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Executives

M. Neale Hickerson - Vice President, Investor Relations

Bruce R. Shaw - Senior Vice President and Chief Financial Officer

Matthew P. Clifton - Chairman of the Board, Chief Executive Officer

Scott C. Surplus - Vice President, Risk Management

Analysts

Jacques Rousseau - Back Bay Research

Eitan Bernstein - Friedman, Billings, Ramsey

Brady Dolsen - Tristone Capital

Holly Corporation (HOC) Q1 2008 Earnings Call May 12, 2008 10:00 AM ET

Operator

Good morning. My name is Cynthia and I will be your conference operator today. At this time, I would like to welcome everyone to the Holly Corporation first quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn today’s conference over to Neale Hickerson. Please go ahead, sir.

M. Neale Hickerson

Good morning. I am Neale Hickerson, Vice President of Investor Relations at Holly. I would like to welcome you to our first quarter 2008 earnings conference call. With me this morning are Matt Clifton, Chairman and CEO of Holly Corporation; Bruce Shaw, Senior Vice President and Chief Financial Officer; and Scott Surplus, Vice President and Controller.

We issued a press release this morning at 7:00 a.m. Eastern Time with our first quarter 2008 results. This press release can be found at our website at www.hollycorp.com.

For this morning’s call, we’ll begin with Bruce, who has some prepared remarks and detail around our quarter’s performance. Matt will then have some additional comments around our earnings and 2008 in general. We’ll have some time to take your questions at the conclusion of these prepared remarks.

Before we move to our financial results and comments, we’re required to make the following Safe Harbor disclosure statement. Also please note the Safe Harbor statement in our earnings release this morning.

The following is a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The statements in this earnings call related to matters that are not historical facts are forward-looking statements based on management’s belief and assumptions using currently available information and expectations as of this date and are not guarantees of future performance and do involve certain risks and uncertainties, including those contained in our filings from time to time with the Securities and Exchange Commission.

Although the company believes these expectations reflected in these forward-looking statements are reasonable, the company cannot give any assurances that these expectations will prove to be correct. Therefore, actual outcomes and results could materially differ from what is expressed, implied, or forecast in such statements. The company assumes no duty to publicly update or revise such statements whether as a result of new information, future events, or otherwise.

Lastly, please note that information presented on today’s call speaks only as of today, May 12, 2008, and therefore any time-sensitive information provided may no longer be accurate at the time of any replay or any rereading of this transcript.

And now I would like to turn things over to Bruce Shaw.

Bruce R. Shaw

Thanks, Neale. My remarks this morning will cover five areas: first, our earnings for the first quarter; second, Holly’s reconsolidation of HEP effective March 1st; third, a few balance sheet highlights; fourth, an update on our stock repurchase activity; and fifth, an update on the value of our ownership position in Holly Energy Partners.

First, our earnings -- earnings for the first quarter were $8.6 million, or $0.17 per diluted share as compared to $67.5 million, or $1.20 per diluted share for the first quarter of 2007. Our lower net income for the quarter versus the first quarter of ’07 resulted primarily from lower gross margins at our Navajo and Woods Cross refineries, and higher operating expenses offset by an increase in refinery production and lower SG&A expenses.

Navajo’s gross margin per barrel averaged $6.43 for the quarter versus $16.54 per barrel for the same quarter last year. Our preliminary estimate for the Navajo gross margin for April is in the $10 range per barrel. For our Woods Cross refinery, our gross margin per barrel averaged $12.54 in the quarter versus $14.74 per barrel for the same quarter last year. Our preliminary estimate for Woods Cross gross margin for April ’08 is in the $16 range per barrel.

The increase in operating expenses of $10.6 million quarter to quarter was due to the inclusion of approximately $3.5 million for HEP operating expenses given the reconsolidation as of March 1st, which I’ll discuss next, an increase in the cost of purchased fuel and utilities, and higher maintenance expenses. The increase in DD&A expense is almost entirely due to the inclusion of DD&A expenses for HEP of approximately $2 million.

During the quarter, we sold 6,000 sulfur credits for approximately $870,000, at an average price of $145 per credit. We have approximately 84,000 credits available for sale as of March 31, 2008, not counting credits generated in 2008.

Second, I’ll cover Holly’s reconsolidation of HEP. When HEP acquired the pipeline and tankage assets from Holly on March 1st ’08, GAAP rules required Holly to reconsider its benefit interest in HEP.

After careful analysis, we determined that our beneficial ownership exceeds 50%, due primarily to the increase in Holly’s expected general partner incentive distributions after the transaction.

Effective March 1st ’08, we will no longer account for Holly’s interest in HEP under the equity accounting method. Instead, HEP balance sheet items, including debt, and HEP revenue and expenses, except for inter-company transactions, will be included on Holly’s consolidated financial statements. Accordingly, we’ll record non-Holly interest in HEP as minority interest starting March 1st.

You will note that we’ve included segment information in our press release that allows you to see the impact of the reconsolidation on key balance sheet and income statement accounts. The 10-Q released later today will discuss the reconsolidation in greater depth.

To summarize the impact of the reconsolidation on Holly’s first quarter financials, first there was no change in net income or stockholder’s equity; fixed assets increased by approximately $370 million; HEP’s debt of approximately $366 million was included on Holly’s balance sheet at fair value at approximately $351 million; minority interest balance is now at $398 million; and the liability line labeled distributions and excess of investment at HEP was eliminated.

Third, let me cover a few balance sheet highlights. At the end of the first quarter, we had $438 million of cash and marketable securities, and no debt at Holly. We are still on budget for the capital spending related to our expansion projects at both Navajo and Woods Cross.

The completion of UNEV pipeline is now projected for the fourth quarter of ’09 due to slight permitting delays and the turnaround to bring on the first phase of the Navajo expansion has been rescheduled from December ’08 to January ’09. Our Woods Cross turnaround remains on schedule for the August/September timeframe later this year.

To reconfirm what we mentioned in our last call, we expect to fund our current refinery projects with cash on hand and cash generated from operations.

Fourth, I’ll provide an update on our stock repurchase activity. As of March 31st ’08, we had repurchased approximately $613 million in Holly shares since we began buying stock in the second quarter of ’05, including 2.1 million shares repurchased in the first quarter of ’08. This amounts to 15.7 million shares at an average price of $39.15 per share.

We continued our stock buy-back program in the second quarter of ’08 and repurchased an additional 0.6 million shares for approximately $28 million. We have approximately $59 million left in our repurchase authorization as of April 30th. We had approximately 50.1 million common shares outstanding at the end of April.

Last, I’ll review a few highlights of our HEP ownership. After the announced pipeline and tankage transaction with HEP which closed on March 1st, we have a 46% ownership in HEP which includes our 2% GP stake. With HEP units trading at $44 -- in the $44 per unit range, our subordinated and common units are worth about $320 million.

On May 14th, HEP will pay its recently announced distribution of $0.735 per unit, for which Holly expects to receive $5.4 million for its common and subordinated units, plus approximately $998,000 for its GP interest, which included $753,000 of incentive distributions.

With that, I will turn things over to Matt.

Matthew P. Clifton

Thanks, Bruce. I think Bruce did a pretty thorough job covering the quarter. I just have a couple of comments.

One, obviously the quarter was challenging, with gasoline cracks, particularly challenging month of January. Diesel cracks were strong and production levels, our employees did a great job keeping production up and maximizing profitability as best we could.

As far as the capital projects, we’re totally committed to those projects. As Bruce said, we are on target of getting -- completing the Woods Cross upgrade project in the August/September timeframe. The Navajo first phase will be completed in the January first quarter timeframe. We were successful, as we’ve talked before in prior calls, about connecting, trying to get connected a connection between Cushing, Oklahoma and the Navajo refinery. We’ve been working with Centurion Pipeline, who’s a subsidiary of Occidental and they are finishing an open season whereby they will be reversing a pipeline that currently runs from West Texas to Cushing and then Holly will be building in conjunction with HEP about a 50-mile pipeline between Lovington, New Mexico and the end of the Centurion pipeline. All that is expected to be completed in the third quarter of ’09, which will tie in nicely with our completion of our second phase, which will allow us to run up to 40,000 barrels a day of heavy Canadian.

We obviously are pleased with our strong financial position, strong cash balance. Cash generation for the quarter was good. We bought back something like $95 million in Holly stock during the quarter. Our cash balance was very strong at the end of the quarter and as you can imagine, we spend a fair amount on capital. It looks like on the refinery projects in total, of the two phases in Artesia and the upgrade in Woods Cross, we are approximately about 45% spent on those projects and we are pleased with the work, how that’s been going so far.

I think with that I will turn it back to Neale.

M. Neale Hickerson

Thanks, Matt, and I’d like to have Cynthia repeat the procedure for asking questions. We are ready to move to that phase of our call and can build the Q&A queue.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Jacques Rousseau with Back Bay Research.

Jacques Rousseau - Back Bay Research

Good morning, gentlemen. I just wanted to see if you could give some color on what expenses we should expect from the Woods Cross fire this past month.

Matthew P. Clifton

Jacques, it really shouldn’t be significant at all. We just had to replace a section of flare line and some small instrumentation there, so that work has been completed. They are ramping back up on Friday afternoon as we left the office, so I think it’s going to be pretty insignificant and we did have in the scope of our turnaround project some upgrades to our flare system, so we were lucky in that we had the pipe available on site and were able to quickly repaid that situation.

Jacques Rousseau - Back Bay Research

Great. One more -- could you let us know the current level of black wax crude being used at Woods Cross?

Bruce R. Shaw

Sure, Jacques. In the quarter, we used about 4,400 barrels a day and that number would have been higher if it hadn’t been for the weather up there. We had a lot of snow that kept trucks from getting to some of the black wax in the quarter. I think as we look into April, we are running over 5,000 barrels a day, bringing in more than 5,000 barrels a day of black wax.

Jacques Rousseau - Back Bay Research

Great. That’s all I have. Thanks.

Operator

(Operator Instructions) Your next question comes from Eitan Bernstein with FBR.

Eitan Bernstein - Friedman, Billings, Ramsey

Good morning, gentlemen. Congratulations on putting together a really good quarter in a difficult market environment. Two questions, number one -- any volume guidance on second quarter?

Matthew P. Clifton

I think we’ll be running pretty much all out. Currently we are taking this opportunity with the high diesel cracks. We have a catalyst change out in our diesel to self-riser that we are conducting right now but in order to maintain diesel at the normal rates, we’ve switched the diesel over to our cat feed to self-riser and then doing some work on the cat over the next couple days. The diesel production will be at the current -- at the regular level, and then we’ll come back on up with the cat. So I would expect that the quarter volume wise should average about what we did in the first quarter. We had a little bit of maintenance work that we did in January when margins were so depressed. We did some exchanger cleaning and some activities that we usually do in the February/March timeframe to get ready for the summer gasoline season. We got that out of the way in January so I think the second quarter should be fairly close to the first.

Eitan Bernstein - Friedman, Billings, Ramsey

Okay, excellent. And then if you could just clarify a little bit the Centurion’s open season, I think it’s probably got a little bit of time left before that’s over. Is there anything left that is contingent here or is it pretty much just sort of moving ahead? And any significant milestones we should be looking forward to?

Matthew P. Clifton

I don’t think we see any contingencies. I think it ends on the 15th of this month. I think the only unknown was the -- how many other subscribers would sign up. We’ve nominated 40,000 barrels a day for a long-term commitment. The only impact would be if we had over-subscription that we might be allocated, pro-rated back some on that. But at least the indications as of last week were that we hadn’t seen any other shipper sign up, so I think we’ve got the tariff nailed down and they seem to be committed to go forward with it.

Eitan Bernstein - Friedman, Billings, Ramsey

Excellent. Thank you very much.

Operator

(Operator Instructions) Your next question comes from Brady Dolsen with Tristone Capital.

Brady Dolsen - Tristone Capital

I’m wondering if you can provide or if you can tell us if you’ve updated your EBITDA increase in estimates from your capital projects, in particular Navajo phase one and two and the Las Vegas pipeline.

Bruce R. Shaw

I think the last presentation that had been on our website gave a good summary of those cash flow estimates, those projections and forecasts. I don’t think we’ve had any significant changes to that view.

Brady Dolsen - Tristone Capital

Okay, so you are sticking with those?

Matthew P. Clifton

I think the only thing, and I think maybe we had noted this by the time we did that webcast, the UNEV project that we were hoping to get on in early ’09 looks like it is going to be at the end of ’09, and that was purely just due to the amount of time that BLM took and is taking and doing the permit approval. We’re expecting permits in the early part of ’09 and then we’re all set to start construction right away at that point. We really don’t have any issues with the permit. It’s just the -- we have approval on routes and getting conditional use approvals with all the respective counties. So we don’t see anything that is -- anything to worry about in getting the permit. It’s just the duration that it normally takes.

Bruce R. Shaw

And the only other minor shift that I covered in my prepared remarks is just that the Navajo turnaround to bring on that first phase looks like it’s going to shift to January versus December later this year.

Matthew P. Clifton

And I guess the, and this might have been reflected there, I can’t remember, but obviously the cash outflow on the UNEV project will slip somewhat between what was initially project and where it is going to end up. I think we are estimating $80 million to $90 million move from originally estimated in ’08 to ’09.

Brady Dolsen - Tristone Capital

Great, thanks.

Operator

At this time, there are no further questions. I would like to turn the call back to management for closing remarks.

M. Neale Hickerson

We certainly appreciate everyone listening today and looking forward to visiting with you again for our second quarter performance later on in the summer. Thanks a lot, everyone.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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