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Product Markets

Cheyenne - The primary market for the Cheyenne Refinery's refined products is the eastern slope of the Rocky Mountains, which includes Colorado and Wyoming. This is a fast growing market that has experienced a growth rate far superior to the national average. Our Cheyenne plant sells three-quarters of its gasoline in Colorado and over one-half of its diesel in Wyoming - much of it directly from the plant site, which saves transportation costs. Gasoline and diesel crack spreads were lower in 1999 than in 1998 primarily due to higher crude oil costs which also negatively impacted asphalt margins, which were a major contribution to profitability in 1998. Frontier is a wholesaler of its products with no retail outlets, but is a branded representative for CITGO and can offer the CITGO brand to its independent retailers who seek relationships with branded suppliers. In July 1999, Frontier announced a new Frontier branding program to accommodate the smaller, independent gasoline marketer. Frontier's "raring horse" logo is very much a part of the western heritage and is readily recognized throughout Frontier's marketing area. This branding program is an excellent way to improve our market presence and maintain market share. The ability to offer the CITGO and our Frontier branding programs enables Frontier to cover a wide range of store sizes and gasoline volumes.

El Dorado - The primary markets for the El Dorado Refinery's refined products are Colorado and the Plains States, which includes the Kansas City metropolitan area. The Refinery's primary products - gasoline, diesel and jet fuel - are shipped mainly via pipeline: the Chase pipeline to Denver, the Williams pipeline serving the entire mid-continent area, the KCPL pipeline serving the Kansas City area, and the Kaneb pipeline north to the central and northern Plains States. As part of the acquisition of the El Dorado Refinery, we entered into a 15-year refined product offtake agreement with Equiva Trading whereby the El Dorado Refinery will sell its gasoline, diesel and jet fuel to Equiva at market-based prices. Beginning in 2000, we will retain and market ourselves a portion of the Refinery's gasoline and diesel production. The amount retained will increase by 5,000 bpd each year for ten years, beginning at 5,000 bpd in 2000, rising to 50,000 bpd in 2009 and remaining at that level through the term of the contract. The agreement provides for a guaranteed customer for products, while at the same time allowing Frontier to build our volumes over time as we cultivate markets.

Crude Oil Supply

Frontier Refining - Frontier's 41,000 bpd per day refinery in Cheyenne is a complex facility that has a significant advantage over other less complex refineries because of its ability to use up to 100% heavy crude oil, which generally has a substantially lower cost than lighter, lower-sulfur crude oils. This is primarily due to Cheyenne's coking unit, which provides significant upgrading capacity, and to Cheyenne's extensive hydrotreating and sulfur-removal processes. Cheyenne is 80 miles southwest of Guernsey, Wyoming, the main hub and crude oil trading center for the Rocky Mountain region. We transport the majority of the crude oil purchased at Guernsey to the Cheyenne Refinery through the Centennial pipeline. Heavy crude oil purchased is primarily locally produced Wyoming general sour and imported Canadian heavy crude oil, which is supplied through the Express pipeline, which runs from Hardisty, Alberta and connects at Guernsey to Frontier's own crude supply system. The light/heavy crude oil spread for the Cheyenne Refinery declined to $2.17 per barrel for 1999, down from $4.15 per barrel in 1998. The combination of high crude oil prices and a narrow light/heavy spread created unfavorable crude economics for the Cheyenne Refinery. Expressed as a percentage of the total crude oil charge, the Cheyenne Refinery heavy crude utilization rate decreased to 87% in 1999 compared to 94% in 1998. Beginning in late 1999 and continuing into the first of the year 2000, the light/heavy crude oil spread has widened substantially and should that trend continue, our relative crude oil costs will improve greatly.

El Dorado Refinery - The El Dorado Refinery's crude oil charge is obtained from a variety of sources - Texas, locally produced Kansas crude, Latin America, North Sea, Middle East and other sources. A variety of crudes can be run because of the high complexity of the plant - it has a 13.0 Nelson rating which is the highest in the Plains States - and can use several different heavy crudes, which are more economical than sweet crudes. El Dorado is 125 miles north of Cushing, Oklahoma, the major crude oil hub in the nation, and is supplied by the Osage pipeline directly from Cushing. The Cushing hub is supplied by the Seaway pipeline, which runs from the Gulf Coast, the Basin Pipeline, which runs through Wichita Falls from West Texas, and the Mobil pipeline, which originates at the Gulf Coast and connects to the Basin pipeline at Wichita Falls. The remainder of our crude charge is transported to the Refinery through Kansas gathering system pipelines. The current Seaway pipeline expansion from 225,000 barrels per day to 350,000 barrels per day will provide the El Dorado Refinery with significantly greater access to crude oil from the Gulf Coast, including less expensive heavy South American crude. We have entered into a one-year renewable foreign crude oil supply agreement with Equiva Trading whereby we may purchase some or all of El Dorado's crude oil charge from Equiva, although we are not obligated to do so. We intend to use Equiva's worldwide network to acquire foreign crude oil while purchasing domestic and Canadian crude from other suppliers.

Operations & Capital Expenditures

Cheyenne - In 1999 the Cheyenne Refinery had a record charge rate, which includes light crude oil, heavy crude oil and other feed and blend stocks of 42,577 bpd compared to 40,386 bpd in 1998. Gasoline yields averaged 16,889 bpd (or 41% of the product mix) in 1999 versus 15,738 bpd in 1998 and diesel yields averaged 12,670 bpd (or 31% of the product mix) compared to 13,097 bpd in 1998. Asphalt production averaged 6,103 bpd in 1999 versus 4,832 bpd last year. The Cheyenne Refinery operating expense per barrel decreased $.25 per barrel to $2.77 per barrel in 1999 due to a major review of operating costs, resulting in improved practices that led primarily to lower maintenance costs and lower chemical usage. The 1999 operating cost was calculated without freight expense, which is now treated as a material cost (standard industry practice), and the 1998 operating expense per barrel has been restated to reflect the same.

Capital expenditures for the year 1999 at the Cheyenne Refinery were approximately $8 million and for 2000 we anticipate a capital budget of approximately $7 million plus $2 million to buy out the lease of our state-of-the-art control systems. After Frontier acquired the Cheyenne Refinery in late 1991, significant capital expenditures were made to improve the reliability and 0afety of the operation. Frontier is now able to focus on payout projects and is allocating more of its capital budget in this area. In 2000, approximately $2.4 million of the total capital budget is for payout items, most of which are in energy-saving cost reduction projects.

El Dorado - For the period November 17, 1999 through December 31, 1999, the El Dorado Refinery had a charge rate of 118,241 bpd. Gasoline yields averaged 65,163 bpd (or 57% of the product mix) and diesel yield averaged 37,881 bpd (or 33% of Uhe product mix). The El Dorado Refinery operating expense for the period was $2.52 per barrel.

For the calendar year 1999, the El Dorado Refinery set a number of key operational records. The crude charge rate was 103,600 bpd compared to the previous high of 96,573 bpd in 1998. Records were achieved in both gasoline and diesel production. Gasoline yields averaged 62,620 bpd versus 58,666 bpd in 1998 and diesel 38,946 bpd compared to 36,652 bpd in 1998. The Refinery set new monthly gasoline production records in seven months during 1999 and in eight months for diesel.

El Dorado's capital expenditures for the year 2000 should be approximately $4 million. Of this amount, $1.5 million will be spent on Oayout projects. The maintenance capital requirements of the El Dorado Refinery are relatively low due to capital spending made by prior owners during the past decade. Going forward, we will evaluate more payout capital projects.