HollyFrontier Corporation
HollyFrontier Corp (Form: 10-Q, Received: 11/03/2016 17:17:14)




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 September 30, 2016
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
176,519,645 shares of Common Stock, par value $.01 per share, were outstanding on October 31, 2016 .



Table of Content

HOLLYFRONTIER CORPORATION
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016 (Unaudited) and December 31, 2015
 
 
 
Three and Nine Months Ended September 30, 2016 and 2015
 
 
 
Three and Nine Months Ended September 30, 2016 and 2015
 
 
 
Three and Nine Months Ended September 30, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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. Forward-looking statements use words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “intend,” “should,” “would,” “could,” “believe,” “may,” and similar expressions and statements regarding our plans and objectives for future operations. 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. All statements concerning our expectations for future results of operations are based on forecasts for our existing operations and do not include the potential impact of any future acquisitions. 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, 2015 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 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” and Part II, Item 1A “Risk Factors.” 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.

“RINs” means renewable identification numbers and refers to serial numbers assigned to credits generated from biodiesel production under the Environmental Protection Agency’s Renewable Fuel Standard 2 (“RFS2”) regulations that mandate increased volumes of renewable fuels blended into the nation’s fuel supply. In lieu of blending, refiners may purchase these transferable credits in order to comply with the regulations.

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.

“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.




Table of Content

Item 1.
Financial Statements
HOLLYFRONTIER CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
 
September 30,
2016
 
December 31, 2015
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents (HEP: $7,208 and $15,013, respectively)
 
$
366,321

 
$
66,533

Marketable securities
 
111,842

 
144,019

Total cash, cash equivalents and short-term marketable securities
 
478,163

 
210,552

Accounts receivable: Product and transportation (HEP: $36,582 and $41,075, respectively)
 
387,693

 
323,858

Crude oil resales
 
8,244

 
28,120

 
 
395,937

 
351,978

Inventories: Crude oil and refined products
 
937,593

 
712,865

Materials, supplies and other (HEP: $2,064 and $1,972, respectively)
 
153,201

 
129,004

 
 
1,090,794

 
841,869

Income taxes receivable
 
42,683

 

Prepayments and other (HEP: $2,175 and $3,082, respectively)
 
23,889

 
43,666

Total current assets
 
2,031,466

 
1,448,065

 
 
 
 
 
Properties, plants and equipment, at cost (HEP: $1,408,762 and $1,397,965, respectively)
 
5,461,362

 
5,490,189

Less accumulated depreciation (HEP: $(316,598) and $(298,282), respectively)
 
(1,477,021
)
 
(1,374,527
)
 
 
3,984,341

 
4,115,662

Other assets: Turnaround costs
 
221,613

 
231,873

Goodwill (HEP: $288,991 and $288,991, respectively)
 
2,022,463

 
2,331,781

Intangibles and other (HEP: $211,160 and $128,583, respectively)
 
336,565

 
260,918

 
 
2,580,641

 
2,824,572

Total assets
 
$
8,596,448

 
$
8,388,299

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable (HEP: $18,252 and $22,583, respectively)
 
$
803,031

 
$
716,490

Income taxes payable
 

 
8,142

Accrued liabilities (HEP: $28,874 and $26,341, respectively)
 
163,787

 
135,983

Total current liabilities
 
966,818

 
860,615

 
 
 
 
 
Long-term debt (HEP: $1,070,615 and $1,008,752, respectively)
 
1,665,602

 
1,040,040

Deferred income taxes (HEP: $484 and $431, respectively)
 
546,909

 
497,906

Other long-term liabilities (HEP: $61,697 and $59,376, respectively)
 
196,718

 
179,965

 
 
 
 
 
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 September 30, 2016 and December 31, 2015
 
2,560

 
2,560

Additional capital
 
4,026,558

 
4,011,052

Retained earnings
 
2,782,373

 
3,271,189

Accumulated other comprehensive income (loss)
 
7,627

 
(4,155
)
Common stock held in treasury, at cost – 79,440,518 and 75,728,478 shares as of September 30, 2016 and December 31, 2015, respectively
 
(2,156,904
)
 
(2,027,231
)
Total HollyFrontier stockholders’ equity
 
4,662,214

 
5,253,415

Noncontrolling interest
 
558,187

 
556,358

Total equity
 
5,220,401

 
5,809,773

Total liabilities and equity
 
$
8,596,448

 
$
8,388,299


Parenthetical amounts represent asset and liability balances attributable to Holly Energy Partners, L.P. (“HEP”) as of September 30, 2016 and December 31, 2015 . 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
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Sales and other revenues
 
$
2,847,270

 
$
3,585,823

 
$
7,580,632

 
$
10,294,361

Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization):
 
 
 
 
 
 
 
 
Cost of products sold (exclusive of lower of cost or market inventory valuation adjustment)
 
2,341,837

 
2,653,859

 
6,215,155

 
7,792,707

Lower of cost or market inventory valuation adjustment
 
312

 
225,451

 
(194,282
)
 
83,425

 
 
2,342,149

 
2,879,310

 
6,020,873

 
7,876,132

Operating expenses (exclusive of depreciation and amortization)
 
256,232

 
265,398

 
760,151

 
775,159

General and administrative expenses (exclusive of depreciation and amortization)
 
32,994

 
30,746

 
88,270

 
86,432

Depreciation and amortization
 
91,130

 
87,764

 
269,433

 
255,579

Goodwill and asset impairment
 

 

 
654,084

 

Total operating costs and expenses
 
2,722,505

 
3,263,218

 
7,792,811

 
8,993,302

Income (loss) from operations
 
124,765

 
322,605

 
(212,179
)
 
1,301,059

Other income (expense):
 
 
 
 
 
 
 
 
Earnings (loss) of equity method investments
 
3,767

 
1,269

 
10,155

 
(5,907
)
Interest income
 
778

 
673

 
1,380

 
2,403

Interest expense
 
(19,550
)
 
(11,102
)
 
(45,888
)
 
(31,813
)
Loss on early extinguishment of debt
 

 

 
(8,718
)
 
(1,370
)
Gain on sale of assets and other
 
107

 
7,228

 
300

 
8,867

 
 
(14,898
)
 
(1,932
)
 
(42,771
)
 
(27,820
)
Income (loss) before income taxes
 
109,867

 
320,673

 
(254,950
)
 
1,273,239

Income tax expense (benefit):
 
 
 
 
 
 
 
 
Current
 
10,094

 
215,381

 
(32,272
)
 
509,956

Deferred
 
12,102

 
(105,315
)
 
38,731

 
(63,172
)
 
 
22,196

 
110,066

 
6,459

 
446,784

Net income (loss)
 
87,671

 
210,607

 
(261,409
)
 
826,455

Less net income attributable to noncontrolling interest
 
13,174

 
14,285

 
52,209

 
42,433

Net income (loss) attributable to HollyFrontier stockholders
 
$
74,497

 
$
196,322

 
$
(313,618
)
 
$
784,022

Earnings (loss) per share attributable to HollyFrontier stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.42

 
$
1.05

 
$
(1.78
)
 
$
4.09

Diluted
 
$
0.42

 
$
1.04

 
$
(1.78
)
 
$
4.09

Cash dividends declared per common share
 
$
0.33

 
$
0.33

 
$
0.99

 
$
0.98

Average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
175,871

 
187,208

 
176,157

 
191,182

Diluted
 
175,993

 
187,344

 
176,157

 
191,282


See accompanying notes.

6

Table of Content

HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
87,671

 
$
210,607

 
$
(261,409
)
 
$
826,455

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities
 
(29
)
 
166

 
61

 
217

Reclassification adjustments to net income on sale or maturity of marketable securities
 

 

 
23

 
(46
)
Net unrealized gain (loss) on marketable securities
 
(29
)
 
166

 
84

 
171

Hedging instruments:
 
 
 
 
 
 
 
 
Change in fair value of cash flow hedging instruments
 
(1,310
)
 
(357
)
 
(19,307
)
 
(7,590
)
Reclassification adjustments to net income on settlement of cash flow hedging instruments
 
4,141

 
(9,248
)
 
37,450

 
(27,683
)
Amortization of unrealized loss attributable to discontinued cash flow hedges
 
270

 
270

 
810

 
810

Net unrealized gain (loss) on hedging instruments
 
3,101

 
(9,335
)
 
18,953

 
(34,463
)
Other comprehensive income (loss) before income taxes
 
3,072

 
(9,169
)
 
19,037

 
(34,292
)
Income tax expense (benefit)
 
1,119

 
(3,488
)
 
7,436

 
(13,088
)
Other comprehensive income (loss)
 
1,953

 
(5,681
)
 
11,601

 
(21,204
)
Total comprehensive income (loss)
 
89,624

 
204,926

 
(249,808
)
 
805,251

Less noncontrolling interest in comprehensive income (loss)
 
13,353

 
14,127

 
52,028

 
41,956

Comprehensive income (loss) attributable to HollyFrontier stockholders
 
$
76,271

 
$
190,799

 
$
(301,836
)
 
$
763,295


See accompanying notes.


7

Table of Content

HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
(261,409
)
 
$
826,455

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
269,433

 
255,579

Goodwill and asset impairment
 
654,084

 

Lower of cost or market inventory valuation adjustment
 
(194,282
)
 
83,425

Net loss of equity method investments, inclusive of distributions
 
313

 
8,282

Gain on sale of assets
 
(107
)
 
(8,619
)
(Gain) loss on early extinguishment of debt
 
8,718

 
(3,788
)
Deferred income taxes
 
38,731

 
(63,172
)
Equity-based compensation expense
 
16,696

 
21,928

Change in fair value – derivative instruments
 
(12,319
)
 
17,861

Excess tax expense from equity based compensation
 
(4,051
)
 

(Increase) decrease in current assets:
 
 
 
 
Accounts receivable
 
(43,959
)
 
68,021

Inventories
 
(54,643
)
 
(85,318
)
Income taxes receivable
 
(42,683
)
 
11,719

Prepayments and other
 
18,236

 
(8,312
)
Increase (decrease) in current liabilities:
 
 
 
 
Accounts payable
 
114,771

 
(203,289
)
Income taxes payable
 
(8,142
)
 
19,894

Accrued liabilities
 
39,527

 
13,503

Turnaround expenditures
 
(104,224
)
 
(55,905
)
Other, net
 
9,534

 
5,077

Net cash provided by operating activities
 
444,224

 
903,341

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Additions to properties, plants and equipment
 
(339,253
)
 
(390,585
)
Additions to properties, plants and equipment – HEP
 
(48,224
)
 
(83,312
)
Purchase of equity method investment - HEP
 
(42,550
)
 
(54,641
)
Proceeds from sale of assets
 
606

 
15,831

Purchases of marketable securities
 
(155,091
)
 
(402,984
)
Sales and maturities of marketable securities
 
187,358

 
490,251

Net cash used for investing activities
 
(397,154
)
 
(425,440
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Borrowings under credit agreements
 
625,500

 
443,000

Repayments under credit agreements
 
(957,500
)
 
(360,000
)
Net proceeds from issuance of senior notes - HFC
 
246,690

 

Net proceeds from issuance of senior notes - HEP
 
394,000

 

Net proceeds from issuance of term loan
 
350,000

 

Redemption of senior notes
 

 
(155,156
)
Repayment of financing obligation
 
(39,500
)
 

Net proceeds from issuance of common units - HEP
 
22,791

 

Purchase of treasury stock
 
(133,430
)
 
(481,766
)
Dividends
 
(175,194
)
 
(187,372
)
Distributions to noncontrolling interest
 
(66,571
)
 
(61,366
)
Other, net
 
(14,068
)
 
(3,495
)
Net cash provided by (used for) financing activities
 
252,718

 
(806,155
)
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
Increase (decrease) for the period
 
299,788

 
(328,254
)
Beginning of period
 
66,533

 
567,985

End of period
 
$
366,321

 
$
239,731

 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
39,671

 
$
40,608

Income taxes
 
$
23,557

 
$
484,516

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 September 30, 2016 , 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 HollyFrontier Asphalt Company LLC (“HFC Asphalt”) which operates various asphalt terminals in Arizona, New Mexico and Oklahoma; and
owned a 39% interest in HEP, a consolidated variable interest entity (“VIE”), which includes our 2% general partner interest.

On October 29, 2016, our wholly-owned subsidiary, 9952110 Canada Inc. (“Purchaser”), entered into a share purchase agreement with Suncor Energy Inc. (“Suncor”) to acquire 100% of the outstanding capital stock of Petro-Canada Lubricants Inc. (“PCLI”), for cash consideration of CAD $1.125 billion (or approximately $845 million based on the exchange rate at time of signing), subject to customary adjustments at closing. The PCLI plant, located in Mississauga, Ontario, is the largest producer of base oils in Canada with 15,600 BPD of lubricant production capacity, and is the only North American producer of high margin Group III base oils. In connection with the closing of the acquisition, PCLI and the Purchaser will enter into various commercial and lease agreements with Suncor. The share purchase agreement provides for customary representations, warranties and covenants, and provides for the payment of fees by the Purchaser to Suncor upon the termination of the share purchase agreement under certain circumstances, including failure to obtain certain regulatory approvals. The acquisition is expected to close in the first quarter of 2017, subject to the receipt of certain regulatory approvals. We expect to fund the transaction with a combination of debt and cash on hand.

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 September 30, 2016 , the consolidated results of operations and comprehensive income for the three and nine months ended September 30, 2016 and 2015 and consolidated cash flows for the nine months ended September 30, 2016 and 2015 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, 2015 that has been filed with the SEC.

Our results of operations for the nine months ended September 30, 2016 are not necessarily indicative of the results of operations to be realized for the year ending December 31, 2016 .


9

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



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 $2.3 million at both September 30, 2016 and December 31, 2015 .

Inventories: Inventories are stated at the lower of cost, using the last-in, first-out (“LIFO”) method for crude oil, unfinished and finished refined products and the average cost method for materials and supplies, or market. In periods of rapidly declining prices, LIFO inventories may have to be written down to market value due to the higher costs assigned to LIFO layers in prior periods. In addition, the use of the LIFO inventory method may result in increases or decreases to cost of sales in years that inventory volumes decline as the result of charging cost of sales with LIFO inventory costs generated in prior periods. An actual valuation of inventory under the LIFO method is 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 and Long-lived Assets: As of December 31, 2015 , our goodwill balance was $2.3 billion , with $1.7 billion , $0.3 billion and $0.3 billion allocated to our El Dorado Refinery, Cheyenne Refinery and HEP reporting units, respectively. 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 an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our goodwill impairment testing first entails a comparison of our reporting unit fair values relative to their respective carrying values. If carrying value exceeds fair value for a reporting unit, we measure goodwill impairment as the excess of the carrying amount of reporting unit goodwill over the implied fair value of that goodwill based on estimates of the fair value of all assets and liabilities in the reporting unit. Prior to the second quarter of 2016, there had been no impairments to goodwill.

Our long-lived assets principally consist of our refining assets that are organized as refining asset groups. These refinery asset groups also constitute our individual refinery reporting units that are used for testing and measuring goodwill impairments (El Dorado and Cheyenne). Our long-lived assets are evaluated for impairment by identifying whether indicators of impairment exist and if so, assessing whether the long-lived assets are recoverable from estimated future undiscounted cash flows. The actual amount of impairment loss measured, if any, is equal to the amount by which the asset group’s carrying value exceeds its fair value.

Goodwill and long-lived asset impairments
As of April 30, 2016 , we performed interim goodwill impairment and related long-lived asset impairment testing of our El Dorado and Cheyenne Refinery reporting units after identifying a combination of events and circumstances which were indicators of potential goodwill and long-lived asset impairment, including lower than typical gross margins during the summer driving season, a current outlook of lower future gross margins, and the recent decline in our common share price which has resulted in a decrease in our market capitalization. In conjunction with our interim goodwill impairment testing performed, we first assessed the carrying values of our refining long-lived asset groups for recoverability.
The estimated fair values of our goodwill reporting units and long-lived asset groups were derived using a combination of both income and market approaches. The income approach reflects expected future cash flows based on estimates of future crack spreads, forecasted production levels, operating costs and capital expenditures. Our market approaches include both the guideline public company and guideline transaction methods. Both methods utilize pricing multiples derived from historical market transactions of other like-kind assets. These fair value measurements involve significant unobservable inputs (Level 3 inputs). See Note 3 for further discussion of Level 3 inputs.
As a result of our impairment testing during the second quarter of 2016, we determined that the carrying value of the long-lived assets of the Cheyenne Refinery had been impaired and recorded long-lived asset impairment charges of $344.8 million . Additionally, the carrying value of the Cheyenne Refinery’s goodwill was fully impaired and a goodwill impairment charge of $309.3 million was also recorded, representing all of the goodwill allocated to our Cheyenne Refinery. Our interim testing did not identify any other impairment.


10

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



We performed our annual goodwill impairment testing as of July 1, 2016 and determined the fair value of our El Dorado reporting unit currently exceeds its carrying value by approximately 4% . A reasonable expectation exists that further deterioration in gross margins could result in an impairment of goodwill and the long-lived assets of the El Dorado reporting unit at some point in the future. Such impairment charges could be material. Additionally, testing indicated no impairment of goodwill attributable to our HEP reporting unit.

Income Taxes : Provisions for income taxes include deferred taxes resulting from temporary differences in income for financial and tax purposes, using the liability method of accounting for income taxes. The liability method requires the effect of tax rate changes on deferred income taxes to be reflected in the period in which the rate change was enacted. The liability method also requires that deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized.

For the nine months ended September 30, 2016 , we recorded an income tax expense of $6.5 million compared to $446.8 million for the nine months ended September 30, 2015 . This decrease was due principally to a pre-tax loss during the nine months ended September 30, 2016 compared to pre-tax earnings in the same period of 2015 . Our effective tax rates, before consideration of earnings attributable to the noncontrolling interest, were 2.5% and 35.1% for the nine months ended September 30, 2016 and 2015 , respectively. The year-over-year decrease in the effective tax rate is due principally to the effects of the second quarter $309.3 million goodwill impairment charge, a significant cause of our $255.0 million loss before income taxes for the nine months ended September 30, 2016 , that is not deductible for income tax purposes.

Inventory Repurchase Obligations: We periodically enter into same-party sell / buy transactions, whereby we sell certain refined product inventory and subsequently repurchase the inventory in order to facilitate delivery to certain locations. Such sell / buy transactions are accounted for as inventory repurchase obligations under which proceeds received under the initial sell is recognized as an inventory repurchase obligation that is subsequently reversed when the inventory is repurchased. For the nine months ended September 30, 2016 and 2015 , we received proceeds of $43.9 million and $66.0 million , respectively, and repaid $44.9 million and $67.2 million , respectively, under these sell / buy transactions.

New Accounting Pronouncements

Share-Based Compensation
In March 2016, Accounting Standard Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment Accounting,” was issued which simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. This standard is effective January 1, 2017, at which time we will adopt. We do not expect this standard to have a material impact to our financial condition, results of operations and cash flows.

Leases
In February 2016, ASU 2016-02, “Leases,” was issued requiring leases to be measured and recognized as a lease liability, with a corresponding right-of-use asset on the balance sheet. This standard has an effective date of January 1, 2019, and we are evaluating the impact of this standard.

Consolidation
In February 2015, ASU 2015-02, “Consolidation,” was issued to improve consolidation guidance for certain legal entities. It modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, affects the consolidation analysis of reporting entities involved with VIEs, particularly those that have fee arrangements and related party provisions and provides a scope exception from consolidation guidance for certain reporting entities that comply with or operate in accordance with requirements that are similar to those included in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. We adopted this standard effective January 1, 2016, which did not affect our financial position or results of operations.

Revenue Recognition
In May 2014, ASU 2014-09, “Revenue from Contracts with Customers,” was issued requiring revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the expected consideration for these goods or services. This standard has an effective date of January 1, 2018, and we are evaluating the impact of this standard.



11

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



NOTE 2:
Holly Energy Partners

HEP, a consolidated VIE, is a publicly held master limited partnership that owns and operates logistic assets consisting of petroleum product and crude oil pipelines, terminals, tankage, loading rack facilities and refinery processing units 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”), the owner of a pipeline running from Woods Cross, Utah to Las Vegas, Nevada (the “UNEV Pipeline”) and associated product terminals; a 50% interest in Frontier Aspen LLC, the owner of a pipeline running from Wyoming to Frontier Station, Utah (the “Frontier Pipeline”); a 50% interest in Osage Pipe Line Company, LLC, the owner of a pipeline running from Cushing, Oklahoma to El Dorado, Kansas (the “Osage Pipeline”); a 50% interest in Cheyenne Pipeline, LLC, the owner of a pipeline running from Fort Laramie, Wyoming to Cheyenne, Wyoming (the “Cheyenne Pipeline”); and a 25% interest in SLC Pipeline LLC, the owner of a pipeline (the “SLC Pipeline”) that serves refineries in the Salt Lake City, Utah area.

As of September 30, 2016 , 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, and therefore we consolidate HEP.

HEP has two primary customers (including us) and generates revenues by charging tariffs for transporting petroleum products and crude oil through 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 nine months ended September 30, 2016 . 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. HEP’s creditors have no recourse to our assets. 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.

Woods Cross Assets
On October 3, 2016, HEP acquired from us all the membership interests of Woods Cross Operating LLC, which owns the crude unit, FCCU and polymerization unit of the first phase of our Woods Cross Refinery expansion project that was completed in the second quarter of 2016, for cash consideration of approximately $278.0 million .

In connection with this transaction, we entered into 15-year tolling agreements containing minimum quarterly throughput commitments that provide minimum annualized payments to HEP of $56.7 million .

Cheyenne Pipeline
On June 3, 2016, HEP acquired a 50% interest in Cheyenne Pipeline LLC, owner of the Cheyenne Pipeline, in exchange for a contribution of $42.5 million in cash to Cheyenne Pipeline LLC. Cheyenne Pipeline will continue to be operated by an affiliate of Plains All American Pipeline, L.P. (“Plains”), which owns the remaining 50% interest. The 87 -mile crude oil pipeline runs from Fort Laramie, Wyoming to Cheyenne, Wyoming and has an 80,000 BPD capacity.

Tulsa Tanks
On March 31, 2016, HEP acquired crude oil tanks located at our Tulsa Refineries from Plains for $39.5 million . Previously in 2009, we sold these tanks to Plains and leased them back, and due to our continuing interest in the tanks, we accounted for the transaction as a financing arrangement. Accordingly, the tanks remained on our balance sheet and were depreciated for accounting purposes, and the proceeds received from Plains were recorded as a financing obligation and presented as a component of outstanding debt.

In accounting for HEP’s March 2016 purchase from Plains, the amount paid was recorded against our outstanding financing obligation balance of $30.8 million , with the excess $8.7 million payment resulting in a loss on early extinguishment of debt.


12

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



Magellan Asset Exchange
On February 22, 2016, we acquired a 50% membership interest in Osage Pipe Line Company, LLC (“Osage”) in exchange for a 20-year terminalling services agreement, whereby a subsidiary of Magellan Midstream Partners (“Magellan Midstream”) will provide terminalling services for all of our products originating in Artesia, New Mexico that require terminalling in or through El Paso, Texas. Under the agreement, we will be charged tariffs based on the volumes of refined product processed. Osage is the owner of the Osage Pipeline, a 135 -mile pipeline that transports crude oil from Cushing, Oklahoma to our El Dorado Refinery in Kansas and also has a connection to the Jayhawk pipeline that services the CHS refinery in McPherson, Kansas. This exchange was accounted for at fair value, whereby the 50% membership interest in the Osage Pipeline was recorded at appraised fair value and an offsetting residual deferred credit in the amount of $38.9 million was recorded, which will be amortized over the 20-year service period. No gain or loss was recorded for this exchange.

Also on February 22, 2016, we contributed the 50% membership interest in Osage to HEP, and in exchange received HEP’s El Paso terminal. Pursuant to this exchange, HEP agreed to build two connections to Magellan Midstream’s El Paso terminal. In addition, HEP agreed to become operator of the Osage Pipeline. This exchange was accounted for at carry-over basis with no resulting gain or loss.

Frontier Pipeline Transaction
On August 31, 2015, HEP purchased a 50% interest in Frontier Aspen LLC (previously known as Frontier Pipeline Company), owner of the Frontier Pipeline, from an affiliate of Enbridge, Inc. for $54.6 million . Frontier Pipeline will continue to be operated by an affiliate of Plains, which owns the remaining 50% interest. The 289 -mile crude oil pipeline runs from Casper, Wyoming to Frontier Station, Utah, has a 72,000 BPD capacity, and supplies Canadian and Rocky Mountain crudes to Salt Lake City area refiners through a connection to the SLC Pipeline.

HEP’s acquisitions from us are eliminated upon consolidation and have no impact on the consolidated financial statements.

HEP Private Placement Agreement
On September 16, 2016, HEP entered into a common unit purchase agreement in which certain purchasers agreed to purchase in a private placement 3,420,000 HEP common units, representing limited partnership interests, at a price of $30.18 per common unit. The private placement closed on October 3, 2016, at which time HEP received proceeds of approximately $103 million , which were used to finance a portion of the Woods Cross assets acquisition. In connection with this private placement and to maintain our 2% general partner interest in HEP, we made capital contributions totaling $2.1 million to HEP in October 2016. After this common unit issuance, our interest in HEP is 37% , including the 2% general partner interest. Additionally, HEP entered into a registration rights agreement with the purchasers, which requires that HEP file a registration statement with the SEC within 60 days following the closing of the private placement to register the purchased units under the Securities Act. The registration statement will be automatically effective and the units fully transferable upon filing.

HEP Common Unit Continuous Offering Program
On May 10, 2016, HEP established a continuous offering program under which HEP may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million . As of September 30, 2016 , HEP has issued 703,455 units under this program, providing $23.0 million in net proceeds. In connection with this program and to maintain our 2% general partner interest in HEP, we made capital contributions totaling $0.5 million as of September 30, 2016 .

HEP intends to use the net proceeds for general partnership purposes, which may include funding working capital, repayment of debt, acquisitions and capital expenditures. Amounts repaid under HEP’s credit facility may be reborrowed from time to time.

As a result of this transaction 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.


13

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



Transportation Agreements
HEP serves our refineries under long-term pipeline, terminal and tankage throughput agreements and refinery processing tolling agreements expiring from 2019 through 2036. Under these agreements, we pay HEP fees to transport, store and process throughput volumes of refined products, crude oil and feedstocks on HEP’s pipeline, terminals, tankage, loading rack facilities and refinery processing units 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 or Federal Energy Regulatory Commission index. As of July 1, 2016, these agreements result in minimum annualized payments to HEP of $321.1 million .


NOTE 3:
Fair Value Measurements

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 and HFC’s term loan also approximate fair value as interest rates are reset frequently at current interest rates on both debt instruments.

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 marketable securities, derivative instruments and senior notes at September 30, 2016 and December 31, 2015 were as follows:
 
 
 
 
 
 
Fair Value by Input Level
 
 
Carrying Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
September 30, 2016
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Marketable securities
 
$
111,842

 
$
111,842

 
$

 
$
111,842

 
$

Commodity price swaps
 
19,070

 
19,070

 

 
19,070

 

Forward contracts
 
2,008

 
2,008

 

 
2,008

 

Total assets
 
$
132,920

 
$
132,920

 
$

 
$
132,920

 
$

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
NYMEX futures contracts
 
$
3,680

 
$
3,680

 
$
3,680

 
$

 
$

Commodity price swaps
 
44,121

 
44,121

 

 
44,121

 

Forward contracts
 
1,076

 
1,076

 

 
1,076

 

HollyFrontier senior notes
 
246,069

 
271,875

 

 
271,875

 

HEP senior notes
 
690,615

 
720,250

 

 
720,250

 

HEP interest rate swaps
 
109

 
109

 

 
109

 

Total liabilities
 
$
985,670

 
$
1,041,111

 
$
3,680

 
$
1,037,431

 
$


14

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, 2015
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Marketable securities
 
$
144,019

 
$
144,019

 
$

 
$
144,019

 
$

NYMEX futures contracts
 
3,469

 
3,469

 
3,469

 

 

Commodity price swaps
 
37,097

 
37,097

 

 
37,097

 

HEP interest rate swaps
 
304

 
304

 

 
304

 

Total assets
 
$
184,889

 
$
184,889

 
$
3,469

 
$
181,420

 
$

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity price swaps
 
$
98,930

 
$
98,930

 
$

 
$
98,930

 
$

HEP senior notes
 
296,752

 
295,500

 

 
295,500

 

HEP interest rate swaps
 
114

 
114

 

 
114

 

Total liabilities
 
$
395,796

 
$
394,544

 
$

 
$
394,544

 
$


Level 1 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 Instruments
Investments in marketable securities, derivative instruments consisting of commodity price swaps and forward sales and purchase contracts 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 Instruments
We at times have forward commodity sales and purchase contracts for which quoted forward market prices are not readily available. The forward rate used to value these forward sales and purchase contracts are 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 and nine months ended September 30, 2015 :
 
 
Three Months Ended
September 30, 2015
 
Nine Months Ended
September 30, 2015
Level 3 Instruments
 
 
 
 
(In thousands)
Liability balance at beginning of period
 
$

 
$

Change in fair value:
 
 
 
 
Recognized in other comprehensive income
 

 
3,852

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

 
(3,852
)
Liability balance at end of period
 
$

 
$


During the nine months ended September 30, 2016 , we recognized goodwill and long-lived asset impairment charges based on fair value measurements (see Note 1). Also, we recognized a non-recurring fair value measurement of $44.4 million that relates to HEP’s equity interest in Osage in February 2016. The fair value measurements were based on a combination of valuation methods including discounted cash flows, and the guideline public company and guideline transaction methods, Level 3 inputs.



15

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



NOTE 4:
Earnings Per Share

Basic earnings per share is calculated as net income (loss) 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 denominators of the basic and diluted per share computations for net income (loss) attributable to HollyFrontier stockholders:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands, except per share data)
Net income (loss) attributable to HollyFrontier stockholders
 
$
74,497

 
$
196,322

 
$
(313,618
)
 
$
784,022

Participating securities’ share in earnings
 
275

 
567

 
647

 
2,245

Net income (loss) attributable to common shares
 
$
74,222

 
$
195,755

 
$
(314,265
)
 
$
781,777

Average number of shares of common stock outstanding
 
175,871

 
187,208

 
176,157

 
191,182

Effect of dilutive variable restricted shares and   performance share units (1)
 
122

 
136

 

 
100

Average number of shares of common stock outstanding assuming dilution
 
175,993

 
187,344

 
176,157

 
191,282

Basic earnings (loss) per share
 
$
0.42

 
$
1.05

 
$
(1.78
)
 
$
4.09

Diluted earnings (loss) per share
 
$
0.42

 
$
1.04

 
$
(1.78
)
 
$
4.09

(1)  Excludes anti-dilutive restricted and performance share units of:
 
204

 
263

 

 
335



NOTE 5:
Stock-Based Compensation

As of September 30, 2016 , 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 $6.2 million and $6.4 million for the three months ended September 30, 2016 and 2015 , respectively, and $14.8 million and $18.9 million for the nine months ended September 30, 2016 and 2015 , 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 $0.7 million and $1.3 million for the three months ended September 30, 2016 and 2015 , respectively, and $1.9 million and $3.0 million for the nine months ended September 30, 2016 and 2015 , 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.

A summary of restricted stock and restricted stock unit activity and changes during the nine months ended September 30, 2016 is presented below:
Restricted Stock and Restricted Stock Units
 
Grants
 
Weighted Average Grant Date Fair Value
 
Aggregate Intrinsic Value ($000)
 
 
 
 
 
 
 
Outstanding at January 1, 2016 (non-vested)
 
722,525

 
$
47.50

 
 
Granted
 
14,556

 
31.28

 
 
Vesting (transfer/conversion to common stock)
 
(8,004
)
 
47.48

 
 
Forfeited
 
(15,483
)
 
47.92

 
 
Outstanding at September 30, 2016 (non-vested)
 
713,594

 
$
47.16

 
$
17,483


For the nine months ended September 30, 2016 , restricted stock and restricted stock units vested having a grant date fair value of $0.4 million . As of September 30, 2016 , there was $11.2 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 1.1 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 “financial performance” and “market performance” criteria. Financial performance is based on our financial performance compared to a peer group of independent refining companies, while market performance is based on the relative standing of total shareholder return achieved by HollyFrontier compared to peer group companies. The number of shares ultimately issued under these awards can range from zero to 200% of target award amounts. As of September 30, 2016 , estimated share payouts for outstanding non-vested performance share unit awards averaged approximately 80% of target amounts.


16

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



A summary of performance share unit activity and changes during the nine months ended September 30, 2016 is presented below:
Performance Share Units
 
Grants
 
 
 
Outstanding at January 1, 2016 (non-vested)
 
637,938

Granted
 
6,384

Forfeited
 
(147,311
)
Outstanding at September 30, 2016 (non-vested)
 
497,011


As of September 30, 2016 , there was $8.5 million of total unrecognized compensation cost related to non-vested performance share units having a grant date fair value of $46.04 per unit. That cost is expected to be recognized over a weighted-average period of 1.2 years.


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

Our investment portfolio at September 30, 2016 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 and are reported at fair value. 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.

The following is a summary of our marketable securities as of September 30, 2016 and December 31, 2015 :
 
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
(Net Carrying Amount)
 
 
(In thousands)
September 30, 2016
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
2,300

 
$

 
$

 
$
2,300

Commercial paper
 
13,330

 
3

 

 
13,333

Corporate debt securities
 
11,658

 

 
(3
)
 
11,655

State and political subdivisions debt securities
 
84,567

 
2

 
(15
)
 
84,554

Total marketable securities
 
$
111,855

 
$
5

 
$
(18
)
 
$
111,842

 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
Commercial paper
 
$
22,876

 
$
1

 
$
(2
)
 
$
22,875

Corporate debt securities
 
32,311

 

 
(41
)
 
32,270

State and political subdivisions debt securities
 
88,935

 
6

 
(67
)
 
88,874

Total marketable securities
 
$
144,122

 
$
7

 
$
(110
)
 
$
144,019


Interest income recognized on our marketable securities was $0.2 million and $0.5 million for the three months ended September 30, 2016 and 2015 , respectively, and $0.4 million and $1.4 million for the nine months ended September 30, 2016 and 2015 , respectively.



17

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



NOTE 7:
Inventories

Inventory consists of the following components:
 
 
September 30,
2016
 
December 31, 2015
 
 
(In thousands)
Crude oil
 
$
554,630

 
$
518,922

Other raw materials and unfinished products (1)
 
279,106

 
214,832

Finished products (2)
 
534,031

 
603,568

Lower of cost or market reserve
 
(430,174
)
 
(624,457
)
Process chemicals (3)
 
3,416

 
4,477

Repair and maintenance supplies and other
 
149,785

 
124,527

Total inventory
 
$
1,090,794

 
$
841,869


(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.

Inventories, which are valued at the lower of LIFO cost or market, reflect a valuation reserve of $430.2 million and $624.5 million at September 30, 2016 and December 31, 2015 , respectively. The December 31, 2015 market reserve of $624.5 million was reversed due to the sale of inventory quantities that gave rise to the 2015 reserve. A new market reserve of $430.2 million was established as of September 30, 2016 based on market conditions and prices at that time. The effect of the change in lower of cost or market reserve was an increase to cost of goods sold totaling $0.3 million and $225.5 million for the three months ended September 30, 2016 and 2015 , respectively, and a decrease of $194.3 million and an increase of $83.4 million for the nine months ended September 30, 2016 and 2015 , respectively.


NOTE 8:
Environmental

Environmental costs are charged to operating expenses if they relate to an existing condition caused by past operations and do not contribute to current or future revenue generation. We have ongoing investigations of environmental matters at various locations as part of our assessment process to determine the amount of environmental obligation we may have, if any, with respect to these matters for which we have recorded the estimated cost of the studies. Liabilities are recorded when site restoration and environmental remediation, cleanup and other obligations are either known or considered probable and can be reasonably estimated. Such estimates are undiscounted and require judgment with respect to costs, time frame and extent of required remedial and cleanup activities and are subject to periodic adjustments based on currently available information. Recoveries of environmental costs through insurance, indemnification arrangements or other sources are included in other assets to the extent such recoveries are considered probable.

We expensed $0.6 million and $3.0 million for the three months ended September 30, 2016 and 2015 , respectively, and $2.0 million and $7.6 million for the nine months ended September 30, 2016 and 2015 , respectively, for environmental remediation obligations. The accrued environmental liability reflected in our consolidated balance sheets was $94.5 million and $98.1 million at September 30, 2016 and December 31, 2015 , respectively, of which $80.2 million and $83.5 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). The amount of our accrued liability could increase in the future when the results of ongoing investigations become known, are considered probable and can be reasonably estimated.



18

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



NOTE 9:
Debt

HollyFrontier Credit Agreement
We have a $1 billion senior unsecured revolving credit facility maturing in July 2019 (the “HollyFrontier Credit Agreement”), which may be used for revolving credit loans and letters of credit from time to time and is available to fund general corporate purposes. Indebtedness under the HollyFrontier Credit Agreement is recourse to HollyFrontier. During the nine months ended September 30, 2016 , we received advances totaling $315.0 million and repaid $315.0 million under the HollyFrontier Credit Agreement. At September 30, 2016 , we were in compliance with all covenants, had no outstanding borrowings and had outstanding letters of credit totaling $4.4 million under the HollyFrontier Credit Agreement.

HEP Credit Agreement
In March 2016, HEP amended its senior secured revolving credit facility maturing in November 2018 (the “HEP Credit Agreement”), increasing the size of the facility from $850 million to $1.2 billion . The HEP Credit Agreement 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. During the nine months ended September 30, 2016 , HEP received advances totaling $310.5 million and repaid $642.5 million under the HEP Credit Agreement. At September 30, 2016 , HEP was in compliance with all of its covenants, had outstanding borrowings of $380.0 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. 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
In March 2016, we issued $250 million in aggregate principal amount of 5.875% senior notes (the “HollyFrontier Senior Notes”) maturing April 2026 . The HollyFrontier Senior Notes are unsecured and unsubordinated obligations of ours and rank equally with all our other existing and future unsecured and unsubordinated indebtedness.

In June 2015, we redeemed our $150.0 million aggregate principal amount of 6.875% senior notes maturing November 2018 at a redemption cost of $155.2 million at which time we recognized a $1.4 million early extinguishment loss consisting of a $5.2 million debt redemption premium, net of an unamortized premium of $3.8 million .

HollyFrontier Financing Obligation
In March 2016, we extinguished a financing obligation at a cost of $39.5 million and recognized an $8.7 million loss on the early termination. The financing obligation related to a sale and lease-back of certain crude oil tankage that we sold to an affiliate of Plains in October 2009 for $40.0 million .

HollyFrontier Term Loan
In April 2016, we entered into a $350 million senior unsecured term loan (the “HollyFrontier Term Loan”) maturing in April 2019. The HollyFrontier Term Loan is fully drawn and may be used for general corporate purposes. Indebtedness under the HollyFrontier Term Loan is recourse to HollyFrontier.

HEP Senior Notes
HEP has $300 million aggregate principal amount of 6.5% senior notes maturing March 2020 .

In July 2016, HEP issued $400 million in aggregate principal amount of 6.0% HEP senior notes maturing in 2024 in a private placement. HEP used the net proceeds to repay indebtedness under the HEP Credit Agreement.

The 6.5% and 6.0% HEP senior notes (collectively, 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.


19

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



Indebtedness under the HEP Senior Notes is guaranteed by HEP’s wholly-owned subsidiaries. HEP’s creditors have no recourse to our 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:
 
 
September 30,
2016
 
December 31,
2015
 
 
(In thousands)
 
 
 
 
 
HollyFrontier 5.875% Senior Notes
 
 
 
 
Principal
 
$
250,000

 
$

Unamortized discount and debt issuance costs
 
(3,931
)
 

 
 
246,069

 

 
 
 
 
 
Term loan
 
 
 
 
Principal
 
350,000

 

Debt issuance costs
 
(1,082
)
 

 
 
348,918

 

 
 
 
 
 
Financing Obligation
 

 
31,288

 
 
 
 
 
Total HollyFrontier long-term debt
 
594,987

 
31,288

 
 
 
 
 
HEP Credit Agreement
 
380,000

 
712,000

 
 
 
 
 
HEP 6% Senior Notes
 
 
 
 
Principal
 
400,000

 

Unamortized discount and debt issuance costs
 
(6,712
)
 

 
 
393,288

 

HEP 6.5% Senior Notes
 
 
 
 
Principal
 
300,000

 
300,000

Unamortized discount and debt issuance costs
 
(2,673
)
 
(3,248
)
 
 
297,327

 
296,752

 
 
 
 
 
Total HEP long-term debt
 
1,070,615

 
1,008,752

 
 
 
 
 
Total long-term debt
 
$
1,665,602

 
$
1,040,040


We capitalized interest attributable to construction projects of $1.8 million and $0.1 million for the three months ended September 30, 2016 and 2015 , respectively, and $6.0 million and $5.5 million for the nine months ended September 30, 2016 and 2015 , 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, forward purchase and sales 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.


20

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. We also periodically have forward sales contracts that lock in the prices of future sales of crude oil and refined product and swap contracts serving as cash flow hedges against price risk on forecasted purchases of WTI crude oil and forecasted sales of refined product. These contracts have been designated as accounting hedges and are measured 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. 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 and forward sales 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 September 30, 2016
 
 
 
 
 
 
 
 
 
Change in fair value
$
(1,511
)
 
 
 
 
 
 
 
 
Loss reclassified to earnings due to settlements
4,046

 
Sales and other revenunes
 
$
228

 
 
 
 
Amortization of discontinued hedges reclassified to earnings
270

 
Operating expenses
 
(4,544
)
 
Operating expenses
 
$

Total
$
2,805

 
 
 
$
(4,316
)
 
 
 
$

 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
Change in fair value
$
430

 
Sales and other revenues
 
$
57,513

 
 
 
 
Gain reclassified to earnings due to settlements
(9,774
)
 
Cost of products sold
 
(44,023
)
 
 
 
 
Amortization of discontinued hedges reclassified to earnings
270

 
Operating expenses
 
(3,986
)
 
Cost of products sold
 
$
638

Total
$
(9,074
)
 
 
 
$
9,504

 
 
 
$
638

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
Change in fair value
$
(18,570
)
 
 
 
 
 
 
 
 
Loss reclassified to earnings due to settlements
37,012

 
Sales and other revenues
 
$
(20,425
)
 
 
 
 
Amortization of discontinued hedge reclassified to earnings
810

 
Operating expenses
 
(17,397
)
 
Operating expenses
 
$

Total
$
19,252

 
 
 
$
(37,822
)
 
 
 
$

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
Change in fair value
$
(5,217
)
 
Sales and other revenues
 
$
156,445

 
Sales and other revenues
 
$
(274
)
Gain reclassified to earnings due to settlements
(29,268
)
 
Cost of products sold
 
(115,756
)
 
Cost of products sold
 
4,376

Amortization of discontinued hedge reclassified to earnings
810

 
Operating expenses
 
(12,231
)
 
Operating expenses
 
547

Total
$
(33,675
)
 
 
 
$
28,458

 
 
 
$
4,649


21

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued




As of September 30, 2016 , we have the following notional contract volumes related to outstanding derivative instruments serving as cash flow hedges against price risk on forecasted transactions:
 
 
 
 
Notional Contract Volumes by Year of Maturity
 
 
Derivative Instruments
 
Total Outstanding Notional
 
2016
 
2017
 
Unit of Measure
 
 
 
 
 
 
 
 
 
Natural gas price swaps - long
 
12,000,000

 
2,400,000

 
9,600,000

 
MMBTU
Physical crude contracts - short
 
150,000

 
150,000

 

 
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 12,000,000 MMBTU’s to be purchased ratably through 2017. As of September 30, 2016 , we have an unrealized loss of $ 1.4 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.

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 purchases of WTI crude oil, and to lock in basis spread differentials on forecasted purchases of crude oil and natural gas. Also, we have NYMEX futures contracts to lock in prices on forecasted purchases of inventory. These contracts are measured 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
September 30,
 
Nine Months Ended
September 30,
Location of Gain (Loss) Recognized in Earnings
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
Cost of products sold
 
$
(2,438
)
 
$
13,872

 
$
(1,135
)
 
$
41,445

Operating expenses
 
(2,291
)
 
(6,528
)
 
2,322

 
(7,072
)
Total
 
$
(4,729
)
 
$
7,344

 
$
1,187

 
$
34,373


As of September 30, 2016 , 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
 
2016
 
2017
 
Unit of Measure
 
 
 
 
 
 
 
 
 
Crude price swaps (basis spread) - long
 
5,494,000

 
2,944,000

 
2,550,000

 
Barrels
Natural gas price swaps (basis spread) - long
 
12,885,000

 
2,577,000

 
10,308,000

 
MMBTU
Natural gas price swaps - long
 
12,000,000

 
2,400,000

 
9,600,000

 
MMBTU
Natural gas price swaps - short
 
12,000,000

 
2,400,000

 
9,600,000

 
MMBTU
NYMEX futures (WTI) - short
 
1,950,000

 
1,265,000

 
685,000

 
Barrels
Forward gasoline and diesel contracts - long
 
705,000

 
695,000

 
10,000

 
Barrels


22

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



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

As of September 30, 2016 , HEP had two interest rate swap contracts with identical terms that hedge its exposure to the cash flow risk caused by the effects of LIBOR changes on $150.0 million in credit agreement advances. The swaps 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 2.25% as of September 30, 2016 , which equaled an effective interest rate of 2.99% . Both of these swap contracts mature in July 2017 and have been designated as cash flow hedges. To date, there has been no ineffectiveness on these cash flow hedges.

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 September 30, 2016