,183 )       (13,171 )       (40,583 )       (37,916 )
Consolidations and Eliminations          (699 )             -            (699 )             -

Consolidated                      $    56,933     $    82,976     $   136,171     $   112,795

(1) The Refining segment includes the operations of our Navajo, Woods Cross and Tulsa Refineries and Holly Asphalt Company. The Refining segment involves the purchase and refining of crude oil and wholesale and branded marketing of refined products, such as gasoline, diesel fuel, jet fuel and specialty lubricant products. The petroleum products produced by the Refining segment are primarily marketed in the southwest, rocky mountain and mid-continent regions of the United States and northern Mexico. Additionally, the Refining segment includes specialty lubricant products produced at our Tulsa Refinery that are marketed throughout North America and are distributed in Central and South America. Holly Asphalt
Company
manufactures
and markets
asphalt and
asphalt
products in
Arizona, New
Mexico, Texas
and northern
Mexico.

-35-

Table of Contents

(2) The HEP segment involves all of the operations of HEP effective March 1, 2008 (date of reconsolidation). HEP owns and operates a system of petroleum product and crude gathering pipelines in Texas, New Mexico, Oklahoma
and Utah, distribution terminals in Texas, New Mexico, Arizona, Utah, Idaho, and Washington and refinery tankage in New Mexico and Utah. Revenues are generated by charging tariffs for transporting petroleum products and crude oil through its pipelines and by charging fees for terminalling petroleum products and other hydrocarbons, and storing and providing other services at their storage tanks and terminals. The HEP segment also includes a 70% interest in Rio Grande which provides petroleum products transportation services. Additionally, HEP owns a 25% interest in the SLC Pipeline that services refineries in the Salt Lake City, Utah area. Revenues from the HEP segment are earned through transactions for pipeline transportation, rental and terminalling operations as well as revenues relating to pipeline transportation services provided for our refining operations and from HEP's interest in Rio Grande and SLC Pipeline.

Refining Operating Data (Unaudited)
Our refinery operations include the Navajo, Woods Cross and Tulsa Refineries.
The following tables set forth information, including non-GAAP performance
measures, about our consolidated refinery operations. The cost of products and
refinery gross margin do not include the effect of depreciation and
amortization. Reconciliations to amounts reported under GAAP are provided under
"Reconciliations to Amounts Reported Under Generally Accepted Accounting
Principles" following Item 3 of Part I of this Form 10-Q.

                                             Three Months Ended          Nine Months Ended
                                                September 30,              September 30,
                                              2009          2008         2009          2008
Navajo Refinery
Crude charge (BPD) (1)                         86,250       78,610        76,670       78,200
Refinery production (BPD) (2)                  93,620       88,710        84,560       86,780
Sales of produced refined products (BPD)       94,000       88,920        84,100       87,630
Sales of refined products (BPD) (3)            96,580       94,760        88,110       96,290

Refinery utilization (4)                         86.2 %       92.5 %        80.7 %       92.0 %

Average per produced barrel (5)
Net sales                                  $    78.15     $ 133.44     $   69.21     $ 122.82
Cost of products (6)                            70.88       120.75         60.25       113.76

Refinery gross margin                            7.27        12.69          8.96         9.06
Refinery operating expenses (7)                  4.37         4.92          4.88         4.96

Net operating margin                       $     2.90     $   7.77     $    4.08     $   4.10


Feedstocks:
Sour crude oil                                     86 %         75 %          84 %         79 %
Sweet crude oil                                     6 %         13 %           6 %         10 %
Other feedstocks and blends                         8 %         12 %          10 %         11 %

Total                                             100 %        100 %         100 %        100 %


Sales of produced refined products:
Gasolines                                          56 %         56 %          57 %         57 %
Diesel fuels                                       33 %         34 %          33 %         33 %
Jet fuels                                           3 %          1 %           2 %          1 %
Fuel oil                                            4 %          3 %           3 %          3 %
Asphalt                                             2 %          3 %           3 %          3 %
LPG and other                                       2 %          3 %           2 %          3 %

Total                                             100 %        100 %         100 %        100 %

-36-

Table of Contents

                                             Three Months Ended          Nine Months Ended
                                                September 30,              September 30,
                                              2009          2008         2009          2008
Woods Cross Refinery(8)
Crude charge (BPD) (1)                         26,860       14,400        25,670       21,090
Refinery production (BPD) (2)                  27,630       15,080        26,220       21,330
Sales of produced refined products (BPD)       27,100       17,250        27,060       22,090
Sales of refined products (BPD) (3)            27,150       18,450        27,520       23,470

Refinery utilization (4)                         86.7 %       55.4 %        81.9 %       81.1 %

Average per produced barrel (5)
Net sales                                  $    80.87     $ 145.86     $   66.87     $ 124.98
Cost of products (6)                            65.68       117.82         55.22       108.40

Refinery gross margin                           15.19        28.04         11.65        16.58
Refinery operating expenses (7)                  6.44         8.78          6.45         7.59

Net operating margin                       $     8.75     $  19.26     $    5.20     $   8.99


Feedstocks:
Sour crude oil                                      6 %          - %           4 %          1 %
Sweet crude oil                                    61 %         68 %          63 %         74 %
Black wax crude oil                                27 %         23 %          28 %         20 %
Other feedstocks and blends                         6 %          9 %           5 %          5 %

Total                                             100 %        100 %         100 %        100 %


Sales of produced refined products:
Gasolines                                          59 %         59 %          65 %         63 %
Diesel fuels                                       32 %         35 %          28 %         28 %
Jet fuels                                           3 %          1 %           1 %          1 %
Fuel oil                                            3 %          3 %           3 %          5 %
Asphalt                                             2 %          1 %           1 %          1 %
LPG and other                                       1 %          1 %           2 %          2 %

Total                                             100 %        100 %         100 %        100 %


Tulsa Refinery(9)
Crude charge (BPD) (1)                         66,230            -        28,300            -
Refinery production (BPD) (2)                  64,230            -        27,400            -
Sales of produced refined products (BPD)       60,600            -        26,080            -
Sales of refined products (BPD)(3)             60,850            -        26,250            -

Refinery utilization (4)                         77.9 %          - %        74.5 %          - %

Average per produced barrel (5)
Net sales                                  $    76.80     $      -     $   76.65     $      -
Cost of products (6)                            70.10            -         70.80            -

Refinery gross margin                            6.70            -          5.85            -
Refinery operating expenses (7)                  4.64            -          4.76            -

Net operating margin                       $     2.06     $      -     $    1.09     $      -


Feedstocks:
Sour crude oil                                      - %          - %           - %          - %
Sweet crude oil                                   100 %          - %         100 %          - %
Other feedstocks and blends                         - %          - %           - %          - %

Total                                             100 %          - %         100 %          - %


Sales of produced refined products:
Gasolines                                          23 %          - %          23 %          - %
Diesel fuels                                       30 %          - %          30 %          - %
Jet fuels                                          11 %          - %          11 %          - %
Lubricants                                         18 %          - %          18 %          - %
Gas oil / intermediates                            16 %          - %          16 %          - %
LPG and other                                       2 %          - %           2 %          - %
. . .