HFC 3-31-2014 10Q




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________
FORM 10-Q
_________________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014
OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from    __________   to   ____________         
Commission File Number 1-3876
 _________________________________________________________________
HOLLYFRONTIER CORPORATION
(Exact name of registrant as specified in its charter)
_________________________________________________________________
Delaware
 
75-1056913
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2828 N. Harwood, Suite 1300
Dallas, Texas
 
75201
(Address of principal executive offices)
 
(Zip Code)
(214) 871-3555
(Registrant’s telephone number, including area code)
_________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
_________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
198,681,002 shares of Common Stock, par value $.01 per share, were outstanding on April 30, 2014.



Table of Content

HOLLYFRONTIER CORPORATION
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Content

FORWARD-LOOKING STATEMENTS

References herein to HollyFrontier Corporation (“HollyFrontier”) include HollyFrontier and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s (“SEC”) “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words “we,” “our,” “ours” and “us” refer only to HollyFrontier and its consolidated subsidiaries or to HollyFrontier or an individual subsidiary and not to any other person with certain exceptions. Generally, the words “we,” “our,” “ours” and “us” include Holly Energy Partners, L.P. (“HEP”) and its subsidiaries as consolidated subsidiaries of HollyFrontier, unless when used in disclosures of transactions or obligations between HEP and HollyFrontier or its other subsidiaries. This document contains certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of HollyFrontier. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact included in this Form 10-Q, including, but not limited to, those under “Results of Operations,” “Liquidity and Capital Resources” and “Risk Management” in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and those in Part II, Item 1 “Legal Proceedings” are forward-looking statements. These statements are based on management’s beliefs and assumptions using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks and uncertainties. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that our expectations will prove to be correct. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in these statements. Any differences could be caused by a number of factors including, but not limited to:

risks and uncertainties with respect to the actions of actual or potential competitive suppliers of refined petroleum products in our markets;
the demand for and supply of crude oil and refined products;
the spread between market prices for refined products and market prices for crude oil;
the possibility of constraints on the transportation of refined products;
the possibility of inefficiencies, curtailments or shutdowns in refinery operations or pipelines;
effects of governmental and environmental regulations and policies;
the availability and cost of our financing;
the effectiveness of our capital investments and marketing strategies;
our efficiency in carrying out construction projects;
our ability to acquire refined product operations or pipeline and terminal operations on acceptable terms and to integrate any existing or future acquired operations;
the possibility of terrorist attacks and the consequences of any such attacks;
general economic conditions; and
other financial, operational and legal risks and uncertainties detailed from time to time in our SEC filings.

Cautionary statements identifying important factors that could cause actual results to differ materially from our expectations are set forth in this Form 10-Q, including without limitation, the forward-looking statements that are referred to above. This summary discussion should be read in conjunction with the discussion of the known material risk factors and other cautionary statements under the heading “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013 and in conjunction with the discussion in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Liquidity and Capital Resources.” All forward-looking statements included in this Form 10-Q and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

3

Table of Content


PART I. FINANCIAL INFORMATION

DEFINITIONS

Within this report, the following terms have these specific meanings:

BPD” means the number of barrels per calendar day of crude oil or petroleum products.

BPSD” means the number of barrels per stream day (barrels of capacity in a 24 hour period) of crude oil or petroleum products.

“Biodiesel” means a clean alternative fuel produced from renewable biological resources.

Black wax crude oil” is a low sulfur, low gravity crude oil produced in the Uintah Basin in Eastern Utah that has certain characteristics that require specific facilities to transport, store and refine into transportation fuels.

Cracking” means the process of breaking down larger, heavier and more complex hydrocarbon molecules into simpler and lighter molecules.

Crude oil distillation” means the process of distilling vapor from liquid crudes, usually by heating, and condensing the vapor slightly above atmospheric pressure turning it back to liquid in order to purify, fractionate or form the desired products.

Ethanol” means a high octane gasoline blend stock that is used to make various grades of gasoline.

FCC,” or fluid catalytic cracking, means a refinery process that breaks down large complex hydrocarbon molecules into smaller more useful ones using a circulating bed of catalyst at relatively high temperatures.

Hydrodesulfurization” means to remove sulfur and nitrogen compounds from oil or gas in the presence of hydrogen and a catalyst at relatively high temperatures.

Hydrogen plant” means a refinery unit that converts natural gas and steam to high purity hydrogen, which is then used in the hydrodesulfurization, hydrocracking and isomerization processes.

Isomerization” means a refinery process for rearranging the structure of C5/C6 molecules without changing their size or chemical composition and is used to improve the octane of C5/C6 gasoline blendstocks.

LPG” means liquid petroleum gases.

Lubricant” or “lube” means a solvent neutral paraffinic product used in commercial heavy duty engine oils, passenger car oils and specialty products for industrial applications such as heat transfer, metalworking, rubber and other general process oil.

“MSAT2” means Control of Hazardous Air Pollutants from Mobile Sources, a rule issued by the U.S. Environmental Protection Agency to reduce hazardous emissions from motor vehicles and motor vehicle fuels.

MMBTU” means one million British thermal units.

Refinery gross margin” means the difference between average net sales price and average product costs per produced barrel of refined products sold. This does not include the associated depreciation and amortization costs.

Sour crude oil” means crude oil containing quantities of sulfur greater than 0.4 percent by weight, while “sweet crude oil” means crude oil containing quantities of sulfur equal to or less than 0.4 percent by weight.

Vacuum distillation” means the process of distilling vapor from liquid crudes, usually by heating, and condensing the vapor below atmospheric pressure turning it back to a liquid in order to purify, fractionate or form the desired products.

“WCS” means Western Canada Select crude oil and is made up of Canadian heavy conventional and bitumen crude oils blended with sweet synthetic and condensate diluents.

“WTI” means West Texas Intermediate and is a grade of crude oil used as a common benchmark in oil pricing. WTI is a sweet crude oil and has a relatively low density.


4

Table of Content

Item 1.
Financial Statements
HOLLYFRONTIER CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
March 31,
2014
 
December 31, 2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents (HEP: $4,879 and $6,352, respectively)
$
1,074,635

 
$
940,103

Marketable securities
709,468

 
725,160

Total cash, cash equivalents and short-term marketable securities
1,784,103

 
1,665,263

Accounts receivable: Product and transportation (HEP: $34,425 and $34,736, respectively)
668,105

 
665,098

Crude oil resales
20,233

 
43,704

 
688,338

 
708,802

Inventories: Crude oil and refined products
1,501,121

 
1,241,448

Materials, supplies and other (HEP: $1,594 and $1,591, respectively)
89,171

 
112,799

 
1,590,292

 
1,354,247

Income taxes receivable
12,431

 
109,376

Prepayments and other (HEP: $1,905 and $2,283, respectively)
110,345

 
58,756

Total current assets
4,185,509

 
3,896,444

 
 
 
 
Properties, plants and equipment, at cost (HEP: $1,212,988 and $1,199,594, respectively)
4,442,736

 
4,343,857

Less accumulated depreciation (HEP: $(207,911) and $(194,619), respectively)
(1,000,437
)
 
(949,261
)
 
3,442,299

 
3,394,596

Marketable securities (long-term)
6,050

 

Other assets: Turnaround costs
239,423

 
258,436

Goodwill (HEP: $288,991 and $288,991, respectively)
2,331,922

 
2,331,922

Intangibles and other (HEP: $73,664 and $74,979, respectively)
175,355

 
175,341

 
2,746,700

 
2,765,699

Total assets
$
10,380,558

 
$
10,056,739

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable (HEP: $15,753 and $22,898, respectively)
$
1,570,973

 
$
1,325,376

Accrued liabilities (HEP: $14,107 and $28,668, respectively)
121,003

 
125,115

Deferred income tax liabilities
224,534

 
223,999

Total current liabilities
1,916,510

 
1,674,490

 
 
 
 
Long-term debt (HEP: $833,790 and $807,630, respectively)
1,023,057

 
997,519

Deferred income taxes (HEP: $5,312 and $5,287, respectively)
644,333

 
616,842

Other long-term liabilities (HEP: $37,395 and $35,918, respectively)
148,157

 
158,490

 
 
 
 
Equity:
 
 
 
HollyFrontier stockholders’ equity:
 
 
 
Preferred stock, $1.00 par value – 5,000,000 shares authorized; none issued

 

Common stock $.01 par value – 320,000,000 shares authorized; 255,962,866 shares issued as of March 31, 2014 and December 31, 2013
2,560

 
2,560

Additional capital
3,998,926

 
3,990,630

Retained earnings
3,136,871

 
3,144,480

Accumulated other comprehensive income
54,064

 
822

Common stock held in treasury, at cost – 57,179,060 and 57,132,515 shares as of March 31, 2014 and December 31, 2013, respectively
(1,147,335
)
 
(1,138,872
)
Total HollyFrontier stockholders’ equity
6,045,086

 
5,999,620

Noncontrolling interest
603,415

 
609,778

Total equity
6,648,501

 
6,609,398

Total liabilities and equity
$
10,380,558

 
$
10,056,739


Parenthetical amounts represent asset and liability balances attributable to Holly Energy Partners, L.P. (“HEP”) as of March 31, 2014 and December 31, 2013. HEP is a consolidated variable interest entity.

See accompanying notes.

5

Table of Content

HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)

 
 
Three Months Ended March 31,
 
 
2014
 
2013
 
 
 
 
 
Sales and other revenues
 
$
4,791,053

 
$
4,707,789

Operating costs and expenses:
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization)
 
4,138,620

 
3,792,535

Operating expenses (exclusive of depreciation and amortization)
 
273,966

 
265,099

General and administrative expenses (exclusive of depreciation and amortization)
 
26,923

 
29,198

Depreciation and amortization
 
80,548

 
71,762

Total operating costs and expenses
 
4,520,057

 
4,158,594

Income from operations
 
270,996

 
549,195

Other income (expense):
 
 
 
 
Earnings (loss) of equity method investments
 
(801
)
 
59

Interest income
 
1,405

 
1,531

Interest expense
 
(12,347
)
 
(21,320
)
Loss on early extinguishment of debt
 
(7,677
)
 

 
 
(19,420
)
 
(19,730
)
Income before income taxes
 
251,576

 
529,465

Income tax provision:
 
 
 
 
Current
 
93,293

 
206,627

Deferred
 
(5,679
)
 
(20,533
)
 
 
87,614

 
186,094

Net income
 
163,962

 
343,371

Less net income attributable to noncontrolling interest
 
11,901

 
9,702

Net income attributable to HollyFrontier stockholders
 
$
152,061

 
$
333,669

Earnings per share attributable to HollyFrontier stockholders:
 
 
 
 
Basic
 
$
0.76

 
$
1.64

Diluted
 
$
0.76

 
$
1.63

Cash dividends declared per common share
 
$
0.80

 
$
0.80

Average number of common shares outstanding:
 
 
 
 
Basic
 
198,297

 
202,726

Diluted
 
198,924

 
203,428


See accompanying notes.

6

Table of Content

HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
 
 
Three Months Ended March 31,
 
 
2014
 
2013
 
 
 
 
 
Net income
 
$
163,962

 
$
343,371

Other comprehensive income:
 
 
 
 
Securities available-for-sale:
 
 
 
 
Unrealized gain on marketable securities
 
12

 
19

Reclassification adjustments to net income on sale or maturity of marketable securities
 
(1
)
 
(3
)
Net unrealized gain on marketable securities
 
11

 
16

Hedging instruments:
 
 
 
 
Change in fair value of cash flow hedging instruments
 
92,035

 
(10,346
)
Reclassification adjustments to net income on settlement of cash flow hedging instruments
 
(5,222
)
 
27,704

Amortization of unrealized loss attributable to discontinued cash flow hedges
 
270

 
939

Net unrealized gain on hedging instruments
 
87,083

 
18,297

Post-retirement benefit obligations:
 
 
 
 
Loss on post-retirement healthcare plan
 
(89
)
 

Post-retirement healthcare plan loss reclassified to net income
 

 
1,726

Net change in post-retirement benefit obligations
 
(89
)
 
1,726

Other comprehensive income before income taxes
 
87,005

 
20,039

Income tax expense
 
33,705

 
7,488

Other comprehensive income
 
53,300

 
12,551

Total comprehensive income
 
217,262

 
355,922

Less noncontrolling interest in comprehensive income
 
11,959

 
10,494

Comprehensive income attributable to HollyFrontier stockholders
 
$
205,303

 
$
345,428


See accompanying notes.


7

Table of Content

HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Three Months Ended March 31,
 
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
Net income
 
$
163,962

 
$
343,371

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
80,548

 
71,762

Earnings of equity method investments, net of distributions
 
1,363

 
628

Loss on early extinguishment of debt attributable to unamortized discount
 
1,489

 

Deferred income taxes
 
(5,679
)
 
(20,533
)
Equity-based compensation expense
 
6,186

 
8,580

Change in fair value – derivative instruments
 
(10,546
)
 
(53,745
)
(Increase) decrease in current assets:
 
 
 
 
Accounts receivable
 
17,878

 
(22,294
)
Inventories
 
(236,045
)
 
(151,168
)
Income taxes receivable
 
96,945

 
37,053

Prepayments and other
 
10,010

 
3,866

Increase (decrease) in current liabilities:
 
 
 
 
Accounts payable
 
260,834

 
(40,964
)
Income taxes payable
 

 
151,403

Accrued liabilities
 
3,060

 
(9,846
)
Turnaround expenditures
 
(4,292
)
 
(69,835
)
Other, net
 
9,216

 
285

Net cash provided by operating activities
 
394,929

 
248,563

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Additions to properties, plants and equipment
 
(103,677
)
 
(66,951
)
Additions to properties, plants and equipment – HEP
 
(20,604
)
 
(5,013
)
Proceeds from sale of property and equipment
 

 
2,290

Investment in Sabine Biofuels
 
(1,000
)
 

Net repayment of advances to Sabine Biofuels
 
2,586

 

Purchases of marketable securities
 
(244,030
)
 
(178,251
)
Sales and maturities of marketable securities
 
253,676

 
143,280

Net cash used for investing activities
 
(113,049
)
 
(104,645
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Borrowings under credit agreement – HEP
 
421,300

 
57,000

Repayments under credit agreement – HEP
 
(246,600
)
 
(110,000
)
Redemption of senior notes – HEP
 
(156,188
)
 

Proceeds from sale of HEP common units
 

 
73,444

Proceeds from common unit offerings - HEP
 

 
73,444

Inventory repurchase obligation
 
21,126

 

Purchase of treasury stock
 
(13,988
)
 
(6,610
)
Dividends
 
(158,614
)
 
(102,163
)
Distributions to noncontrolling interest
 
(18,881
)
 
(15,288
)
Excess tax benefit from equity-based compensation
 
5,156

 
744

Purchase of units for incentive grants – HEP
 
(336
)
 
(2,719
)
Deferred financing costs and other
 
(323
)
 
2,973

Net cash used for financing activities
 
(147,348
)
 
(29,175
)
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
Increase for the period
 
134,532

 
114,743

Beginning of period
 
940,103

 
1,757,699

End of period
 
$
1,074,635

 
$
1,872,442

 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
20,469

 
$
20,825

Income taxes
 
$
233

 
$
17,380


See accompanying notes.

8

Table of Content

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1:
Description of Business and Presentation of Financial Statements

References herein to HollyFrontier Corporation (“HollyFrontier”) include HollyFrontier and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s (“SEC”) “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In these financial statements, the words “we,” “our,” “ours” and “us” refer only to HollyFrontier and its consolidated subsidiaries or to HollyFrontier or an individual subsidiary and not to any other person, with certain exceptions. Generally, the words “we,” “our,” “ours” and “us” include Holly Energy Partners, L.P. (“HEP”) and its subsidiaries as consolidated subsidiaries of HollyFrontier, unless when used in disclosures of transactions or obligations between HEP and HollyFrontier or its other subsidiaries. These financial statements contain certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of HollyFrontier. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.

We are principally an independent petroleum refiner that produces high-value light products such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. We own and operate petroleum refineries that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. As of March 31, 2014, we:

owned and operated a petroleum refinery in El Dorado, Kansas (the “El Dorado Refinery”), two refinery facilities located in Tulsa, Oklahoma (collectively, the “Tulsa Refineries”), a refinery in Artesia, New Mexico that is operated in conjunction with crude oil distillation and vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the “Navajo Refinery”), a refinery located in Cheyenne, Wyoming (the “Cheyenne Refinery”) and a refinery in Woods Cross, Utah (the “Woods Cross Refinery”);
owned and operated NK Asphalt Partners (“NK Asphalt”) which operates various asphalt terminals in Arizona and New Mexico;
owned a 50% interest in Sabine Biofuels II, LLC (“Sabine Biofuels”), a biodiesel production facility located in Port Arthur, Texas; and
owned a 39% interest in HEP, a consolidated variable interest entity (“VIE”), which includes our 2% general partner interest. HEP owns and operates logistic assets consisting of petroleum product and crude oil pipelines and terminal, tankage and loading rack facilities that principally support our refining and marketing operations in the Mid-Continent, Southwest and Rocky Mountain regions of the United States and Alon USA, Inc.'s (“Alon”) refinery in Big Spring, Texas. Additionally, HEP owns a 75% interest in UNEV Pipeline, LLC (“UNEV”), which owns a 12-inch refined products pipeline from Salt Lake City, Utah to Las Vegas, Nevada, together with terminal facilities in the Cedar City, Utah and North Las Vegas areas (the “UNEV Pipeline”) and a 25% interest in SLC Pipeline LLC (the “SLC Pipeline”), which owns a 95-mile intrastate pipeline system that serves refineries in the Salt Lake City area.

We have prepared these consolidated financial statements without audit. In management’s opinion, these consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of our consolidated financial position as of March 31, 2014, the consolidated results of operations and comprehensive income for the three months ended March 31, 2014 and 2013 and consolidated cash flows for the three months ended March 31, 2014 and 2013 in accordance with the rules and regulations of the SEC. Although certain notes and other information required by generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013 that has been filed with the SEC.

Our results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results of operations to be realized for the year ending December 31, 2014.

Accounts Receivable: Our accounts receivable consist of amounts due from customers that are primarily companies in the petroleum industry. Credit is extended based on our evaluation of the customer’s financial condition, and in certain circumstances collateral, such as letters of credit or guarantees, is required. We reserve for doubtful accounts based on our historical loss experience as well as specific accounts identified as high risk, which historically have been minimal. Credit losses are charged to the allowance for doubtful accounts when an account is deemed uncollectible. Our allowance for doubtful accounts was $2.4 million at March 31, 2014 and December 31, 2013.


9

Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


Inventories: We use the last-in, first-out (“LIFO”) method of valuing inventory. Under the LIFO method, an actual valuation of inventory can only be made at the end of each year based on the inventory levels at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final year-end LIFO inventory valuation.

Goodwill: Goodwill represents the excess of the cost of an acquired entity over the fair value of the assets acquired and liabilities assumed. Goodwill is not subject to amortization and is tested annually, or more frequently if events or circumstances indicate the possibility of impairment. As of March 31, 2014, there have been no impairments to goodwill.


NOTE 2:
Variable Interest Entities

Holly Energy Partners

HEP, a consolidated VIE, is a publicly held master limited partnership that was formed to acquire, own and operate the petroleum product and crude oil pipeline and terminal, tankage and loading rack facilities that support our refining and marketing operations in the Mid-Continent, Southwest and Rocky Mountain regions of the United States. HEP also owns and operates refined product pipelines and terminals, located primarily in Texas, that serve Alon's refinery in Big Spring, Texas.

As of March 31, 2014, we owned a 39% interest in HEP, including the 2% general partner interest. As the general partner of HEP, we have the sole ability to direct the activities that most significantly impact HEP's financial performance. We are the primary beneficiary of HEP's earnings and cash flows and therefore we consolidate HEP. See Note 16 for supplemental guarantor/non-guarantor financial information, including HEP balances included in these consolidated financial statements.

HEP has two primary customers (including us) and generates revenues by charging tariffs for transporting petroleum products and crude oil though its pipelines, by charging fees for terminalling refined products and other hydrocarbons, and storing and providing other services at its storage tanks and terminals. Under our long-term transportation agreements with HEP (discussed further below), we accounted for 83% of HEP’s total revenues for the three months ended March 31, 2014. We do not provide financial or equity support through any liquidity arrangements and / or debt guarantees to HEP.

HEP has outstanding debt under a senior secured revolving credit agreement and its senior notes. With the exception of the assets of HEP Logistics Holdings, L.P., one of our wholly-owned subsidiaries and HEP’s general partner, HEP’s creditors have no recourse to our other assets. Any recourse to HEP’s general partner would be limited to the extent of HEP Logistics Holdings, L.P.’s assets, which other than its investment in HEP are not significant. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries. See Note 9 for a description of HEP’s debt obligations.

HEP has risk associated with its operations. If a major customer of HEP were to terminate its contracts or fail to meet desired shipping or throughput levels for an extended period of time, revenue would be reduced and HEP could suffer substantial losses to the extent that a new customer is not found. In the event that HEP incurs a loss, our operating results will reflect HEP’s loss, net of intercompany eliminations, to the extent of our ownership interest in HEP at that point in time.

Transportation Agreements
HEP serves our refineries under long-term pipeline and terminal, tankage and throughput agreements expiring from 2019 through 2026. Under these agreements, we pay HEP fees to transport, store and throughput volumes of refined product and crude oil on HEP's pipeline and terminal, tankage and loading rack facilities that result in minimum annual payments to HEP including UNEV (a consolidated subsidiary of HEP). Under these agreements, the agreed upon tariff rates are subject to annual tariff rate adjustments on July 1 at a rate based upon the percentage change in Producer Price Index (“PPI”) or Federal Energy Regulatory Commission (“FERC”) index. As of March 31, 2014, these agreements result in minimum annualized payments to HEP of $225.5 million.

Our transactions with HEP including fees paid under our transportation agreements with HEP and UNEV are eliminated and have no impact on our consolidated financial statements.


10

Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


HEP Common Unit Offering
In March 2013, HEP closed on a public offering of 1,875,000 of its common units. Additionally, our wholly-owned subsidiary, HollyFrontier Holdings LLC, as a selling unitholder, closed on a public sale of 1,875,000 HEP common units held by it. HEP used net proceeds of $73.4 million to repay indebtedness incurred under its credit facility and for general partnership purposes. As a result of these transactions and resulting HEP ownership changes, we adjusted additional capital and equity attributable to HEP's noncontrolling interest holders to reallocate HEP's equity among its unitholders.

Sabine Biofuels

We have a 50% ownership interest in Sabine Biofuels, an unconsolidated VIE. This investment, accounted for using the equity method of accounting, had a carrying amount of $8.2 million at March 31, 2014 and is classified as a noncurrent asset under “Intangibles and other” in our consolidated balance sheets. Also, we have extended a working capital facility to Sabine Biofuels having an outstanding balance of $7.4 million at March 31, 2014.

NOTE 3:
Financial Instruments

Our financial instruments consist of cash and cash equivalents, investments in marketable securities, accounts receivable, accounts payable, debt and derivative instruments. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value. HEP's outstanding credit agreement borrowings also approximate fair value as interest rates are reset frequently at current interest rates.

Fair value measurements are derived using inputs (assumptions that market participants would use in pricing an asset or liability, including assumptions about risk). GAAP categorizes inputs used in fair value measurements into three broad levels as follows:

(Level 1) Quoted prices in active markets for identical assets or liabilities.
(Level 2) Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, similar assets and liabilities in markets that are not active or can be corroborated by observable market data.
(Level 3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes valuation techniques that involve significant unobservable inputs.

The carrying amounts and estimated fair values of our investments in marketable securities, derivative instruments and senior notes at March 31, 2014 and December 31, 2013 were as follows:
 
 
 
 
 
 
Fair Value by Input Level
Financial Instrument
 
Carrying Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
March 31, 2014
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Marketable securities
 
$
715,518

 
$
715,518

 
$

 
$
715,518

 
$

Commodity price swaps
 
129,128

 
129,128

 

 
110,015

 
19,113

Forward sales contracts
 
2,089

 
2,089

 

 

 
2,089

HEP interest rate swaps
 
1,628

 
1,628

 

 
1,628

 

Total assets
 
$
848,363

 
$
848,363

 
$

 
$
827,161

 
$
21,202

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
NYMEX futures contracts
 
$
3,450

 
$
3,450

 
$
3,450

 
$

 
$

Commodity price swaps
 
76,297

 
76,297

 

 
32,622

 
43,675

HollyFrontier senior notes
 
154,830

 
160,688

 

 
160,688

 

HEP senior notes
 
296,090

 
319,500

 

 
319,500

 

HEP interest rate swaps
 
1,677

 
1,677

 

 
1,677

 

Total liabilities
 
$
532,344

 
$
561,612

 
$
3,450

 
$
514,487

 
$
43,675


11

Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


 
 
 
 
 
 
Fair Value by Input Level
Financial Instrument
 
Carrying Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
December 31, 2013
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Marketable securities
 
$
725,160

 
$
725,160

 
$

 
$
725,160

 
$

Commodity price swaps
 
43,284

 
43,284

 

 
36,312

 
6,972

HEP interest rate swaps
 
1,670

 
1,670

 

 
1,670

 

Total assets
 
$
770,114

 
$
770,114

 
$

 
$
763,142

 
$
6,972

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
NYMEX futures contracts
 
$
3,569

 
$
3,569

 
$
3,569

 
$

 
$

Commodity price swaps
 
83,349

 
83,349

 

 
41,059

 
42,290

HollyFrontier senior notes
 
155,054

 
161,250

 

 
161,250

 

HEP senior notes
 
444,630

 
471,750

 

 
471,750

 

HEP interest rate swaps
 
1,814

 
1,814

 

 
1,814

 

Total liabilities
 
$
688,416

 
$
721,732

 
$
3,569

 
$
675,873

 
$
42,290


Level 1 Financial Instruments
Our NYMEX futures contracts are exchange traded and are measured and recorded at fair value using quoted market prices, a Level 1 input.

Level 2 Financial Instruments
Investments in marketable securities and derivative instruments consisting of commodity price swaps and HEP's interest rate swaps are measured and recorded at fair value using Level 2 inputs. The fair values of the commodity price and interest rate swap contracts are based on the net present value of expected future cash flows related to both variable and fixed rate legs of the respective swap agreements. The measurements are computed using market-based observable inputs, quoted forward commodity prices with respect to our commodity price swaps and the forward London Interbank Offered Rate (“LIBOR”) yield curve with respect to HEP's interest rate swaps. The fair value of the marketable securities and senior notes is based on values provided by a third-party, which were derived using market quotes for similar type instruments, a Level 2 input.

Level 3 Financial Instruments
We have commodity price swap contracts that relate to forecasted sales of diesel and unleaded gasoline and forecasted purchases of WCS for which quoted forward market prices are not readily available. The forward rate used to value these price swaps is derived using a projected forward rate using quoted market rates for similar products, adjusted for regional pricing and grade differentials, a Level 3 input.

The following table presents the changes in fair value of our Level 3 assets and liabilities (all related to derivative instruments) for the three months ended March 31, 2014 and 2013:
 
 
Three Months Ended March 31,
Level 3 Financial Instruments
 
2014
 
2013
 
 
(In thousands)
Liability balance at beginning of period
 
$
(35,318
)
 
$
(33,658
)
Change in fair value:
 
 
 
 
Recognized in other comprehensive income
 
(22,137
)
 
(49,202
)
Recognized in cost of products sold
 
8,970

 
43,559

Settlement date fair value of contractual maturities:
 
 
 
 
Recognized in sales and other revenues
 
25,331

 
19,185

Recognized in cost of products sold
 
681

 
13,867

Liability balance at end of period
 
$
(22,473
)
 
$
(6,249
)

A hypothetical change of 10% to the estimated future cash flows attributable to our Level 3 commodity price swaps would result in an estimated fair value change of $2.5 million.

12

Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued




NOTE 4:
Earnings Per Share

Basic earnings per share is calculated as net income attributable to HollyFrontier stockholders divided by the average number of shares of common stock outstanding. Diluted earnings per share assumes, when dilutive, the issuance of the net incremental shares from restricted shares and performance share units. The following is a reconciliation of the components of the basic and diluted per share computations for net income attributable to HollyFrontier stockholders:
 
 
Three Months Ended March 31,
 
 
2014
 
2013
 
 
(In thousands, except per share data)
Net income attributable to HollyFrontier stockholders
 
$
152,061

 
$
333,669

Participating securities' share in earnings
 
466

 
1,294

Net income attributable to common shares
 
$
151,595

 
$
332,375

Average number of shares of common stock outstanding
 
198,297

 
202,726

Effect of dilutive variable restricted shares and performance share units (1)
 
627

 
702

Average number of shares of common stock outstanding assuming dilution
 
198,924

 
203,428

Basic earnings per share
 
$
0.76

 
$
1.64

Diluted earnings per share
 
$
0.76

 
$
1.63

(1) Excludes anti-dilutive restricted and performance share units of:
 
14

 


NOTE 5:
Stock-Based Compensation

As of March 31, 2014, we have two principal share-based compensation plans (collectively, the “Long-Term Incentive Compensation Plan”).

The compensation cost charged against income for these plans was $5.4 million and $7.5 million for the three months ended March 31, 2014 and 2013, respectively. Our accounting policy for the recognition of compensation expense for awards with pro-rata vesting is to expense the costs ratably over the vesting periods.

Additionally, HEP maintains a share-based compensation plan for Holly Logistic Services, L.L.C.'s non-employee directors and certain executives and employees. Compensation cost attributable to HEP’s share-based compensation plan was $0.8 million and $1.1 million for the three months ended March 31, 2014 and 2013, respectively.

Restricted Stock and Restricted Stock Units
Under our Long-Term Incentive Compensation Plan, we grant certain officers and other key employees restricted stock and restricted stock unit awards with awards generally vesting over a period of one to three years. Restricted stock award recipients are generally entitled to all the rights of absolute ownership of the restricted shares from the date of grant including the right to vote the shares and to receive dividends. Upon vesting, restrictions on the restricted shares lapse at which time they convert to common shares. In addition, we grant non-employee directors restricted stock unit awards, which typically vest over a period of one year and are payable in stock. The fair value of each restricted stock and restricted stock unit award is measured based on the grant date market price of our common shares and is amortized over the respective vesting period.


13

Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


A summary of restricted stock and restricted stock unit activity and changes during the three months ended March 31, 2014 is presented below:
Restricted Stock and Restricted Stock Units
 
Grants
 
Weighted Average Grant Date Fair Value
 
Aggregate Intrinsic Value ($000)
 
 
 
 
 
 
 
Outstanding at January 1, 2014 (non-vested)
 
737,562

 
$
39.54

 
 
Granted
 
56,482

 
47.92

 
 
Vesting (transfer/conversion to common stock)
 
(92,240
)
 
32.76

 
 
Forfeited
 
(56,567
)
 
41.86

 
 
Outstanding at March 31, 2014 (non-vested)
 
645,237

 
$
41.04

 
$
30,700


For the three months ended March 31, 2014, 92,240 restricted stock and restricted stock units vested having a grant date fair value of $3.0 million. As of March 31, 2014, there was $16.9 million of total unrecognized compensation cost related to non-vested restricted stock and restricted stock unit grants. That cost is expected to be recognized over a weighted-average period of 1.3 years.

Performance Share Units
Under our Long-Term Incentive Compensation Plan, we grant certain officers and other key employees performance share units, which are payable in stock upon meeting certain criteria over the service period, and generally vest over a period of three years. Under the terms of our performance share unit grants, awards are subject to both a “financial performance” and “market performance” criteria. Financial performance is based on our financial performance compared to an equally-weighted peer group of independent refining companies, while market performance is based on total shareholder return achieved by HollyFrontier stockholders compared with the average shareholder return achieved by shareholders of peer group companies. The number of shares ultimately issued under these awards can range from zero to 200%. As of March 31, 2014, estimated share payouts for outstanding non-vested performance share unit awards ranged from 120% to 165% of the initial target award.

A summary of performance share unit activity and changes during the three months ended March 31, 2014 is presented below:
Performance Share Units
 
Grants
 
 
 
Outstanding at January 1, 2014 (non-vested)
 
983,610

Granted
 
23,964

Vesting and transfer of ownership to recipients
 
(181,290
)
Forfeited
 
(87,564
)
Outstanding at March 31, 2014 (non-vested)
 
738,720


For the three months ended March 31, 2014, we issued 172,231 shares of our common stock, representing a 95% payout on vested performance shares units having a grant date fair value of $5.9 million. Based on the weighted-average grant date fair value of $40.53 per share, there was $23.3 million of total unrecognized compensation cost related to non-vested performance share units as of March 31, 2014. That cost is expected to be recognized over a weighted-average period of 1.7 years.


NOTE 6:
Cash and Cash Equivalents and Investments in Marketable Securities

Our investment portfolio at March 31, 2014 consisted of cash, cash equivalents and investments in marketable securities.

We currently invest in marketable debt securities with the maximum maturity or put date of any individual issue generally not greater than one year from the date of purchase, which are usually held until maturity. All of these instruments are classified as available-for-sale. As a result, they are reported at fair value using quoted market prices. Interest income is recorded as earned. Unrealized gains and losses, net of related income taxes, are reported as a component of accumulated other comprehensive income. Upon sale or maturity, realized gains on our marketable debt securities are recognized as interest income. These gains are computed based on the specific identification of the underlying cost of the securities, net of unrealized gains and losses previously reported in other comprehensive income. Unrealized gains and losses on our available-for-sale securities are due to changes in market prices and are considered temporary.

14

Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



The following is a summary of our marketable securities:
 
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
(Net Carrying Amount)
 
 
(In thousands)
March 31, 2014
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
64,703

 
$
20

 
$

 
$
64,723

Commercial paper
 
72,568

 
20

 

 
72,588

Corporate debt securities
 
136,056

 
15

 
(64
)
 
136,007

State and political subdivisions debt securities
 
442,167

 
66

 
(33
)
 
442,200

Total marketable securities
 
$
715,494

 
$
121

 
$
(97
)
 
$
715,518

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
74,802

 
$
21

 
$
(1
)
 
$
74,822

Commercial paper
 
78,216

 
28

 

 
78,244

Corporate debt securities
 
96,889

 
6

 
(44
)
 
96,851

State and political subdivisions debt securities
 
475,235

 
49

 
(41
)
 
475,243

Total marketable securities
 
$
725,142

 
$
104

 
$
(86
)
 
$
725,160


Interest income recognized on our marketable securities was $0.6 million and $0.5 million for the three months ended March 31, 2014 and 2013, respectively.


NOTE 7:
Inventories

Inventory consists of the following components:
 
 
March 31,
2014
 
December 31, 2013
 
 
(In thousands)
Crude oil
 
$
617,422

 
$
567,281

Other raw materials and unfinished products(1)
 
208,080

 
154,534

Finished products(2)
 
675,619

 
519,633

Process chemicals(3)
 
3,993

 
3,504

Repair and maintenance supplies and other
 
85,178

 
109,295

Total inventory
 
$
1,590,292

 
$
1,354,247


(1)
Other raw materials and unfinished products include feedstocks and blendstocks, other than crude.
(2)
Finished products include gasolines, jet fuels, diesels, lubricants, asphalts, LPG’s and residual fuels.
(3)
Process chemicals include additives and other chemicals.


NOTE 8:
Environmental

We expensed $0.3 million and $0.1 million for the three months ended March 31, 2014 and 2013, respectively, for environmental remediation obligations. The accrued environmental liability reflected in our consolidated balance sheets was $85.2 million and $87.8 million at March 31, 2014 and December 31, 2013, respectively, of which $72.0 million and $73.6 million, respectively, were classified as other long-term liabilities. These accruals include remediation and monitoring costs expected to be incurred over an extended period of time (up to 30 years for certain projects).



15

Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


NOTE 9:
Debt

HollyFrontier Credit Agreement
We have a $1 billion senior secured credit agreement that matures in July 2016 (the “HollyFrontier Credit Agreement”) and may be used to fund working capital requirements, capital expenditures, acquisitions and general corporate purposes. Obligations under the HollyFrontier Credit Agreement are collateralized by our inventory, accounts receivable and certain deposit accounts and guaranteed by our material, wholly-owned subsidiaries. At March 31, 2014, we were in compliance with all covenants, had no outstanding borrowings and had outstanding letters of credit totaling $4.5 million under the HollyFrontier Credit Agreement.

HEP Credit Agreement
HEP has a $650 million senior secured revolving credit facility that matures in November 2018 (the “HEP Credit Agreement”) and is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. It is also available to fund letters of credit up to a $50 million sub-limit. At March 31, 2014, HEP was in compliance with all of its covenants, had outstanding borrowings of $537.7 million and no outstanding letters of credit under the HEP Credit Agreement.

HEP’s obligations under the HEP Credit Agreement are collateralized by substantially all of HEP’s assets (presented parenthetically in our consolidated balance sheets). Indebtedness under the HEP Credit Agreement involves recourse to HEP Logistics Holdings, L.P., its general partner, and is guaranteed by HEP’s wholly-owned subsidiaries. Any recourse to the general partner would be limited to the extent of HEP Logistics Holdings, L.P.’s assets, which other than its investment in HEP are not significant. HEP’s creditors have no recourse to our other assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries.

HollyFrontier Senior Notes
Our 6.875% senior notes ($150 million aggregate principal amount maturing November 2018) (the “HollyFrontier Senior Notes”) are unsecured and impose certain restrictive covenants, including limitations on our ability to incur additional debt, incur liens, enter into sale-and-leaseback transactions, pay dividends, enter into mergers, sell assets and enter into certain transactions with affiliates. Additionally, we have certain redemption rights under the HollyFrontier Senior Notes.

At any time, following notice to the trustee, that the HollyFrontier Senior Notes are rated investment grade by both Moody's and Standard & Poor's and no default or event of default exists, we are not subject to many of the foregoing covenants (a "Covenant Suspension"). As of March 31, 2014, the HollyFrontier Senior Notes were rated investment grade by both Standard & Poor's (BBB-) and Moody's (Baa3). As a result, we are under the Covenant Suspension pursuant to the terms of the indenture governing the HollyFrontier Senior Notes.

HollyFrontier Financing Obligation
We have a financing obligation that relates to a sale and lease-back of certain crude oil tankage that we sold to an affiliate of Plains All American Pipeline, L.P. (“Plains”) in October 2009 for $40.0 million. Monthly lease payments are recorded as a reduction in principal over the 15-year lease term ending in 2024.

HEP Senior Notes
HEP’s 6.5% senior notes ($300 million aggregate principal amount maturing March 2020) (the “HEP Senior Notes”) are unsecured and impose certain restrictive covenants, including limitations on HEP’s ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. At any time when the HEP Senior Notes are rated investment grade by both Moody’s and Standard & Poor’s and no default or event of default exists, HEP will not be subject to many of the foregoing covenants. Additionally, HEP has certain redemption rights under the HEP Senior Notes.

In March 2014, HEP redeemed its $150.0 million aggregate principal amount of 8.25% senior notes maturing March 2018 at a redemption cost of $156.2 million, at which time HEP recognized a $7.7 million early extinguishment loss consisting of a $6.2 million debt redemption premium and unamortized discount and financing costs of $1.5 million. HEP funded the redemption with borrowings under the HEP Credit Agreement.


16

Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


Indebtedness under the HEP Senior Notes involves recourse to HEP Logistics Holdings, L.P., its general partner, and is guaranteed by HEP’s wholly-owned subsidiaries. However, any recourse to the general partner would be limited to the extent of HEP Logistics Holdings, L.P.’s assets, which other than its investment in HEP, are not significant. HEP’s creditors have no recourse to our other assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries.

The carrying amounts of long-term debt are as follows:
 
 
March 31,
2014
 
December 31,
2013
 
 
(In thousands)
6.875% Senior Notes
 
 
 
 
Principal
 
$
150,000

 
$
150,000

Unamortized premium
 
4,830

 
5,054

 
 
154,830

 
155,054

Financing Obligation
 
34,437

 
34,835

 
 
 
 
 
Total HollyFrontier long-term debt
 
189,267

 
189,889

 
 
 
 
 
HEP Credit Agreement
 
537,700

 
363,000

 
 
 
 
 
HEP 6.5% Senior Notes
 
 
 
 
Principal
 
300,000

 
300,000

Unamortized discount
 
(3,910
)
 
(4,073
)
 
 
296,090

 
295,927

HEP 8.25% Senior Notes
 
 
 
 
Principal
 

 
150,000

Unamortized discount
 

 
(1,297
)
 
 

 
148,703

 
 
 
 
 
Total HEP long-term debt
 
833,790

 
807,630

 
 
 
 
 
Total long-term debt
 
$
1,023,057

 
$
997,519


We capitalized interest attributable to construction projects of $3.0 million and $3.4 million for the three months ended March 31, 2014 and 2013, respectively.


NOTE 10: Derivative Instruments and Hedging Activities

Commodity Price Risk Management

Our primary market risk is commodity price risk. We are exposed to market risks related to the volatility in crude oil and refined products, as well as volatility in the price of natural gas used in our refining operations. We periodically enter into derivative contracts in the form of commodity price swaps and futures contracts to mitigate price exposure with respect to:
our inventory positions;
natural gas purchases;
costs of crude oil and related grade differentials;
prices of refined products; and
our refining margins.


17

Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


Accounting Hedges
We have swap contracts serving as cash flow hedges against price risk on forecasted purchases of natural gas and WTI crude oil and forecasted sales of ultra-low sulfur diesel and conventional unleaded gasoline. We also have forward sales contracts that lock in the prices of future sales of refined product. These contracts have been designated as accounting hedges and are measured quarterly at fair value with offsetting adjustments (gains/losses) recorded directly to other comprehensive income. These fair value adjustments are later reclassified to earnings as the hedging instruments mature. Also on a quarterly basis, hedge ineffectiveness is measured by comparing the change in fair value of the swap contracts against the expected future cash inflows/outflows on the respective transaction being hedged. Any hedge ineffectiveness is also recognized in earnings.

The following table presents the pre-tax effect on other comprehensive income (“OCI”) and earnings due to fair value adjustments and maturities of commodity price swaps under hedge accounting:
 
Unrealized Gain (Loss) Recognized in OCI
 
Gain (Loss) Recognized in Earnings Due to Settlements
 
Gain (Loss) Attributable to Hedge Ineffectiveness Recognized in Earnings
 
 
Location
 
Amount
 
Location
 
Amount
 
(In thousands)
Three Months Ended March 31, 2014
 
 
 
 
 
 
 
 
 
Commodity price swaps
 
 
 
 
 
 
 
 
 
Change in fair value
$
92,478

 
Sales and other revenues
 
$
(25,331
)
 
 
 
 
Gain reclassified to earnings due to settlements
(5,760
)
 
Cost of products sold
 
29,317

 
 
 
 
Amortization of discontinued hedges reclassified to earnings
270

 
Operating expenses
 
1,504

 
Operating expenses
 
$
(2,160
)
Total
$
86,988

 
 
 
$
5,490

 
 
 
$
(2,160
)
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2013
 
 
 
 
 
 
 
 
 
Commodity price swaps
 
 
 
 
 
 
 
 
 
Change in fair value
$
(10,404
)
 
Sales and other revenues
 
$
(19,185
)
 
Sales and other revenues
 
$
(356
)
Loss reclassified to earnings due to settlements
27,200

 
Cost of products sold
 
(6,532
)
 
Cost of products sold
 
3,131

Amortization of discontinued hedges reclassified to earnings
90

 
Operating expenses
 
(1,573
)
 
Operating expenses
 
(365
)
Total
$
16,886

 
 
 
$
(27,290
)
 
 
 
$
2,410


As of March 31, 2014, we have the following notional contract volumes related to outstanding derivative instruments serving as cash flow hedges against price risk on forecasted purchases of natural gas and crude oil and sales of refined products:
 
 
 
 
Notional Contract Volumes by Year of Maturity
 
 
Derivative Instrument
 
Total Outstanding Notional
 
2014
 
2015
 
2016
 
2017
 
Unit of Measure
 
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas - long
 
36,000,000

 
7,200,000

 
9,600,000

 
9,600,000

 
9,600,000

 
MMBTU
WTI crude oil - long
 
24,042,500

 
19,662,500

 
4,380,000

 

 

 
Barrels
Ultra-low sulfur diesel - short
 
14,142,500

 
9,762,500

 
4,380,000

 

 

 
Barrels
Sub octane gasoline - short
 
9,900,000

 
9,900,000

 

 

 

 
Barrels
Forward sales - diesel and gasoline
 
825,000

 
825,000

 

 

 

 
Barrels

In 2013, we dedesignated certain commodity price swaps (long positions) that previously received hedge accounting treatment. These contracts now serve as economic hedges against price risk on forecasted natural gas purchases totaling 36,000,000 MMBTU's to be purchased ratably through 2017. As of March 31, 2014, we have an unrealized loss of $4.1 million classified in accumulated other comprehensive income that relates to the application of hedge accounting prior to dedesignation that is amortized as a charge to operating expenses as the contracts mature.


18

Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


Economic Hedges
We also have swap contracts that serve as economic hedges (derivatives used for risk management, but not designated as accounting hedges) to fix our purchase price on forecasted natural gas purchases, and to lock in the spread between WCS and WTI crude oil on forecasted purchases of WCS. Also, we have NYMEX futures contracts to lock in prices on forecasted purchases of inventory. These contracts are measured quarterly at fair value with offsetting adjustments (gains/losses) recorded directly to income.

The following table presents the pre-tax effect on income due to maturities and fair value adjustments of our economic hedges:
 
 
Three Months Ended March 31,
Location of Gain (Loss) Recognized in Income
 
2014
 
2013
 
 
(In thousands)
Cost of products sold
 
$
26

 
$
33,592

Operating expenses
 
(48
)
 
(4,993
)
Total
 
$
(22
)
 
$
28,599


As of March 31, 2014, we have the following notional contract volumes related to our outstanding derivative contracts serving as economic hedges:
 
 
 
Notional Contract Volumes by Year of Maturity
 
 
Derivative Instrument
Total Outstanding Notional
 
2014
 
2015
 
2016
 
2017
 
Unit of Measure
 
 
 
 
 
 
 
 
 
 
 
 
Commodity price swap (WCS spread) - long
4,812,500

 
4,812,500

 

 

 

 
Barrels
Commodity price swap (natural gas) - long
36,000,000

 
7,200,000

 
9,600,000

 
9,600,000

 
9,600,000

 
MMBTU
Commodity price swap (natural gas) - short
36,000,000

 
7,200,000

 
9,600,000

 
9,600,000

 
9,600,000

 
MMBTU
NYMEX futures (WTI) - short
2,914,000

 
2,914,000

 

 

 

 
Barrels

Interest Rate Risk Management
HEP uses interest rate swaps to manage its exposure to interest rate risk.

As of March 31, 2014, HEP had three interest rate swap contracts that hedge its exposure to the cash flow risk caused by the effects of LIBOR changes on $305.0 million in credit agreement advances. The first interest rate swap effectively converts $155.0 million of LIBOR based debt to fixed rate debt having an interest rate of 0.99% plus an applicable margin of 2.00% as of March 31, 2014, which equaled an effective interest rate of 2.99%. This swap matures in February 2016. HEP has two additional interest rate swaps with identical terms which effectively convert $150.0 million of LIBOR based debt to fixed rate debt having an interest rate of 0.74% plus an applicable margin of 2.00% as of March 31, 2014, which equaled an effective interest rate of 2.74%. Both of these swap contracts mature in July 2017. All of these swap contracts have been designated as cash flow hedges. To date, there has been no ineffectiveness on these cash flow hedges.


19

Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


The following table presents the pre-tax effect on other comprehensive income and earnings due to fair value adjustments and maturities of HEP's interest rate swaps under hedge accounting:
 
Unrealized Gain (Loss) Recognized in OCI
 
Loss Recognized in Earnings Due to Settlements
 
 
Location
 
Amount
 
(In thousands)
Three Months Ended March 31, 2014
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
Change in fair value
$
(443
)
 
 
 
 
Loss reclassified to earnings due to settlements
538

 
Interest expense
 
$
(538
)
Total
$
95

 
 
 
$
(538
)
 
 
 
 
 
 
Three Months Ended March 31, 2013
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
Change in fair value
$
58

 
 
 
 
Loss reclassified to earnings due to settlements
504

 
 
 
 
Amortization of discontinued hedge reclassified to earnings
849

 
Interest expense
 
$
(1,353
)
Total
$
1,411

 
 
 
$
(1,353
)

The following table presents the fair value and balance sheet locations of our outstanding derivative instruments. These amounts are presented on a gross basis with offsetting balances that reconcile to a net asset or liability position in our consolidated balance sheets. We present on a net basis to reflect the net settlement of these positions in accordance with provisions of our master netting arrangements.
 
 
Derivatives in Net Asset Position
 
Derivatives in Net Liability Position
 
 
Gross Assets
 
Gross Liabilities Offset in Balance Sheet
 
Net Assets Recognized in Balance Sheet
 
Gross Liabilities
 
Gross Assets Offset in Balance Sheet
 
Net Liabilities Recognized in Balance Sheet
 
 
 
 
(In thousands)
 
 
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as cash flow hedging instruments:
 
 
Commodity price swap contracts
 
$
92,912

 
$
(40,044
)
 
$
52,868

 
$
18,321

 
$
(8,040
)
 
$
10,281

Forward sales contracts
 
2,089

 

 
2,089

 

 

 

Interest rate swap contracts
 
1,628

 

 
1,628

 
1,677

 

 
1,677

 
 
$
96,629

 
$
(40,044
)
 
$
56,585

 
$
19,998

 
$
(8,040
)
 
$
11,958

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as cash flow hedging instruments:
 
 
Commodity price swap contracts
 
$
19,093

 
$
(4,445
)
 
$
14,648

 
$
13,487

 
$
(9,083
)
 
$
4,404

NYMEX futures contracts
 

 

 

 
3,450

 

 
3,450

 
 
$
19,093

 
$
(4,445
)
 
$
14,648

 
$
16,937

 
$
(9,083
)
 
$
7,854

 
 
 
 
 
 
 
 
 
 
 
 
 
Total net balance
 
 
 
 
 
$
71,233

 
 
 
 
 
$
19,812

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance sheet classification:
 
Prepayment and other
 
$
68,572

 
Accrued liabilities
 
$
3,450

 
 
Intangibles and other
 
2,661

 
Other long-term liabilities
 
16,362

 
 
 
 
 
 
$
71,233

 
 
 
 
 
$
19,812



20

Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


 
 
Derivatives in Net Asset Position
 
Derivatives in Net Liability Position
 
 
Gross Assets
 
Gross Liabilities Offset in Balance Sheet
 
Net Assets Recognized in Balance Sheet
 
Gross Liabilities
 
Gross Assets Offset in Balance Sheet
 
Net Liabilities Recognized in Balance Sheet
 
 
 
 
(In thousands)
 
 
December 31, 2013
 
 
Derivatives designated as cash flow hedging instruments:
 
 
Commodity price swap contracts
 
$

 
$

 
$

 
$
63,561

 
$
(23,679
)
 
$
39,882

Interest rate swap contracts
 
1,670

 

 
1,670

 
1,814

 

 
1,814

 
 
$
1,670

 
$

 
$
1,670

 
$
65,375

 
$
(23,679
)
 
$
41,696

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as cash flow hedging instruments:
 
 
Commodity price swap contracts
 
$
6,972

 
$

 
$
6,972

 
$
19,766

 
$
(12,611
)
 
$
7,155

NYMEX futures contracts
 

 

 

 
3,569

 

 
3,569

 
 
$
6,972

 
$

 
$
6,972

 
$
23,335

 
$
(12,611
)
 
$
10,724

 
 
 
 
 
 
 
 
 
 
 
 
 
Total net balance
 
 
 
 
 
$
8,642

 
 
 
 
 
$
52,420

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance sheet classification:
 
Prepayment and other
 
$
6,972

 
Accrued liabilities
 
$
26,843

 
 
Intangibles and other
 
1,670

 
Other long-term liabilities
 
25,577

 
 
 
 
 
 
$
8,642

 
 
 
 
 
$
52,420


At March 31, 2014, we had a pre-tax net unrealized gain of $42.8 million classified in accumulated other comprehensive income that relates to all accounting hedges having contractual maturities through 2017. Assuming commodity prices and interest rates remain unchanged, an unrealized gain of $54.9 million will be effectively transferred from accumulated other comprehensive income into the statement of income as the hedging instruments contractually mature over the next twelve-month period.


NOTE 11:
Equity

Changes to equity during the three months ended March 31, 2014 are presented below:
 
 
HollyFrontier
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Equity
 
 
(In thousands)
Balance at December 31, 2013
 
$
5,999,620

 
$
609,778

 
$
6,609,398

Net income
 
152,061

 
11,901

 
163,962

Dividends
 
(159,670
)
 

 
(159,670
)
Distributions to noncontrolling interest holders
 

 
(18,881
)
 
(18,881
)
Other comprehensive income, net of tax
 
53,242

 
58

 
53,300

Equity-based compensation
 
5,366

 
820

 
6,186

Excess tax benefit attributable to equity-based compensation
 
5,156

 

 
5,156

Purchase of treasury stock (1)
 
(10,689
)
 

 
(10,689
)
Purchase of HEP units for restricted grants
 

 
(336
)
 
(336
)
Other
 

 
75

 
75

Balance at March 31, 2014
 
$
6,045,086

 
$
603,415

 
$
6,648,501

 
(1)
Includes 90,393 shares withheld under the terms of stock-based compensation agreements to provide funds for the payment of payroll and income taxes due at the vesting of share-based awards.


21

Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


We have a Board approved repurchase program that authorizes us to repurchase common stock in the open market or through privately negotiated transactions. The timing and amount of stock repurchases will depend on market conditions, corporate, regulatory and other relevant considerations. This program may be discontinued at any time by the Board of Directors. As of March 31, 2014, we had remaining authorization to repurchase up to $311.6 million under this stock repurchase program.


NOTE 12:
Other Comprehensive Income (Loss)

The components and allocated tax effects of other comprehensive income (loss) are as follows:
 
 
Before-Tax
 
Tax Expense
(Benefit)
 
After-Tax
 
 
(In thousands)
Three Months Ended March 31, 2014
 
 
 
 
 
 
Net unrealized gain on marketable securities
 
$
11

 
$
(3
)
 
$
14

Net unrealized gain on hedging instruments
 
87,083

 
33,743

 
53,340

Net change in post-retirement benefit obligations
 
(89
)
 
(35
)
 
(54
)
Other comprehensive income
 
87,005

 
33,705

 
53,300

Less other comprehensive income attributable to noncontrolling interest
 
58

 

 
58

Other comprehensive income attributable to HollyFrontier stockholders
 
$
86,947

 
$
33,705

 
$
53,242

 
 
 
 
 
 
 
Three Months Ended March 31, 2013
 
 
 
 
 
 
Net unrealized gain on marketable securities
 
$
16

 
$
8

 
$
8

Net unrealized gain on hedging instruments
 
18,297

 
6,809

 
11,488

Net change in post-retirement benefit obligations
 
1,726

 
671

 
1,055

Other comprehensive income
 
20,039

 
7,488

 
12,551

Less other comprehensive income attributable to noncontrolling interest
 
792

 

 
792

Other comprehensive income attributable to HollyFrontier stockholders
 
$
19,247

 
$
7,488

 
$
11,759



22

Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued


The following table presents the income statement line item effects for reclassifications out of accumulated other comprehensive income (“AOCI”):
AOCI Component
 
Gain (Loss) Reclassified From AOCI