Attached files
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8-K - FORM 8-K - HollyFrontier Corp | d69677e8vk.htm |
EX-99.2 - EX-99.2 - HollyFrontier Corp | d69677exv99w2.htm |
EX-99.1 - EX-99.1 - HollyFrontier Corp | d69677exv99w1.htm |
EX-99.3 - EX-99.3 - HollyFrontier Corp | d69677exv99w3.htm |
Exhibit
99.4
The proposed
Sinclair Refinery acquisition
Substantially all the information presented below regarding
the Sinclair Refinery and related assets to be acquired from
Sinclair is based on information provided to us by Sinclair in
connection with our proposed acquisition. The information
presented below regarding the results and the operations of the
Sinclair Refinery reflect the current configuration of the
Sinclair Refinery and are prior to our proposed integration of
the Sinclair Refinery with our existing Tulsa Refinery.
On October 19, 2009, one of our wholly-owned subsidiaries
entered into a definitive purchase agreement with Sinclair to
acquire the Sinclair Refinery for approximately
$54.5 million in cash, subject to certain adjustments
(including post closing payments of approximately
$17.0 million for reimbursement of certain capital
expenditures) and $74.0 million in Holly common stock, plus
an amount to be paid at closing for the market value of crude
oil, refined product and other inventories. Our current estimate
is that the amount to be paid for these inventories will be
approximately $45.0 million. A subsidiary of HEP is a party
to our definitive purchase agreement with Sinclair and will
acquire certain logistics assets that serve the Sinclair
Refinery for $21.5 million in cash and $53.5 million
in HEP common units. We intend to use the net proceeds from this
offering to fund the cash portion of the purchase price for the
Sinclair Refinery and a portion of the purchase price for the
related inventory. If the acquisition of the Sinclair Refinery
does not close, we will use the net proceeds from this offering
for general corporate purposes, including working capital,
capital expenditures and possible future acquisitions. See
Use of proceeds.
DESCRIPTION OF
THE SINCLAIR REFINERY
Facilities
The Sinclair Refinery is located on a
466-acre
site in Tulsa, Oklahoma situated along the Arkansas River. The
refinery has a total crude oil throughput capacity of
approximately 75,000 BPSD. The refinery currently has a Nelson
Complexity Index of 9.8 and has the ability to produce gasoline,
diesel, #1 fuel oil, asphalt, heavy fuels and propane. The
buildings that make up the Sinclair Refinery contain
approximately 200,000 square feet. Additions and
improvements to the Sinclair Refinery since late 2004 include a
Scanfining unit to meet 2006 gasoline sulfur content
requirements, a new Naphtha hydro desulphurizer (Naphtha
HDS) unit in 2005, a new sulfur plant, modifications to
the Distillate HDS unit, a new tall gas unit installed on the
new sulfur plant and the conversion of the reformer from a 17
thousand BPD, or Mbpd, semi-regenerative reformer to a 22 Mbpd
continuous catalyst regeneration reformer (CCR
Reformer) (thereby increasing its capacity, octane
capability and yield of gasoline). The refinery completed a
partial maintenance turnaround in 2007, including the Crude
Unit, Fluid Catalytic Cracking (FCC) unit and CCR
Reformer. The next major maintenance turnaround is scheduled for
2010.
24
The proposed
Sinclair Refinery acquisition
The following table provides information about the main process
units of the Sinclair Refinery:
Sinclair Refinery
process units
Current design |
||
Unit | capacity (Mbpd) | |
Crude Unit
|
75.5 | |
Naphtha HDS
|
22.0 | |
FCC
|
24.0 | |
Penex
|
9.0 | |
CCR Reformer
|
19.0 | |
Alkylation Unit
|
4.5 | |
Scanfiner
|
16.0 | |
Diesel HDS
|
24.0 | |
Sulfur Unit
|
40.0 long tons per day |
The refinerys supporting infrastructure includes
approximately 3.750 million barrels of tankage capacity on
the refinerys premises, approximately 1.362 million
barrels of which is being acquired by HEP. Crude can be received
by three pipelines that originate in Cushing, Oklahoma. The
first pipeline is a 10 pipeline operated by Enbridge. This
is a common carrier pipeline operated under an intrastate tariff
that is dedicated to serving the refinery. The Enbridge pipeline
has a capacity of 59,000 BPD of WTI-equivalent crude. The
capacity falls to 35,000 BPD when transporting heavy/sour crude.
The MidContinent pipeline is a 10 pipeline operated by Sun
Pipeline Company that has historically provided up to 15,000 BPD
of capacity to the refinery. The Magellan crude pipeline is
operated by Magellan Midstream Partners, L.P. Under a ten year
agreement expiring November 3, 2017, Magellan Midstream
Partners, L.P. provides the refinery with 23,000 BPD of
capacity, of which the first 22,000 BPD are on a take or pay
basis. Product shipping is done primarily by pipeline, rail and
truck rack. There are also three truck racks and a rail rack
that support product distribution at the Sinclair Refinery. In
addition, there is a separate rack for butane. HEP is acquiring
the three truck loading racks for light products, asphalt and
propane. HEP is also acquiring light product delivery pipelines.
Approximately 80% of gasoline, 70% of diesel and 50% of #1
fuel oil is distributed through a refined products pipeline also
owned by Magellan.
Operations
The following table provides information about the Sinclair
Refinerys operations:
Year ended |
Six months |
|||||||||||||||||||
December 31, |
ended
June 30, |
|||||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||
2008 | 2007 | 2006 | 2009 | 2008 | ||||||||||||||||
Sinclair Refinery
|
||||||||||||||||||||
Crude charge
(BPD)(1)
|
60,300 | 58,000 | 65,500 | 69,200 | 59,400 | |||||||||||||||
Refinery production
(BPD)(2)
|
61,300 | 56,200 | 64,900 | 67,800 | 61,200 | |||||||||||||||
Refinery
utilization(3)
|
79.8 | % | 76.8 | % | 86.8 | % | 91.6 | % | 78.7 | % |
(1) | Crude charge represents the barrels per day of crude oil processed at the crude units at the Sinclair Refinery. | |
(2) | Refinery production represents the barrels per day of refined products yielded from processing crude and other refinery feedstocks through the crude units and other conversion units at the refinery. | |
(3) | Represents crude charge divided by total crude capacity measured in BPSD. |
25
The proposed
Sinclair Refinery acquisition
Markets and
competition
Sinclair currently distributes the gasoline and distillates
produced at the Sinclair Refinery primarily through its
Mid-Continent retail and wholesale network. After the
acquisition, an affiliate of Sinclair will continue to
distribute gasoline and distillates to its network under an
offtake agreement with us. Under the offtake agreement, Sinclair
would purchase 45,000 to 50,000 BPD of product. The offtake
agreement would have an initial term of five years and could be
renewed by Sinclair for an additional five-year term. The
product would be delivered to Sinclair at the product pipeline
owned and operated by Magellan Midstream Partners, L.P. and at
the refinerys truck rack.
The refinerys asphalt and roofing flux production is sold
via truck or railcar directly from the refinery or from leased
terminals in Phillipsburg, Kansas and Catoosa, Oklahoma to
customers throughout the Mid-Continent.
Refined product demand in the Mid-Continent region has generally
historically resulted in higher refined product margins for its
regional refineries as compared to some other regions in the
United States as a result of a shortage of refining capacity in
the Mid-Continent region. This shortage of refining capacity in
the region is compensated by imports of petroleum products into
the region from the Gulf Coast and other regions via pipeline,
which generally supports the margins of local refineries such as
the Sinclair Refinery due to the increased cost to import
petroleum products. Additionally, Mid-Continent refining margins
may benefit from increasing Canadian crude oil production and
supply into the region.
In support of the growth of the Canadian crude market in the
region, Enbridge and TransCanada have completed or announced
plans to expand their respective systems to the refining hub at
Cushing, Oklahoma, which will significantly improve access to
the region by Canadian crude producers. Enbridge completed the
expansion of its Spearhead Pipeline from the Chicago area to
Cushing in May 2009. TransCanadas Keystone pipeline runs
from Hardisty, Alberta to the Nebraska/Kansas border, and
TransCanada has announced plans to extend the pipeline to
Cushing by late 2010 or early 2011.
Crude oil and
feedstock supplies
The Sinclair Refinery is located approximately 50 miles
from Cushing, Oklahoma, a significant crude oil pipeline
crossroad and storage hub. Local pipelines provide access to
regional crude production as well as many United States onshore,
Gulf of Mexico, Canadian and other foreign crudes. The proximity
of the refinery to this pipeline and storage hub allows the
refinery the flexibility to optimize its crude slate and
maintain lower crude inventories than a typical refinery.
Principal
products and customers
The Sinclair Refinery primarily processes light sweet crudes
into high value light products, such as gasoline and diesel
fuels. It also produces asphalt and roofing flux.
26
The proposed
Sinclair Refinery acquisition
The table below provides information regarding the principal
products produced at the Sinclair Refinery:
Six months |
||||||||||||||||||||
Year ended
December 31, |
ended
June 30, |
|||||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||
2008 | 2007 | 2006 | 2009 | 2008 | ||||||||||||||||
Sinclair Refinery
|
||||||||||||||||||||
Production of refined products:
|
||||||||||||||||||||
Gasolines
|
53 | % | 53 | % | 52 | % | 54 | % | 54 | % | ||||||||||
Distillates
|
30 | % | 29 | % | 31 | % | 30 | % | 30 | % | ||||||||||
Asphalt
|
3 | % | 5 | % | 5 | % | 1 | % | 3 | % | ||||||||||
Roofing Flux
|
9 | % | 5 | % | 7 | % | 8 | % | 7 | % | ||||||||||
Other
|
5 | % | 8 | % | 5 | % | 7 | % | 6 | % | ||||||||||
Total
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||
Light products are shipped primarily by product pipelines and
are also made available to customers through truck and rail
loading facilities.
The gasoline and distillates produced at the Sinclair Refinery
have primarily been distributed through Sinclairs retail
and wholesale network, which will continue after the acquisition
through the offtake agreement.
Asphalt and roofing flux are sold primarily to paving
contractors and manufacturers of roofing products.
INTEGRATION OF
THE TWO REFINERIES
We plan to operate the Sinclair Refinery and our existing Tulsa
Refinery as one integrated, highly complex facility at a total
crude processing rate of approximately 125,000 BPSD, primarily
by sending intermediate streams from one facility to the other
for further processing. Pursuant to this plan, high sulfur
diesel and various gas oil streams would be sent from the Tulsa
Refinery to be processed in the diesel hydrotreater and FCC
units, respectively, of the Sinclair Refinery. Various heavy oil
streams would be sent from the Sinclair Refinery to be processed
in our coker unit at our Tulsa Refinery. Various other streams
such as naphtha, hydrogen, and fuel gas would be shared between
the two refineries.
Capital
improvement projects
The integration of the two refineries will require us to utilize
either existing third party pipelines
and/or build
interconnecting pipelines. We anticipate that the construction
of the pipelines would take approximately six months. We will
use these pipelines to upgrade the gas oil produced at the Tulsa
Refinery into gasoline and diesel by processing the gas oil
through the Sinclair Refinerys FCC unit, as an alternative
to selling the gas oil at a discount to WTI crude under our
five-year gas oil offtake agreement with Sunoco. Additionally we
expect that we will utilize the full capacity of the Sinclair
Refinerys diesel hydrotreater to reduce the volume of high
sulfur diesel that we produce and sell. We also plan to expand
the diesel hydrotreater located at the Sinclair Refinery to
allow all the diesel produced at the integrated refinery to be
sold as ULSD. We estimate that this DHT expansion project and a
planned flare gas recovery expansion at our existing Tulsa
Refinery will cost approximately $20.0 million. We also
plan to spend approximately $20.0 million on a related
project to expand our sulfur recovery capacity at our existing
Tulsa Refinery.
We believe that the synergy of these two plants operated as an
integrated facility will result in saving approximately
$110.0 million of expected capital expenditures related to
ULSD compliance. Also as a result of the integrated facility, we
expect to be able to reduce capital expenditures for the
forthcoming benzene in
27
The proposed
Sinclair Refinery acquisition
gasoline requirements from approximately $30.0 million for
the Tulsa Refinery alone to approximately $15.0 million for
the integrated complex. Even if we are able to realize the
operating synergies of the integrated facility, our Tulsa
Refinery will still require sulfur recovery investment, but we
estimate combining the two refineries will reduce our net
near-term capital expenditure requirements by approximately
$125.0 million, excluding the cost to construct the
pipelines that will integrate the refinery.
Additionally, although we have not done the engineering or cost
estimating for a future gas oil conversion project that would
have been needed at the expiration of our gas oil offtake
agreement with Sunoco, we believe that the cost of such a
project would have been in excess of $100.0 million.
Employees
As of September 30, 2009, the Sinclair Refinery employed
approximately 300 workers. The Sinclair Refinery is not
unionized. Hollys existing senior management, marketing,
and business development personnel will perform the same
functions with respect to the Sinclair Refinery as they do at
our other refineries.
REGULATORY AND
ENVIRONMENTAL MATTERS
In June 2008, Sinclair entered into a consent decree with the
EPA and environmental agencies in Oklahoma and Wyoming. This
consent decree addresses various alleged air compliance issues
at the Sinclair Refinery and other refineries owned by Sinclair.
In connection with our acquisition of the Sinclair Refinery, we
will assume, pursuant to an amended consent decree, all of the
liabilities and obligations of the consent decree that apply to
the assets we are acquiring at the Sinclair Refinery. These
obligations include requirements for NOx reductions from the
refinerys heaters and boilers, reduced emission levels in
the refinerys FCC unit, and installing a flare gas
recovery system. We estimate the capital expenditures to address
the remaining consent decree requirements to be approximately
$16.0 million, which is expected to be expended through
2010.
Beginning in 2006, the Clean Air Act phased in limits on the
sulfur content of diesel fuel. Effective in June 2006, diesel
fuel for on-road uses was required to contain no more than 15
PPM of sulfur. Effective in June 2012, the same requirement will
apply to diesel for locomotive and marine operations. We refer
to these requirements as the ULSD requirements. Sunoco operated
the Tulsa Refinery under a hardship waiver from the EPA that
excepted the refinery from these requirements until
April 1, 2010, but required Sunoco to generate or purchase
diesel sulfur credits to offset non-ULSD production at the Tulsa
Refinery. In connection with our acquisition of the Tulsa
Refinery, we requested from the EPA, and received, a hardship
waiver that waives the ULSD requirements with respect to our
operation of the Tulsa Refinery until November 1, 2011,
subject to an obligation to offset production of non-ULSD diesel
with diesel sulfur credits. We originally planned to construct a
new diesel hydrotreater and to expand sulfur recovery capacity
at the Tulsa Refinery at a cost of approximately
$150 million with expected completion in mid-2011. This
project would have allowed all diesel produced at the Tulsa
Refinery to be produced as ULSD. We believe that the Sinclair
Refinery will simplify the project needed to upgrade the diesel
desulfurization capabilities at the Tulsa Refinery. We expect
that the addition of this asset will allow us to forego
approximately $150.0 million of expenditures related to a
diesel hydrotreater at our existing Tulsa Refinery, as the
Sinclair Refinery already has a hydrotreater onsite. We
currently plan to expand the diesel hydrotreater located at the
Sinclair Refinery to allow all the diesel produced at the
integrated refinery to be sold as ULSD. We estimate that this
DHT expansion project and a planned flare gas recovery expansion
at our existing Tulsa Refinery will cost approximately
$20.0 million. We also plan to spend approximately
$20.0 million on a related project to expand our sulfur
recovery capacity at our existing Tulsa Refinery.
Due to soil and groundwater contamination at the Sinclair
Refinery, the refinery has been studying and remediating areas
of the Sinclair Refinery under a Resource Conservation and
Recovery Act (RCRA) permit issued by the Oklahoma
Department of Environmental Quality, or ODEQ. The remediation
28
The proposed
Sinclair Refinery acquisition
includes, among other things, the removal of light non-aqueous
phase liquids. In connection with our acquisition of the
Sinclair Refinery, we will become the permittee under the RCRA
permit and will assume all obligations under the final RCRA
corrective action permit relating to the Sinclair Refinery.
Pursuant to our purchase agreement with Sinclair, Sinclair will,
however, be obligated to pay for certain remedial activities
associated with the RCRA permit. Following our planned
acquisition of the Sinclair Refinery, we plan to continue to
work with the ODEQ to obtain a site-wide RCRA post-closure
permit. Prior to entering into our agreement to acquire the
refinery, Sinclair reportedly spent between approximately
$1.0 million and $5.0 million on remediation projects
relating to soil and groundwater contamination. In order to
obtain a RCRA post-closure permit, we expect to spend
approximately $10.0 to $20.0 million on soil and
groundwater projects over the next several years.
The Sinclair Refinery is currently subject to a bar from federal
contracts or benefits resulting from Sinclairs 2007 Clean
Water Act conviction. Pursuant to our purchase agreement with
Sinclair, Sinclair has advised EPA debarment counsel that we are
purchasing the refinery and Sinclair will cooperate with us in
seeking reinstatement by the EPA of the Sinclair Refinery.
OTHER
AGREEMENTS
In connection with the closing of the acquisition of the
Sinclair Refinery, we intend to enter into a number of other
ancillary agreements with Sinclair or affiliates of Sinclair and
HEP or its subsidiaries, including a refined products purchase
agreement, or offtake agreement, with an affiliate of Sinclair.
Pursuant to this offtake agreement, an affiliate of Sinclair
would continue to distribute gasoline and distillates to its
network following our acquisition of the Sinclair Refinery.
Under the offtake agreement, Sinclair would purchase 45,000 to
50,000 BPD of product. The offtake agreement would have an
initial term of five years and could be renewed by Sinclair for
an additional five-year term. The product would be delivered to
Sinclair at the product pipeline owned and operated by Magellan
Midstream Partners, L.P. and at the Sinclair Refinerys
truck and rail racks.
We also expect to enter into a
15-year
pipelines, tankage and loading rack throughput and storage
agreement with a subsidiary of HEP providing for throughput and
storage services to be provided by HEP with the logistics assets
being purchased by HEP from Sinclair. Under this agreement we
will agree to pay a subsidiary of HEP, subject to various
adjustments:
Ø | a pipeline tariff of $0.10 for each barrel of refined products moved on the pipelines acquired by HEP from Sinclair, with a guaranteed minimum throughput of 60,000 bpd of refined products moved; |
Ø | a tankage base tariff of $0.30 for each barrel of refined products stored using tankage acquired by HEP from Sinclair, with a guaranteed minimum throughput of 80,000 bpd of refined products, $0.10 per barrel for volumes in excess of 80,000 bpd but less than 120,000 bpd, and $0.22 per barrel for volumes in excess of 120,000 bpd; and |
Ø | a loading racks tariff of $0.30 for each barrel of refined products, LPG, and heavy products loaded over the loading racks acquired by HEP from Sinclair, with a guaranteed minimum throughput of 26,000 bpd. |
The contractual minimum annual revenue under this agreement will
initially be $13.8 million and will increase July 1 of each
contract year, commencing on July 1, 2011, based on the
percentage change, if any, in the producers price index, up to a
maximum increase of 3.0% annually. However, if in any given year
the percentage change in the producers price index is a negative
number, then the minimum annual revenue will remain at the same
level and will not be decreased. With respect to our minimum
revenue commitments under this agreement for the pipeline,
tankage and loading rack assets, any deficiency owed to HEP due
to our failure to meet any minimum revenue commitment for a
given quarter will be offset by amounts owed to HEP in excess of
any minimum revenue commitment during the same quarter.
29