Document


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 June 30, 2017
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
¨
Emerging growth company
¨

 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
177,279,134 shares of Common Stock, par value $.01 per share, were outstanding on July 31, 2017.

Table of Content

HOLLYFRONTIER CORPORATION
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017 (Unaudited) and December 31, 2016
 
 
 
Three and Six Months Ended June 30, 2017 and 2016
 
 
 
Three and Six Months Ended June 30, 2017 and 2016
 
 
 
Six Months Ended June 30, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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 recent or future acquired operations, including Petro-Canada Lubricants Inc.;
•
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, 2016 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 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.

“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)
 
 
June 30,
2017
 
December 31, 2016
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents (HEP: $16,339 and $3,657, respectively)
 
$
460,326

 
$
710,579

Marketable securities
 
—

 
424,148

Total cash, cash equivalents and short-term marketable securities
 
460,326

 
1,134,727

Accounts receivable: Product and transportation (HEP: $8,131 and $7,846, respectively)
 
563,905

 
449,036

Crude oil resales
 
38,445

 
30,163

 
 
602,350

 
479,199

Inventories: Crude oil and refined products
 
1,064,178

 
970,361

Materials, supplies and other (HEP: $1,470 and $1,402, respectively)
 
127,795

 
165,315

 
 
1,191,973

 
1,135,676

Income taxes receivable
 
1,428

 
68,371

Prepayments and other (HEP: $1,652 and $1,486, respectively)
 
37,686

 
33,036

Total current assets
 
2,293,763

 
2,851,009

 
 
 
 
 
Properties, plants and equipment, at cost (HEP: $1,719,143 and $1,702,703, respectively)
 
6,118,506

 
5,546,856

Less accumulated depreciation (HEP: $(371,867) and $(337,135), respectively)
 
(1,674,948
)
 
(1,538,408
)
 
 
4,443,558

 
4,008,448

Other assets: Turnaround costs
 
251,337

 
217,340

Goodwill (HEP: $288,991 and $288,991, respectively)
 
2,205,490

 
2,022,463

Intangibles and other (HEP: $204,485 and $208,975, respectively)
 
448,887

 
336,401

 
 
2,905,714

 
2,576,204

Total assets
 
$
9,643,035

 
$
9,435,661

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable (HEP: $8,912 and $10,518, respectively)
 
$
1,009,135

 
$
935,387

Income taxes payable
 
24,427

 
—

Accrued liabilities (HEP: $31,680 and $37,793, respectively)
 
186,886

 
147,842

Total current liabilities
 
1,220,448

 
1,083,229

 
 
 
 
 
Long-term debt (HEP: $1,236,739 and $1,243,912, respectively)
 
2,227,951

 
2,235,137

Deferred income taxes (HEP: $649 and $509, respectively)
 
745,050

 
620,414

Other long-term liabilities (HEP: $61,312 and $62,971, respectively)
 
207,502

 
194,896

 
 
 
 
 
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; 256,009,012 and 255,962,866 shares issued as of June 30, 2017 and December 31, 2016, respectively
 
2,560

 
2,560

Additional capital
 
4,058,594

 
4,026,805

Retained earnings
 
2,671,276

 
2,776,728

Accumulated other comprehensive income
 
18,785

 
10,612

Common stock held in treasury, at cost – 78,729,878 and 78,617,600 shares as of June 30, 2017 and December 31, 2016, respectively
 
(2,137,312
)
 
(2,135,311
)
Total HollyFrontier stockholders’ equity
 
4,613,903

 
4,681,394

Noncontrolling interest
 
628,181

 
620,591

Total equity
 
5,242,084

 
5,301,985

Total liabilities and equity
 
$
9,643,035

 
$
9,435,661


Parenthetical amounts represent asset and liability balances attributable to Holly Energy Partners, L.P. (“HEP”) as of June 30, 2017 and December 31, 2016. 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
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Sales and other revenues
 
$
3,458,864

 
$
2,714,638

 
$
6,539,347

 
$
4,733,362

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)
 
2,753,440

 
2,248,155

 
5,394,597

 
3,873,318

Lower of cost or market inventory valuation adjustment
 
83,982

 
(138,473
)
 
95,805

 
(194,594
)
 
 
2,837,422

 
2,109,682

 
5,490,402

 
3,678,724

Operating expenses (exclusive of depreciation and amortization)
 
315,652

 
251,336

 
622,769

 
503,919

General and administrative expenses (exclusive of depreciation and amortization)
 
59,576

 
29,655

 
116,646

 
55,276

Depreciation and amortization
 
105,282

 
90,423

 
201,322

 
178,303

Goodwill and asset impairment
 
19,247

 
654,084

 
19,247

 
654,084

Total operating costs and expenses
 
3,337,179

 
3,135,180

 
6,450,386

 
5,070,306

Income (loss) from operations
 
121,685

 
(420,542
)
 
88,961

 
(336,944
)
Other income (expense):
 
 
 
 
 
 
 
 
Earnings of equity method investments
 
4,053

 
3,623

 
5,893

 
6,388

Interest income
 
176

 
527

 
995

 
602

Interest expense
 
(29,645
)
 
(14,251
)
 
(56,803
)
 
(26,338
)
Loss on early extinguishment of debt
 
—

 
—

 
(12,225
)
 
(8,718
)
Gain on foreign currency swap
 
—

 
—

 
24,545

 
—

Gain on foreign currency transactions
 
10,328

 
—

 
395

 
—

Other, net
 
(528
)
 
128

 
(263
)
 
193

 
 
(15,616
)
 
(9,973
)
 
(37,463
)
 
(27,873
)
Income (loss) before income taxes
 
106,069

 
(430,515
)
 
51,498

 
(364,817
)
Income tax expense (benefit):
 
 
 
 
 
 
 
 
Current
 
32,251

 
(18,012
)
 
7,935

 
(42,366
)
Deferred
 
(255
)
 
(20,033
)
 
7,272

 
26,629

 
 
31,996

 
(38,045
)
 
15,207

 
(15,737
)
Net income (loss)
 
74,073

 
(392,470
)
 
36,291

 
(349,080
)
Less net income attributable to noncontrolling interest
 
16,306

 
16,898

 
23,992

 
39,035

Net income (loss) attributable to HollyFrontier stockholders
 
$
57,767

 
$
(409,368
)
 
$
12,299

 
$
(388,115
)
Earnings (loss) per share attributable to HollyFrontier stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.33

 
$
(2.33
)
 
$
0.07

 
$
(2.20
)
Diluted
 
$
0.33

 
$
(2.33
)
 
$
0.07

 
$
(2.20
)
Cash dividends declared per common share
 
$
0.33

 
$
0.33

 
$
0.66

 
$
0.66

Average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
176,147

 
175,865

 
176,141

 
176,301

Diluted
 
176,302

 
175,865

 
176,490

 
176,301


See accompanying notes.

6
Table of Content

HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
74,073

 
$
(392,470
)
 
$
36,291

 
$
(349,080
)
Other comprehensive income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
14,298

 
—

 
7,585

 
—

Securities available-for-sale:
 
 
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities
 
—

 
12

 
(4
)
 
90

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

 
—

 
—

 
23

Net unrealized gain (loss) on marketable securities
 
—

 
12

 
(4
)
 
113

Hedging instruments:
 
 
 
 
 
 
 
 
Change in fair value of cash flow hedging instruments
 
1,389

 
(5,393
)
 
4,802

 
(17,997
)
Reclassification adjustments to net income on settlement of cash flow hedging instruments
 
(427
)
 
22,023

 
(66
)
 
33,309

Amortization of unrealized loss attributable to discontinued cash flow hedges
 
270

 
270

 
540

 
540

Net unrealized gain on hedging instruments
 
1,232

 
16,900

 
5,276

 
15,852

Other comprehensive income before income taxes
 
15,530

 
16,912

 
12,857

 
15,965

Income tax expense
 
4,936

 
6,578

 
4,701

 
6,317

Other comprehensive income
 
10,594

 
10,334

 
8,156

 
9,648

Total comprehensive income (loss)
 
84,667

 
(382,136
)
 
44,447

 
(339,432
)
Less noncontrolling interest in comprehensive income (loss)
 
16,239

 
16,813

 
23,975

 
38,675

Comprehensive income (loss) attributable to HollyFrontier stockholders
 
$
68,428

 
$
(398,949
)
 
$
20,472

 
$
(378,107
)

See accompanying notes.


7
Table of Content

HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Six Months Ended June 30,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
36,291

 
$
(349,080
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
201,322

 
178,303

Goodwill and asset impairment
 
19,247

 
654,084

Lower of cost or market inventory valuation adjustment
 
95,805

 
(194,594
)
Earnings of equity method investments, inclusive of distributions
 
594

 
1,081

(Gain) loss on sale of assets
 
679

 
(61
)
Loss on early extinguishment of debt attributable to unamortized discount
 
2,475

 
8,718

Deferred income taxes
 
7,272

 
26,629

Equity-based compensation expense
 
16,557

 
9,774

Change in fair value – derivative instruments
 
(5,597
)
 
(18,164
)
Excess tax expense from equity based compensation
 
—

 
(4,198
)
(Increase) decrease in current assets:
 
 
 
 
Accounts receivable
 
(5,545
)
 
(128,271
)
Inventories
 
60,963

 
15,531

Income taxes receivable
 
66,943

 
(49,999
)
Prepayments and other
 
(9,272
)
 
9,086

Increase (decrease) in current liabilities:
 
 
 
 
Accounts payable
 
495

 
210,139

Income taxes payable
 
22,340

 
(8,142
)
Accrued liabilities
 
40,141

 
18,905

Turnaround expenditures
 
(86,036
)
 
(72,409
)
Other, net
 
8,724

 
2,994

Net cash provided by operating activities
 
473,398

 
310,326

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Additions to properties, plants and equipment
 
(116,526
)
 
(214,660
)
Additions to properties, plants and equipment – HEP
 
(20,524
)
 
(75,385
)
Purchase of equity method investment - HEP
 
—

 
(42,500
)
Purchase of PCLI, net of cash acquired
 
(870,627
)
 
—

Purchases of marketable securities
 
(41,565
)
 
(86,798
)
Sales and maturities of marketable securities
 
465,716

 
149,599

Other, net
 
3,017

 
408

Net cash used for investing activities
 
(580,509
)
 
(269,336
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Borrowings under credit agreements
 
505,000

 
554,000

Repayments under credit agreements
 
(215,000
)
 
(480,000
)
Net proceeds from issuance of senior notes - HFC
 
—

 
246,690

Net proceeds from issuance of term loan - HFC
 
—

 
350,000

Redemption of senior notes - HEP
 
(309,750
)
 
—

Repayment of financing obligation
 
—

 
(39,500
)
Net proceeds from issuance of common units - HEP
 
52,634

 
13,690

Purchase of treasury stock
 
—

 
(133,430
)
Dividends
 
(117,754
)
 
(116,795
)
Distributions to noncontrolling interest
 
(53,776
)
 
(43,840
)
Other, net
 
(4,820
)
 
(6,348
)
Net cash provided by (used for) financing activities
 
(143,466
)
 
344,467

 
 
 
 
 
Effect of exchange rate on cash flow
 
324

 
—

 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
Increase (decrease) for the period
 
(250,253
)
 
385,457

Beginning of period
 
710,579

 
66,533

End of period
 
$
460,326

 
$
451,990

 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
Cash (paid) received during the period for:
 
 
 
 
Interest
 
$
(64,205
)
 
$
(23,212
)
Income taxes, net
 
$
80,348

 
$
(21,426
)
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. In addition, we own and operate a lubricant production facility with retail and wholesale marketing of its products through a global sales network with locations in Canada, United States, Europe and China. As of June 30, 2017, 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;
•
owned and operated Petro-Canada Lubricants Inc. (“PCLI”) located in Mississauga, Ontario which produces base oils and other specialized lubricant products; and
•
owned a 36% 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., entered into a Share Purchase Agreement (“SPA”) with Suncor Energy Inc. (“Suncor”) to acquire 100% of the outstanding capital stock of PCLI. The acquisition closed on February 1, 2017. See Note 2 for additional information.

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 June 30, 2017, the consolidated results of operations and comprehensive income for the three and six months ended June 30, 2017 and 2016 and consolidated cash flows for the six months ended June 30, 2017 and 2016 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, 2016 that has been filed with the SEC.

Our results of operations for the six months ended June 30, 2017 are not necessarily indicative of the results of operations to be realized for the year ending December 31, 2017.

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 $3.7 million and $2.3 million at June 30, 2017 and December 31, 2016, respectively.


9
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



Inventories: Inventories related to our refining operations are stated at the lower of cost, using the last-in, first-out (“LIFO”) method for crude oil and unfinished and finished refined products, 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.

Inventories consisting of process chemicals, materials and maintenance supplies and renewable identification numbers (“RINs”) are stated at the lower of weighted-average cost or net realizable value.

Inventories of our PCLI operations are stated at the lower of cost, using the first-in, first-out (“FIFO”) method, or net realizable value.

Goodwill and Long-lived Assets: As of June 30, 2017, our goodwill balance was $2.2 billion, with goodwill assigned to our Refining, PCLI and HEP segments of $1.7 billion, $0.2 billion and $0.3 billion, respectively. During 2017, we recognized $184.2 million in goodwill as a result of our PCLI acquisition, all of which has been assigned to our PCLI segment. See Note 16 for additional information on our segments. 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. As of June 30, 2017, we have a cumulative goodwill impairment of $309.3 million, all of which relates to goodwill assigned to our Cheyenne Refinery reporting unit that was fully impaired in the second quarter of 2016.

Additionally, the carrying amount of our goodwill may fluctuate from period to period due to the effects of foreign currency translation adjustments on goodwill assigned to our PCLI segment.

As of June 30, 2017, the fair value of our El Dorado reporting unit exceeded its carrying value by approximately 18%. 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 and such impairment charges could be material.

Our long-lived assets principally consist of our refining assets that are organized as refining asset groups and our PCLI business. The refinery asset groups also constitute our individual refinery reporting units that are used for testing and measuring goodwill impairments. 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. As a result of our impairment testing in 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.

During the second quarter of 2017, we incurred long-lived asset impairment charges totaling $23.2 million, including $19.2 million of construction-in-progress consisting primarily of engineering work for a planned expansion of our Woods Cross refinery to add lubricants production capabilities. During the second quarter of 2017, we concluded to no longer pursue this expansion for various reasons including our recent acquisition of PCLI. The remaining $4.0 million in charges relate to property, plant and equipment that we expensed in the form of accelerated depreciation in the income statement.

Revenue Recognition: Refined product sales and related cost of sales are recognized when products are shipped and title has passed to customers. HEP recognizes pipeline transportation revenues as products are shipped through its pipelines. All revenues are reported inclusive of shipping and handling costs billed and exclusive of any taxes billed to customers. Shipping and handling costs incurred are reported in cost of products sold.

10
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



For PCLI subsidiaries in Canada and in the U.S., a portion of sales are made to marketers and distributors under agreements which provide certain rights of return or provisions for PCLI to repurchase product in order to sell directly to end customers. Based on the terms of these agreements, PCLI defers revenues and cost of revenues on sales to Canadian marketers until the related products have been sold to end customers, and PCLI recognizes revenues for sales to its U.S. distributors when products are shipped to the distributors, net of allowances for returns related to inventories PCLI is expected to repurchase from the distributors to sell directly to end customers.

Foreign Currency Translation: The functional currency of our PCLI operations consists of the respective local currency of its foreign operations, which includes the Canadian dollar, the euro and Chinese renminbi. Balance sheet accounts are translated into U.S. dollars using exchange rates in effect as of the balance sheet date. Revenue and expense accounts are translated using the weighted-average exchange rates during the period presented. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income.

In connection with our PCLI acquisition on February 1, 2017, we issued intercompany notes to initially fund certain of PCLI’s foreign businesses. Remeasurement adjustments resulting from the conversion of such intercompany financing from local currencies to the U.S. dollar are recorded as gains and losses as a component of other income (expense) in the income statement. Such adjustments are not recorded to the PCLI segment operations, but to corporate and other. See Note 16 for additional information on our segments.

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 six months ended June 30, 2017, we recorded an income tax expense of $15.2 million compared to an income tax benefit of $15.7 million for the six months ended June 30, 2016. This increase was due principally to pre-tax income during the six months ended June 30, 2017 compared to a pre-tax loss in the same period of 2016. Our effective tax rates, before consideration of earnings attributable to the noncontrolling interest, were 29.5% and 4.3% for the six months ended June 30, 2017 and 2016, respectively.

Potential interest and penalties related to income tax matters are recognized in income tax expense. We believe we have appropriate support for the income tax positions taken and to be taken on our income tax returns and that our accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.

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 six months ended June 30, 2017 and 2016, we received proceeds of $26.2 million and $29.8 million, respectively, and repaid $27.0 million and $30.2 million, respectively, under these sell / buy transactions.

New Accounting Pronouncements

Post-retirement Benefit Cost
In March 2017, Accounting Standard Update (“ASU”) 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost,” was issued amending current GAAP related to the income statement presentation of the components of net periodic post-retirement cost (credit). This standard has an effective date of January 1, 2018. We do not expect adoption of this standard to have a material impact on our financial condition, results of operations or cash flows.


11
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



Share-Based Compensation
In March 2016, 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. We adopted this standard effective January 1, 2017. As the result of the adoption, on a prospective basis, we recognized zero and $0.1 million of excess tax expense from stock-based compensation as a discrete item in our provision for income taxes for the three and six months ended June 30, 2017. The new standard also requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the statement of cash flows on a retrospective basis. Previously, this activity was included in operating activities. The impact of this change for the six months ended June 30, 2017 and 2016 was $0.3 million and zero, respectively. Finally, consistent with our existing policy, we have elected to account for forfeitures on an estimated basis.

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.

Inventories Measurement
In July 2015, ASU 2015-11, “Inventory - Simplifying the Measurement of Inventory,” was issued requiring measurement of inventories, other than inventories accounted for using the LIFO method, to be measured at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business less reasonable, predictable cost of completion, disposal and transportation. We adopted this standard effective January 1, 2017 for our affected inventories, which is primarily our PCLI inventory valued on a FIFO basis, and it had no material effect on our financial condition, results of operations or cash flows.

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 anticipate using the modified retrospective implementation method, whereby a cumulative effect adjustment is recorded to retained earnings as of the date of initial application. Our preparation for adoption of this standard is in progress, and we are currently evaluating terms, conditions and our performance obligations of our existing contracts with customers. We are also evaluating the effect of this standard on our revenue recognition policies and whether it will have a material impact on our financial condition, results of operations or cash flows.


NOTE 2:
PCLI Acquisition

On October 29, 2016, our wholly-owned subsidiary, 9952110 Canada Inc., entered into an SPA with Suncor to acquire 100% of the outstanding capital stock of PCLI. The acquisition closed on February 1, 2017. Cash consideration paid at that time was approximately $862.0 million, or $1.125 billion in Canadian dollars. PCLI is located in Mississauga, Ontario, Canada and is a producer of lubricant products such as base oils, white oils, specialty products and finished lubricants. PCLI’s operations also include marketing of its products to both retail and wholesale outlets through a global sales network with locations in Canada, the United States, Europe and China.

Aggregate consideration totaled approximately $904.3 million and consists of $862.0 million in cash paid to Suncor at acquisition, a closing date working capital settlement of $30.6 million that was paid to Suncor in the second quarter of 2017, an accrued payable in the amount of $6.5 million and $5.1 million, representing a portion of the fair value of replacement restricted stock unit awards issued to PCLI employees that relate to pre-acquisition services.
This transaction is accounted for as a business combination using the acquisition method of accounting, with the purchase price allocated to the fair value of the acquired PCLI assets and liabilities as of the February 1 acquisition date, with the excess purchase price recorded as goodwill assigned to our PCLI segment. This goodwill is not deductible for income tax purposes.

12
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



The following summarizes our preliminary value estimates of the PCLI assets and liabilities acquired:
 
 
(in millions)
 
 
 
Cash and cash equivalents
 
$
21.6

Accounts receivable and other current assets
 
117.5

Inventories
 
213.0

Properties, plants and equipment
 
459.0

Goodwill
 
184.2

Intangibles and precious metals
 
119.0

Accounts payable and accrued liabilities
 
(89.0
)
Deferred income tax liabilities
 
(107.0
)
Other long-term liabilities
 
(14.0
)
Net assets acquired
 
$
904.3


Intangibles include trademarks, patents, technical know-how and customer relationships totaling $98.2 million that are being amortized on a straight-line basis over periods ranging from 10 to 20 years.

These values are preliminary and reflect revisions to our February 1, 2017 fair value estimates that were initially recorded during the first quarter of 2017. These estimated values are not final and may be subject to additional change once all needed information has become available and we complete our valuations.

Our consolidated financial and operating results reflect the PCLI operations beginning February 1, 2017. Our results of operations for the three months ended June 30, 2017 included PCLI revenues and net income of $309.6 million and $12.6 million, respectively, and $511.5 million and $21.1 million for the period from February 1, 2017 through June 30, 2017.
As of June 30, 2017, we have incurred $19.3 million in incremental direct acquisition and integration costs that principally relate to legal, advisory and other professional fees and are presented as general and administrative expenses.

NOTE 3:
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 June 30, 2017, we owned a 36% 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 85% of HEP’s total revenues for the six months ended June 30, 2017. 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 10 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.

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.

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 to cost of products sold 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.

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. During the six months ended June 30, 2017, HEP issued 1,538,452 units under this program, providing $52.4 million in net proceeds. In connection with this program and to maintain our 2% general partner interest in HEP, we made capital contributions totaling $1.1 million. As of June 30, 2017, HEP has issued 2,241,907 units with an aggregate gross sales amount of $77.1 million.

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
Table of Contents
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, 2017, these agreements result in minimum annualized payments to HEP of $321.6 million.


NOTE 4:
Fair Value Measurements

Our financial instruments measured at fair value on a recurring basis consist of investments in marketable securities and derivative 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 of marketable securities and derivative instruments at June 30, 2017 and December 31, 2016 were as follows:
 
 
 
 
Fair Value by Input Level
 
 
Carrying Amount
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
June 30, 2017
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
NYMEX futures contracts
 
$
662

 
$
662

 
$
—

 
$
—

Commodity price swaps
 
7,863

 
—

 
7,863

 
—

Commodity forward contracts
 
1,447

 
—

 
1,447

 
—

HEP interest rate swaps
 
63

 
—

 
63

 
—

Total assets
 
$
10,035

 
$
662

 
$
9,373

 
$
—

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Commodity price swaps
 
$
20,631

 
$
—

 
$
20,631

 
$
—

Commodity forward contracts
 
1,218

 
—

 
1,218

 
—

Total liabilities
 
$
21,849

 
$
—

 
$
21,849

 
$
—


14
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



December 31, 2016
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Marketable securities
 
$
424,148

 
$
—

 
$
424,148

 
$
—

Commodity price swaps
 
14,563

 
—

 
14,358

 
205

Commodity forward contracts
 
5,905

 
—

 
5,905

 
—

HEP interest rate swaps
 
91

 
—

 
91

 
—

Total assets
 
$
444,707

 
$
—

 
$
444,502

 
$
205

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
NYMEX futures contracts
 
$
1,975

 
$
1,975

 
$
—

 
$
—

Commodity price swaps
 
26,845

 
—

 
24,086

 
2,759

Commodity forward contracts
 
8,316

 
—

 
8,316

 
—

Foreign currency forward contracts
 
6,519

 
—

 
6,519

 
—

Total liabilities
 
$
43,655

 
$
1,975

 
$
38,921

 
$
2,759


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 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 commodity price swap contracts that relate to forecasted sales of unleaded gasoline and forward commodity sales and purchase contracts for which quoted forward market prices are not readily available. The forward rate used to value these price swaps and 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 six months ended June 30, 2017:
    
 
 
Three Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2017
Level 3 Instruments
 
 
 
 
(In thousands)
Liability balance at beginning of period
 
$
—

 
$
(2,554
)
Change in fair value:
 
 
 
 
Recognized in other comprehensive income
 
—

 
1,625

Recognized in cost of products sold
 
—

 
(1
)
Settlement date fair value of contractual maturities:
 
 
 
 
Recognized in sales and other revenues
 
—

 
(165
)
Recognized in cost of products sold
 
—

 
1,095

Liability balance at end of period
 
$
—

 
$
—




15
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



NOTE 5:
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
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(In thousands, except per share data)
Net income (loss) attributable to HollyFrontier stockholders
 
$
57,767

 
$
(409,368
)
 
$
12,299

 
$
(388,115
)
Participating securities’ (restricted stock) share in earnings
 
373

 
216

 
752

 
432

Net income (loss) attributable to common shares
 
$
57,394

 
$
(409,584
)
 
$
11,547

 
$
(388,547
)
Average number of shares of common stock outstanding
 
176,147

 
175,865

 
176,141

 
176,301

Effect of dilutive variable restricted shares and performance share units (1)
 
155

 
—

 
349

 
—

Average number of shares of common stock outstanding assuming dilution
 
176,302

 
175,865

 
176,490

 
176,301

Basic earnings (loss) per share
 
$
0.33

 
$
(2.33
)
 
$
0.07

 
$
(2.20
)
Diluted earnings (loss) per share
 
$
0.33

 
$
(2.33
)
 
$
0.07

 
$
(2.20
)
(1) Excludes anti-dilutive restricted and performance share units of:
 
140

 
191

 
133

 
183



NOTE 6:
Stock-Based Compensation

As of June 30, 2017, 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 $8.4 million and $6.0 million for the three months ended June 30, 2017 and 2016, respectively, and $15.4 million and $8.6 million for the six months ended June 30, 2017 and 2016, 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 $0.5 million for the three months ended June 30, 2017 and 2016, respectively, and $1.1 million and $1.2 million for the six months ended June 30, 2017 and 2016, 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.


16
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 six months ended June 30, 2017 is presented below:
Restricted Stock and Restricted Stock Units
 
Grants
 
Weighted Average Grant Date Fair Value
 
Aggregate Intrinsic Value ($000)
 
 
 
 
 
 
 
Outstanding at January 1, 2017 (non-vested)
 
1,188,774

 
$
28.87

 
 
Granted (1)
 
733,270

 
28.20

 
 
Vesting (transfer/conversion to common stock)
 
(29,527
)
 
33.08

 
 
Forfeited
 
(39,209
)
 
30.58

 
 
Outstanding at June 30, 2017 (non-vested)
 
1,853,308

 
$
28.83

 
$
50,910


(1) Includes restricted stock units issued to PCLI employees.

In connection with our February 1, 2017 PCLI acquisition, we issued 472,276 restricted stock units to PCLI employees as replacement units for unvested awards issued under the legacy PCLI plan. The fair value of these awards totaled $13.3 million and is based on a February 1 grant date value of $28.12 per unit. Of this total, $5.1 million is recognized as an increase to our PCLI purchase price as it represents the value of the awards attributable to pre-acquisition services, and the remaining $8.2 million to be recognized as compensation expense over the two-year vesting period.

For the six months ended June 30, 2017, restricted stock and restricted stock units vested having a grant date fair value of $1.0 million. As of June 30, 2017, there was $31.2 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 1.3 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 “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 June 30, 2017, estimated share payouts for outstanding non-vested performance share unit awards averaged approximately 60% of target amounts.

A summary of performance share unit activity and changes during the six months ended June 30, 2017 is presented below:
Performance Share Units
 
Grants
 
 
 
Outstanding at January 1, 2017 (non-vested)
 
703,939

Granted
 
21,923

Forfeited
 
(86,117
)
Outstanding at June 30, 2017 (non-vested)
 
639,745


As of June 30, 2017, there was $10.2 million of total unrecognized compensation cost related to non-vested performance share units having a grant date fair value of $33.34 per unit. That cost is expected to be recognized over a weighted-average period of 1.7 years.


NOTE 7:
Cash and Cash Equivalents and Investments in Marketable Securities

Our investment portfolio at June 30, 2017 consisted of cash and cash equivalents.

We 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 December 31, 2016:
 
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
(Net Carrying Amount)
 
 
(In thousands)
December 31, 2016
 
 
 
 
 
 
 
 
Commercial paper
 
$
7,687

 
$
1

 
$
(1
)
 
$
7,687

Corporate debt securities
 
4,001

 
—

 
—

 
4,001

State and political subdivisions debt securities
 
412,462

 
1

 
(3
)
 
412,460

Total marketable securities
 
$
424,150

 
$
2

 
$
(4
)
 
$
424,148


Interest income recognized on our marketable securities was zero and $0.1 million for the three months ended June 30, 2017 and 2016 respectively, and $0.3 million and $0.1 million for the six months ended June 30, 2017 and 2016.


NOTE 8:
Inventories

Inventory consists of the following components:
 
 
June 30,
2017
 
December 31, 2016
 
 
(In thousands)
Crude oil
 
$
543,139

 
$
549,886

Other raw materials and unfinished products(1)
 
342,991

 
287,561

Finished products(2)
 
606,371

 
465,432

Lower of cost or market reserve
 
(428,323
)
 
(332,518
)
Process chemicals(3)
 
21,704

 
2,767

Repair and maintenance supplies and other (4)
 
106,091

 
162,548

Total inventory
 
$
1,191,973

 
$
1,135,676


(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.
(4)
Includes RINs.

We acquired $213.0 million of other raw materials, unfinished and finished products and repair and maintenance supplies in connection with our February 1, 2017 acquisition of PCLI. We value these inventories at the lower of FIFO cost or net realizable value.


17
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



Inventories, which are valued at the lower of LIFO cost or market, reflect a valuation reserve of $428.3 million and $332.5 million at June 30, 2017 and December 31, 2016, respectively. The December 31, 2016 market reserve of $332.5 million was reversed due to the sale of inventory quantities that gave rise to the 2016 reserve. A new market reserve of $428.3 million was established as of June 30, 2017 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 $84.0 million for the three months ended June 30, 2017 and a decrease of $138.5 million for the three months ended June 30, 2016, respectively, and an increase to cost of goods sold totaling $95.8 million for the six months ended June 30, 2017 and a decrease of $194.6 million for the six months ended June 30, 2016.

At June 30, 2017, the LIFO value of inventory, net of the lower of cost or market reserve, was equal to current costs.

In May 2017, the Environmental Protection Agency (“EPA”) granted the Cheyenne Refinery a one-year small refinery exemption from the Renewable Fuel Standard (“RFS”) program requirements for the 2016 calendar year. As a result, the Cheyenne Refinery’s gasoline and diesel production are not subject to the percentage of production that must satisfy a Renewable Volume Obligation (“RVO”) for 2016. We are currently working with the EPA to reinstate the RINs previously submitted to meet our Cheyenne Refinery’s 2016 RVO and expect the EPA to reinstate these RINs. The cost of the RINs used earlier to satisfy the Cheyenne Refinery’s 2016 RVO of $30.5 million was charged to cost of products sold in 2016. In the second quarter of 2017, we increased our inventory of RINs and reduced our cost of products sold by this amount, representing the cost of the RINs to be reinstated as a result of the RFS exemption received by the Cheyenne Refinery.


NOTE 9:
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 and routinely assess our recorded environmental obligations, if any, with respect to such matters. 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 reduced expense by $0.9 million for each of the three and the six months ended June 30, 2017 and incurred expense of $0.5 million and $1.3 million for the three and the six months ended June 30, 2016, respectively, for environmental remediation obligations. The accrued environmental liability reflected in our consolidated balance sheets was $91.3 million and $96.4 million at June 30, 2017 and December 31, 2016, respectively, of which $82.9 million and $82.9 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 includes PCLI environmental obligations of $4.6 million assumed upon our February 1, 2017 acquisition. Estimated liabilities could increase in the future when the results of ongoing investigations become known, are considered probable and can be reasonably estimated.


NOTE 10:
Debt

HollyFrontier Credit Agreement
In February 2017, we increased the size of our senior unsecured revolving credit facility from $1 billion to $1.35 billion and extended the maturity date to February 2022 (the “HollyFrontier Credit Agreement”). The Holly Frontier Credit Agreement may be used for revolving credit loans and letters of credit from time to time and is available to fund general corporate purposes. During the six months ended June 30, 2017, we received advances totaling $26.0 million and repaid $26.0 million under the HollyFrontier Credit Agreement. At June 30, 2017, we were in compliance with all covenants, had no outstanding borrowings and had outstanding letters of credit totaling $3.1 million under the HollyFrontier Credit Agreement.


18
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



HEP Credit Agreement
At June 30, 2017, HEP had a $1.2 billion senior secured revolving credit facility maturing in November 2018 (the “HEP Credit Agreement”). During the six months ended June 30, 2017, HEP received advances totaling $479.0 million and repaid $189.0 million under the HEP Credit Agreement. At June 30, 2017, HEP was in compliance with all of its covenants, had outstanding borrowings of $843.0 million and no outstanding letters of credit under the HEP Credit Agreement.

In July 2017, the HEP Credit Agreement was amended to increase the size of the facility to $1.4 billion and to extend the maturity to July 2022 (the “HEP Amended Credit Agreement”) The HEP Amended Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments, working capital and for general partnership purposes. It is also available to fund letters of credit up to a $50 million sub-limit and has a $300 million accordion.

HEP’s obligations under the HEP Amended Credit Agreement are collateralized by substantially all of HEP’s assets and is guaranteed by HEP’s material 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 5.875% senior notes ($1 billion aggregate principal amount 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.

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 was fully repaid with proceeds received upon the November 2016 issuance of the HollyFrontier Senior Notes.

HEP Senior Notes
HEP’s 6.0% senior notes ($400 million aggregate principal amount maturing August 2024) (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 January 2017, HEP redeemed its $300 million aggregate principal amount of 6.5% senior notes maturing March 2020 at a redemption cost of $309.8 million, at which time HEP recognized a $12.2 million early extinguishment loss consisting of a $9.8 million debt redemption premium and unamortized discount and financing costs of $2.4 million. HEP funded the redemption with borrowings under the HEP Credit Agreement.

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.


19
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



The carrying amounts of long-term debt are as follows:
 
 
June 30,
2017
 
December 31,
2016
 
 
(In thousands)
HollyFrontier 5.875% Senior Notes
 
 
 
 
Principal
 
$
1,000,000

 
$
1,000,000

Unamortized discount and debt issuance costs
 
(8,788
)
 
(8,775
)
 
 
991,212

 
991,225

 
 
 
 
 
HEP Credit Agreement
 
843,000

 
553,000

 
 
 
 
 
HEP 6% Senior Notes
 
 
 
 
Principal
 
400,000

 
400,000

Unamortized discount and debt issuance costs
 
(6,261
)
 
(6,607
)
 
 
393,739

 
393,393

HEP 6.5% Senior Notes
 
 
 
 
Principal
 
—

 
300,000

Unamortized discount and debt issuance costs
 
—

 
(2,481
)
 
 
—

 
297,519

 
 
 
 
 
Total HEP long-term debt
 
1,236,739

 
1,243,912

 
 
 
 
 
Total long-term debt
 
$
2,227,951

 
$
2,235,137


The fair values of the senior notes are as follows:
 
 
June 30,
2017
 
December 31,
2016
 
 
(In thousands)
 
 
 
 
 
HollyFrontier senior notes
 
$
1,065,000

 
$
1,022,500

 
 
 
 
 
HEP senior notes
 
$
418,000

 
$
723,750


These fair values are based on estimates provided by a third party using market quotes for similar type instruments, a Level 2 input. See Note 4 for additional information on Level 2 inputs.

We capitalized interest attributable to construction projects of $0.6 million and $3.5 million for the three months ended June 30, 2017 and 2016, respectively, and $3.2 million and $4.2 million for the six months ended June 30, 2017 and 2016, respectively.


NOTE 11: 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
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. 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 June 30, 2017
 
 
 
 
 
 
 
 
 
Change in fair value
$
1,378

 
 
 
 
 
 
 
 
Gain reclassified to earnings due to settlements
(325
)
 
Sales and other revenues
 
$
4,476

 
 
 
 
Amortization of discontinued hedges reclassified to earnings
270

 
Operating expenses
 
(4,421
)
 
Operating expenses
 
$
(18
)
Total
$
1,323

 
 
 
$
55

 
 
 
$
(18
)
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
Change in fair value
$
(5,138
)
 
 
 
 
 
 
 
 
Loss reclassified to earnings due to settlements
21,910

 
Sales and other revenue
 
$
(15,897
)
 
 
 
 
Amortization of discontinued hedges reclassified to earnings
270

 
Operating expenses
 
(6,283
)
 
Operating expenses
 
$
—

Total
$
17,042

 
 
 
$
(22,180
)
 
 
 
$
—

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
Change in fair value
$
4,715

 
Sales and other revenues
 
$
8,426

 
 
 
 
Loss reclassified to earnings due to settlements
49

 
Cost of products sold
 
(299
)
 
 
 
 
Amortization of discontinued hedge reclassified to earnings
540

 
Operating expenses
 
(8,716
)
 
Operating expenses
 
$
(18
)
Total
$
5,304

 
 
 
$
(589
)
 
 
 
$
(18
)
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
Change in fair value
$
(17,059
)
 
 
 
 
 
 
 
 
Loss reclassified to earnings due to settlements
32,966

 
Sales and other revenues
 
$
(20,653
)
 
 
 
 
Amortization of discontinued hedge reclassified to earnings
540

 
Operating expenses
 
(12,853
)
 
Operating expenses
 
$
—

Total
$
16,447

 
 
 
$
(33,506
)
 
 
 
$
—


As of June 30, 2017, 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 Instrument
 
Total Outstanding Notional
 
2017
 
2018
 
2019
 
2020
 
2021
 
Unit of Measure
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas price swaps - long
 
12,000,000

 
4,800,000

 
1,800,000

 
1,800,000

 
1,800,000

 
1,800,000

 
MMBTU

21
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued




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 4,800,000 MMBTU’s to be purchased ratably through 2017. As of June 30, 2017, we have an unrealized loss of $0.5 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 lock in basis spread differentials on forecasted purchases of crude oil and natural gas. Also, we have commodity forward contracts and NYMEX futures contracts to lock in prices on forecasted purchases of inventory. In addition, we had Canadian currency swap contracts that effectively fixed the conversion rate on $1.125 billion Canadian dollars (the PCLI purchase price), which were settled on February 1, 2017, in connection with the closing of the PCLI acquisition. 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
June 30,
 
Six Months Ended
June 30,
Location of Gain (Loss) Recognized in Earnings
 
2017
 
2016
 
2017
 
2016
 
 
(In thousands)
Cost of products sold
 
$
6,983

 
$
828

 
$
14,035

 
$
1,302

Operating expenses
 
(1,541
)
 
8,083

 
(5,763
)
 
4,614

Gain on foreign currency swap
 
—

 
—

 
24,545

 
—

Total
 
$
5,442

 
$
8,911

 
$
32,817

 
$
5,916


As of June 30, 2017, 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
 
2017
 
2018
 
Unit of Measure
 
 
 
 
 
 
 
 
 
Crude price swaps (basis spread) - long
 
1,836,000

 
1,836,000

 
—

 
Barrels
Natural gas price swaps (basis spread) - long
 
5,154,000

 
5,154,000

 
—

 
MMBTU
Natural gas price swaps - long
 
4,800,000

 
4,800,000

 
—

 
MMBTU
Natural gas price swaps - short
 
4,800,000

 
4,800,000

 
—

 
MMBTU
NYMEX futures (WTI) - short
 
1,240,000

 
1,040,000

 
200,000

 
Barrels
Forward gasoline and diesel contracts - long
 
465,000

 
465,000

 
—

 
Barrels

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

As of June 30, 2017, 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 June 30, 2017, which equaled an effective interest rate of 2.99%. Both of these swap contracts matured in July 2017 and have been designated as cash flow hedges. To date, there has been no ineffectiveness on these cash flow hedges.


22
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
 
Gain (Loss) Recognized in Earnings Due to Settlements
 
 
Location
 
Amount
 
(In thousands)
Three Months Ended June 30, 2017
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
Change in fair value
$
11

 
 
 
 
Gain reclassified to earnings due to settlements
(102
)
 
Interest expense
 
$
102

Total
$
(91
)
 
 
 
$
102

 
 
 
 
 
 
Three Months Ended June 30, 2016
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
Change in fair value
$
(255
)
 
 
 
 
Loss reclassified to earnings due to settlements
113

 
Interest expense
 
$
(113
)
Total
$
(142
)
 
 
 
$
(113
)
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
Change in fair value
$
87

 
 
 
 
Gain reclassified to earnings due to settlements
(115
)
 
Interest expense
 
$
115

Total
$
(28
)
 
 
 
$
115

 
 
 
 
 
 
Six Months Ended June 30, 2016
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
Change in fair value
$
(938
)
 
 
 
 
Loss reclassified to earnings due to settlements
343

 
Interest expense
 
$
(343
)
Total
$
(595
)
 
 
 
$
(343
)



23
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



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)
 
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as cash flow hedging instruments:
 
 
Commodity price swap contracts
 
$
—

 
$
—

 
$
—

 
$
10,018

 
$
—

 
$
10,018

Interest rate swap contracts
 
63

 
—

 
63

 
—

 
—

 
—

 
 
$
63

 
$
—

 
$
63

 
$
10,018

 
$
—

 
$
10,018

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as cash flow hedging instruments:
 
 
Commodity price swap contracts
 
$
—

 
$
—

 
$
—

 
$
10,613

 
$
(7,863
)
 
$
2,750

NYMEX futures contracts
 
662

 
—

 
662

 
—

 
—

 
—

Forward contracts
 
1,447

 
—

 
1,447

 
1,218

 
—

 
1,218

 
 
$
2,109

 
$
—

 
$
2,109

 
$
11,831

 
$
(7,863
)
 
$
3,968

 
 
 
 
 
 
 
 
 
 
 
 
 
Total net balance
 
 
 
 
 
$
2,172

 
 
 
 
 
$
13,986

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance sheet classification:
 
 
 
 
 
Accrued liabilities
 
$
13,308

 
 
 
 
 
 
Other long-term liabilities
 
678

 
 
Prepayment and other
 
$
2,172

 
 
 
 
 
$
13,986


 
 
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, 2016
 
 
Derivatives designated as cash flow hedging instruments:
 
 
Commodity price swap contracts
 
$
—

 
$
—

 
$
—

 
$
13,185

 
$
(431
)
 
$
12,754

Commodity forward contracts
 
—

 
—

 
—

 
2,978

 
—

 
2,978

Interest rate swap contracts
 
91

 
—

 
91

 
—

 
—

 
—

 
 
$
91

 
$
—

 
$
91

 
$
16,163

 
$
(431
)
 
$
15,732

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as cash flow hedging instruments:
 
 
Commodity price swap contracts
 
$
4,244

 
$
(756
)
 
$
3,488

 
$
12,903

 
$
(9,887
)
 
$
3,016

NYMEX futures contracts
 
—

 
—

 
—

 
1,975

 
—

 
1,975

Commodity forward contracts
 
5,905

 
—

 
5,905

 
5,338

 
—

 
5,338

Foreign currency forward contracts
 
—

 
—

 
—

 
6,519

 
—

 
6,519

 
 
$
10,149

 
$
(756
)
 
$
9,393

 
$
26,735

 
$
(9,887
)
 
$
16,848

 
 
 
 
 
 
 
 
 
 
 
 
 
Total net balance
 
 
 
 
 
$
9,484

 
 
 
 
 
$
32,580

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance sheet classification:
 
Prepayment and other
 
$
9,484

 
Accrued liabilities
 
$
32,580

 
 
 
 
 
 
 
 
 
 
 
 
 


24
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



At June 30, 2017, we had a pre-tax net unrealized loss of $10.5 million classified in accumulated other comprehensive income that relates to all accounting hedges having contractual maturities through 2021. Assuming commodity prices and interest rates remain unchanged, an unrealized loss of $9.8 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 12:
Equity

Changes to equity during the six months ended June 30, 2017 are presented below:
 
 
HollyFrontier
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Equity
 
 
(In thousands)
Balance at December 31, 2016
 
$
4,681,394

 
$
620,591

 
$
5,301,985

Net income
 
12,299

 
23,992

 
36,291

Dividends
 
(117,754
)
 
—

 
(117,754
)
Distributions to noncontrolling interest holders
 
—

 
(53,776
)
 
(53,776
)
Other comprehensive income (loss), net of tax
 
8,173

 
(17
)
 
8,156

Allocated equity on HEP common unit issuances, net of tax
 
9,598

 
36,723

 
46,321

Equity awards issued in PCLI acquisition
 
5,056

 
—

 
5,056

Equity-based compensation
 
15,411

 
1,146

 
16,557

Purchase of treasury stock (1)
 
(274
)
 
—

 
(274
)
Purchase of HEP units for restricted grants
 
—

 
(35
)
 
(35
)
Other
 
—

 
(443
)
 
(443
)
Balance at June 30, 2017
 
$
4,613,903

 
$
628,181

 
$
5,242,084


(1) Includes 9,349 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.

In May 2015, our Board of Directors approved a $1 billion share repurchase program, which replaced all existing share repurchase programs, authorizing 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 and corporate, regulatory and other relevant considerations. This program may be discontinued at any time by the Board of Directors. As of June 30, 2017, we had remaining authorization to repurchase up to $178.8 million under this stock repurchase program. In addition, we are authorized by our Board of Directors to repurchase shares in an amount sufficient to offset shares issued under our compensation programs.


NOTE 13:
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 June 30, 2017
 
 
 
 
 
 
Net change in foreign currency translation adjustment
 
$
14,298

 
$
4,433

 
$
9,865

Net unrealized gain on hedging instruments
 
1,232

 
503

 
729

Other comprehensive income
 
15,530

 
4,936

 
10,594

Less other comprehensive loss attributable to noncontrolling interest
 
(67
)
 
—

 
(67
)
Other comprehensive income attributable to HollyFrontier stockholders
 
$
15,597

 
$
4,936

 
$
10,661

 
 
 
 
 
 
 
Three Months Ended June 30, 2016
 
 
 
 
 
 
Net unrealized gain on marketable securities
 
$
12

 
$
4

 
$
8

Net unrealized gain on hedging instruments
 
16,900

 
6,574

 
10,326

Other comprehensive income
 
16,912

 
6,578

 
10,334

Less other comprehensive loss attributable to noncontrolling interest
 
(85
)
 
—

 
(85
)
Other comprehensive income attributable to HollyFrontier stockholders
 
$
16,997

 
$
6,578

 
$
10,419

 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
 
Net change in foreign currency translation adjustment
 
$
7,585

 
$
2,654

 
$
4,931

Net unrealized loss on marketable securities
 
(4
)
 
(1
)
 
(3
)
Net unrealized gain on hedging instruments
 
5,276

 
2,048

 
3,228

Other comprehensive income
 
12,857

 
4,701

 
8,156

Less other comprehensive loss attributable to noncontrolling interest
 
(17
)
 
—

 
(17
)
Other comprehensive income attributable to HollyFrontier stockholders
 
$
12,874

 
$
4,701

 
$
8,173

 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
 
 
 
 
 
Net unrealized gain on marketable securities
 
$
113

 
$
44

 
$
69

Net unrealized gain on hedging instruments
 
15,852

 
6,273

 
9,579

Other comprehensive income
 
15,965

 
6,317

 
9,648

Less other comprehensive loss attributable to noncontrolling interest
 
(360
)
 
—

 
(360
)
Other comprehensive income attributable to HollyFrontier stockholders
 
$
16,325

 
$
6,317

 
$
10,008


25
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
 
Income Statement Line Item
 
 
(In thousands)
 
 
 
 
Three Months Ended June 30,
 
 
 
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Hedging instruments:
 
 
 
 
 
 
Commodity price swaps
 
$
4,476

 
$
(15,897
)
 
Sales and other revenues
 
 
(4,421
)
 
(6,283
)
 
Operating expenses
Interest rate swaps
 
102

 
(113
)
 
Interest expense
 
 
157

 
(22,293
)
 
 
 
 
36

 
(8,601
)
 
Income tax expense (benefit)
 
 
121

 
(13,692
)
 
Net of tax
 
 
(65
)
 
69

 
Noncontrolling interest
 
 
56

 
(13,623
)
 
Net of tax and noncontrolling interest
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
56

 
$
(13,623
)
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Marketable securities
 
$
—

 
$
(23
)
 
Interest income
 
 
—

 
(9
)
 
Income tax benefit
 
 
—

 
(14
)
 
Net of tax
 
 
 
 
 
 
 
Hedging instruments:
 
 
 
 
 
 
Commodity price swaps
 
8,426

 
(20,653
)
 
Sales and other revenues
 
 
(299
)
 
—

 
Cost of products sold
 
 
(8,716
)
 
(12,853
)
 
Operating expenses
Interest rate swaps
 
115

 
(343
)
 
Interest expense
 
 
(474
)
 
(33,849
)
 
 
 
 
(212
)
 
(13,019
)
 
Income tax benefit
 
 
(262
)
 
(20,830
)
 
Net of tax
 
 
(73
)
 
209

 
Noncontrolling interest
 
 
(335
)
 
(20,621
)
 
Net of tax and noncontrolling interest
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(335
)
 
$
(20,635
)
 
 

Accumulated other comprehensive income in the equity section of our consolidated balance sheets includes:
 
 
June 30,
2017
 
December 31,
2016
 
 
(In thousands)
Foreign currency translation adjustment
 
$
4,931

 
$
—

Unrealized gain on post-retirement benefit obligations
 
20,055

 
20,055

Unrealized gain on marketable securities
 
—

 
3

Unrealized loss on hedging instruments, net of noncontrolling interest
 
(6,201
)
 
(9,446
)
Accumulated other comprehensive income
 
$
18,785

 
$
10,612



NOTE 14:
Post-retirement Plans

In connection with our PCLI acquisition, we agreed to establish employee benefit plans including union and non-union pension plans and a post retirement plan for PCLI employees that were previously covered under legacy Suncor plans.

Our agreement with Suncor also provides that pension assets related to the union and non-union pension plans will be transferred to a pension trust which will be established by us. The amount of assets to be transferred will be agreed by Suncor and us based on actuarial valuations and a formula specified in the SPA.


26
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



Our purchase price allocation as of February 1, 2017 included estimates of the amount of pension benefit obligation and the pension assets to be transferred based on actuarial estimates and are as follows:
 
February 1, 2017
 
(in thousands)
Projected benefit obligation
$
50,827

Estimated pension assets
52,082

Estimated funded status
$
1,255


The net periodic pension expense of these plans consisted of the following components:
 
 
Three Months Ended
June 30, 2017
 
February 1, 2017 to June 30, 2017
 
 
(in thousands)
Service cost - benefit earned during the period
 
$
944

 
$
1,582

Interest cost on projected benefit obligations
 
518

 
868

Expected return on plan assets
 
(747
)
 
(1,252
)
Net periodic pension expense
 
$
715

 
$
1,198


We have a post-retirement healthcare and other benefits plan that is available to certain of our non-PCLI employees who satisfy certain age and service requirements. The net periodic benefit credit of this plan consisted of the following components:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(In thousands)
Service cost – benefit earned during the period
 
$
301

 
$
324

 
$
601

 
$
648

Interest cost on projected benefit obligations
 
169

 
197

 
339

 
394

Amortization of prior service credit
 
(870
)
 
(871
)
 
(1,740
)
 
(1,742
)
Net periodic post-retirement credit
 
$
(400
)
 
$
(350
)
 
$
(800
)
 
$
(700
)

In addition, we established a post-retirement healthcare and other benefits plan for our PCLI employees. Our purchase price allocation as of February 1, 2017 included estimates of the amount of projected benefit obligations of $8.2 million. The net periodic benefit expense related to this plan was $0.1 million and $0.3 million for the three and the six months ended June 30, 2017, respectively.


NOTE 15:
Contingencies

We are a party to various litigation and legal proceedings which we believe, based on advice of counsel, will not either individually or in the aggregate have a material adverse effect on our financial condition, results of operations or cash flows.

In March, 2006, a subsidiary of ours sold the assets of Montana Refining Company under an Asset Purchase Agreement (“APA”). Calumet Montana Refining LLC, the current owner of the assets, has submitted requests for reimbursement pursuant to contractual indemnity provisions under the APA for various costs incurred, as well as additional claims related to environmental matters. This matter is scheduled for arbitration beginning in January 2018. We have accrued the costs we believe are owed pursuant to the APA, and we estimate that any reasonably possible losses beyond the amounts accrued are not material.



27
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



NOTE 16:
Segment Information

Our operations are organized into three reportable segments, Refining, PCLI and HEP. Our operations that are not included in the Refining, PCLI and HEP segments are included in Corporate and Other. Intersegment transactions are eliminated in our consolidated financial statements and are included in Consolidations and Eliminations.

The Refining segment represents the operations of the El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries and HFC Asphalt (aggregated as a reportable segment). Refining activities involve the purchase and refining of crude oil and wholesale and branded marketing of refined products, such as gasoline, diesel fuel and jet fuel. These petroleum products are primarily marketed in the Mid-Continent, Southwest and Rocky Mountain regions of the United States. Additionally, the Refining segment includes specialty lubricant products produced at our Tulsa Refineries that are marketed throughout North America and are distributed in Central and South America. HFC Asphalt operates various asphalt terminals in Arizona, New Mexico and Oklahoma.

On February 1, 2017, we acquired PCLI, a Canadian-based producer of lubricant products such as base oils, white oils, specialty products and finished lubricants. The PCLI segment involves production operations, located in Mississauga, Ontario, and marketing of its products to both retail and wholesale outlets through a global sales network with locations in Canada, the United States, Europe and China.

The HEP segment includes all of the operations of HEP, which owns and operates logistics and refinery assets consisting of petroleum product and crude oil pipelines, terminals, tankage, loading rack facilities and processing units in the Mid-Continent, Southwest and Rocky Mountain regions of the United States. The HEP segment also includes a 75% ownership interest in UNEV (a consolidated subsidiary of HEP); a 50% ownership interest in each of the Frontier Pipeline, Osage Pipeline and the Cheyenne Pipeline and a 25% ownership interest in the SLC Pipeline. Revenues from the HEP segment are earned through transactions with unaffiliated parties for pipeline transportation, rental and terminalling operations as well as revenues relating to pipeline transportation services provided for our refining operations. Due to certain basis differences, our reported amounts for the HEP segment may not agree to amounts reported in HEP’s periodic public filings.

The accounting policies for our segments are the same as those described in the summary of significant accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2016.

28
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



 
 
Refining (1)
 
PCLI
 
HEP (2)
 
Corporate
and Other
 
Consolidations
and Eliminations
 
Consolidated
Total
 
 
(In thousands)
Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
Sales and other revenues
 
$
3,141,137

 
$
309,566

 
$
109,143

 
$
15

 
$
(100,997
)
 
$
3,458,864

Operating expenses
 
$
245,265

 
$
52,652

 
$
34,097

 
$
1,322

 
$
(17,684
)
 
$
315,652

Depreciation and amortization
 
$
75,656

 
$
7,302

 
$
19,541

 
$
2,990

 
$
(207
)
 
$
105,282

Income (loss) from operations
 
$
86,603

 
$
17,511

 
$
52,890

 
$
(34,746
)
 
$
(573
)
 
$
121,685

Earnings of equity method investments
 
$
—

 
$
—

 
$
4,053

 
$
—

 
$
—

 
$
4,053

Capital expenditures
 
$
52,190

 
$
8,757

 
$
12,259

 
$
4,087

 
$
—

 
$
77,293

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
Sales and other revenues
 
$
2,699,022

 
$
—

 
$
94,896

 
$
47

 
$
(79,327
)
 
$
2,714,638

Operating expenses
 
$
225,683

 
$
—

 
$
29,212

 
$
1,152

 
$
(4,711
)
 
$
251,336

Depreciation and amortization
 
$
72,023

 
$
—

 
$
15,308

 
$
3,299

 
$
(207
)
 
$
90,423

Income (loss) from operations
 
$
(436,214
)
 
$
—

 
$
47,514

 
$
(31,197
)
 
$
(645
)
 
$
(420,542
)
Earnings of equity method investments
 
$
—

 
$
—

 
$
3,623

 
$
—

 
$
—

 
$
3,623

Capital expenditures
 
$
105,875

 
$
—

 
$
33,201

 
$
1,396

 
$
—

 
$
140,472

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Sales and other revenues
 
$
6,003,213

 
$
511,506

 
$
214,777

 
$
42

 
$
(190,191
)
 
$
6,539,347

Operating expenses
 
$
502,380

 
$
88,681

 
$
66,586

 
$
2,335

 
$
(37,213
)
 
$
622,769

Depreciation and amortization
 
$
145,324

 
$
12,376

 
$
37,914

 
$
6,122

 
$
(414
)
 
$
201,322

Income (loss) from operations
 
$
36,348

 
$
29,905

 
$
105,028

 
$
(81,181
)
 
$
(1,139
)
 
$
88,961

Earnings of equity method investments
 
$
—

 
$
—

 
$
5,893

 
$
—

 
$
—

 
$
5,893

Capital expenditures
 
$
99,864

 
$
10,352

 
$
20,524

 
$
6,310

 
$
—

 
$
137,050

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Sales and other revenues
 
$
4,698,609

 
$
—

 
$
196,906

 
$
157

 
$
(162,310
)
 
$
4,733,362

Operating expenses
 
$
453,512

 
$
—

 
$
56,968

 
$
2,407

 
$
(8,968
)
 
$
503,919

Depreciation and amortization
 
$
140,901

 
$
—

 
$
31,337

 
$
6,479

 
$
(414
)
 
$
178,303

Income (loss) from operations
 
$
(380,281
)
 
$
—

 
$
102,648

 
$
(58,052
)
 
$
(1,259
)
 
$
(336,944
)
Earnings of equity method investments
 
$
—

 
$
—

 
$
6,388

 
$
—

 
$
—

 
$
6,388

Capital expenditures
 
$
210,582

 
$
—

 
$
75,385

 
$
4,078

 
$
—

 
$
290,045

June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and investments in marketable securities
 
$
2,311

 
$
68,346

 
$
16,339

 
$
373,330

 
$
—

 
$
460,326

Total assets
 
$
6,354,911

 
$
1,194,478

 
$
1,904,951

 
$
471,367

 
$
(282,672
)
 
$
9,643,035

Long-term debt
 
$
—

 
$
—

 
$
1,236,739

 
$
991,212

 
$
—

 
$
2,227,951

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and investments in marketable securities
 
$
49

 
$
—

 
$
3,657

 
$
1,131,021

 
$
—

 
$
1,134,727

Total assets
 
$
6,513,806

 
$
—

 
$
1,920,487

 
$
1,306,169

 
$
(304,801
)
 
$
9,435,661

Long-term debt
 
$
—

 
$
—

 
$
1,243,912

 
$
991,225

 
$
—

 
$
2,235,137


(1) For the three and six months ended June 30, 2017, we recorded a long-lived asset impairment charge of $19.2 million that related to our Woods Cross Refinery, which is included in our Refining segment. For the three and six months ended June 30, 2016, we recorded goodwill and long-lived asset impairment charges of $309.3 million and $344.8 million, respectively, that relate to our Cheyenne Refinery, which is included in our Refining segment.


29
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



(2) HEP acquired a newly constructed crude unit, FCCU and polymerization unit at our Woods Cross Refinery in October 2016. As a result, we have recast our 2016 HEP segment information to include these asset-related capital expenditures and certain operating expenses that were previously presented under the Refining segment.

HEP segment revenues from external customers were $16.0 million and $15.7 million for the three months ended June 30, 2017 and 2016, respectively, and $32.6 million and $34.9 million for the six months ended June 30, 2017 and 2016, respectively.


NOTE 17:
Additional Financial Information

Borrowings pursuant to the HollyFrontier Credit Agreement are recourse to HollyFrontier, but not HEP. Furthermore, borrowings under the HEP Credit Agreement are recourse to HEP, but not to the assets of HFC with the exception of HEP Logistics Holdings, L.P., HEP’s general partner. Other than its investment in HEP, the assets of the general partner are insignificant.

The following condensed financial information is provided for HollyFrontier Corporation (on a standalone basis, before consolidation of HEP), and for HEP and its consolidated subsidiaries (on a standalone basis, exclusive of HFC). Due to certain basis differences, our reported amounts for HEP may not agree to amounts reported in HEP’s periodic public filings.


Condensed Consolidating Balance Sheet
 
 
 
 
 
 
 
June 30, 2017
 
HollyFrontier
Corp. Before
Consolidation
of HEP
 
HEP Segment
 
Consolidations and Eliminations
 
Consolidated
 
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
443,987

 
$
16,339

 
$
—

 
$
460,326

Accounts receivable, net
 
601,098

 
44,738

 
(43,486
)
 
602,350

Inventories
 
1,190,503

 
1,470

 
—

 
1,191,973

Income taxes receivable
 
1,428

 
—

 
—

 
1,428

Prepayments and other
 
42,199

 
1,652

 
(6,165
)
 
37,686

Total current assets
 
2,279,215

 
64,199

 
(49,651
)
 
2,293,763

 
 
 
 
 
 
 
 
 
Properties, plants and equipment, net
 
3,320,339

 
1,347,276

 
(224,057
)
 
4,443,558

Intangibles and other assets
 
2,411,622

 
493,476

 
616

 
2,905,714

Total assets
 
$
8,011,176

 
$
1,904,951

 
$
(273,092
)
 
$
9,643,035

 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
Accounts payable
 
$
1,036,693

 
$
15,928

 
$
(43,486
)
 
$
1,009,135

Income tax payable
 
24,427

 
—

 
—

 
24,427

Accrued liabilities
 
161,371

 
31,680

 
(6,165
)
 
186,886

Total current liabilities
 
1,222,491

 
47,608

 
(49,651
)
 
1,220,448

 
 
 
 
 
 
 
 
 
Long-term debt
 
991,212

 
1,236,739

 
—

 
2,227,951

Liability to HEP
 
202,382

 
—

 
(202,382
)
 
—

Deferred income taxes
 
744,401

 
649

 
—

 
745,050

Other long-term liabilities
 
146,718

 
61,312

 
(528
)
 
207,502

 
 
 
 
 
 
 
 
 
Investment in HEP
 
151,055

 
—

 
(151,055
)
 
—

Equity – HollyFrontier
 
4,552,917

 
466,113

 
(405,127
)
 
4,613,903

Equity – noncontrolling interest
 
—

 
92,530

 
535,651

 
628,181

Total liabilities and equity
 
$
8,011,176

 
$
1,904,951

 
$
(273,092
)
 
$
9,643,035

Condensed Consolidating Balance Sheet
 
 
 
 
 
 
 
December 31, 2016
 
HollyFrontier
Corp. Before
Consolidation
of HEP
 
HEP Segment
 
Consolidations and Eliminations
 
Consolidated
 
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
706,922

 
$
3,657

 
$
—

 
$
710,579

Marketable securities
 
424,148

 
—

 
—

 
424,148

Accounts receivable, net
 
487,693

 
50,408

 
(58,902
)
 
479,199

Inventories
 
1,134,274

 
1,402

 
—

 
1,135,676

Income taxes receivable
 
68,371

 
—

 
—

 
68,371

Prepayments and other
 
37,379

 
1,486

 
(5,829
)
 
33,036

Total current assets
 
2,858,787

 
56,953

 
(64,731
)
 
2,851,009

 
 
 
 
 
 
 
 
 
Properties, plants and equipment, net
 
2,874,041

 
1,365,568

 
(231,161
)
 
4,008,448

Intangibles and other assets
 
2,077,683

 
497,966

 
555

 
2,576,204

Total assets
 
$
7,810,511

 
$
1,920,487

 
$
(295,337
)
 
$
9,435,661

 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
Accounts payable
 
$
967,347

 
$
26,942

 
$
(58,902
)
 
$
935,387

Accrued liabilities
 
115,878

 
37,793

 
(5,829
)
 
147,842

Total current liabilities
 
1,083,225

 
64,735

 
(64,731
)
 
1,083,229

 
 
 
 
 
 
 
 
 
Long-term debt
 
991,225

 
1,243,912

 
—

 
2,235,137

Liability to HEP
 
208,603

 
—

 
(208,603
)
 
—

Deferred income taxes
 
619,905

 
509

 
—

 
620,414

Other long-term liabilities
 
132,515

 
62,971

 
(590
)
 
194,896

 
 
 
 
 
 
 
 
 
Investment in HEP
 
136,435

 
—

 
(136,435
)
 
—

Equity – HollyFrontier
 
4,638,603

 
454,803

 
(412,012
)
 
4,681,394

Equity – noncontrolling interest
 
—

 
93,557

 
527,034

 
620,591

Total liabilities and equity
 
$
7,810,511

 
$
1,920,487

 
$
(295,337
)
 
$
9,435,661



Condensed Consolidating Statement of Income and Comprehensive Income
 
 
 
 
Three Months Ended June 30, 2017
 
HollyFrontier
Corp. Before
Consolidation
of HEP
 
HEP Segment
 
Consolidations and Eliminations
 
Consolidated
 
 
(In thousands)
Sales and other revenues
 
$
3,442,999

 
$
109,143

 
$
(93,278
)
 
$
3,458,864

Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of products sold
 
2,828,274

 
—

 
(74,834
)
 
2,753,440

Lower of cost or market inventory valuation adjustment
 
83,982

 
—

 
—

 
83,982

Operating expenses
 
299,239

 
34,097

 
(17,684
)
 
315,652

General and administrative
 
56,941

 
2,615

 
20

 
59,576

Depreciation and amortization
 
89,311

 
19,541

 
(3,570
)
 
105,282

Goodwill and asset impairment
 
19,247

 
—

 
—

 
19,247

Total operating costs and expenses
 
3,376,994

 
56,253

 
(96,068
)
 
3,337,179

Income from operations
 
66,005

 
52,890

 
2,790

 
121,685

Other income (expense):
 

 
 
 
 
 
 
Earnings of equity method investments
 
26,949

 
4,053

 
(26,949
)
 
4,053

Interest expense
 
(13,393
)
 
(13,645
)
 
(2,431
)
 
(29,469
)
Other, net
 
9,710

 
90

 
—

 
9,800

 
 
23,266

 
(9,502
)
 
(29,380
)
 
(15,616
)
Income before income taxes
 
89,271

 
43,388

 
(26,590
)
 
106,069

Income tax expense
 
31,868

 
128

 
—

 
31,996

Net income
 
57,403

 
43,260

 
(26,590
)
 
74,073

Less net income (loss) attributable to noncontrolling interest
 
(4
)
 
1,521

 
14,789

 
16,306

Net income attributable to HollyFrontier stockholders
 
$
57,407

 
$
41,739

 
$
(41,379
)
 
$
57,767

Comprehensive income attributable to HollyFrontier stockholders
 
$
68,062

 
$
41,690

 
$
(41,324
)
 
$
68,428




30
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued



Condensed Consolidating Statement of Income and Comprehensive Income
 
 
 
 
 
 
Three Months Ended June 30, 2016
 
HollyFrontier
Corp. Before
Consolidation
of HEP
 
HEP Segment
 
Consolidations and Eliminations
 
Consolidated
 
(In thousands)
Sales and other revenues
 
$
2,699,069

 
$
94,896

 
$
(79,327
)
 
$
2,714,638

Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of products sold
 
2,321,919

 
—

 
(73,764
)
 
2,248,155

Lower of cost or market inventory valuation adjustment
 
(138,473
)
 
—

 
—

 
(138,473
)
Operating expenses
 
226,835

 
29,212

 
(4,711
)
 
251,336

General and administrative
 
26,793

 
2,862

 
—

 
29,655

Depreciation and amortization
 
78,686

 
15,308

 
(3,571
)
 
90,423

Goodwill and asset impairment
 
654,084

 
—

 
—

 
654,084

Total operating costs and expenses
 
3,169,844

 
47,382

 
(82,046
)
 
3,135,180

Income (loss) from operations
 
(470,775
)
 
47,514

 
2,719

 
(420,542
)
Other income (expense):
 
 
 
 
 
 
 
 
Earnings of equity method investments
 
25,096

 
3,623

 
(25,096
)
 
3,623

Interest expense
 
(339
)
 
(11,164
)
 
(2,221
)
 
(13,724
)
Other, net
 
127

 
1

 
—

 
128

 
 
24,884

 
(7,540
)
 
(27,317
)
 
(9,973
)
Income (loss) before income taxes
 
(445,891
)
 
39,974

 
(24,598
)
 
(430,515
)
Income tax expense (benefit)
 
(38,098
)
 
53

 
—

 
(38,045
)
Net income (loss)
 
(407,793
)
 
39,921

 
(24,598
)
 
(392,470
)
Less net income (loss) attributable to noncontrolling interest
 
(9
)
 
2,355

 
14,552

 
16,898

Net income (loss) attributable to HollyFrontier stockholders
 
$
(407,784
)
 
$
37,566

 
$
(39,150
)
 
$
(409,368
)
Comprehensive income (loss) attributable to HollyFrontier stockholders
 
$
(397,364
)
 
$
37,510

 
$
(39,095
)
 
$
(398,949
)


Condensed Consolidating Statement of Income and Comprehensive Income
 
 
 
 
Six Months Ended June 30, 2017
 
HollyFrontier
Corp. Before
Consolidation
of HEP
 
HEP Segment
 
Consolidations and Eliminations
 
Consolidated
 
(In thousands)
Sales and other revenues
 
$
6,507,042

 
$
214,777

 
$
(182,472
)
 
$
6,539,347

Operating costs and expenses:
 
 
 
—

 
 
 
 
Cost of products sold
 
5,538,303

 
—

 
(143,706
)
 
5,394,597

Lower of cost or market inventory valuation adjustment
 
95,805

 
—

 
—

 
95,805

Operating expenses
 
593,396

 
66,586

 
(37,213
)
 
622,769

General and administrative
 
111,397

 
5,249

 
—

 
116,646

Depreciation and amortization
 
170,511

 
37,914

 
(7,103
)
 
201,322

Goodwill and asset impairment
 
19,247

 
—

 
—

 
19,247

Total operating costs and expenses
 
6,528,659

—

109,749

—

(188,022
)
—

6,450,386

Income (loss) from operations
 
(21,617
)
 
105,028

 
5,550

 
88,961

Other income (expense):
 
 
 
 
 
 
 
 
Earnings of equity method investments
 
47,537

 
5,893

 
(47,537
)
 
5,893

Interest expense
 
(23,977
)
 
(27,082
)
 
(4,749
)
 
(55,808
)
Loss on early extinguishment of debt
 
—

 
(12,225
)
 
—

 
(12,225
)
Other, net
 
24,514

 
163

 
—

 
24,677

 
 
48,074

 
(33,251
)
 
(52,286
)
 
(37,463
)
Income before income taxes
 
26,457

 
71,777

 
(46,736
)
 
51,498

Income tax expense
 
14,973

 
234

 
—

 
15,207

Net income
 
11,484

 
71,543

 
(46,736
)
 
36,291

Less net income (loss) attributable to noncontrolling interest
 
(14
)
 
3,837

 
20,169

 
23,992

Net income attributable to HollyFrontier stockholders
 
$
11,498

 
$
67,706

 
$
(66,905
)
 
$
12,299

Comprehensive income attributable to HollyFrontier stockholders
 
$
19,671

 
$
67,695

 
$
(66,894
)
 
$
20,472


31
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued




Condensed Consolidating Statement of Income and Comprehensive Income
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
HollyFrontier
Corp. Before
Consolidation
of HEP
 
HEP Segment
 
Consolidations and Eliminations
 
Consolidated
 
(In thousands)
Sales and other revenues
 
$
4,698,766

 
$
196,906

 
$
(162,310
)
 
$
4,733,362

Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of products sold
 
4,024,987

 
—

 
(151,669
)
 
3,873,318

Lower of cost or market inventory valuation adjustment
 
(194,594
)
 
—

 
—

 
(194,594
)
Operating expenses
 
455,919

 
56,968

 
(8,968
)
 
503,919

General and administrative
 
49,323

 
5,953

 
—

 
55,276

Depreciation and amortization
 
154,107

 
31,337

 
(7,141
)
 
178,303

Goodwill and asset impairment
 
654,084

 
—

 
—

 
654,084

Total operating costs and expenses
 
5,143,826

 
94,258

 
(167,778
)
 
5,070,306

Income (loss) from operations
 
(445,060
)
 
102,648

 
5,468

 
(336,944
)
Other income (expense):
 
 
 
 
 
 
 
 
Earnings of equity method investments
 
50,893

 
6,388

 
(50,893
)
 
6,388

Interest income (expense)
 
369

 
(21,587
)
 
(4,518
)
 
(25,736
)
Loss on early extinguishment of debt
 
(8,718
)
 
—

 
—

 
(8,718
)
Other, net
 
200

 
(7
)
 
—

 
193

 
 
42,744

 
(15,206
)
 
(55,411
)
 
(27,873
)
Income (loss) before income taxes
 
(402,316
)
 
87,442

 
(49,943
)
 
(364,817
)
Income tax expense (benefit)
 
(15,886
)
 
149

 
—

 
(15,737
)
Net income (loss)
 
(386,430
)
 
87,293

 
(49,943
)
 
(349,080
)
Less net income (loss) attributable to noncontrolling interest
 
(16
)
 
7,282

 
31,769

 
39,035

Net income (loss) attributable to HollyFrontier stockholders
 
$
(386,414
)
 
$
80,011

 
$
(81,712
)
 
$
(388,115
)
Comprehensive income (loss) attributable to HollyFrontier stockholders
 
$
(376,405
)
 
$
79,777

 
$
(81,479
)
 
$
(378,107
)



Condensed Consolidating Statement of Cash Flows
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
HollyFrontier
Corp. Before
Consolidation
of HEP
 
HEP Segment
 
Consolidations and Eliminations
 
Consolidated
 
 
(In thousands)
Cash flows from operating activities
 
$
420,404

 
$
113,597

 
$
(60,603
)
 
$
473,398

 
 
 
 
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
 
 
 
 
Additions to properties, plants and equipment
 
(116,526
)
 
—

 
—

 
(116,526
)
Additions to properties, plants and equipment – HEP
 
—

 
(20,524
)
 
—

 
(20,524
)
Purchase of PCLI, net of cash acquired
 
(870,627
)
 
—

 
—

 
(870,627
)
Purchases of marketable securities
 
(41,565
)
 
—

 
—

 
(41,565
)
Sales and maturities of marketable securities
 
465,716

 
—

 
—

 
465,716

Other, net
 
1,152

 
2,289

 
(424
)
 
3,017

 
 
(561,850
)
 
(18,235
)
 
(424
)
 
(580,509
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
Net borrowings under credit agreements
 
—

 
290,000

 
—

 
290,000

Redemption of senior notes - HEP
 
—

 
(309,750
)
 
—

 
(309,750
)
Net proceeds from issuance of common units - HEP
 
—

 
52,634

 
—

 
52,634

Dividends
 
(117,754
)
 
—

 
—

 
(117,754
)
Distributions to noncontrolling interest
 
—

 
(115,695
)
 
61,919

 
(53,776
)
Other, net
 
(4,059
)
 
131

 
(892
)
 
(4,820
)
 
 
(121,813
)
 
(82,680
)
 
61,027

 
(143,466
)
 
 
 
 
 
 
 
 
 
Effect of exchange rates on cash flows
 
324

 
—

 
—

 
324

 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
 
Increase (decrease) for the period
 
(262,935
)
 
12,682

 
—

 
(250,253
)
Beginning of period
 
706,922

 
3,657

 
—

 
710,579

End of period
 
$
443,987

 
$
16,339

 
$
—

 
$
460,326



32
Table of Contents
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued




Condensed Consolidating Statement of Cash Flows
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
HollyFrontier
Corp. Before
Consolidation
of HEP
 
HEP Segment
 
Consolidations and Eliminations
 
Consolidated
 
 
(In thousands)
Cash flows from operating activities
 
$
256,019

 
$
104,076

 
$
(49,769
)
 
$
310,326

 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
Additions to properties, plants and equipment
 
(214,660
)
 
—

 
—

 
(214,660
)
Additions to properties, plants and equipment – HEP
 
—

 
(75,385
)
 
—

 
(75,385
)
Purchase of equity method investment - HEP
 
—

 
(42,500
)
 
—

 
(42,500
)
Purchases of marketable securities
 
(86,798
)
 
—

 
—

 
(86,798
)
Sales and maturities of marketable securities
 
149,599

 
—

 
—

 
149,599

Other, net
 
390

 
18

 
—

 
408

 
 
(151,469
)
 
(117,867
)
 
—

 
(269,336
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
Net borrowings under credit agreements
 
—

 
74,000

 
—

 
74,000

Net proceeds from issuance of senior notes - HFC
 
246,690

 
—

 
—

 
246,690

Net proceeds from issuance of term loan
 
350,000

 
—

 
—

 
350,000

Net proceeds from issuance of common units - HEP
 
—

 
13,690

 
—

 
13,690

Repayment of financing obligation
 
—

 
(39,500
)
 
—

 
(39,500
)
Purchase of treasury stock
 
(133,430
)
 
—

 
—

 
(133,430
)
Dividends
 
(116,795
)
 
—

 
—

 
(116,795
)
Distributions to noncontrolling interest
 
—

 
(93,609
)
 
49,769

 
(43,840
)
Contribution from general partner
 
(53,304
)
 
53,304

 
—

 
—

Other, net
 
(2,123
)
 
(4,225
)
 
—

 
(6,348
)
 
 
291,038

 
3,660

 
49,769

 
344,467

 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
 
Increase (decrease) for the period:
 
395,588

 
(10,131
)
 
—

 
385,457

Beginning of period
 
51,520

 
15,013

 
—

 
66,533

End of period
 
$
447,108

 
$
4,882

 
$
—

 
$
451,990





33
Table of Content


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Item 2 contains “forward-looking” statements. See “Forward-Looking Statements” at the beginning of Part I of this Quarterly Report on Form 10-Q. 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.


OVERVIEW

We are principally an independent petroleum refiner that produces high-value refined products such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. We own and operate refineries having a combined nameplate crude oil processing capacity of 457,000 barrels per day that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. Our refineries are located in El Dorado, Kansas (the “El Dorado Refinery”), Tulsa, Oklahoma (the, “Tulsa Refineries”), which comprise two production facilities, the Tulsa West and East facilities, Artesia, New Mexico, which operates in conjunction with crude, vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the “Navajo Refinery”), Cheyenne, Wyoming (the “Cheyenne Refinery”) and Woods Cross, Utah (the “Woods Cross Refinery”).

On October 29, 2016, our wholly-owned subsidiary, 9952110 Canada Inc., entered into a share purchase agreement with Suncor to acquire 100% of the outstanding capital stock of Petro-Canada Lubricants Inc. (“PCLI”). The acquisition closed on February 1, 2017. Cash consideration paid was $862.0 million, or $1.125 billion in Canadian dollars.

PCLI is Canadian-based producer of base oils with a plant having 15,600 BPD of lubricant production capacity that is located in Mississauga, Ontario. The facility is downstream integrated from base oils to finished lubricants and produces a broad spectrum of specialty lubricants and white oils that are distributed to end customers worldwide through a global sales network with locations in Canada, the United States, Europe and China.

For the three months ended June 30, 2017, net income attributable to HollyFrontier stockholders was $57.8 million compared to a net loss of $(409.4) million for the three months ended June 30, 2016. For the six months ended June 30, 2017, net income attributable to HollyFrontier stockholders was $12.3 million compared to a net loss of $(388.1) million for the six months ended June 30, 2016. Included in our financial results for the second quarter of 2016 were non-cash items consisting of goodwill and long-lived asset impairment charges, offset by our second quarter lower of cost or market inventory reserve adjustment. Second quarter 2017 earnings reflect improved refining margins relative to prior period levels, with overall gross refining margin per produced barrel increasing 29% compared to the three months ended June 30, 2016. Additionally, our second quarter results reflect $12.6 million in earnings attributable to our recently acquired PCLI operations.

Pursuant to the 2007 Energy Independence and Security Act, the Environmental Protection Agency (“EPA”) promulgated the Renewable Fuel Standard 2 (“RFS2”) regulations, which increased the volume of renewable fuels mandated to be blended into the nation’s fuel supply. The regulations, in part, require refiners to add annually increasing amounts of “renewable fuels” to their petroleum products or purchase credits, known as renewable identification numbers (“RINs”), in lieu of such blending. Compliance with RFS2 significantly increases our cost of products sold, with RINs costs totaling $53.0 million for the three months ended June 30, 2017, which is net of the $30.5 million cost reduction resulting from reinstatement of 2016 RINs as described below.

In May 2017, the EPA granted the Cheyenne Refinery a one-year small refinery exemption from the Renewable Fuel Standard (RFS) program requirements for the 2016 calendar year. As a result, the Cheyenne Refinery’s gasoline and diesel production are not subject to the percentage of production that must satisfy a Renewable Volume Obligation (“RVO”) for 2016. We are currently working with the EPA to reinstate RINs previously submitted to meet our Cheyenne Refinery’s 2016 RVO and expect the EPA to reinstate these RINs. The cost of the RINs used earlier to satisfy the Cheyenne Refinery’s 2016 RVO of $30.5 million was charged to cost of products sold in 2016. In the second quarter of 2017, we reduced our cost of products sold by this amount, representing the cost of the RINs to be reinstated as a result of the RFS exemption received by the Cheyenne Refinery.


34
Table of Content


OUTLOOK

Our profitability is largely driven by our operational reliability and crack spreads (the price difference between refined products and inputs such as crude oil). Crack spreads are driven by the supply and demand of refined product markets. We believe 2016 represented a cyclical low driven by large additions of refining capacity around the world. Based on continued demand growth and limited capacity additions, we expect crack spreads to be higher in 2017 than 2016.

Our RINs costs are material and represent a cost of products sold. The price of RINs may be extremely volatile due to real or perceived future shortages in RINs. As of June 30, 2017, we are purchasing RINs in order to meet approximately half of our renewable fuel requirements.

A more detailed discussion of our financial and operating results for the three and six months ended June 30, 2017 and 2016 is presented in the following sections.


RESULTS OF OPERATIONS

Financial Data
 
 
Three Months Ended June 30,
 
Change from 2016
 
 
2017
 
2016
 
Change
 
Percent
 
 
(In thousands, except per share data)
Sales and other revenues
 
$
3,458,864

 
$
2,714,638

 
$
744,226

 
27
 %
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)
 
2,753,440

 
2,248,155

 
505,285

 
22

Lower of cost or market inventory valuation adjustment
 
83,982

 
(138,473
)
 
222,455

 
(161
)
 
 
2,837,422

 
2,109,682

 
727,740

 
34

Operating expenses (exclusive of depreciation and amortization)
 
315,652

 
251,336

 
64,316

 
26

General and administrative expenses (exclusive of depreciation and amortization)
 
59,576

 
29,655

 
29,921

 
101

Depreciation and amortization
 
105,282

 
90,423

 
14,859

 
16

Goodwill and asset impairment
 
19,247

 
654,084

 
(634,837
)
 
(97
)
Total operating costs and expenses
 
3,337,179

 
3,135,180

 
201,999

 
6

Income (loss) from operations
 
121,685

 
(420,542
)
 
542,227

 
(129
)
Other income (expense):
 
 
 
 
 
 
 
 
Earnings of equity method investments
 
4,053

 
3,623

 
430

 
12

Interest income
 
176

 
527

 
(351
)
 
(67
)
Interest expense
 
(29,645
)
 
(14,251
)
 
(15,394
)
 
108

Gain on foreign currency transactions
 
10,328

 
—

 
10,328

 
—

Other, net
 
(528
)
 
128

 
(656
)
 
(513
)
 
 
(15,616
)
 
(9,973
)
 
(5,643
)
 
57

Income (loss) before income taxes
 
106,069

 
(430,515
)
 
536,584

 
(125
)
Income tax expense (benefit)
 
31,996

 
(38,045
)
 
70,041

 
(184
)
Net income (loss)
 
74,073

 
(392,470
)
 
466,543

 
(119
)
Less net income attributable to noncontrolling interest
 
16,306

 
16,898

 
(592
)
 
(4
)
Net income (loss) attributable to HollyFrontier stockholders
 
$
57,767

 
$
(409,368
)
 
$
467,135

 
(114
)%
Earnings (loss) per share attributable to HollyFrontier stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.33

 
$
(2.33
)
 
$
2.66

 
(114
)%
Diluted
 
$
0.33

 
$
(2.33
)
 
$
2.66

 
(114
)%
Cash dividends declared per common share
 
$
0.33

 
$
0.33

 
$
—

 
—
 %
Average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
176,147

 
175,865

 
282

 
—
 %
Diluted
 
176,302

 
175,865

 
437

 
—
 %


35
Table of Content

 
 
Six Months Ended
June 30,
 
Change from 2016
 
 
2017
 
2016
 
Change
 
Percent
 
 
(In thousands, except per share data)
Sales and other revenues
 
$
6,539,347


$
4,733,362

 
$
1,805,985

 
38
 %
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)
 
5,394,597

 
3,873,318

 
1,521,279

 
39

Lower of cost or market inventory valuation adjustment
 
95,805

 
(194,594
)
 
290,399

 
(149
)
 
 
5,490,402

 
3,678,724

 
1,811,678

 
49

Operating expenses (exclusive of depreciation and amortization)
 
622,769

 
503,919

 
118,850

 
24

General and administrative expenses (exclusive of depreciation and amortization)
 
116,646

 
55,276

 
61,370

 
111

Depreciation and amortization
 
201,322

 
178,303

 
23,019

 
13

Goodwill and asset impairment
 
19,247

 
654,084

 
(634,837
)
 
(97
)
Total operating costs and expenses
 
6,450,386

 
5,070,306

 
1,380,080

 
27

Income (loss) from operations
 
88,961

 
(336,944
)
 
425,905

 
(126
)
Other income (expense):
 
 
 
 
 
 
 
 
Earnings of equity method investments
 
5,893

 
6,388

 
(495
)
 
(8
)
Interest income
 
995

 
602

 
393

 
65

Interest expense
 
(56,803
)
 
(26,338
)
 
(30,465
)
 
116

Loss on early extinguishment of debt
 
(12,225
)
 
(8,718
)
 
(3,507
)
 
40

Gain on foreign currency swaps
 
24,545

 
—

 
24,545

 
—

Gain on foreign currency transactions
 
395

 
—

 
395

 
—

Other, net
 
(263
)
 
193

 
(456
)
 
(236
)
 
 
(37,463
)
 
(27,873
)
 
(9,590
)
 
34

Income (loss) before income taxes
 
51,498

 
(364,817
)
 
416,315

 
(114
)
Income tax expense (benefit)
 
15,207

 
(15,737
)
 
30,944

 
(197
)
Net income (loss)
 
36,291

 
(349,080
)
 
385,371

 
(110
)
Less net income attributable to noncontrolling interest
 
23,992

 
39,035

 
(15,043
)
 
(39
)
Net income (loss) attributable to HollyFrontier stockholders
 
$
12,299

 
$
(388,115
)
 
$
400,414

 
(103
)%
Earnings (loss) per share attributable to HollyFrontier stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.07

 
$
(2.20
)
 
$
2.27

 
(103
)%
Diluted
 
$
0.07

 
$
(2.20
)
 
$
2.27

 
(103
)%
Cash dividends declared per common share
 
$
0.66

 
$
0.66

 
$
—

 
—
 %
Average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
176,141

 
176,301

 
(160
)
 
—
 %
Diluted
 
176,490

 
176,301

 
189

 
—
 %


Balance Sheet Data
 
 
June 30, 2017
 
December 31, 2016
 
 
(Unaudited)
 
 
 
 
(In thousands)
Cash, cash equivalents and total investments in marketable securities
 
$
460,326

 
$
1,134,727

Working capital
 
$
1,073,315

 
$
1,767,780

Total assets
 
$
9,643,035

 
$
9,435,661

Long-term debt
 
$
2,227,951

 
$
2,235,137

Total equity
 
$
5,242,084

 
$
5,301,985


36
Table of Content

Other Financial Data 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(In thousands)
Net cash provided by (used for) operating activities
 
$
512,782

 
$
303,690

 
$
473,398

 
$
310,326

Net cash used for investing activities
 
$
(107,493
)
 
$
(264,143
)
 
$
(580,509
)
 
$
(269,336
)
Net cash provided by (used for) financing activities
 
$
(75,103
)
 
$
301,422

 
$
(143,466
)
 
$
344,467

Capital expenditures
 
$
77,293

 
$
140,472

 
$
137,050

 
$
290,045

EBITDA (1)
 
$
224,514

 
$
(343,266
)
 
$
296,861

 
$
(191,095
)

(1)
Earnings before interest, taxes, depreciation and amortization, which we refer to as “EBITDA,” is calculated as net income (loss) plus (i) interest expense, net of interest income, (ii) income tax provision, and (iii) depreciation and amortization. EBITDA is not a calculation provided for under GAAP; however, the amounts included in the EBITDA calculation are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies. EBITDA is presented here because it is a widely used financial indicator used by investors and analysts to measure performance. EBITDA is also used by our management for internal analysis. EBITDA presented above is reconciled to net income under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.

Our operations are organized into three reportable segments, Refining, PCLI and HEP. See Note 16 “Segment Information” in the Notes to Consolidated Financial Statements for additional information on our reportable segments.

Refining Operating Data
Our refinery operations include the El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries.The following tables set forth information, including non-GAAP performance measures, about our consolidated refinery operations. The cost of products and refinery gross and net operating margins do not include the non-cash effects of lower of cost or market inventory valuation adjustments and depreciation and amortization. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q. 

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Mid-Continent Region (El Dorado and Tulsa Refineries)
 
 
 
 
 
 
 
 
Crude charge (BPD) (1)
 
290,460

 
270,590

 
256,370

 
252,070

Refinery throughput (BPD) (2)
 
304,840

 
292,320

 
263,730

 
272,240

Refinery production (BPD) (3)
 
293,860

 
280,590

 
263,400

 
261,340

Sales of produced refined products (BPD)
 
281,670

 
264,660

 
254,830

 
249,010

Sales of refined products (BPD) (4)
 
308,280

 
285,780

 
281,970

 
274,000

Refinery utilization (5)
 
111.7
%
 
104.1
%
 
98.6
%
 
97.0
%
 
 
 
 
 
 
 
 
 
Average per produced barrel (6)
 
 
 
 
 
 
 
 
Net sales
 
$
65.01

 
$
60.24

 
$
65.76

 
$
53.89

Cost of products (7)
 
55.63

 
52.55

 
57.59

 
46.13

Refinery gross margin (8)
 
9.38

 
7.69

 
8.17

 
7.76

Refinery operating expenses (9)
 
4.48

 
4.56

 
5.21

 
4.95

Net operating margin (8)
 
$
4.90

 
$
3.13

 
$
2.96

 
$
2.81

 
 
 
 
 
 
 
 
 
Refinery operating expenses per throughput barrel (10)
 
$
4.14

 
$
4.13

 
$
5.03

 
$
4.53


37
Table of Content

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Mid-Continent Region (El Dorado and Tulsa Refineries)
 
 
 
 
 
 
 
 
Feedstocks:
 
 
 
 
 
 
 
 
Sweet crude oil
 
62
%
 
58
%
 
60
%
 
55
%
Sour crude oil
 
18
%
 
17
%
 
19
%
 
19
%
Heavy sour crude oil
 
15
%
 
17
%
 
15
%
 
19
%
Other feedstocks and blends
 
5
%
 
8
%
 
6
%
 
7
%
Total
 
100
%
 
100
%
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
Sales of produced refined products:
 
 
 
 
 
 
 
 
Gasolines
 
50
%
 
47
%
 
50
%
 
48
%
Diesel fuels
 
34
%
 
35
%
 
32
%
 
35
%
Jet fuels
 
6
%
 
6
%
 
7
%
 
6
%
Fuel oil
 
1
%
 
1
%
 
1
%
 
1
%
Asphalt
 
3
%
 
3
%
 
3
%
 
2
%
Lubricants
 
4
%
 
5
%
 
5
%
 
5
%
LPG and other
 
2
%
 
3
%
 
2
%
 
3
%
Total
 
100
%
 
100
%
 
100
%
 
100
%
Southwest Region (Navajo Refinery)
 
 
 
 
 
 
 
 
Crude charge (BPD) (1)
 
102,120

 
101,660

 
88,370

 
99,890

Refinery throughput (BPD) (2)
 
112,720

 
111,610

 
96,200

 
110,370

Refinery production (BPD) (3)
 
111,240

 
110,520

 
94,770

 
109,020

Sales of produced refined products (BPD)
 
108,390

 
110,360

 
92,460

 
111,870

Sales of refined products (BPD) (4)
 
110,350

 
111,570

 
100,570

 
112,660

Refinery utilization (5)
 
102.1
%
 
101.7
%
 
88.4
%
 
99.9
%
 
 
 
 
 
 
 
 
 
Average per produced barrel (6)
 
 
 
 
 
 
 
 
Net sales
 
$
65.97

 
$
61.86

 
$
66.46

 
$
53.67

Cost of products (7)
 
54.63

 
50.71

 
56.32

 
44.66

Refinery gross margin (8)
 
11.34

 
11.15

 
10.14

 
9.01

Refinery operating expenses (9)
 
4.96

 
4.77

 
5.76

 
4.50

Net operating margin (8)
 
$
6.38

 
$
6.38

 
$
4.38

 
$
4.51

 
 
 
 
 
 
 
 
 
Refinery operating expenses per throughput barrel (10)
 
$
4.77

 
$
4.72

 
$
5.54

 
$
4.56

 
 
 
 
 
 
 
 
 
Feedstocks:
 
 
 
 
 
 
 
 
Sweet crude oil
 
25
%
 
27
%
 
22
%
 
30
%
Sour crude oil
 
66
%
 
64
%
 
70
%
 
60
%
Other feedstocks and blends
 
9
%
 
9
%
 
8
%
 
10
%
Total
 
100
%
 
100
%
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
Sales of produced refined products:
 
 
 
 
 
 
 
 
Gasolines
 
52
%
 
54
%
 
52
%
 
55
%
Diesel fuels
 
42
%
 
41
%
 
41
%
 
40
%
Fuel oil
 
2
%
 
2
%
 
3
%
 
2
%
Asphalt
 
1
%
 
1
%
 
1
%
 
1
%
LPG and other
 
3
%
 
2
%
 
3
%
 
2
%
Total
 
100
%
 
100
%
 
100
%
 
100
%
Rocky Mountain Region (Cheyenne and Woods Cross Refineries)
 
 
 
 
 
 
 
 
Crude charge (BPD) (1)
 
74,510

 
56,340

 
74,610

 
57,880

Refinery throughput (BPD) (2)
 
80,740

 
54,680

 
82,240

 
61,950

Refinery production (BPD) (3)
 
78,110

 
51,550

 
79,630

 
58,900

Sales of produced refined products (BPD)
 
75,840

 
56,090

 
78,300

 
61,370

Sales of refined products (BPD) (4)
 
76,070

 
61,950

 
78,740

 
65,960

Refinery utilization (5)
 
76.8
%
 
67.9
%
 
76.9
%
 
69.7
%

38
Table of Content

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Rocky Mountain Region (Cheyenne and Woods Cross Refineries)
 
 
 
 
 
 
 
 
Average per produced barrel (6)
 
 
 
 
 
 
 
 
Net sales
 
$
68.52

 
$
62.26

 
$
67.14

 
$
53.86

Cost of products (7)
 
49.05

 
52.22

 
52.47

 
45.04

Refinery gross margin (8)
 
19.47

 
10.04

 
14.67

 
8.82

Refinery operating expenses (9)
 
10.34

 
11.48

 
10.20

 
10.51

Net operating margin (8)
 
$
9.13

 
$
(1.44
)
 
$
4.47

 
$
(1.69
)
 
 
 
 
 
 
 
 
 
Refinery operating expenses per throughput barrel (10)
 
$
9.71

 
$
11.78

 
$
9.71

 
$
10.41

 
 
 
 
 
 
 
 
 
Feedstocks:
 
 
 
 
 
 
 
 
Sweet crude oil
 
32
%
 
45
%
 
35
%
 
42
%
Heavy sour crude oil
 
39
%
 
35
%
 
36
%
 
34
%
Black wax crude oil
 
21
%
 
20
%
 
20
%
 
17
%
Other feedstocks and blends
 
8
%
 
—
%
 
9
%
 
7
%
Total
 
100
%
 
100
%
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
Sales of produced refined products:
 
 
 
 
 
 
 
 
Gasolines
 
59
%
 
58
%
 
59
%
 
60
%
Diesel fuels
 
33
%
 
36
%
 
33
%
 
34
%
Fuel oil
 
3
%
 
1
%
 
2
%
 
2
%
Asphalt
 
3
%
 
1
%
 
4
%
 
1
%
LPG and other
 
2
%
 
4
%
 
2
%
 
3
%
Total
 
100
%
 
100
%
 
100
%
 
100
%
Consolidated
 
 
 
 
 
 
 
 
Crude charge (BPD) (1)
 
467,090

 
428,590

 
419,350

 
409,840

Refinery throughput (BPD) (2)
 
498,300

 
458,610

 
442,170

 
444,560

Refinery production (BPD) (3)
 
483,210

 
442,660

 
437,800

 
429,260

Sales of produced refined products (BPD)
 
465,900

 
431,110

 
425,590

 
422,250

Sales of refined products (BPD) (4)
 
494,700

 
459,300

 
461,280

 
452,620

Refinery utilization (5)
 
102.2
%
 
96.7
%
 
91.8
%
 
92.5
%
 
 
 
 
 
 
 
 
 
Average per produced barrel (6)
 
 
 
 
 
 
 
 
Net sales
 
$
65.80

 
$
60.92

 
$
66.17

 
$
53.83

Cost of products (7)
 
54.33

 
52.04

 
56.37

 
45.58

Refinery gross margin (8)
 
11.47

 
8.88

 
9.80

 
8.25

Refinery operating expenses (9)
 
5.54

 
5.51

 
6.25

 
5.64

Net operating margin (8)
 
$
5.93

 
$
3.37

 
$
3.55

 
$
2.61

 
 
 
 
 
 
 
 
 
Refinery operating expenses per throughput barrel (10)
 
$
5.18

 
$
5.18

 
$
6.01

 
$
5.35

 
 
 
 
 
 
 
 
 
Feedstocks:
 
 
 
 
 
 
 
 
Sweet crude oil
 
49
%
 
49
%
 
48
%
 
47
%
Sour crude oil
 
26
%
 
27
%
 
26
%
 
27
%
Heavy sour crude oil
 
16
%
 
15
%
 
15
%
 
16
%
Black wax crude oil
 
3
%
 
2
%
 
4
%
 
2
%
Other feedstocks and blends
 
6
%
 
7
%
 
7
%
 
8
%
Total
 
100
%
 
100
%
 
100
%
 
100
%

39
Table of Content

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Consolidated
 
 
 
 
 
 
 
 
Sales of produced refined products:
 
 
 
 
 
 
 
 
Gasolines
 
52
%
 
50
%
 
52
%
 
51
%
Diesel fuels
 
36
%
 
37
%
 
34
%
 
36
%
Jet fuels
 
4
%
 
4
%
 
5
%
 
4
%
Fuel oil
 
1
%
 
1
%
 
1
%
 
1
%
Asphalt
 
2
%
 
2
%
 
2
%
 
2
%
Lubricants
 
3
%
 
3
%
 
3
%
 
3
%
LPG and other
 
2
%
 
3
%
 
3
%
 
3
%
Total
 
100
%
 
100
%
 
100
%
 
100
%
 
(1)
Crude charge represents the barrels per day of crude oil processed at our refineries.
(2)
Refinery throughput represents the barrels per day of crude and other refinery feedstocks input to the crude units and other conversion units at our refineries.
(3)
Refinery production represents the barrels per day of refined products yielded from processing crude and other refinery feedstocks through the crude units and other conversion units at our refineries.
(4)
Includes refined products purchased for resale.
(5)
Represents crude charge divided by total crude capacity (BPSD). Effective July 1, 2016, our consolidated crude capacity increased from 443,000 BPSD to 457,000 BPSD upon completion of our Woods Cross Refinery expansion project.
(6)
Represents average per barrel amount for produced refined products sold, which is a non-GAAP measure. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.
(7)
Transportation, terminal and refinery storage costs billed from HEP are included in cost of products.
(8)
Excludes lower of cost or market inventory valuation adjustments that decreased gross margin by $84.0 million and increased gross margin by $138.5 million for the three months ended June 30, 2017 and 2016, respectively and decreased gross margin by $95.8 million and increased gross margin by $194.6 million for the six months ended June 30, 2017 and 2016, respectively.
(9)
Represents operating expenses of our refineries, exclusive of depreciation and amortization.
(10)
Represents refinery operating expenses, exclusive of depreciation and amortization, divided by refinery throughput.


PCLI Operating Data
The following table sets forth information about our our PCLI operations for the period from February 1, 2017 (date of acquisition) through June 30, 2017.
 
 
Three months ended June 30, 2017
 
Period from February 1, 2017 through June 30, 2017
PCLI
 
 
 
 
Throughput (BPD) (1)
 
21,470

 
21,750

Production (BPD) (2)
 
20,880

 
21,230

Sales of produced refined products (BPD)
 
23,720

 
20,690


(1)
Throughput represents the barrels per day of feedstocks (principally vacuum gas oil and hydrocracker bottoms) input into our PCLI production facilities.
(2)
Production represents the barrels per day of products yielded from our PCLI production facilities.


Results of Operations – Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016

Summary
Net income attributable to HollyFrontier stockholders for the three months ended June 30, 2017 was $57.8 million ($0.33 per basic and diluted share), a $467.1 million increase compared to net loss attributable to HollyFrontier stockholders of $(409.4) million ($(2.33) per basic and diluted share) for the three months ended June 30, 2016. Current year second quarter earnings reflect an increase in refining segment sales volumes and margins and $12.6 million in earnings attributable to our recently acquired PCLI operations. Additionally, we recorded long-lived asset impairment charges totaling $23.2 million for the three months ended June 30, 2017 compared to goodwill and long-lived asset impairment charges totaling $654.1 million for the same period of last year. For the three months ended June 30, 2017, lower of cost or market inventory reserve adjustments decreased pre-tax earnings by $84.0 million compared to an increase of $138.5 million for the three months ended June 30, 2016. Refinery gross margins for the three months ended June 30, 2017 increased to $11.47 per produced barrel from $8.88 for the three months ended June 30, 2016. During the second quarter of 2017, our Cheyenne Refinery was granted a one-year small refinery exemption from the EPA at which time we recorded a $30.5 million decrease to our RINs costs, reflecting the reinstatement of RINs previously expensed.

Sales and Other Revenues
Sales and other revenues increased 27% from $2,714.6 million for the three months ended June 30, 2016 to $3,458.9 million for the three months ended June 30, 2017 due to a year-over-year increase in second quarter sales prices and higher refined product sales volumes. The average sales price we received per produced barrel sold was $60.92 for the three months ended June 30, 2016 compared to $65.80 for the three months ended June 30, 2017. Sales and other revenues for the three months ended June 30, 2017 and 2016 include $16.0 million and $15.7 million, respectively, in HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties. PCLI contributed $309.6 million in sales and other revenues for the three months ended June 30, 2017.

Cost of Products Sold
Total cost of products sold increased 34% from $2,109.7 million for the three months ended June 30, 2016 to $2,837.4 million for the three months ended June 30, 2017, due principally to higher crude oil costs and higher sales volumes of refined products. Additionally during second quarter of 2017, we recognized an $84.0 million lower of cost or market inventory valuation charge, a $222.5 million increase compared to a benefit of $138.5 million for the same period of 2016, resulting in a new $428.3 million inventory reserve at June 30, 2017. The reserve at June 30, 2017 is based on market conditions and prices at that time. Excluding this non-cash adjustment, the average price we paid per barrel for crude oil and feedstocks and the transportation costs of moving finished products to market increased 4% from $52.04 for the three months ended June 30, 2016 to $54.33 for the three months ended June 30, 2017. Additionally, we recorded a $30.5 million RINs cost reduction during the second quarter of 2017 as a result of our Cheyenne small refinery exemption. Cost of products sold includes $205.6 million in costs attributable to our PCLI operations.

Gross Refinery Margins
Gross refinery margin per produced barrel increased 29% from $8.88 for the three months ended June 30, 2016 to $11.47 for the three months ended June 30, 2017. This was due to the effects of an increase in the average per barrel sales price for refined products sold, partially offset by increased crude oil and feedstock prices during the current year quarter. Gross refinery margin does not include the non-cash effects of lower of cost or market inventory valuation adjustments, goodwill and asset impairment charges or depreciation and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q for a reconciliation to the income statement of prices of refined products sold and cost of products purchased.

Operating Expenses
Operating expenses, exclusive of depreciation and amortization, increased 26% from $251.3 million for the three months ended June 30, 2016 to $315.7 million for the three months ended June 30, 2017 due principally to $52.7 million in costs attributable to our recently acquired PCLI operations and higher purchased fuel costs compared to the same period of 2016.

General and Administrative Expenses
General and administrative expenses increased 101% from $29.7 million for the three months ended June 30, 2016 to $59.6 million for the three months ended June 30, 2017 due principally to $26.5 million in costs attributable to our recently acquired PCLI operations and $3.7 million in incremental direct acquisition and integration costs of our PCLI business.


40
Table of Content

Depreciation and Amortization Expenses
Depreciation and amortization increased 16% from $90.4 million for the three months ended June 30, 2016 to $105.3 million for the three months ended June 30, 2017. This increase was due principally to depreciation and amortization attributable to capitalized improvement projects and capitalized refinery turnaround costs. Depreciation and amortization expenses include $7.3 million in costs attributable to our PCLI operations.

Goodwill and Asset Impairment
During the three months ended June 30, 2017, we recorded a $19.2 million long-lived asset impairment charge resulting from management’s plan to cease further expansion of our Woods Cross Refinery to add lubricants production compared to goodwill and long-lived asset impairment charges of $309.3 million and $344.8 million, respectively, for the three months ended June 30, 2016. See Note 1 “Description of Business and Presentation of Financial Statements” in the Notes to Consolidated Financial Statements for additional information on the Cheyenne Refinery impairment during the second quarter of 2016.

Interest Income
Interest income for the three months ended June 30, 2017 was $0.2 million compared to $0.5 million for the three months ended June 30, 2016. This decrease was due to lower investment levels in marketable debt securities during the current year quarter.

Interest Expense
Interest expense was $29.6 million for the three months ended June 30, 2017 compared to $14.3 million for the three months ended June 30, 2016. This increase is due to interest attributable to higher debt levels during the current year quarter relative to the same period of 2016. For the three months ended June 30, 2017 and 2016, interest expense included $13.7 million and $11.3 million, respectively, in interest costs attributable to limited recourse debt that finances HEP operations.

Gain on Foreign Currency Transactions
Remeasurement adjustments resulting from the conversion of the intercompany financing structure on our PCLI acquisition from local currencies to the U.S. dollar resulted in a $10.3 million gain for the three months ended June 30, 2017.

Income Taxes
For the three months ended June 30, 2017, we recorded income tax expense of $32.0 million compared to an income tax benefit of $38.0 million for the three months ended June 30, 2016. This increase was due principally to pre-tax income during the three months ended June 30, 2017 compared to a pre-tax loss in the same period of 2016. Our effective tax rates, before consideration of earnings attributable to the noncontrolling interest, were 30.2% and 8.8% for the three months ended June 30, 2017 and 2016, respectively.


Results of Operations – Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

Summary
Net income attributable to HollyFrontier stockholders for the six months ended June 30, 2017 was $12.3 million ($0.07 per basic and diluted share), a $400.4 million increase compared to a net loss attributable to HollyFrontier stockholders of $(388.1) million ($(2.20) per basic and diluted share) for the six months ended June 30, 2016. Net income increased due principally to an increase in refining segment sales volumes and gross refining margins and the inclusion of $21.1 million in earnings attributable to our recently acquired PCLI operations. Additionally, we recorded long-lived asset impairment charges totaling $23.2 million for the six months ended June 30, 2017 compared to goodwill and long-lived asset impairment charges totaling $654.1 million for the same period of last year. For the six months ended June 30, 2017, lower of cost or market inventory reserve adjustments decreased pre-tax earnings by $95.8 million compared to an increase of $194.6 million for the six months ended June 30, 2016. Refinery gross margins for the six months ended June 30, 2017 increased to $9.80 per produced barrel from $8.25 for the six months ended June 30, 2016. During the second quarter of 2017, our Cheyenne Refinery was granted a one-year small refinery exemption from the EPA at which time we recorded a $30.5 million decrease to our RINs costs, reflecting the reinstatement of RINs previously expensed.

Sales and Other Revenues
Sales and other revenues increased 38% from $4,733.4 million for the six months ended June 30, 2016 to $6,539.3 million for the six months ended June 30, 2017 due to a year-over-year increase in sales prices and higher refined product sales volumes. The average sales price we received per produced barrel sold was $53.83 for the six months ended June 30, 2016 compared to $66.17 for the six months ended June 30, 2017. Sales and other revenues for the six months ended June 30, 2017 and 2016 include $32.6 million and $34.9 million, respectively, in HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties. PCLI contributed $511.5 million in sales and other revenues for the six months ended June 30, 2017.


41
Table of Content

Cost of Products Sold
Total cost of products sold increased 49% from $3,678.7 million for the six months ended June 30, 2016 to $5,490.4 million for the six months ended June 30, 2017, due principally to higher crude oil costs and higher sales volumes of refined products. Additionally, this increase also reflects a $95.8 million charge that is attributable to an increase in the lower of cost or market reserve for the six months ended June 30, 2017, a $290.4 million increase compared to a benefit of $194.6 million for the same period of last year. The reserve at June 30, 2017 is based on market conditions and prices at that time. Excluding this non-cash adjustment, the average price we paid per barrel for crude oil and feedstocks and the transportation costs of moving the finished products to the marketplace increased 24% from $45.58 for the six months ended June 30, 2016 to $56.37 for the six months ended June 30, 2017. Additionally, we recorded a $30.5 million RINs cost reduction during the second quarter of 2017 as a result of our Cheyenne small refinery exemption. Cost of products sold includes $341.9 million in costs attributable to our PCLI operations.

Gross Refinery Margins
Gross refinery margin per produced barrel increased 19% from $8.25 for the six months ended June 30, 2016 to $9.80 for the six months ended June 30, 2017. This was due to the effects of an increase in the average per barrel sales price for refined products sold, partially offset by increased crude oil and feedstock prices during the current year-to-date period. Gross refinery margin does not include the non-cash effects of lower of cost or market inventory valuation adjustments, goodwill and asset impairment charges or depreciation and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q for a reconciliation to the income statement of prices of refined products sold and cost of products purchased.

Operating Expenses
Operating expenses, exclusive of depreciation and amortization, increased 24% from $503.9 million for the six months ended June 30, 2016 to $622.8 million for the six months ended June 30, 2017 due principally to $88.7 million in costs attributable to our recently acquired PCLI operations and higher purchased fuel costs compared to the same period of 2016.

General and Administrative Expenses
General and administrative expenses increased 111% from $55.3 million for the six months ended June 30, 2016 to $116.6 million for the six months ended June 30, 2017 due principally to $38.7 million in costs attributable to our recently acquired PCLI operations and $19.3 million in incremental direct acquisition and integration costs of our PCLI business.

Depreciation and Amortization Expenses
Depreciation and amortization increased 13% from $178.3 million for the six months ended June 30, 2016 to $201.3 million for the six months ended June 30, 2017. This increase was due principally to depreciation and amortization attributable to capitalized improvement projects and capitalized refinery turnaround costs. Depreciation and amortization expenses include $12.4 million in costs attributable to our PCLI operations.

Goodwill and Asset Impairment
During the six months ended June 30, 2017, we recorded a $19.2 million long-lived asset impairment charge resulting from management’s plan to cease further expansion of our Woods Cross Refinery to add lubricants production compared to goodwill and long-lived asset impairment charges of $309.3 million and $344.8 million, respectively, for the six months ended June 30, 2016. See Note 1 “Description of Business and Presentation of Financial Statements” in the Notes to Consolidated Financial Statements for additional information on the Cheyenne refinery impairment during the second quarter of 2016.

Interest Income
Interest income for the six months ended June 30, 2017 was $1.0 million compared to $0.6 million for the six months ended June 30, 2016. This increase was due to higher investment levels in marketable debt securities during the current year-to-date period.

Interest Expense
Interest expense was $56.8 million for the six months ended June 30, 2017 compared to $26.3 million for the six months ended June 30, 2016. This increase was due to interest attributable to higher debt levels during the current year relative to the same period of 2016. For the six months ended June 30, 2017 and 2016, interest expense included $27.3 million and $21.8 million, respectively, in interest costs attributable to limited recourse debt that finances HEP operations.

Loss on Early Extinguishment of Debt
For the six months ended June 30, 2017, a $12.2 million loss was recorded upon HEP’s redemption of its $300 million aggregate principal amount of 6.5% senior notes maturing March 2020 at a cost of $309.8 million.


42
Table of Content

For the six months ended June 30, 2016, we recognized an $8.7 million loss on the early retirement of a financing obligation, a component of outstanding debt, upon HEP's purchase of crude oil tanks from an affiliate of Plains All American Pipeline L.P. (“Plains”). See Note 10 “Debt” in the Notes to Consolidated Financial Statements for additional information on this financing obligation.

Gain on Foreign Currency Swaps
During the six months ended June 30, 2017, we recorded a $24.5 million gain on currency swap contracts that effectively fixed the conversion rate on $1.125 billion Canadian dollars (the PCLI purchase price), which were settled on February 1, 2017, in connection with the closing of the PCLI acquisition.

Gain on Foreign Currency Transactions
Remeasurement adjustments resulting from the conversion of the intercompany financing structure on our PCLI acquisition from local currencies to the U.S. dollar resulted in a $0.4 million gain for the six months ended June 30, 2017.

Income Taxes
For the six months ended June 30, 2017, we recorded income tax expense of $15.2 million compared to a benefit of $15.7 million for the six months ended June 30, 2016. This increase was due principally to pre-tax income during the six months ended June 30, 2017 compared to a pre-tax loss in the same period of 2016. Our effective tax rates, before consideration of earnings attributable to the noncontrolling interest, were 29.5% and 4.3% for the six months ended June 30, 2017 and 2016, respectively. The year-over-year increase in the effective tax rate is due principally to the effects of the second quarter 2016 $309.3 million goodwill impairment charge, a significant driver of our $364.8 million loss before income taxes for the six months ended June 30, 2016, that is not deductible for income tax purposes.


LIQUIDITY AND CAPITAL RESOURCES

HollyFrontier Credit Agreement
In February 2017, we increased the size of our senior unsecured revolving credit facility from $1 billion to $1.35 billion and extended the maturity date to February 2022 (the “HollyFrontier Credit Agreement”). The HollyFrontier Credit Agreement may be used for revolving credit loans and letters of credit from time to time and is available to fund general corporate purposes. During the six months ended June 30, 2017, we received advances totaling $26.0 million and repaid $26.0 million under the HollyFrontier Credit Agreement. At June 30, 2017, we were in compliance with all covenants, had no outstanding borrowings and had outstanding letters of credit totaling $3.1 million under the HollyFrontier Credit Agreement.

HEP Credit Agreement
At June 30, 2017, HEP had a $1.2 billion senior secured revolving credit facility maturing in November 2018 (the “HEP Credit Agreement”). During the six months ended June 30, 2017, HEP received advances totaling $479.0 million and repaid $189.0 million under the HEP Credit Agreement. At June 30, 2017, HEP was in compliance with all of its covenants, had outstanding borrowings of $843.0 million and no outstanding letters of credit under the HEP Credit Agreement.

In July 2017, the HEP Credit Agreement was amended to increase the size of the facility to $1.4 billion and to extend the maturity to July 2022 (the “HEP Amended Credit Agreement”). The HEP Amended 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 and has a $300 million accordion.

HEP Senior Notes
In January 2017, HEP redeemed its $300 million aggregate principal amount of 6.5% senior notes maturing March 2020 at a redemption cost of $309.8 million, at which time HEP recognized a $12.2 million early extinguishment loss consisting of a $9.8 million debt redemption premium and unamortized discount and financing costs of $2.4 million. HEP funded the redemption with borrowings under the HEP Credit Agreement.

See Note 10 “Debt” in the Notes to Consolidated Financial Statements for additional information on our debt instruments.

HEP Common Unit Continuous Offering Program
In May 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. During the six months ended June 30, 2017, HEP issued 1,538,452 units under this program, providing $52.4 million in net proceeds. In connection with this program and to maintain the 2% general partner interest, we made capital contributions totaling $1.1 million during the six months ended June 30, 2017. As of June 30, 2017, HEP has issued 2,241,907 units with an aggregate gross sales amount of $77.1 million.

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.

Liquidity
We believe our current cash and cash equivalents, along with future internally generated cash flow and funds available under our credit facilities, will provide sufficient resources to fund currently planned capital projects and our liquidity needs for the foreseeable future. In addition, components of our growth strategy include construction of new refinery processing units and the expansion of existing units at our facilities and selective acquisition of complementary assets for our refining operations intended to increase earnings and cash flow.

As of June 30, 2017, our cash and cash equivalents totaled $460.3 million. We consider all highly-liquid instruments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. These primarily consist of investments in conservative, highly-rated instruments issued by financial institutions, government and corporate entities with strong credit standings and money market funds.

On October 29, 2016, our wholly-owned subsidiary, 9952110 Canada Inc., entered into a share purchase agreement with Suncor to acquire 100% of the outstanding capital stock of PCLI that closed on February 1, 2017. Cash consideration paid was $862.0 million, or $1.125 billion in Canadian dollars.


43
Table of Content

In May 2015, our Board of Directors approved a $1 billion share repurchase program, which replaced all existing share repurchase programs, authorizing 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 and corporate, regulatory and other relevant considerations. This program may be discontinued at any time by the Board of Directors. As of June 30, 2017, we had remaining authorization to repurchase up to $178.8 million under this stock repurchase program. In addition, we are authorized by our Board of Directors to repurchase shares in an amount sufficient to offset shares issued under our compensation programs.

Cash and cash equivalents decreased $250.3 million for the six months ended June 30, 2017. Working capital decreased by $694.5 million during the six months ended June 30, 2017, which is principally due to our cash purchase of PCLI, net of working capital acquired.

Cash Flows – Operating Activities

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
Net cash flows provided by operating activities were $473.4 million for the six months ended June 30, 2017 compared to $310.3 million for the six months ended June 30, 2016, an increase of $163.1 million. Net income for the six months ended June 30, 2017 was $36.3 million, an increase of $385.4 million compared to net loss of $349.1 million for the six months ended June 30, 2016. Non-cash adjustments to net income consisting of depreciation and amortization, goodwill and asset impairment, lower of cost or market inventory valuation adjustment, earnings of equity method investments, inclusive of distributions, gain or loss on sale of assets, loss on extinguishment of debt, deferred income taxes, equity-based compensation expense, fair value changes to derivative instruments and excess tax expense from equity-based compensation totaled $338.4 million for the six months ended June 30, 2017 compared to $661.6 million for the same period in 2016. Changes in working capital items increased cash flows by $176.1 million and $67.2 million for the six months ended June 30, 2017 and 2016, respectively. Additionally, for the six months ended June 30, 2017, turnaround expenditures increased to $86.0 million from $72.4 million for the same period of 2016.

Cash Flows – Investing Activities and Planned Capital Expenditures

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
Net cash flows used for investing activities were $580.5 million for the six months ended June 30, 2017 compared to $269.3 million for the six months ended June 30, 2016, an increase of $311.2 million. Current year investing activities reflect a net cash outflow of $870.6 million upon the acquisition of PCLI. Cash expenditures for properties, plants and equipment for the first six months of 2017 decreased to $137.1 million from $290.0 million for the same period in 2016. These include HEP capital expenditures of $20.5 million and $75.4 million for the six months ended June 30, 2017 and 2016, respectively. In addition, in 2016, HEP purchased a 50% interest in Cheyenne Pipeline for $42.5 million. Also for the six months ended June 30, 2017 and 2016, we invested $41.6 million and $86.8 million, respectively, in marketable securities and received proceeds of $465.7 million and $149.6 million, respectively, from the sale or maturity of marketable securities.

Planned Capital Expenditures

HollyFrontier Corporation
Each year our Board of Directors approves our annual capital budget, which includes specific projects that management is authorized to undertake. Additionally, when conditions warrant or as new opportunities arise, additional projects may be approved. The funds appropriated for a particular capital project may be expended over a period of several years, depending on the time required to complete the project. Therefore, our planned capital expenditures for a given year consist of expenditures appropriated in that year’s capital budget plus expenditures for projects appropriated in prior years which have not yet been completed. During 2017, we expect to spend approximately $225.0 million to $275.0 million in cash for capital projects appropriated in 2017 and prior years. In addition, we expect to spend approximately $135.0 million to $150.0 million on refinery turnarounds. Refinery turnaround spending is amortized over the useful life of the turnaround.

The refining industry is capital intensive and requires on-going investments to sustain our refining operations. This includes replacement of, or rebuilding, refinery units and components that extend the useful life. We also invest in projects that improve operational reliability and profitability via enhancements that improve refinery processing capabilities as well as production yield and flexibility. Our capital expenditures also include projects related to environmental, health and safety compliance and include initiatives as a result of federal and state mandates.


44
Table of Content

A significant portion of our current capital spending is associated with compliance-oriented capital improvements. This spending is required due to existing consent decrees (for projects including FCC unit flue gas scrubbers and tail gas treatment units), federal fuels regulations (particularly Tier3, which mandates a reduction in the sulfur content of blended gasoline), refinery waste water treatment improvements and other similar initiatives. Our refinery operations and related emissions are highly regulated at both federal and state levels, and we invest in our facilities as needed to remain in compliance with these standards. Additionally, when faced with new emissions or fuels standards, we seek to execute projects that facilitate compliance and also improve the operating costs and / or yields of associated refining processes.

We have completed construction on our existing Woods Cross expansion project, increasing crude processing capacity to 45,000 BPSD, and providing greater crude slate flexibility, which we believe will increase capacity utilization and improve overall economic returns during periods when wax crudes are in short supply. The project also included construction of new refining facilities and a new rail loading rack for intermediates and finished products associated with refining waxy crude oil.

On November 18, 2013, the Utah Division of Air Quality issued a revised air quality permit (the “Approval Order”) authorizing the expansion. On December 18, 2013, two local environmental groups filed an administrative appeal challenging the issuance of the Approval Order and seeking a stay of the Approval Order. Following an extended appeal process, the Executive Director of the Utah Department of Environmental Quality issued a final order in favor of Woods Cross on all claims on March 31, 2015, and dismissed the project opponents’ arguments with prejudice. On April 27, 2015, the opponents filed a petition for review and notice of appeal with the Utah Court of Appeals challenging the agency’s decision to uphold the permit and dismiss the project opponents’ arguments. On August 4, 2016, the Utah Court of Appeals transferred the case to the Utah Supreme Court. The Utah Supreme Court established a supplemental briefing schedule, which ran through October 2016. Oral argument took place on December 14, 2016 and focused primarily on alleged procedural defects in the Petitioner’s appeal. The Utah Supreme Court took the matter under advisement and, on June 19, 2017, issued a 4-1 decision in favor of the State of Utah and HollyFrontier in a brief four-page opinion. This matter is now closed unless Petitioners file a motion for reconsideration, which appears unlikely at this point in time.

HEP
Each year the Holly Logistic Services, L.L.C. board of directors approves HEP’s annual capital budget, which specifies capital projects that HEP management is authorized to undertake. Additionally, at times when conditions warrant or as new opportunities arise, special projects may be approved. The funds allocated for a particular capital project may be expended over a period of several years, depending on the time required to complete the project. Therefore, HEP’s planned capital expenditures for a given year consist of expenditures approved for capital projects included in its current year capital budget as well as, in certain cases, expenditures approved for capital projects in capital budgets for prior years. The 2017 HEP capital budget is comprised of $9.0 million for maintenance capital expenditures and $30.0 million for expansion capital expenditures.

Cash Flows – Financing Activities

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
Net cash flows used for financing activities were $143.5 million for the six months ended June 30, 2017 compared to cash flows provided by financing activities of $344.5 million for the six months ended June 30, 2016, an increase of $488.0 million. During the six months ended June 30, 2017, we received $26.0 million and repaid $26.0 million under the Holly Frontier Credit Agreement and paid $117.8 million in dividends. Also during this period, HEP received $479.0 million and repaid $189.0 million under the HEP Credit Agreement, paid $309.8 million upon the redemption of HEP’s 6.5% senior notes, received $52.6 million in net proceeds from the issuance of its common units and paid distributions of $53.8 million to noncontrolling interests. During the six months ended June 30, 2016, we received $246.7 million in net proceeds upon issuance of our 5.875% senior notes, received $350.0 million in net proceeds from issuance of a term loan, received $315.0 million and repaid $315.0 million under the HollyFrontier Credit Agreement, purchased $133.4 million in common stock and paid $116.8 million in dividends. In addition, we extinguished our financing obligation with Plains for $39.5 million. Also, during this period, HEP received $239.0 million and repaid $165.0 million under the HEP Credit Agreement, received $13.7 million in proceeds from the issuance of common units and paid distributions of $43.8 million to noncontrolling interests.


45
Table of Content

Contractual Obligations and Commitments

HollyFrontier Corporation

In February 2017, we amended the HollyFrontier Credit Agreement, increasing the size of the credit facility from $1.0 billion to $1.35 billion and extended the maturity to February 2022.

There were no other significant changes to our long-term contractual obligations during the six months ended June 30, 2017.

HEP

In January 2017, HEP redeemed its $300 million aggregate principal amount of 6.5% senior notes maturing March 2020.

In July 2017, HEP amended its previous credit agreement increasing the size of the credit facility from $1.2 billion to $1.4 billion and extending its maturity to July 2022. During the six months ended June 30, 2017, HEP received net borrowings of $290.0 million resulting in $843.0 million of outstanding borrowings in the HEP Credit Agreement at June 30, 2017.

There were no other significant changes to HEP’s long-term contractual obligations during this period.


CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.


46
Table of Content

Our significant accounting policies are described in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2016. Certain critical accounting policies that materially affect the amounts recorded in our consolidated financial statements include the assessment and consolidation of variable interest entities, the use of the last-in, first-out (“LIFO”) method of valuing certain inventories, the amortization of deferred costs for regular major maintenance and repairs at our refineries, assessing the possible impairment of certain long-lived assets and goodwill, accounting for derivative instruments and assessing contingent liabilities for probable losses.

Inventory Valuation: Inventories related to our refining operations are stated at the lower of cost, using the LIFO method for crude oil and unfinished and finished refined products, 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.

At June 30, 2017, our lower of cost or market inventory valuation reserve was $428.3 million. This amount, or a portion thereof, is subject to reversal as a reduction to cost of products sold in subsequent periods as inventories giving rise to the reserve are sold, and a new reserve is established. Such a reduction to cost of products sold could be significant if inventory values return to historical cost price levels. Additionally, further decreases in overall inventory values could result in additional charges to cost of products sold should the lower of cost or market inventory valuation reserve be increased.

Inventories consisting of process chemicals, materials and maintenance supplies and RINs are stated at the lower of weighted-average cost or net realizable value. Inventories of our PCLI operations are stated at the lower of cost, using the FIFO method, or net realizable value.

Goodwill and Long-lived Assets: As of June 30, 2017, our goodwill balance was $2.2 billion, with goodwill assigned to our refining, PCLI and HEP segments of $1.7 billion, $0.2 billion and $0.3 billion, 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.

Our long-lived assets principally consist of our refining assets that are organized as refining asset groups and our PCLI business. The refinery asset groups also constitute our individual refinery reporting units that are used for testing and measuring goodwill impairments. 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.

We performed our annual goodwill impairment testing as of July 1, 2016 and determined the fair value of our El Dorado reporting unit exceeded its carrying value by approximately 4%. The market outlook for future crack spreads has since improved and based on subsequent testing, the fair value of the El Dorado reporting unit exceeded its carrying value by approximately 18% at June 30, 2017. 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 and such impairment charges could be material.
 

RISK MANAGEMENT

We use certain strategies to reduce some commodity price and operational risks. We do not attempt to eliminate all market risk exposures when we believe that the exposure relating to such risk would not be significant to our future earnings, financial position, capital resources or liquidity or that the cost of eliminating the exposure would outweigh the benefit.

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:

47
Table of Content

•
our inventory positions;
•
natural gas purchases;
•
costs of crude oil and related grade differentials;
•
prices of refined products; and
•
our refining margins.

As of June 30, 2017, we have the following notional contract volumes related to all outstanding derivative contracts used to mitigate commodity price risk:
 
 
 
 
Notional Contract Volumes by Year of Maturity
 
 
Contract Description
 
Total Outstanding Notional
 
2017
 
2018
 
2019
 
2020
 
2021
 
Unit of Measure
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas price swaps - long
 
16,800,000

 
9,600,000

 
1,800,000

 
1,800,000

 
1,800,000

 
1,800,000

 
MMBTU
Natural gas price swaps - short
 
4,800,000

 
4,800,000

 
—

 
—

 
—

 
—

 
MMBTU
Natural gas price swaps (basis spread) - long
 
5,154,000

 
5,154,000

 
—

 
—

 
—

 
—

 
MMBTU
Crude price swaps (basis spread) - long
 
1,836,000

 
1,836,000

 
—

 
—

 
—

 
—

 
Barrels
NYMEX futures (WTI) - short
 
1,240,000

 
1,040,000

 
200,000

 
—

 
—

 
—

 
Barrels
Forward gasoline and diesel contracts - long
 
465,000

 
465,000

 
—

 
—

 
—

 
—

 
Barrels

The following sensitivity analysis provides the hypothetical effects of market price fluctuations to the commodity positions hedged under our derivative contracts:
 
 
Estimated Change in Fair Value at June 30,
Commodity-based Derivative Contracts
 
2017
 
2016
 
 
(In thousands)
Hypothetical 10% change in underlying commodity prices
 
$
1,069

 
$
16,700


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

As of June 30, 2017, 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 June 30, 2017, which equaled an effective interest rate of 2.99%. Both of these swap contracts matured in July 2017. These swap contracts have been designated as cash flow hedges.

The market risk inherent in our fixed-rate debt is the potential change arising from increases or decreases in interest rates as discussed below.

For the fixed rate HollyFrontier Senior Notes and HEP Senior Notes, changes in interest rates will generally affect fair value of the debt, but not earnings or cash flows. The outstanding principal, estimated fair value and estimated change in fair value (assuming a hypothetical 10% change in the yield-to-maturity rates) for this debt as of June 30, 2017 is presented below:
 
 
Outstanding
Principal
 
Estimated
Fair Value
 
Estimated
Change in
Fair Value
 
 
(In thousands)
HollyFrontier Senior Notes
 
$
1,000,000

 
$
1,065,000

 
$
36,926

HEP Senior Notes
 
$
400,000

 
$
418,000

 
$
12,619



48
Table of Content

For the variable rate HEP Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. At June 30, 2017, outstanding borrowings under the HEP Credit Agreement were $843.0 million. By means of its cash flow hedges, HEP has effectively converted the variable rate on $150.0 million of outstanding principal to a weighted average fixed rate of 2.99%. For the remaining unhedged HEP Credit Agreement borrowings of $693.0 million, a hypothetical 10% change in applicable interest rates would not materially affect cash flows.

Our operations are subject to hazards of petroleum processing operations, including fire, explosion and weather-related perils. We maintain various insurance coverages, including business interruption insurance, subject to certain deductibles. We are not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do not justify such expenditures.

Financial information is reviewed on the counterparties in order to review and monitor their financial stability and assess their ongoing ability to honor their commitments under the derivative contracts. We have not experienced, nor do we expect to experience, any difficulty in the counterparties honoring their commitments.

We have a risk management oversight committee consisting of members from our senior management. This committee oversees our risk enterprise program, monitors our risk environment and provides direction for activities to mitigate identified risks that may adversely affect the achievement of our goals.


Item 3.
Quantitative and Qualitative Disclosures About Market Risk

See “Risk Management” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles

Reconciliations of earnings before interest, taxes, depreciation and amortization (“EBITDA”) to amounts reported under generally accepted accounting principles in the United States (“GAAP”) in financial statements.

Earnings before interest, taxes, depreciation and amortization, which we refer to as EBITDA, is calculated as net income (loss) attributable to HollyFrontier stockholders plus (i) interest expense, net of interest income, (ii) income tax provision, and (iii) depreciation and amortization. EBITDA is not a calculation provided for under GAAP; however, the amounts included in these calculations are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies. EBITDA is presented here because it is a widely used financial indicator used by investors and analysts to measure performance. EBITDA is also used by our management for internal analysis.

Set forth below is our calculation of EBITDA and adjusted EBITDA.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Net income (loss) attributable to HollyFrontier stockholders
$
57,767

 
$
(409,368
)
 
$
12,299

 
$
(388,115
)
Add (subtract) income tax expense (benefit)
31,996

 
(38,045
)
 
15,207

 
(15,737
)
Add interest expense (1)
29,645

 
14,251

 
69,028

 
35,056

Subtract interest income
(176
)
 
(527
)
 
(995
)
 
(602
)
Add depreciation and amortization
105,282

 
90,423

 
201,322

 
178,303

EBITDA
$
224,514

 
$
(343,266
)
 
$
296,861

 
$
(191,095
)

(1) Includes loss on early extinguishment of debt of $12.2 million and $8.7 million for the six months ended June 30, 2017 and 2016, respectively.


49
Table of Content

Reconciliations of refinery operating information (non-GAAP performance measures) to amounts reported under generally accepted accounting principles in financial statements.

Refinery gross margin and net operating margin are non-GAAP performance measures that are used by our management and others to compare our refining performance to that of other companies in our industry. We believe these margin measures are helpful to investors in evaluating our refining performance on a relative and absolute basis.

Refinery gross margin per barrel is the difference between average net sales price and average cost of products per barrel of produced refined products. Net operating margin per barrel is the difference between refinery gross margin and refinery operating expenses per barrel of produced refined products. These two margins do not include the non-cash effects of lower of cost or market inventory valuation adjustments, goodwill and asset impairment charges or depreciation and amortization. Each of these component performance measures can be reconciled directly to our consolidated statements of income. Other companies in our industry may not calculate these performance measures in the same manner.

Refinery Gross and Net Operating Margins

Below are reconciliations to our consolidated statements of income for (i) net sales, cost of products (exclusive of lower of cost or market inventory valuation adjustment) and operating expenses, in each case averaged per produced barrel sold, and (ii) net operating margin and refinery gross margin. Due to rounding of reported numbers, some amounts may not calculate exactly.

Reconciliation of produced product sales to total sales and other revenues 

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands, except per barrel amounts)
Consolidated
 
 
 
 
 
 
 
Average sales price per produced barrel sold
$
65.80

 
$
60.92

 
$
66.17

 
$
53.83

Times sales of produced refined products (BPD)
465,900

 
431,110

 
425,590

 
422,250

Times number of days in period
91

 
91

 
181

 
182

Produced refined product sales
$
2,789,716

 
$
2,389,953

 
$
5,097,194

 
$
4,136,809

 
 
 
 
 
 
 
 
Total produced refined products sales
$
2,789,716

 
$
2,389,953

 
$
5,097,194

 
$
4,136,809

Add refined product sales from purchased products and rounding (1)
172,841

 
161,860

 
433,131

 
293,460

Total refined product sales
2,962,557

 
2,551,813

 
5,530,325

 
4,430,269

Add direct sales of excess crude oil (2)
121,566

 
100,782

 
380,307

 
191,700

Add other refining segment revenue (3)
57,014

 
46,427

 
92,581

 
76,640

Total refining segment revenue
3,141,137

 
2,699,022

 
6,003,213

 
4,698,609

Add PCLI segment sales and other revenues
309,566

 
—

 
511,506

 
—

Add HEP segment sales and other revenues
109,143

 
94,896

 
214,777

 
196,906

Add corporate and other revenues
15

 
47

 
42

 
157

Subtract consolidations and eliminations
(100,997
)
 
(79,327
)
 
(190,191
)
 
(162,310
)
Sales and other revenues
$
3,458,864

 
$
2,714,638

 
$
6,539,347

 
$
4,733,362


50
Table of Content


Reconciliation of average cost of products per produced barrel sold to total cost of products sold (exclusive of lower of cost or market inventory valuation adjustment)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands, except per barrel amounts)
Consolidated
 
 
 
 
 
 
 
Average cost of products per produced barrel sold
$
54.33

 
$
52.04

 
$
56.37

 
$
45.58

Times sales of produced refined products (BPD)
465,900

 
431,110

 
425,590

 
422,250

Times number of days in period
91

 
91

 
181

 
182

Cost of products for produced products sold
$
2,303,424

 
$
2,041,582

 
$
4,342,282

 
$
3,502,800

 
 
 
 
 
 
 
 
Total cost of products for produced products sold
$
2,303,424

 
$
2,041,582

 
$
4,342,282

 
$
3,502,800

Add refined product costs from purchased products and rounding(1)
172,554

 
159,155

 
433,615

 
297,519

Total cost of refined products sold
2,475,978

 
2,200,737

 
4,775,897

 
3,800,319

Add crude oil cost of direct sales of excess crude oil (2)
121,454

 
101,719

 
381,284

 
193,307

Add other refining segment cost of products sold (4)
32,952

 
19,463

 
46,928

 
31,361

Total refining segment cost of products sold
2,630,384

 
2,321,919

 
5,204,109

 
4,024,987

Add PCLI segment cost of products sold
205,559

 
—

 
341,863

 
—

Subtract consolidations and eliminations
(82,503
)
 
(73,764
)
 
(151,375
)
 
(151,669
)
Costs of products sold (exclusive of lower of cost or market inventory valuation adjustment and depreciation and amortization)
$
2,753,440

 
$
2,248,155

 
$
5,394,597

 
$
3,873,318



Reconciliation of average refinery operating expenses per produced barrel sold to total operating expenses
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands, except per barrel amounts)
Consolidated
 
 
 
 
 
 
 
Average refinery operating expenses per produced barrel sold
$
5.54

 
$
5.51

 
$
6.25

 
$
5.64

Times sales of produced refined products (BPD)
465,900

 
431,110

 
425,590

 
422,250

Times number of days in period
91

 
91

 
181

 
182

Refinery operating expenses for produced products sold
$
234,879

 
$
216,163

 
$
481,449

 
$
433,431

 
 
 
 
 
 
 
 
Total refinery operating expenses for produced products sold
$
234,879

 
$
216,163

 
$
481,449

 
$
433,431

Add other refining segment operating expenses and rounding (5)
10,386

 
9,520

 
20,931

 
20,081

Total refining segment operating expenses
245,265

 
225,683

 
502,380

 
453,512

Add PCLI segment operating expenses
52,652

 
—

 
88,681

 
—

Add HEP segment operating expenses
34,097

 
29,212

 
66,586

 
56,968

Add corporate and other costs
1,322

 
1,152

 
2,335

 
2,407

Subtract consolidations and eliminations
(17,684
)
 
(4,711
)
 
(37,213
)
 
(8,968
)
Operating expenses (exclusive of depreciation and amortization)
$
315,652

 
$
251,336

 
$
622,769

 
$
503,919




51
Table of Content

Reconciliation of net operating margin per barrel to refinery gross margin per barrel to total sales and other revenues
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands, except per barrel amounts)
Consolidated
 
 
 
 
 
 
 
Net operating margin per barrel
$
5.93

 
$
3.37

 
$
3.55

 
$
2.61

Add average refinery operating expenses per produced barrel
5.54

 
5.51

 
6.25

 
5.64

Refinery gross margin per barrel
11.47

 
8.88

 
9.80

 
8.25

Add average cost of products per produced barrel sold
54.33

 
52.04

 
56.37

 
45.58

Average sales price per produced barrel sold
$
65.80

 
$
60.92

 
$
66.17

 
$
53.83

Times sales of produced refined products (BPD)
465,900

 
431,110

 
425,590

 
422,250

Times number of days in period
91

 
91

 
181

 
182

Produced refined products sales
$
2,789,716

 
$
2,389,953

 
$
5,097,194

 
$
4,136,809

 
 
 
 
 
 
 
 
Total produced refined products sales
$
2,789,716

 
$
2,389,953

 
$
5,097,194

 
$
4,136,809

Add refined product sales from purchased products and rounding (1)
172,841

 
161,860

 
433,131

 
293,460

Total refined product sales
2,962,557

 
2,551,813

 
5,530,325

 
4,430,269

Add direct sales of excess crude oil (2)
121,566

 
100,782

 
380,307

 
191,700

Add other refining segment revenue (3)
57,014

 
46,427

 
92,581

 
76,640

Total refining segment revenue
3,141,137

 
2,699,022

 
6,003,213

 
4,698,609

Add PCLI segment sales and other revenues
309,566

 
—

 
511,506

 
—

Add HEP segment sales and other revenues
109,143

 
94,896

 
214,777

 
196,906

Add corporate and other revenues
15

 
47

 
42

 
157

Subtract consolidations and eliminations
(100,997
)
 
(79,327
)
 
(190,191
)
 
(162,310
)
Sales and other revenues
$
3,458,864

 
$
2,714,638

 
$
6,539,347

 
$
4,733,362


(1)
We purchase finished products to facilitate delivery to certain locations or to meet delivery commitments.
(2)
We purchase crude oil that at times exceeds the supply needs of our refineries. Quantities in excess of our needs are sold at market prices to purchasers of crude oil that are recorded on a gross basis with the sales price recorded as revenues and the corresponding acquisition cost as inventory and then upon sale as cost of products sold. Additionally, at times we enter into buy/sell exchanges of crude oil with certain parties to facilitate the delivery of quantities to certain locations that are netted at cost.
(3)
Other refining segment revenue includes the incremental revenues associated with HFC Asphalt, product purchased and sold forward for profit as market conditions and available storage capacity allows and miscellaneous revenue.
(4)
Other refining segment cost of products sold includes the incremental cost of products for HFC Asphalt, the incremental cost associated with storing product purchased and sold forward as market conditions and available storage capacity allows and miscellaneous costs.
(5)
Other refining segment operating expenses include the marketing costs associated with our refining segment and the operating expenses of HFC Asphalt.


Item 4.
Controls and Procedures

Evaluation of disclosure controls and procedures. Our principal executive officer and principal financial officer have evaluated, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2017.


52
Table of Content

Changes in internal control over financial reporting. We acquired PCLI from Suncor effective February 1, 2017 and have included PCLI’s operating results, assets and liabilities in our consolidated financial statements as of June 30, 2017 and for the five months then ended. Pursuant to a Transition Service Agreement with Suncor, Suncor provides accounting support services for PCLI including month end close process and other accounting services. Other than internal controls for PCLI, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.


53
Table of Content

PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings

Commitment and Contingency Reserves

We periodically establish reserves for certain legal proceedings. The establishment of a reserve involves an estimation process that includes the advice of legal counsel and subjective judgment of management. While management believes these reserves to be adequate, future changes in the facts and circumstances could result in the actual liability exceeding the estimated ranges of loss and amounts accrued.

While the outcome and impact on us cannot be predicted with certainty, based on advice of counsel, management believes that the resolution of these proceedings through settlement or adverse judgment will not either individually or in the aggregate have a material adverse effect on our financial condition, results of operations or cash flows.

Environmental Matters

We are reporting the following proceedings to comply with SEC regulations which require us to disclose proceedings arising under federal, state or local provisions regulating the discharge of materials into the environment or protecting the environment if we reasonably believe that such proceedings may result in monetary sanctions of $100,000 or more. Our respective subsidiaries have or will develop corrective action plans regarding these disclosures that will be implemented in consultation with the respective federal and state agencies. It is not possible to predict the ultimate outcome of these proceedings, although none are currently expected to have a material effect on our financial condition, results of operations or cash flows.

Cheyenne
HollyFrontier Cheyenne Refining LLC (“HFCR”), our wholly-owned subsidiary, completed certain environmental audits at the Cheyenne Refinery regarding compliance with federal and state environmental requirements. By letters dated October 5, 2012, November 7, 2012, and January 10, 2013, and pursuant to the EPA's audit policy to the extent applicable, HFCR submitted reports to the EPA voluntarily disclosing non-compliance with certain emission limitations, reporting requirements, and provisions of a 2009 federal consent decree. By letters dated October 31, 2012; February 6, 2013; June 21, 2013; July 9, 2013 and July 25, 2013, and pursuant to applicable Wyoming audit statutes, HFCR submitted environmental audit reports to the Wyoming Department of Environmental Quality (“WDEQ”) voluntarily disclosing non-compliance with certain notification, reporting, and other provisions of the refinery's state air permit and other environmental regulatory requirements. No further action has been taken by either agency at this time.

El Dorado
The El Dorado Refinery has been engaged in discussions with the EPA regarding potential Clean Air Act violations relating to flaring devices and other equipment at the refinery. The El Dorado Refinery has responded to two separate information requests covering air emissions for a time frame from January 1, 2009 through May 31, 2014. The EPA also conducted an on-site Clean Air Act - Sec. 112r Risk Management Program (“RMP”) compliance audit at the El Dorado Refinery and notified the El Dorado Refinery of 20 alleged “deficiencies” related to that inspection. Although no Notice or Finding of Violation has been issued by the EPA in connection with either the Clean Air Act inquiry or the 112r inspection, the EPA and the U.S. Department of Justice have indicated that the federal government believes it has claims for civil penalties relating to the information provided in response to the information requests and the RMP inspection. We have had discussions with the government parties, are continuing to evaluate the relevant law and facts and will continue to work with the EPA regarding these matters.

Tulsa
HollyFrontier Tulsa Refining LLC (“HFTR”) manufactures paraffin and hydrocarbon waxes at its Tulsa West facility. On March 11, 2014, the EPA issued a notice to HFTR of possible violations of certain provisions of the federal Toxic Substances Control Act in connection with the manufacture of certain of these products. HFTR and the EPA met and are working productively towards a settlement of this matter.

Other

We are a party to various other litigation and proceedings that we believe, based on advice of counsel, will not either individually or in the aggregate have a materially adverse impact on our financial condition, results of operations or cash flows.



54
Table of Content

Item 1A.
Risk Factors

There have been no material changes in our risk factors as previously disclosed in Part 1, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and in Part II, “Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017. You should carefully consider the risk factors discussed in our 2016 Form 10-K and March 31, 2017 Form 10-Q, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.


Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

(c) Common Stock Repurchases Made in the Quarter

Under our common stock repurchase programs, repurchases are being made from time to time in the open market or privately negotiated transactions based on market conditions, securities law limitations and other factors. The following table includes repurchases made under these programs during the second quarter of 2017.

Period
 
Total Number of
Shares Purchased
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased
as Part of Publicly Announced Plans or Programs
 
Maximum Dollar
Value of Shares
that May Yet Be
Purchased Under the Plans or Programs
April 2017
 
—

 
$
—

 
—

 
$
178,811,213

May 2017
 
—

 
$
—

 
—

 
$
178,811,213

June 2017
 
—

 
$
—

 
—

 
$
178,811,213

Total for April to June 2017
 
—

 
 
 
—

 
 


Item 6.
Exhibits

The Exhibit Index on page 62 of this Quarterly Report on Form 10-Q lists the exhibits that are filed or furnished, as applicable, as part of the Quarterly Report on Form 10-Q.


55
Table of Content

 
SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
HOLLYFRONTIER CORPORATION
 
 
(Registrant)
 
 
 
 
Date: August 2, 2017
 
 
/s/ Richard L. Voliva III
 
 
 
Richard L.Voliva III
 
 
 
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
Date: August 2, 2017
 
 
/s/ J. W. Gann, Jr.
 
 
 
J. W. Gann, Jr.
 
 
 
Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)

56
Table of Content


Exhibit Index

Exhibit Number
  
Description
 
 
 
3.1
 
 
 
 
3.2
 
 
 
 
4.1*
 
 
 
 
10.1
 
 
 
 
10.2
 
 
 
 
31.1*
 
 
 
 
31.2*
 
 
 
 
32.1**
 
 
 
 
32.2**
 
 
 
 
101+
 
The following financial information from HollyFrontier Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, and (v) Notes to the Consolidated Financial Statements.

* Filed herewith.
** Furnished herewith.
+ Filed electronically herewith.


57