Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

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)

Registrant’s telephone number, including area code (214) 871-3555

Holly Corporation, 100 Crescent Court, Suite 1600, Dallas, Texas 75201-6915

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  x    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  x    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   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

105,030,510 shares of Common Stock, par value $.01 per share, were outstanding on July 29, 2011.

 

 

 


Table of Contents

HOLLYFRONTIER CORPORATION

INDEX

 

               Page  
PART I.    FINANCIAL INFORMATION   
   Forward-Looking Statements      3   
   Definitions      4   
   Item 1.    Financial Statements   
      Consolidated Balance Sheets June 30, 2011
(Unaudited) and December 31, 2010
     6   
      Consolidated Statements of Income (Unaudited)
Three and Six Months Ended June 30, 2011 and 2010
     7   
      Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2011 and 2010
     8   
      Consolidated Statements of Comprehensive Income (Unaudited)
Three and Six Months Ended June 30, 2011 and 2010
     9   
      Notes to Consolidated Financial Statements (Unaudited)      10   
   Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      30   
   Item 3.    Quantitative and Qualitative Disclosures About Market Risk      49   
   Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles      49   
   Item 4.    Controls and Procedures      56   
PART II.    OTHER INFORMATION   
   Item 1.    Legal Proceedings      57   
   Item 6.    Exhibits      62   
   Signatures      63   
   Index to Exhibits      64   


Table of Contents

PART I. FINANCIAL INFORMATION

FORWARD-LOOKING STATEMENTS

Holly Corporation (“Holly”) changed its name to HollyFrontier Corporation (“HollyFrontier” or “HollyFrontier Corporation”) in connection with the consummation of its “merger of equals” with Frontier Oil Corporation (“Frontier”), which became effective on July 1, 2011. References herein to HollyFrontier Corporation with respect to time periods through and including June 30, 2011 include Holly and its consolidated subsidiaries and do not include Frontier and its consolidated subsidiaries since the merger had not been consummated as of June 30, 2011, while references herein to HollyFrontier with respect to time periods from and after July 1, 2011 include Frontier and its consolidated subsidiaries. Unless otherwise specified, the financial statements included herein are as of and for the period ended June 30, 2011 and, thus, do not include financial information for Frontier. 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. The words “we,” “our,” “ours” and “us” generally include Holly Energy Partners, L.P. (“HEP”) and its subsidiaries as consolidated subsidiaries of HollyFrontier with certain exceptions where there are transactions or obligations between HEP and HollyFrontier or its other subsidiaries. This document contains certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of HollyFrontier. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.

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

 

   

risks and uncertainties with respect to the actions of actual or potential competitive suppliers of refined petroleum products in our markets;

 

   

the demand for and supply of crude oil and refined products;

 

   

the spread between market prices for refined products and market prices for crude oil;

 

   

the possibility of constraints on the transportation of refined products;

 

   

the possibility of inefficiencies, curtailments or shutdowns in refinery operations or pipelines;

 

   

effects of governmental and environmental regulations and policies;

 

   

the availability and cost of our financing;

 

   

the effectiveness of our capital investments and marketing strategies;

 

   

our efficiency in carrying out construction projects;

 

   

our ability to acquire refined product operations or pipeline and terminal operations on acceptable terms and to integrate any existing or future acquired operations;

 

   

the possibility of terrorist attacks and the consequences of any such attacks;

 

   

general economic conditions;

 

   

our ability to successfully integrate the operations of Holly’s and Frontier’s businesses and to realize fully or at all the anticipated benefits of our “merger of equals” with Frontier; 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 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, 2010 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.

 

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Table of Contents

DEFINITIONS

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

Alkylation” means the reaction of propylene or butylene (olefins) with isobutane to form an iso-paraffinic gasoline (inverse of cracking).

Aromatic oil” is long chain oil that is highly aromatic in nature that is used to manufacture tires and in the production of asphalt.

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.

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.

Catalytic reforming” means a refinery process which uses a precious metal (such as platinum) based catalyst to convert low octane naphtha to high octane gasoline blendstock and hydrogen. The hydrogen produced from the reforming process is used to desulfurize other refinery oils and is a primary source of hydrogen for the refinery.

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

Crude 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.

Delayed coker unit” is a refinery unit that removes carbon from the bottom cuts of crude oil to produce unfinished light transportation fuels and petroleum coke.

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.

Hydrocracker” means a refinery unit that breaks down large complex hydrocarbon molecules into smaller more useful ones using a fixed bed of catalyst at high pressure and temperature with hydrogen.

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.

HF alkylation,” or hydrofluoric alkylation, means a refinery process which combines isobutane and C3/C4 olefins using HF acid as a catalyst to make high octane gasoline blend stock.

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.

LSG,” or low sulfur gasoline, means gasoline that contains less than 30 PPM of total sulfur.

 

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Table of Contents

Lube extraction unit” is a unit used in the lube process that separates aromatic oils from paraffinic oils using furfural as a solvent.

Lubricant” or “lube” means a solvent neutral paraffinic product used in passenger and commercial vehicle engine oils, specialty products for metal working or heat transfer and other industrial applications.

MEK” means a lube process that separates waxy oil from non-waxy oils using methyl ethyl ketone as a solvent.

MMBTU” means one million British thermal units.

MMSCFD” means one million standard cubic feet per day.

MTBE” means methyl tertiary butyl ether, a high octane gasoline blend stock that is used to make various grades of gasoline.

Natural gasoline” means a low octane gasoline blend stock that is purchased and used to blend with other high octane stocks produced to make various grades of gasoline.

PPM” means parts-per-million.

Parafinnic oil” is a high paraffinic, high gravity oil produced by extracting aromatic oils and waxes from gas oil and is used in producing high-grade lubricating oils.

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.

Reforming” means the process of converting gasoline type molecules into aromatic, higher octane gasoline blend stocks while producing hydrogen in the process.

Roofing flux” is produced from the bottom cut of crude oil and is the base oil used to make roofing shingles for the housing industry.

RFS2” or advanced renewable fuel standard is a regulatory mandate required by the Energy Independence and Security Act of 2007 that requires 36 billion gallons of renewable fuel to be blended into transportation fuels by 2022. New mandated blending requirements for this standard became effective July 1, 2010.

ROSE,” or “Solvent deasphalter / residuum oil supercritical extraction,” means a refinery unit that uses a light hydrocarbon like propane or butane to extract non-asphaltene heavy oils from asphalt or atmospheric reduced crude. These deasphalted oils are then further converted to gasoline and diesel in the FCC process. The remaining asphaltenes are either sold, blended to fuel oil or blended with other asphalt as a hardener.

Scanfiner” is a refinery unit that removes sulfur from gasoline to produce low sulfur gasoline blendstock.

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.

ULSD,” or ultra low sulfur diesel, means diesel fuel that contains less than 15 PPM of total sulfur.

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.

 

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Table of Contents
Item 1. Financial Statements

HOLLYFRONTIER CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

     June 30,
2011
    December 31,
2010
 
     (Unaudited)        

ASSETS

  

Current assets:

    

Cash and cash equivalents (HEP: $1,402 and $403, respectively)

   $ 426,689      $ 229,101   

Marketable securities

     65,854        1,343   

Accounts receivable:

 

Product and transportation (HEP: $18,756 and $22,508, respectively)

     363,585        299,081   
 

Crude oil resales

     639,942        694,035   
  

 

 

   

 

 

 
     1,003,527        993,116   

Inventories:

 

Crude oil and refined products

     444,733        353,636   
 

Materials and supplies (HEP: $185 and $202, respectively)

     50,567        46,731   
  

 

 

   

 

 

 
     495,300        400,367   

Income taxes receivable

     —          51,034   

Prepayments and other (HEP: $853 and $573, respectively)

     33,604        28,474   
  

 

 

   

 

 

 

Total current assets

     2,024,974        1,703,435   

Properties, plants and equipment, at cost (HEP: $575,259 and $552,398, respectively)

     2,363,081        2,215,828   

Less accumulated depreciation (HEP: $(73,790) and $(60,300), respectively)

     (503,318     (459,137
  

 

 

   

 

 

 
     1,859,763        1,756,691   

Marketable securities (long-term)

     24,804        —     

Other assets:

 

Turnaround costs

     75,377        69,533   
 

Goodwill (HEP: $81,602 and $81,602)

     81,602        81,602   
 

Intangibles and other (HEP: $74,241 and $72,434, respectively)

     98,783        90,214   
  

 

 

   

 

 

 
     255,762        241,349   
  

 

 

   

 

 

 

Total assets

   $ 4,165,303      $ 3,701,475   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities:

    

Accounts payable (HEP: $7,115 and $10,238, respectively)

   $ 1,450,640      $ 1,317,446   

Income taxes payable

     23,002        —     

Accrued liabilities (HEP: $16,108 and $21,206, respectively)

     83,951        72,409   
  

 

 

   

 

 

 

Total current liabilities

     1,557,593        1,389,855   

Long-term debt (HEP: $510,566 and $482,271, respectively)

     838,866        810,561   

Deferred income taxes

     128,465        131,935   

Other long-term liabilities (HEP: $9,164 and $10,809, respectively)

     81,191        80,985   

Equity:

    

HollyFrontier stockholders’ equity:

    

Preferred stock, $1.00 par value – 1,000,000 shares authorized; none issued

     —          —     

Common stock $.01 par value – 160,000,000 shares authorized; 76,346,432 shares issued as of June 30, 2011 and December 31, 2010

     763        763   

Additional capital

     193,411        194,378   

Retained earnings

     1,467,233        1,206,328   

Accumulated other comprehensive loss

     (26,091     (26,246

Common stock held in treasury, at cost – 22,936,525 and 23,081,744 shares as of June 30, 2011 and December 31, 2010, respectively

     (674,853     (677,804
  

 

 

   

 

 

 

Total HollyFrontier stockholders’ equity

     960,463        697,419   

Noncontrolling interest

     598,725        590,720   
  

 

 

   

 

 

 

Total equity

     1,559,188        1,288,139   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 4,165,303      $ 3,701,475   
  

 

 

   

 

 

 

Parenthetical amounts represent asset and liability balances attributable to Holly Energy Partners, L.P. (“HEP”) as of June 30, 2011 and December 31, 2010. HEP is a consolidated variable interest entity.

Holly Corporation changed its name to HollyFrontier Corporation in connection with the consummation of its “merger of equals” with Frontier Oil Corporation which became effective on July 1, 2011. The financial statements included herein are as of June 30, 2011 and do not include the financial position and operating results of Frontier Oil Corporation.

See accompanying notes.

 

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Table of Contents

HOLLYFRONTIER CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Sales and other revenues

   $ 2,967,133      $ 2,145,860      $ 5,293,718      $ 4,020,150   

Operating costs and expenses:

        

Cost of products sold (exclusive of depreciation and amortization)

     2,447,095        1,848,212        4,431,712        3,572,076   

Operating expenses (exclusive of depreciation and amortization)

     139,345        120,831        274,088        248,375   

General and administrative expenses (exclusive of depreciation and amortization)

     18,682        15,829        35,500        33,698   

Depreciation and amortization

     31,832        28,824        63,140        56,581   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     2,636,954        2,013,696        4,804,440        3,910,730   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     330,179        132,164        489,278        109,420   

Other income (expense):

        

Equity in earnings of SLC Pipeline

     467        544        1,207        1,025   

Interest income

     657        635        742        694   

Interest expense

     (15,193     (21,023     (31,397     (38,745

Merger transaction costs

     (2,316     —          (6,014     —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     (16,385     (19,844     (35,462     (37,026
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     313,794        112,320        453,816        72,394   

Income tax provision:

        

Current

     115,051        34,561        164,540        39,922   

Deferred

     (3,090     5,093        (3,568     (16,940
  

 

 

   

 

 

   

 

 

   

 

 

 
     111,961        39,654        160,972        22,982   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     201,833        72,666        292,844        49,412   

Less net income attributable to noncontrolling interest

     9,598        6,504        15,915        11,344   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to HollyFrontier stockholders

   $ 192,235      $ 66,162      $ 276,929      $ 38,068   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to HollyFrontier stockholders:

        

Basic

   $ 3.60      $ 1.24      $ 5.19      $ 0.72   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 3.58      $ 1.24      $ 5.16      $ 0.71   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.15      $ 0.15      $ 0.30      $ 0.30   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average number of common shares outstanding:

        

Basic

     53,365        53,206        53,336        53,152   

Diluted

     53,670        53,408        53,643        53,375   

See accompanying notes.

 

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Table of Contents

HOLLYFRONTIER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

     Six Months Ended
June 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 292,844      $ 49,412   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     63,140        56,581   

SLC Pipeline earnings, net of distributions

     (82     100   

Deferred income taxes

     (3,568     (16,940

Equity based compensation expense

     5,562        5,440   

Change in fair value – derivative instruments

     7,155        1,464   

(Increase) decrease in current assets:

    

Accounts receivable

     (10,411     (314

Inventories

     (94,933     (117,633

Income taxes receivable

     51,034        38,072   

Prepayments and other

     (13,088     (16,828

Current assets of discontinued operations

     —          2,195   

Increase (decrease) in current liabilities:

    

Accounts payable

     133,154        34,863   

Income taxes payable

     23,002        —     

Accrued liabilities

     16,712        5,441   

Turnaround expenditures

     (19,824     (8,723

Other, net

     7,299        5,216   
  

 

 

   

 

 

 

Net cash provided by operating activities

     457,996        38,346   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Additions to properties, plants and equipment

     (133,405     (72,043

Additions to properties, plants and equipment – HEP

     (22,900     (4,487

Investment in Sabine Biofuels

     (9,125     —     

Purchases of marketable securities

     (157,782     —     

Sales and maturities of marketable securities

     68,150        —     
  

 

 

   

 

 

 

Net cash used for investing activities

     (255,062     (76,530
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Borrowings under credit agreement

     —          310,000   

Repayments under credit agreement

     —          (310,000

Borrowings under credit agreement – HEP

     64,000        39,000   

Repayments under credit agreement – HEP

     (37,000     (90,000

Proceeds from issuance of senior notes – HEP

     —          147,540   

Repayments under financing obligation

     (563     (415

Purchase of treasury stock

     (2,996     (1,308

Contribution from joint venture partner

     16,500        5,000   

Dividends

     (15,984     (15,901

Distributions to noncontrolling interest

     (25,133     (23,933

Excess tax benefit (expense) from equity based compensation

     498        (1,313

Purchase of units for restricted grants – HEP

     (1,379     (2,276

Deferred financing costs

     (3,289     (2,655

Issuance of common stock upon exercise of options

     —          61   
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     (5,346     53,800   
  

 

 

   

 

 

 

Cash and cash equivalents:

    

Increase for the period

     197,588        15,616   

Beginning of period

     229,101        124,596   
  

 

 

   

 

 

 

End of period

   $ 426,689      $ 140,212   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 34,264      $ 31,449   

Income taxes

   $ 89,935      $ 1,043   

See accompanying notes.

 

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Table of Contents

HOLLYFRONTIER CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Net income

   $ 201,833      $ 72,666      $ 292,844      $ 49,412   

Other comprehensive income (loss):

        

Securities available-for-sale:

        

Unrealized gain (loss) on available-for-sale securities

     (525     (251     (383     (7

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

     66        —          66        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized gain (loss) on available-for-sale securities

     (459     (251     (317     (7

Hedging instruments:

        

Change in fair value of cash flow hedging instruments

     271        (1,696     1,592        (3,057

Reclassification adjustment to net income on settlement of cash flow hedging instruments

     —          1,076        —          1,076   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized gain (loss) on hedging instruments

     271        (620     1,592        (1,981

Other comprehensive income (loss) before income taxes

     (188     (871     1,275        (1,988

Income tax expense (benefit)

     (144     (180     98        138   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (44     (691     1,177        (2,126
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     201,789        71,975        294,021        47,286   

Less noncontrolling interest in comprehensive income

     9,776        6,097        16,935        9,001   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to HollyFrontier stockholders

   $ 192,013      $ 65,878      $ 277,086      $ 38,285   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1: Description of Business and Presentation of Financial Statements

Holly Corporation (“Holly”) changed its name to HollyFrontier Corporation (“HollyFrontier” or “HollyFrontier Corporation”) in connection with the consummation of its “merger of equals” with Frontier Oil Corporation (“Frontier”), which became effective on July 1, 2011 (see Note 2). All previous references to “Holly” within these financial statements have been replaced with “HollyFrontier.” References herein to HollyFrontier Corporation with respect to time periods through and including June 30, 2011 include Holly and its consolidated subsidiaries and do not include Frontier and its consolidated subsidiaries since the merger had not been consummated as of June 30, 2011, while references herein to HollyFrontier with respect to time periods from and after July 1, 2011 include Frontier and its consolidated subsidiaries. Unless otherwise specified, the financial statements included herein are as of and for the period ended June 30, 2011 and, thus, do not include financial information for Frontier. 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. The words “we,” “our,” “ours” and “us” generally include HEP and its subsidiaries as consolidated subsidiaries of HollyFrontier with certain exceptions where there are 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.

As of June 30, 2011, we:

 

   

owned and operated three refineries consisting of a petroleum 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 in Woods Cross, Utah (the “Woods Cross Refinery”) and our two refinery facilities located in Tulsa, Oklahoma (collectively, the “Tulsa Refinery”);

 

   

owned and operated NK Asphalt Partners (“NK Asphalt”) which operates various asphalt terminals in Arizona, New Mexico and Texas;

 

   

owned a 75% interest in a 12-inch refined products pipeline project, under construction, from Salt Lake City, Utah to Las Vegas, Nevada, together with terminal facilities in the Cedar City, Utah and North Las Vegas areas (the “UNEV Pipeline”);

 

   

owned a 50% interest in a development stage biodiesel production facility to be located in Port Arthur, Texas, and Sabine Biofuels II, LLC, (“Sabine Biofuels”);

 

   

owned a 34% interest in HEP, a consolidated variable interest entity (“VIE”), which includes our 2% general partner interest. HEP has logistic assets including petroleum product and crude oil pipelines located in Texas, New Mexico, Oklahoma and Utah; ten refined product terminals; a jet fuel terminal; loading rack facilities at each of our three refineries, a refined products tank farm facility and on-site crude oil tankage at our Navajo, Woods Cross and Tulsa Refineries. Additionally, HEP owns a 25% interest in SLC Pipeline LLC (“SLC Pipeline”), a new 95-mile intrastate pipeline system that serves refineries in the Salt Lake City area.

We have prepared these consolidated financial statements without audit. In management’s opinion, these consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of our consolidated financial position as of June 30, 2011, the consolidated results of operations and comprehensive income for the three and the six months ended June 30, 2011 and 2010 and consolidated cash flows for the six months ended June 30, 2011 and 2010 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, 2010 filed with the SEC.

 

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Beginning July 1, 2011, our business operations will reflect the merged Frontier businesses (see Note 2). Our results of operations for the first six months of 2011 are not necessarily indicative of the results to be expected for the full year.

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 a letter of credit or guarantee, is required. Our credit losses, which historically have been minimal are charged to income when accounts are deemed uncollectible. At June 30, 2011, our allowance for doubtful accounts reserve was $2.6 million.

Inventories

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

 

NOTE 2: Holly-Frontier Merger

On February 21, 2011, we entered into a merger agreement providing for a “merger of equals” business combination between us and Frontier. On July 1, 2011, North Acquisition, Inc., a direct wholly-owned subsidiary of Holly, merged with and into Frontier, with Frontier surviving as a wholly-owned subsidiary of Holly. Concurrent with the merger, we changed our name to HollyFrontier Corporation and changed the trading symbol for our common stock traded on the New York Stock Exchange to “HFC.” Subsequent to the merger and following approval by the post-closing board of directors of HollyFrontier, Frontier merged with and into HollyFrontier, with HollyFrontier continuing as the surviving corporation.

In accordance with the merger agreement, we issued approximately 51.4 million shares of HollyFrontier common stock in exchange for outstanding shares of Frontier common stock to former Frontier stockholders. Each outstanding share of Frontier common stock was converted into 0.4811 shares of HollyFrontier common stock with any fractional shares paid in cash. Based on the July 1, 2011 market closing price of $71.86, the aggregate equity consideration paid in connection with the merger was approximately $3.7 billion.

The merger will be accounted for using the acquisition method of accounting with Holly being considered the acquirer of Frontier for accounting purposes. Therefore, the purchase price shall be allocated to the fair value of the acquired Frontier tangible and intangible assets and liabilities at the acquisition date, with the excess purchase price being recorded as goodwill. Due to the short timeframe between the consummation of the merger and filing this Quarterly Report on Form 10-Q, we have not completed the detailed valuation studies necessary to arrive at the required fair value estimates of the acquired Frontier assets, the liabilities assumed and the related purchase price allocations.

Beginning July 1, 2011, HollyFrontier’s consolidated financial and operating results will reflect the operations of the merged Frontier businesses. This includes a refinery located in El Dorado, Kansas (the “El Dorado Refinery”) and a refinery located in Cheyenne, Wyoming (the “Cheyenne Refinery”) that serve markets in the Rocky Mountain and Plains States regions of the United States. Assuming the merger had been consummated on January 1, 2010, the beginning of the earliest period presented, pro forma revenues, net income and basic earnings per share are as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  
     (In thousands, except per share amounts)  

Sales and other revenues

   $ 5,037,660       $ 3,694,740       $ 9,272,899       $ 6,841,174   

Net income attributable to HollyFrontier stockholders

   $ 368,375       $ 140,351       $ 601,791       $ 80,494   

Basic earnings per share

   $ 3.52       $ 1.34       $ 5.74       $ 0.77   

Diluted earnings per share

   $ 3.50       $ 1.34       $ 5.72       $ 0.77   

 

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The pro forma financial information above reflects adjustments that primarily relate to depreciation and amortization expense and are based on management’s preliminary fair value estimates including useful life assumptions on the Frontier property, plant and equipment and intangible assets. These estimates are preliminary in nature and are expected to change following the completion of our valuation of the Frontier assets and liabilities. Such changes could be material.

As of June 30, 2011, we have recognized $6 million in merger transaction costs that are presented separately in our income statements and primarily relate to legal, advisory and other professional fees incurred since the announcement of our merger agreement in 2011. This does not include post-merger transaction costs including fees contingent upon the merger closing as well as costs to integrate the operations of the combined company.

 

NOTE 3: Holly Energy Partners

HEP, a consolidated VIE, is a publicly held master limited partnership that was formed to acquire, own and operate the petroleum product and crude oil pipeline and terminal, tankage and loading rack facilities that support our refining and marketing operations in west Texas, New Mexico, Utah, Oklahoma, Idaho and Arizona. HEP also owns and operates refined product pipelines and terminals, located primarily in Texas, that service Alon USA, Inc.’s (“Alon”) refinery in Big Spring, Texas.

As of June 30, 2011, we owned a 34% interest in HEP, including the 2% general partner interest. We are HEP’s primary beneficiary and therefore we consolidate HEP. See Note 17 for supplemental guarantor/non-guarantor financial information, including HEP balances included in these consolidated financial statements. All intercompany transactions with HEP are eliminated in our consolidated balances.

HEP has two primary customers (including us) and generates revenues by charging tariffs for transporting petroleum products and crude oil though its pipelines, by charging fees for terminalling refined products and other hydrocarbons, and storing and providing other services at its storage tanks and terminals. Under our long-term transportation agreements with HEP (discussed further below), we accounted for 74% of HEP’s total revenues for the six months ended June 30, 2011. We do not provide financial or equity support through any liquidity arrangements and /or guarantees to HEP.

HEP has outstanding debt under a senior secured revolving credit agreement and its senior notes. With the exception of the assets of HEP Logistics Holdings, L.P., one of our wholly-owned subsidiaries and HEP’s general partner, HEP’s creditors have no recourse to our assets. Any recourse to HEP’s general partner would be limited to the extent of HEP Logistics Holdings, L.P.’s assets, which other than its investment in HEP, are not significant. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries. See Note 10 for a description of HEP’s debt obligations.

We have pledged 6,000,000 of our HEP common units to collateralize certain crude oil purchases in 2011.

HEP has risk associated with its operations. If a major shipper of HEP were to terminate its contracts or fail to meet desired shipping 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.

 

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2010 Tulsa East / Lovington Storage Asset Transaction

On March 31, 2010, HEP acquired from us certain storage assets for $93 million, consisting of hydrocarbon storage tanks having approximately 2 million barrels of storage capacity, a rail loading rack and a truck unloading rack located at our Tulsa Refinery east facility and an asphalt loading rack facility located at our Navajo Refinery facility located in Lovington, New Mexico.

Transportation Agreements

HEP serves our refineries in New Mexico, Utah and Oklahoma under the following long-term pipeline and terminal, tankage and throughput agreements:

 

   

HEP PTA (pipelines and terminals throughput agreement expiring in 2019 that relates to the pipelines and terminal assets that we contributed to HEP upon its initial public offering in 2004);

 

   

HEP IPA (intermediate pipelines throughput agreement expiring in 2024 that relates to the intermediate pipelines sold to HEP in 2005 and 2009);

 

   

HEP CPTA (crude pipelines and tankage throughput agreement expiring in 2023 that relates to the crude pipelines and tankage assets sold to HEP in 2008);

 

   

HEP PTTA (pipeline, tankage and loading rack throughput agreement expiring in 2024 that relates to the Tulsa east storage tank and loading rack facilities acquired in 2009 and 2010);

 

   

HEP RPA (pipeline throughput agreement expiring in 2024 that relates to the Roadrunner Pipeline sold to HEP in 2009);

 

   

HEP ETA (equipment and throughput agreement expiring in 2024 that relates to the Tulsa west loading rack facilities sold to HEP in 2009);

 

   

HEP NPA (natural gas pipeline throughput agreement expiring in 2024); and

 

   

HEP ATA (loading rack throughput agreement expiring in 2025 that relates to the Lovington asphalt loading rack facility sold to HEP in March 2010).

Under these agreements, we pay HEP fees to transport, store and throughput volumes of refined product and crude oil on HEP’s pipeline and terminal, tankage and loading rack facilities that result in minimum annual payments to HEP. These minimum annual payments are subject to annual tariff rate adjustments on July 1, based on the Producer Price Index (“PPI”) or Federal Energy Regulatory Commission (“FERC”) index, but with the exception of the HEP IPA, generally will not decrease as a result of a decrease in the PPI or FERC index. As of July 1, 2011, these agreements result in minimum annualized payments to HEP of $140 million.

 

NOTE 4: Financial Instruments

Our financial instruments consist of cash and cash equivalents, investments in marketable securities, accounts receivable, accounts payable, debt and derivative instruments. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments.

As of June 30, 2011, debt consisted of borrowings outstanding under HEP’s $275 million revolving credit agreement (the “HEP Credit Agreement”), our 9.875% senior notes due 2017 (the “HollyFrontier 9.875% Senior Notes”), HEP’s 6.25% senior notes due 2015 (the “HEP 6.25% Senior Notes”) and HEP’s 8.25% senior notes due 2018 (the “HEP 8.25% Senior Notes”). The $186 million carrying amount of borrowings outstanding under the HEP Credit Agreement approximates fair value as interest rates are reset frequently using current interest rates. At June 30, 2011, the estimated fair values of the HollyFrontier 9.875% Senior Notes, HEP 6.25% Senior Notes and HEP 8.25% Senior Notes were $333.8 million, $184.1 million and $159.4 million, respectively. These fair value estimates are based on market quotes provided from a third-party bank. See Note 10 for additional information on these debt instruments.

 

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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.

Our investments in marketable securities are measured at fair value using quoted market prices, a Level 1 input. See Note 7 for additional information on our investments in marketable securities, including fair value measurements.

We have commodity price swaps and HEP has an interest rate swap that is measured at fair value on a recurring basis using Level 2 inputs. With respect to these instruments, fair value is 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 swap. See Note 11 for additional information on these swap contracts, including fair value measurements.

 

NOTE 5: Earnings Per Share

Basic earnings per share is calculated as net income attributable to HollyFrontier stockholders divided by the average number of shares of common stock outstanding. Diluted earnings per share assumes, when dilutive, the issuance of the net incremental shares from stock options, variable restricted shares and variable performance shares. The following is a reconciliation of the denominators of the basic and diluted per share computations for net income attributable to HollyFrontier stockholders:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  
     (In thousands, except per share data)  

Earnings attributable to HollyFrontier stockholders

   $ 192,235       $ 66,162       $ 276,929       $ 38,068   

Average number of shares of common stock outstanding

     53,365         53,206         53,336         53,152   

Effect of dilutive stock options, variable restricted shares and performance share units

     305         202         307         223   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average number of shares of common stock outstanding assuming dilution

     53,670         53,408         53,643         53,375   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 3.60       $ 1.24       $ 5.19       $ 0.72   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 3.58       $ 1.24       $ 5.16       $ 0.71   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

NOTE 6: Stock-Based Compensation

On June 30, 2011, we had two principal share-based compensation plans that are described below (collectively, the “Long-Term Incentive Compensation Plan”). The compensation cost that has been charged against income for these plans was $3.4 million and $2.2 million for the three months ended June 30, 2011 and 2010, respectively, and $4.5 million and $4.1 million for the six months ended June 30, 2011 and 2010, respectively.

 

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The total income tax benefit recognized in the income statement for share-based compensation arrangements was $1.3 million and $0.8 million for the three months ended June 30, 2011 and 2010, respectively, and $1.8 million and $1.6 million for the six months ended June 30, 2011 and 2010 respectively. Our current accounting policy for the recognition of compensation expense for awards with pro-rata vesting (substantially all of our awards) is to expense the costs pro-rata over the vesting periods.

Additionally, HEP maintains share-based compensation plans for HEP directors and select Holly Logistic Services, L.L.C. executives and employees. Compensation cost attributable to HEP’s share-based compensation plans was $0.4 million and $0.3 million for the three months ended June 30, 2011 and 2010, respectively, and $1.1 million and $1.3 million for the six months ended June 30, 2011 and 2010, respectively.

Restricted Stock

Under our Long-Term Incentive Compensation Plan, we grant certain officers, other key employees and outside directors restricted stock awards with substantially all awards vesting generally over a period of one to five years. Although ownership of the shares does not transfer to the recipients until after the shares vest, recipients generally have dividend rights on these shares from the date of grant. The vesting for certain key executives is contingent upon certain performance targets being realized. The fair value of each share of restricted stock awarded, including the shares issued to the key executives, was measured based on the market price as of the date of grant and is being amortized over the respective vesting period.

A summary of restricted stock activity and changes during the six months ended June 30, 2011 is presented below:

 

Restricted Stock

   Grants     Weighted-
Average Grant
Date Fair
Value
     Aggregate
Intrinsic Value
($000)
 

Outstanding at January 1, 2011 (non-vested)

     346,996      $ 29.31      

Vesting and transfer of ownership to recipients

     (158,528     31.18      

Granted

     102,710        58.23      

Forfeited

     (12,965     52.02      
  

 

 

      

Outstanding at June 30, 2011 (non-vested)

     278,213      $ 37.86       $ 16,904   
  

 

 

   

 

 

    

 

 

 

The total fair value of restricted stock vested and transferred to recipients during the six months ended June 30, 2011 and 2010 was $4.9 million and $4.2 million, respectively. As of June 30, 2011, there was $5.5 million of total unrecognized compensation cost related to non-vested restricted stock grants. That cost is expected to be recognized over a weighted-average period of 1 years.

Performance Share Units

Under our Long-Term Incentive Compensation Plan, we grant certain officers and other key employees performance share units, which are payable in stock upon meeting certain criteria over the service period, and generally vest over a period of one to three years. Under the terms of our performance share unit grants, awards are subject to financial performance criteria.

The fair value of each performance share unit award is computed using the grant date closing stock price of each respective award grant and will apply to the number of units ultimately awarded. The number of shares ultimately issued for each award will be based on our financial performance as compared to peer group companies over the performance period and can range from zero to 200%. As of June 30, 2011, estimated share payouts for outstanding non-vested performance share unit awards ranged from 150% to 175%.

 

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A summary of performance share unit activity and changes during the six months ended June 30, 2011 is presented below:

 

Performance Share Units

   Grants  

Outstanding at January 1, 2011 (non-vested)

     278,093   

Vesting and transfer of ownership to recipients

     (53,962

Granted

     61,491   
  

 

 

 

Outstanding at June 30, 2011 (non-vested)

     285,622   
  

 

 

 

For the six months ended June 30, 2011, we issued 75,007 shares of our common stock having a fair value of $2.6 million related to vested performance share units, representing a 139% payout. Based on the weighted average grant date fair value of $32.86, there was $8.2 million of total unrecognized compensation cost related to non-vested performance share units. That cost is expected to be recognized over a weighted-average period of 1.3 years.

 

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

Our investment portfolio at June 30, 2011, consisted of cash, cash equivalents and investments in debt securities primarily issued by government entities. We also hold 1,000,000 shares of Connacher Oil and Gas Limited common stock that were received as partial consideration upon our sale of our Montana refinery in 2006.

We invest in highly-rated marketable debt securities, primarily issued by government entities that have maturities at the date of purchase of greater than three months. We also invest in other marketable debt securities with the maximum maturity of any individual issue not greater than two years from the date of purchase. All of these instruments including investments in equity securities are classified as available-for-sale, and as a result, are reported at fair value using quoted market prices. Interest income is recorded as earned. Unrealized gains and losses, net of related income taxes, are considered temporary and are reported as a component of accumulated other comprehensive income. For investments in an unrealized loss position that are determined to be other than temporary, unrealized losses are reclassified out of accumulated other comprehensive income and into earnings as an impairment loss. Upon sale, realized gains and losses on the sale of marketable securities are computed based on the specific identification of the underlying cost of the securities sold and the unrealized gains and losses previously reported in other comprehensive income are reclassified to current earnings.

The following is a summary of our available-for-sale securities:

 

     Available-for-Sale Securities  
     Amortized
Cost
     Gross
Unrealized
Gain (Loss)
    Estimated Fair
Value

(Net Carrying
Amount)
 
     (In thousands)  

June 30, 2011

       

Marketable debt securities (state and political subdivisions)

   $ 89,632       $ (69   $ 89,563   

Equity securities

     610         485        1,095   
  

 

 

    

 

 

   

 

 

 

Total marketable securities

   $ 90,242       $ 416      $ 90,658   
  

 

 

    

 

 

   

 

 

 

December 31, 2010

       

Equity securities

   $ 610       $ 733      $ 1,343   
  

 

 

    

 

 

   

 

 

 

For the six months ended June 30, 2011, we invested $157.8 million in marketable debt securities and received a total of $68.2 million related to sales and maturities of our investments in marketable debt securities.

 

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NOTE 8: Inventories

Inventory consists of the following components:

 

     June 30,
2011
     December 31,
2010
 
     (In thousands)  

Crude oil

   $ 179,650       $ 96,570   

Other raw materials and unfinished products (1)

     56,677         68,792   

Finished products (2)

     208,406         188,274   

Process chemicals (3)

     22,576         22,512   

Repairs and maintenance supplies and other

     27,991         24,219   
  

 

 

    

 

 

 

Total inventory

   $ 495,300       $ 400,367   
  

 

 

    

 

 

 

 

(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 catalysts, additives and other chemicals.

 

NOTE 9: Environmental

Consistent with our accounting policy for environmental remediation costs, we expensed $0.1 million for the three months ended June 30, 2011 and 2010 and $0.1 million and $1.5 million for the six months ended June 30, 2011 and 2010, respectively, for environmental remediation obligations. The accrued environmental liability reflected in our consolidated balance sheets was $23.4 million and $26.2 million at June 30, 2011 and December 31, 2010, respectively, of which $17.8 million and $20.4 million, respectively, were classified as other long-term liabilities. Costs of future expenditures for environmental remediation that are expected to be incurred over the next several years are not discounted to their present value.

 

NOTE 10: Debt

Credit Facilities

On July 1, 2011, we entered into a $1 billion senior secured credit agreement (the “HollyFrontier credit Agreement”) with Union Bank, N.A. as administrative agent and BNP Paribas as syndication agent, and certain lenders from time to time party thereto, and terminated our previous credit agreement discussed below. The HollyFrontier Credit Agreement matures in July 2016 and may be used to fund working capital requirements, capital expenditures, acquisitions and general corporate purposes.

At June 30, 2011, we had a $400 million senior secured credit agreement expiring in March 2013 with Bank of America, N.A. as administrative agent and one of a syndicate of lenders. We were in compliance with all covenants at June 30, 2011. At June 30, 2011, we had no outstanding borrowings and outstanding letters of credit totaling $76.8 million. At that level of usage, the unused commitment was $323.2 million at June 30, 2011.

The $275 million HEP Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. In February 2011, HEP amended its previous credit agreement (expiring in August 2011), extending the expiration date and slightly reducing the size of the credit facility from $300 million to $275 million. The size was reduced based on management’s review of past and forecasted utilization of the facility. The HEP Credit Agreement expires in February 2016; however, in the event that the HEP 6.25% Senior Notes (discussed below) are not repurchased, refinanced, extended or repaid prior to September 1, 2014, the HEP Credit Agreement shall expire on that date.

HEP’s obligations under the HEP Credit Agreement are collateralized by substantially all of HEP’s assets (presented parenthetically in our Consolidated Balance Sheets). Indebtedness under the HEP Credit Agreement is recourse to HEP Logistics Holdings, L.P., its general partner, and guaranteed by HEP’s material, wholly-owned subsidiaries. Any recourse to the general partner would be limited to the extent of HEP Logistics

 

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Holdings, L.P.’s assets, which other than its investment in HEP, are not significant. HEP’s creditors have no other recourse to our assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries.

HollyFrontier Senior Notes Due 2017

Our $300 million 9.875% Senior Notes mature in June 2017 and are unsecured and impose certain restrictive covenants, including limitations on our ability to incur additional debt, incur liens, enter into sale-and-leaseback transactions, pay dividends, enter into mergers, sell assets and enter into certain transactions with affiliates. At any time when the HollyFrontier 9.875% Senior Notes are rated investment grade by both Moody’s and Standard & Poor’s and no default or event of default exists, we will not be subject to many of the foregoing covenants. Additionally, we have certain redemption rights under the HollyFrontier 9.875% Senior Notes.

HEP Senior Notes Due 2018 and 2015

In March 2010, HEP issued $150 million in aggregate principal amount of 8.25% Senior Notes which mature in March 2018. A portion of the $147.5 million in net proceeds received was used to fund HEP’s $93 million purchase of certain storage assets at our Tulsa Refinery east facility and Navajo Refinery Lovington facility on March 31, 2010. Additionally, HEP used a portion to repay $42 million in outstanding HEP Credit Agreement borrowings, with the remaining proceeds available for general partnership purposes, including working capital and capital expenditures.

The HEP 6.25% Senior Notes having an aggregate principal amount of $185 million outstanding mature in March 2015 and are registered with the SEC. The HEP 6.25% Senior Notes and HEP 8.25% Senior Notes (collectively, the “HEP Senior Notes”) are unsecured and impose certain restrictive covenants, including limitations on HEP’s ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. At any time when the HEP Senior Notes are rated investment grade by both Moody’s and Standard & Poor’s and no default or event of default exists, HEP will not be subject to many of the foregoing covenants. Additionally, HEP has certain redemption rights under the HEP Senior Notes.

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

HollyFrontier Financing Obligation

In October 2009, we sold approximately 400,000 barrels of crude oil tankage at our Tulsa Refinery west facility as well as certain crude oil pipeline receiving facilities to Plains All American Pipeline, L.P. (“Plains”) for $40 million in cash. In connection with this transaction, we entered into a 15-year lease agreement with Plains, whereby we agreed to pay a fixed monthly fee for the exclusive use of this tankage as well as a fee for volumes received at the receiving facilities purchased by Plains. Additionally, we have a margin sharing agreement with Plains under which we will equally share contango profits for crude oil purchased by them and delivered to our Tulsa Refinery west facility for storage. Due to our continuing involvement in these assets, this transaction has been accounted for as a financing obligation. As a result, we retained these assets on our books and recorded a liability representing the $40 million in proceeds received.

 

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The carrying amounts of long-term debt are as follows:

 

     June 30,
2011
    December 31,
2010
 
     (In thousands)  

HollyFrontier 9.875% Senior Notes

    

Principal

   $ 300,000      $ 300,000   

Unamortized discount

     (9,918     (10,491
  

 

 

   

 

 

 
     290,082        289,509   

HollyFrontier financing obligation

    

Principal

     38,218        38,781   
  

 

 

   

 

 

 

Total HollyFrontier long-term debt

     328,300        328,290   
  

 

 

   

 

 

 

HEP Credit Agreement

     186,000        159,000   

HEP 6.25% Senior Notes

    

Principal

     185,000        185,000   

Unamortized discount

     (9,646     (10,961

Unamortized premium – dedesignated fair value hedge

     1,271        1,444   
  

 

 

   

 

 

 
     176,625        175,483   

HEP 8.25% Senior Notes

    

Principal

     150,000        150,000   

Unamortized discount

     (2,059     (2,212
  

 

 

   

 

 

 
     147,941        147,788   
  

 

 

   

 

 

 

Total HEP long-term debt

     510,566        482,271   
  

 

 

   

 

 

 

Total long-term debt

   $ 838,866      $ 810,561   
  

 

 

   

 

 

 

We capitalized interest attributable to construction projects of $4.3 million and $0.6 million for the three months ended June 30, 2011 and 2010, respectively, and $7.9 million and $1.9 million for the six months ended June 30, 2011 and 2010, 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 to mitigate price exposure with respect to:

 

   

our inventory positions;

 

   

natural gas purchases;

 

   

costs of crude oil;

 

   

prices of refined products; and

 

   

our refining margins.

As of June 30, 2011, we have outstanding commodity price swap contracts serving as economic hedges to protect the value of temporary inventory builds of 210,000 barrels against price volatility and to lock in the spread between WTS and WTI crude oil with respect to forecasted purchases of 3.5 million barrels of crude oil. These contracts are measured quarterly at fair value with offsetting adjustments (gains / losses) recorded directly to cost of products sold.

 

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Interest Rate Risk Management

HEP uses interest rate swaps to manage its exposure to interest rate risk.

As of June 30, 2011, HEP has an interest rate swap that hedges its exposure to the cash flow risk caused by the effects of LIBOR changes on a $155 million HEP Credit Agreement advance. This interest rate swap effectively converts $155 million of LIBOR based debt to fixed rate debt having an interest rate of 3.74% plus an applicable margin, currently 2.50%, which equaled an effective interest rate of 6.24% as of June 30, 2011. This interest rate swap contract has been designated as a cash flow hedge and matures in February 2013.

This contract initially hedged variable LIBOR interest on $171 million in outstanding HEP Credit Agreement debt. In May 2010, HEP repaid $16 million of the HEP Credit Agreement debt and also settled a corresponding portion of its interest rate swap agreement having a notional amount of $16 million for $1.1 million. Upon payment, HEP reduced its swap liability and reclassified a $1.1 million charge from accumulated other comprehensive loss to interest expense, representing the application of hedge accounting prior to settlement.

The following table presents balance sheet locations and related fair values of outstanding derivative instruments.

 

Derivative Instruments

 

Balance Sheet

Location

   Fair Value     

Location of Offsetting

Balance

   Offsetting
Amount
 
    (Dollars in thousands)  

June 30, 2011

          

Derivative designated as cash flow hedging instrument:

          

Variable-to-fixed interest rate swap contract ($155 million LIBOR based debt interest payments)

 

Other long-term liabilities

   $ 8,472      

Accumulated other comprehensive loss

   $ 8,472   
    

 

 

       

 

 

 

Derivatives not designated as hedging instruments:

          
          

Variable-to-fixed commodity price swap contracts (various inventory positions)

 

Prepayments and other current assets

   $ 7,958      

Cost of products sold (decrease)

   $ 7,958   
    

 

 

       

 

 

 

Fixed/variable-to-variable/fixed commodity price contracts (various inventory positions)

 

Accrued liabilities

   $ 1,300      

Cost of products sold (increase)

   $ 1,300   
    

 

 

       

 

 

 

Derivative Instruments

 

Balance Sheet

Location

   Fair Value     

Location of Offsetting

Balance

   Offsetting
Amount
 
    (Dollars in thousands)  

December 31, 2010

          

Derivatives designated as cash flow hedging instruments:

          

Variable-to-fixed commodity price swap contracts (forecasted volumes of natural gas purchases)

 

Accrued liabilities

   $ 38      

Accumulated other comprehensive loss

   $ 38   
    

 

 

       

 

 

 

Variable-to-fixed interest rate swap contract ($155 million LIBOR based debt interest payments)

 

Other long-term liabilities

   $ 10,026      

Accumulated other comprehensive loss

   $ 10,026   
    

 

 

       

 

 

 

Derivatives not designated as hedging instruments:

          
          

Fixed-to-variable rate swap contracts (various inventory positions)

 

Accrued liabilities

   $ 497      

Cost of products sold (increase)

   $ 497   
    

 

 

       

 

 

 

For the three and the six months ended June 30, 2011, maturities and fair value adjustments attributable to our economic hedges resulted in a $3 million decrease and a $0.7 million increase, respectively, to costs of products sold.

For the three and six months ended June 30, 2010, HEP recognized $1.5 million in charges to interest expense as a result of fair value changes to interest rate swap contracts that were settled in the first quarter of 2010.

 

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NOTE 12: Equity

Changes to equity during the six months ended June 30, 2011 are presented below:

 

     HollyFrontier
Stockholders’
Equity
    Noncontrolling
Interest
    Total
Equity
 
     (In thousands)  

Balance at December 31, 2010

   $ 697,419      $ 590,720      $ 1,288,139   

Net income

     276,929        15,915        292,844   

Dividends

     (16,024     —          (16,024

Distributions to noncontrolling interest holders

     —          (25,133     (25,133

Other comprehensive income

     157        1,020        1,177   

Contribution from joint venture partner

     —          16,500        16,500   

Equity based compensation

     4,480        1,082        5,562   

Excess tax benefit on equity based compensation arrangements

     498        —          498   

Purchase of HEP units for restricted grants

     —          (1,379     (1,379

Purchase of treasury stock (1)

     (2,996     —          (2,996
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

   $ 960,463      $ 598,725      $ 1,559,188   
  

 

 

   

 

 

   

 

 

 

 

(1) Includes 56,813 shares purchased under the terms of restricted stock agreements to provide funds for the payment of payroll and income taxes due at vesting of restricted stock.

During the six months ended June 30, 2011, we repurchased shares of our common stock at market price from certain executives and employees costing $3 million. These purchases were made under the terms of restricted stock and performance share unit agreements to provide funds for the payment of payroll and income taxes due at the vesting of restricted and performance shares in the case of officers and employees who did not elect to satisfy such taxes by other means.

 

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, 2011

      

Unrealized loss on available-for-sale securities

   $ (459   $ (179   $ (280

Unrealized gain on hedging activities

     271        35        236   
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (188     (144     (44

Less other comprehensive income attributable to noncontrolling interest

     178        —          178   
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss attributable to HollyFrontier stockholders

   $ (366   $ (144   $ (222
  

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2010

      

Unrealized loss on available-for-sale securities

   $ (251   $ (98   $ (153

Unrealized loss on hedging activities

     (620     (82     (538
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (871     (180     (691

Less other comprehensive loss attributable to noncontrolling interest

     (407     —          (407
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss attributable to HollyFrontier stockholders

   $ (464   $ (180   $ (284
  

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2011

      

Unrealized loss on available-for-sale securities

   $ (317   $ (124   $ (193

Unrealized gain on hedging activities

     1,592        222        1,370   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income

     1,275        98        1,177   

Less other comprehensive income attributable to noncontrolling interest

     1,020        —          1,020   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income attributable to HollyFrontier stockholders

   $ 255      $ 98      $ 157   
  

 

 

   

 

 

   

 

 

 

 

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     Before-Tax     Tax
Expense
(Benefit)
    After-Tax  
     (In thousands)  

Six Months Ended June 30, 2010

      

Unrealized loss on available-for-sale securities

   $ (7   $ (4   $ (3

Unrealized loss on hedging activities

     (1,981     142        (2,123
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (1,988     138        (2,126

Less other comprehensive loss attributable to noncontrolling interest

     (2,343     —          (2,343
  

 

 

   

 

 

   

 

 

 

Other comprehensive income attributable to HollyFrontier stockholders

   $ 355      $ 138      $ 217   
  

 

 

   

 

 

   

 

 

 

The temporary unrealized gain (loss) on available-for-sale securities is due to changes in market prices of securities.

Accumulated other comprehensive loss in the equity section of our consolidated balance sheets includes:

 

     June 30,     December 31,  
     2011     2010  
     (In thousands)  

Pension obligation adjustment

   $ (22,672   $ (22,672

Retiree medical obligation adjustment

     (1,894     (1,894

Unrealized gain on available-for-sale securities

     258        451   

Unrealized loss on hedging activities, net of noncontrolling interest

     (1,783     (2,131
  

 

 

   

 

 

 

Accumulated other comprehensive loss

   $ (26,091   $ (26,246
  

 

 

   

 

 

 

 

NOTE 14: Retirement Plan

We have a non-contributory defined benefit retirement plan that covers most of our non-union employees hired prior to January 1, 2007 and union employees prior to July 1, 2010. Our policy is to make contributions annually of not less than the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Benefits are based on the employee’s years of service and compensation.

The retirement plan is closed to all new employees. To the extent an employee was hired prior to the plan closing date (January 1, 2007 for non-union employees and July 1, 2010 for union employees) and elected to participate in automatic contributions features under our defined contribution plan, their participation in future benefits of the retirement plan has been frozen.

The net periodic pension expense consisted of the following components:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (In thousands)  

Service cost – benefit earned during the period

   $ 1,268      $ 1,156      $ 2,535      $ 2,298   

Interest cost on projected benefit obligations

     1,281        1,291        2,562        2,577   

Expected return on plan assets

     (1,339     (1,164     (2,678     (2,288

Amortization of prior service cost

     97        98        195        195   

Amortization of net loss

     533        474        1,066        1,098   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension expense

   $ 1,840      $ 1,855      $ 3,680      $ 3,880   
  

 

 

   

 

 

   

 

 

   

 

 

 

The expected long-term annual rate of return on plan assets is 8.5%. This rate was used in measuring 2011 and 2010 net periodic benefit cost. We expect to contribute $10 million to the retirement plan in 2011.

 

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NOTE 15: Contingencies

In May 2007, the United States Court of Appeals for the District of Columbia Circuit (“Court of Appeals”) issued its decision on petitions for review, brought by us and other parties, concerning rulings by the FERC in proceedings brought by us and other parties against SFPP, L.P. (“SFPP”). These proceedings relate to tariffs of common carrier pipelines, which are owned and operated by SFPP, for shipments of refined products from El Paso, Texas to Tucson and Phoenix, Arizona and from points in California to points in Arizona. We are one of several refiners that regularly utilize the SFPP pipeline to ship refined products from El Paso, Texas to Tucson and Phoenix, Arizona on SFPP’s East Line. The Court of Appeals in its May 2007 decision approved a FERC position, which is adverse to us, on the treatment of income taxes in the calculation of allowable rates for pipelines operated by partnerships and ruled in our favor on an issue relating to our rights to reparations when it is determined that certain tariffs we paid to SFPP in the past were too high. The case was remanded to FERC and consolidated with other cases that together addressed SFPP’s rates for the period from January 1992 through May 2006. In 2003 we received an initial payment of $15.3 million from SFPP as reparations for the period from 1992 through July 2000. On April 16, 2010, a settlement among us, SFPP, and other shippers was filed with FERC for its approval. FERC approved the settlement on May 28, 2010. Pursuant to the settlement, we received an additional settlement payment of $8.6 million. This settlement finally resolves the amount of additional payments SFPP owes us for the period January 1992 through May 2006.

We and other shippers also engaged in settlement discussions with SFPP relating to East Line service in the FERC proceedings that address periods after May 2006. A partial settlement covering the period June 2006 through November 2007, which became final in February 2008, resulted in a payment from SFPP to us of $1.3 million in April 2008. On October 22, 2008, we and other shippers jointly filed at the FERC with SFPP a settlement covering the period from December 2008 through November 2010. The FERC approved the settlement on January 29, 2009. The settlement reduced SFPP’s current rates and required SFPP to make additional payments to us of $2.9 million, which were received on May 18, 2009.

On June 2, 2009, SFPP notified us that it would terminate the October 22, 2008 settlement, as provided under the settlement, effective August 31, 2009. On July 31, 2009, SFPP filed substantial rate increases for East Line service to become effective September 1, 2009. We and several other shippers filed protests at the FERC challenging the rate increase and asking the FERC to suspend the effectiveness of the increased rates. On August 31, 2009, the FERC issued an order suspending the effective date of the rate increase until January 1, 2010, on which date the rate increase was placed into effect subject to refund, and setting the rate increase for a full evidentiary hearing to be held in 2010. SFPP subsequently reduced its rates for the East Line service, effective September 1, 2010. The rates placed in effect on January 1, 2010, and the lower rates put into effect on September 1, 2010, remain subject to refund subject to the outcome of the evidentiary hearing. We are not in a position to predict the ultimate outcome of the rate proceeding.

We are a party to various other litigation and proceedings which 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.

 

NOTE 16: Segment Information

Our operations are currently organized into two reportable segments, Refining and HEP. Our operations that are not included in the Refining 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 includes the operations of our Navajo, Woods Cross, and Tulsa Refineries and NK Asphalt and involves 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 Southwest, Rocky Mountain and Mid-Continent regions of the United States and northern Mexico. Additionally, the Refining segment includes specialty lubricant products produced at our Tulsa Refinery that are marketed throughout North America and are distributed in Central and South America. NK Asphalt operates various asphalt terminals in Arizona, New Mexico and Texas.

 

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The HEP segment includes all of the operations of HEP, a consolidated VIE, which owns and operates a system of petroleum product and crude gathering pipelines in Texas, New Mexico, Oklahoma and Utah, distribution terminals in Texas, New Mexico, Arizona, Utah, Idaho, and Washington and refinery tankage in New Mexico, Utah and Oklahoma. Revenues are generated by charging tariffs for transporting petroleum products and crude oil through its pipelines, by leasing certain pipeline capacity to Alon USA, Inc., by charging fees for terminalling refined products and other hydrocarbons and storing and providing other services at its storage tanks and terminals. The HEP segment also includes a 25% interest in SLC Pipeline that services refineries in the Salt Lake City, Utah area. 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. Our revaluation of HEP’s assets and liabilities at March 1, 2008 (date of reconsolidation) resulted in basis adjustments to our consolidated HEP balances. Therefore, 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, 2010.

 

     Refining      HEP (1)      Corporate
and Other
    Consolidations
and
Eliminations
    Consolidated
Total
 
     (In thousands)  

Three Months Ended June 30, 2011

            

Sales and other revenues

   $ 2,953,226       $ 50,940       $ 153      $ (37,186   $ 2,967,133   

Depreciation and amortization

   $ 23,478       $ 7,309       $ 1,252      $ (207   $ 31,832   

Income (loss) from operations

   $ 321,032       $ 27,692       $ (18,040   $ (505   $ 330,179   

Capital expenditures

   $ 25,152       $ 11,425       $ 45,690      $ —        $ 82,267   

Three Months Ended June 30, 2010

            

Sales and other revenues

   $ 2,137,361       $ 45,483       $ 150      $ (37,134   $ 2,145,860   

Depreciation and amortization

   $ 20,599       $ 7,187       $ 1,333      $ (295   $ 28,824   

Income (loss) from operations

   $ 124,549       $ 22,888       $ (15,111   $ (162   $ 132,164   

Capital expenditures

   $ 42,492       $ 2,576       $ 364      $ —        $ 45,432   

Six Months Ended June 30, 2011

            

Sales and other revenues

   $ 5,268,318       $ 95,945       $ 801      $ (71,346   $ 5,293,718   

Depreciation and amortization

   $ 46,461       $ 14,544       $ 2,549      $ (414   $ 63,140   

Income (loss) from operations

   $ 473,136       $ 51,303       $ (34,138   $ (1,023   $ 489,278   

Capital expenditures

   $ 45,784       $ 22,900       $ 87,621      $ —        $ 156,305   

Six Months Ended June 30, 2010

            

Sales and other revenues

   $ 4,004,534       $ 86,172       $ 217      $ (70,773   $ 4,020,150   

Depreciation and amortization

   $ 41,325       $ 13,992       $ 1,854      $ (590   $ 56,581   

Income (loss) from operations

   $ 99,969       $ 41,149       $ (30,877   $ (821   $ 109,420   

Capital expenditures

   $ 70,764       $ 4,487       $ 1,279      $ —        $ 76,530   

June 30, 2011

            

Cash, cash equivalents and investments in marketable securities

   $ —         $ 1,402       $ 515,945      $ —        $ 517,347   

Total assets

   $ 2,614,120       $ 678,508       $ 901,439      $ (28,764   $ 4,165,303   

Long-term debt

   $ —         $ 510,566       $ 344,996      $ (16,696   $ 838,866   

December 31, 2010

            

Cash, cash equivalents and investments in marketable securities

   $ —         $ 403       $ 230,041      $ —        $ 230,444   

Total assets

   $ 2,490,193       $ 669,820       $ 573,531      $ (32,069   $ 3,701,475   

Long-term debt

   $ —         $ 482,271       $ 345,215      $ (16,925   $ 810,561   

 

(1) HEP segment revenues from external customers were $13.8 million and $8.4 million for the three months ended June 30, 2011 and 2010, respectively, and $24.7 million and $15.5 million for the six months ended June 30, 2011 and 2010, respectively.

 

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NOTE 17: Supplemental Guarantor/Non-Guarantor Financial Information

Our obligations under the HollyFrontier 9.875% Senior Notes have been jointly and severally guaranteed by the substantial majority of our existing and future restricted subsidiaries (“Guarantor Restricted Subsidiaries”). These guarantees are full and unconditional. HEP, in which we have a 34% ownership interest, and its subsidiaries (collectively, “Non-Guarantor Non-Restricted Subsidiaries”), and certain of our other subsidiaries (“Non-Guarantor Restricted Subsidiaries”) have not guaranteed these obligations.

The following financial information presents condensed consolidating balance sheets, statements of income, and statements of cash flows of HollyFrontier (the “Parent”), the Guarantor Restricted Subsidiaries, the Non-Guarantor Restricted Subsidiaries and the Non-Guarantor Non-Restricted Subsidiaries. The information has been presented as if the Parent accounted for its ownership in the Guarantor Restricted Subsidiaries, and the Guarantor Restricted Subsidiaries accounted for the ownership of the Non-Guarantor Restricted Subsidiaries and Non-Guarantor Non-Restricted Subsidiaries, using the equity method of accounting. The Guarantor Restricted Subsidiaries and the Non-Guarantor Restricted Subsidiaries are collectively the “Restricted Subsidiaries.” Our revaluation of HEP’s assets and liabilities at March 1, 2008 (date of reconsolidation) resulted in basis adjustments to our consolidated HEP balances. Therefore, our reported amounts for the HEP segment may not agree to amounts reported in HEP’s periodic public filings.

 

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Table of Contents
Condensed Consolidating Balance Sheet   

June 30, 2011

  Parent     Guarantor
Restricted

Subsidiaries
    Non-
Guarantor
Restricted
Subsidiaries
    Eliminations     HollyFrontier
Before
Consolidation
of HEP
    Non-Guarantor
Non-Restricted
Subsidiaries

(HEP Segment)
    Eliminations     Consolidated  
    (In thousands)  

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 414,141      $ (1,656   $ 12,802      $ —        $ 425,287      $ 1,402      $ —        $ 426,689   

Marketable securities

    64,759        1,095        —          —          65,854        —          —          65,854   

Accounts receivable

    3,074        1,000,967        57        —          1,004,098        18,756        (19,327     1,003,527   

Intercompany accounts receivable (payable)

    (1,844,815     1,418,880        425,935        —          —          —          —          —     

Inventories

    —          495,115        —          —          495,115        185        —          495,300   

Prepayments and other assets

    17,828        18,809        —          —          36,637        853        (3,886     33,604   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    (1,345,013     2,933,210        438,794        —          2,026,991        21,196        (23,213     2,024,974   

Properties and equipment, net

    17,713        1,031,585        315,691        —          1,364,989        501,469        (6,695     1,859,763   

Marketable securities (long-term)

    24,804        —          —          —          24,804        —          —          24,804   

Investment in subsidiaries

    2,766,499        664,480        (394,949     (3,036,030     —          —          —          —     

Intangibles and other assets

    16,284        82,491        —          —          98,775        155,843        1,144        255,762   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,480,287      $ 4,711,766      $ 359,536      $ (3,036,030   $ 3,515,559      $ 678,508      $ (28,764   $ 4,165,303   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

               

Current liabilities:

               

Accounts payable

  $ 7,278      $ 1,447,891      $ 7,683      $ —        $ 1,462,852      $ 7,115      $ (19,327   $ 1,450,640   

Income taxes payable

    23,002        —          —          —          23,002        —          —          23,002   

Accrued liabilities

    29,133        40,738        1,858        —          71,729        16,108        (3,886     83,951   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    59,413        1,488,629        9,541        —          1,557,583        23,223        (23,213     1,557,593   

Long-term debt

    290,083        54,913        —          —          344,996        510,566        (16,696     838,866   

Non-current liabilities

    46,315        25,712        —          —          72,027        9,164        —          81,191   

Deferred income taxes

    122,565        176        773        —          123,514        —          4,951        128,465   

Distributions in excess of inv in HEP

    —          375,837        —          —          375,837        —          (375,837     —     

Equity – HollyFrontier

    961,911        2,766,499        349,222        (3,115,721     961,911        135,555        (137,003     960,463   

Equity – noncontrolling interest

    —          —          —          79,691        79,691        —          519,034        598,725   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 1,480,287      $ 4,711,766      $ 359,536      $ (3,036,030   $ 3,515,559      $ 678,508      $ (28,764   $ 4,165,303   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Condensed Consolidating Balance Sheet   

December 31, 2010

  Parent     Guarantor
Restricted

Subsidiaries
    Non-
Guarantor
Restricted
Subsidiaries
    Eliminations     HollyFrontier
Before
Consolidation
of HEP
    Non-Guarantor
Non-Restricted
Subsidiaries

(HEP Segment)
    Eliminations     Consolidated  
    (In thousands)  

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 230,082      $ (9,035   $ 7,651      $ —        $ 228,698      $ 403      $ —        $ 229,101   

Marketable securities

    —          1,343        —          —          1,343        —          —          1,343   

Accounts receivable

    1,683        991,778        —          —          993,461        22,508        (22,853     993,116   

Intercompany accounts receivable (payable)

    (1,401,580     981,691        419,889        —          —          —          —          —     

Inventories

    —          400,165        —          —          400,165        202        —          400,367   

Income taxes receivable

    51,034        —          —          —          51,034        —          —          51,034   

Prepayments and other assets

    10,210        20,942        —          —          31,152        573        (3,251     28,474   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    (1,108,571     2,386,884        427,540        —          1,705,853        23,686        (26,104     1,703,435   

Properties and equipment, net

    17,177        1,017,877        236,648        —          1,271,702        492,098        (7,109     1,756,691   

Investment in subsidiaries

    2,273,159        595,888        (393,011     (2,476,036     —          —          —          —     

Intangibles and other assets

    8,569        77,600        —          —          86,169        154,036        1,144        241,349   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,190,334      $ 4,078,249      $ 271,177      $ (2,476,036   $ 3,063,724      $ 669,820      $ (32,069   $ 3,701,475   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

               

Current liabilities:

               

Accounts payable

  $ 7,170      $ 1,319,316      $ 3,575      $ —        $ 1,330,061      $ 10,238      $ (22,853   $ 1,317,446   

Accrued liabilities

    25,512        28,145        797        —          54,454        21,206        (3,251     72,409   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    32,682        1,347,461        4,372        —          1,384,515        31,444        (26,104     1,389,855   

Long-term debt

    289,509        55,706        —          —          345,215        482,271        (16,925     810,561   

Non-current liabilities

    42,655        27,521        —          —          70,176        10,809        —          80,985   

Deferred income taxes

    126,160        259        565        —          126,984        —          4,951        131,935   

Distributions in excess of inv in HEP

    —          374,143        —          —          374,143        —          (374,143     —     

Equity – HollyFrontier

    699,328        2,273,159        266,240        (2,539,399     699,328        145,296        (147,205     697,419   

Equity – noncontrolling interest

    —          —          —          63,363        63,363        —          527,357        590,720   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 1,190,334      $ 4,078,249      $ 271,177      $ (2,476,036   $ 3,063,724      $ 669,820      $ (32,069   $ 3,701,475   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

- 26 -


Table of Contents

Condensed Consolidating Statement of Income

 

  

Three Months Ended

June 30, 2011

   Parent     Guarantor
Restricted

Subsidiaries
    Non-
Guarantor
Restricted
Subsidiaries
    Eliminations     HollyFrontier
Before
Consolidation
of HEP
    Non-Guarantor
Non-Restricted
Subsidiaries

(HEP Segment)
    Eliminations     Consolidated  
     (In thousands)  

Sales and other revenues

   $ 153      $ 2,953,226      $ —        $ —        $ 2,953,379      $ 50,940      $ (37,186   $ 2,967,133   

Operating costs and expenses:

                

Cost of products sold

     —          2,483,435        —          —          2,483,435        —          (36,340     2,447,095   

Operating expenses

     —          124,992        121        —          125,113        14,366        (134     139,345   

General and administrative expenses

     16,976        133        —          —          17,109        1,573        —          18,682   

Depreciation and amortization

     907        23,644        179        —          24,730        7,309        (207     31,832   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     17,883        2,632,204        300        —          2,650,387        23,248        (36,681     2,636,954   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (17,730     321,022        (300     —          302,992        27,692        (505     330,179   

Other income (expense):

                

Equity in earnings of subsidiaries and joint venture

     329,496        9,268        9,480        (338,764     9,480        467        (9,480     467   

Interest income (expense)

     (5,063     (795     13        —          (5,845     (9,286     595        (14,536

Merger transaction costs

     (2,316     —          —          —          (2,316     —          —          (2,316
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     322,117        8,473        9,493        (338,764     1,319        (8,819     (8,885     (16,385
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     304,387        329,495        9,193        (338,764     304,311        18,873        (9,390     313,794   

Income tax provision

     111,943        —          —          —          111,943        18        —          111,961   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     192,444        329,495        9,193        (338,764     192,368        18,855        (9,390     201,833   

Less net income attributable to noncontrolling interest

     —          —          —          (75     (75     —          9,673        9,598   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to HollyFrontier stockholders

   $ 192,444      $ 329,495      $ 9,193      $ (338,689   $ 192,443      $ 18,855      $ (19,063   $ 192,235   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Condensed Consolidating Statement of Income   

Three Months Ended

June 30, 2010

   Parent     Guarantor
Restricted

Subsidiaries
    Non-
Guarantor
Restricted
Subsidiaries
    Eliminations     HollyFrontier
Before
Consolidation
of HEP
    Non-Guarantor
Non-Restricted
Subsidiaries

(HEP Segment)
    Eliminations     Consolidated  
     (In thousands)  

Sales and other revenues

   $ 150      $ 2,137,361      $ —        $ —        $ 2,137,511      $ 45,483      $ (37,134   $ 2,145,860   

Operating costs and expenses:

                

Cost of products sold

     —          1,884,676        86        —          1,884,762        —          (36,550     1,848,212   

Operating expenses

     —          107,463        —          —          107,463        13,495        (127     120,831   

General and administrative expenses

     13,916        —          —          —          13,916        1,913        —          15,829   

Depreciation and amortization

     928        20,825        179        —          21,932        7,187        (295     28,824   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     14,844        2,012,964        265        —          2,028,073        22,595        (36,972     2,013,696   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (14,694     124,397        (265     —          109,438        22,888        (162     132,164   

Other income (expense):

                

Equity in earnings of subsidiaries and joint venture

     130,097        6,819        7,007        (136,916     7,007        544        (7,007     544   

Interest income (expense)

     (9,527     (1,119     12        —          (10,634     (10,109     355        (20,388
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     120,570        5,700        7,019        (136,916     (3,627     (9,565     (6,652     (19,844
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     105,876        130,097        6,754        (136,916     105,811        13,323        (6,814     112,320   

Income tax provision

     39,608        —          —          —          39,608        46        —          39,654   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     66,268        130,097        6,754        (136,916     66,203        13,277        (6,814     72,666   

Less net income attributable to noncontrolling interest

     —          —          —          (65     (65     —          6,569        6,504   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to HollyFrontier stockholders

   $ 66,268      $ 130,097      $ 6,754      $ (136,851   $ 66,268      $ 13,277      $ (13,383   $ 66,162   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 27 -


Table of Contents
Condensed Consolidating Statement of Income   

Six Months Ended

June 30, 2011

   Parent     Guarantor
Restricted

Subsidiaries
    Non-
Guarantor
Restricted
Subsidiaries
    Eliminations     HollyFrontier
Frontier
Before
Consolidation
of HEP
    Non-Guarantor
Non-Restricted
Subsidiaries

(HEP Segment)
    Eliminations     Consolidated  
     (In thousands)  

Sales and other revenues

   $ 801      $ 5,268,318      $ —        $ —        $ 5,269,119      $ 95,945      $ (71,346   $ 5,293,718   

Operating costs and expenses:

                

Cost of products sold

     —          4,501,361        —          —          4,501,361        —          (69,649     4,431,712   

Operating expenses

     —          246,677        509        —          247,186        27,162        (260     274,088   

General and administrative expenses

     32,329        235        —          —          32,564        2,936        —          35,500   

Depreciation and amortization

     1,847        46,805        358        —          49,010        14,544        (414     63,140   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     34,176        4,795,078        867        —          4,830,121        44,642        (70,323     4,804,440   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (33,375     473,240        (867     —          438,998        51,303        (1,023     489,278   

Other income (expense):

                

Equity in earnings of subsidiaries and joint venture

     488,453        16,831        17,500        (505,284     17,500        1,207        (17,500     1,207   

Interest income (expense)

     (11,872     (1,618     26        —          (13,464     (18,398     1,207        (30,655

Merger transaction costs

     (6,014     —          —          —          (6,014     —          —          (6,014
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     470,567        15,213        17,526        (505,284     (1,978     (17,191     (16,293     (35,462
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     437,192        488,453        16,659        (505,284     437,020        34,112        (17,316     453,816   

Income tax provision

     160,726        —          —          —          160,726        246        —          160,972   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     276,466        488,453        16,659        (505,284     276,294        33,866        (17,316     292,844   

Less net income attributable to noncontrolling interest

     —          —          —          (172     (172     —          16,087        15,915   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to HollyFrontier stockholders

   $ 276,466      $ 488,453      $ 16,659      $ (505,112   $ 276,466      $ 33,866      $ (33,403   $ 276,929   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Condensed Consolidating Statement of Income   

Six Months Ended

June 30, 2010

   Parent     Guarantor
Restricted

Subsidiaries
    Non-
Guarantor
Restricted
Subsidiaries
    Eliminations     HollyFrontier
Before
Consolidation
of HEP
    Non-Guarantor
Non-Restricted
Subsidiaries

(HEP Segment)
    Eliminations     Consolidated  
     (In thousands)  

Sales and other revenues

   $ 217      $ 4,004,534      $ —        $ —        $ 4,004,751      $ 86,172      $ (70,773   $ 4,020,150   

Operating costs and expenses:

                

Cost of products sold

     —          3,641,183        12        —          3,641,195        —          (69,119     3,572,076   

Operating expenses

     —          222,063        —          —          222,063        26,555        (243     248,375   

General and administrative expenses

     28,801        421        —          —          29,222        4,476        —          33,698   

Depreciation and amortization

     1,871        41,779        (471     —          43,179        13,992        (590     56,581   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     30,672        3,905,446        (459     —          3,935,659        45,023        (69,952     3,910,730   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (30,455     99,088        459        —          69,092        41,149        (821     109,420   

Other income (expense):

                

Equity in earnings of subsidiaries and joint venture

     109,989        13,299        12,936        (123,288     12,936        1,025        (12,936     1,025   

Interest income (expense)

     (18,670     (2,398     20        —          (21,048     (18,213     1,210        (38,051
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     91,319        10,901        12,956        (123,288     (8,112     (17,188     (11,726     (37,026
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     60,864        109,989        13,415        (123,288     60,980        23,961        (12,547     72,394   

Income tax provision

     22,842        —          —          —          22,842        140        —          22,982   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     38,022        109,989        13,415        (123,288     38,138        23,821        (12,547     49,412   

Less net income attributable to noncontrolling interest

     —          —          —          116        116        —          11,228        11,344   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to HollyFrontier stockholders

   $ 38,022      $ 109,989      $ 13,415      $ (123,404   $ 38,022      $ 23,821      $ (23,775   $ 38,068   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
Condensed Consolidating Statement of Cash Flows   

Six Months Ended

June 30, 2011

   Parent     Guarantor
Restricted

Subsidiaries
    Non-
Guarantor
Restricted
Subsidiaries
    HollyFrontier
Before
Consolidation
of HEP
    Non-Guarantor
Non-Restricted
Subsidiaries

(HEP Segment)
    Eliminations     Consolidated  
     (In thousands)  

Cash flows from operating activities

   $ 304,061      $ 122,324      $ 5,051      $ 431,436      $ 46,289      $ (19,729   $ 457,996   

Cash flows from investing activities

              

Additions to properties, plants and equipment

     (2,623     (51,382     (79,400     (133,405     —          —          (133,405

Additions to properties, plants and equipment – HEP

     —          —          —          —          (22,900     —          (22,900

Investment in Sabine Biofuels

     (9,125     —          —          (9,125     —          —          (9,125

Purchases of marketable securities

     (157,782     —          —          (157,782     —          —          (157,782

Sales and maturities of marketable securities

     68,150        —          —          68,150        —          —          68,150   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (101,380     (51,382     (79,400     (232,162     (22,900     —          (255,062
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

              

Net borrowings under credit agreements – HEP

     —          —          —          —          27,000        —          27,000   

Repayments under financing obligation

     —          (563     —          (563     —          —          (563

Purchase of treasury stock

     (2,996     —          —          (2,996     —          —          (2,996

Contribution from joint venture partner

     —          (63,000     79,500        16,500        —          —          16,500   

Dividends

     (15,984     —          —          (15,984     —          —          (15,984

Distributions to noncontrolling interest

     —          —          —          —          (44,862     19,729        (25,133

Excess tax benefit from equity based compensation

     498        —          —          498        —          —          498   

Purchase of units for HEP restricted grants

     —          —          —          —          (1,379     —          (1,379

Deferred financing costs

     (140     —          —          (140     (3,149     —          (3,289
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (18,622     (63,563     79,500        (2,685     (22,390     19,729        (5,346
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

              

Increase (decrease) for the period

     184,059        7,379        5,151        196,589        999        —          197,588   

Beginning of period

     230,082        (9,035     7,651        228,698        403        —          229,101   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of period

   $ 414,141      $ (1,656   $ 12,802      $ 425,287      $ 1,402      $ —        $ 426,689   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Condensed Consolidating Statement of Cash Flows   

Six Months Ended

June 30, 2010

   Parent     Guarantor
Restricted

Subsidiaries
    Non-
Guarantor
Restricted
Subsidiaries
    HollyFrontier
Before
Consolidation
of HEP
    Non-Guarantor
Non-Restricted
Subsidiaries

(HEP Segment)
    Eliminations     Consolidated  
     (In thousands)  

Cash flows from operating activities

   $ 24,464      $ (15,103   $ 1,379      $ 10,740      $ 45,186      $ (17,580   $ 38,346   

Cash flows from investing activities

              

Additions to properties, plants and equipment

     (1,279     (54,880     (15,884     (72,043     —          —          (72,043

Additions to properties, plants and equipment – HEP

     —          —          —          —          (43,527     39,040        (4,487

Proceeds from sale of assets

     —          39,040        —          39,040        —          (39,040     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (1,279     (15,840     (15,884     (33,003     (43,527     —          (76,530
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

              

Net repayments under credit agreements – HEP

     —          —          —          —          (51,000     —          (51,000

Proceeds from issuance of senior notes – HEP

     —          —          —          —          147,540        —          147,540   

Repayments under financing obligation

     —          (616     —          (616     —          201        (415

Purchase of treasury stock

     (1,308     —          —          (1,308     —          —          (1,308

Contribution from joint venture partner

     —          (15,000     20,000        5,000        —          —          5,000   

Dividends

     (15,901     —          —          (15,901     —          —          (15,901

Purchase price in excess of transferred basis in assets

     —          53,960        —          53,960        (53,960     —          —     

Distributions to noncontrolling interest

     —          —          —          —          (41,312     17,379        (23,933

Excess tax expense from equity based compensation

     (1,313     —          —          (1,313     —          —          (1,313

Deferred financing costs

     (1,177     (1,125     —          (2,302     (353     —          (2,655

Purchase of units for HEP restricted grants

     —          —          —          —          (2,276     —          (2,276

Issuance of common stock upon exercise of options

     61        —          —          61        —          —          61   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (19,638     37,219        20,000        37,581        (1,361     17,580        53,800   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

              

Increase (decrease) for the period

     3,547        6,276        5,495        15,318        298        —          15,616   

Beginning of period

     127,560        (12,477     7,005        122,088        2,508        —          124,596   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of period

   $ 131,107      $ (6,201   $ 12,500      $ 137,406      $ 2,806      $ —        $ 140,212   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

NOTE 18: Subsequent Event

On August 3, 2011 we announced that our Board of Directors approved a two-for-one stock split payable in the form of a stock dividend of one share of common stock for each issued and outstanding share of HollyFrontier common stock and a special cash dividend of $1.00 per share. The stock dividend is payable on August 31, 2011 to all holders of record on August 24, 2011, and the cash dividend is payable on August 22, 2011 to all holders of record on August 15, 2011. Upon completion of the stock split, we will have approximately 210 million shares of common stock outstanding.

 

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Table of Contents
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. Holly Corporation (“Holly”) changed its name to HollyFrontier Corporation (“HollyFrontier” or “HollyFrontier Corporation”) in connection with the consummation of its “merger of equals” with Frontier Oil Corporation (“Frontier”), which became effective on July 1, 2011 (see description below). All previous references to “Holly” within this document have been replaced with “HollyFrontier.” References herein to HollyFrontier Corporation with respect to time periods through and including June 30, 2011 include Holly and its consolidated subsidiaries and do not include Frontier and its consolidated subsidiaries since the merger had not been consummated as of June 30, 2011, while references herein to HollyFrontier with respect to time periods from and after July 1, 2011 include Frontier and its consolidated subsidiaries. Unless otherwise specified, the financial information included herein are as of and for the period ended June 30, 2011 and, thus, do not include financial information for Frontier. 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. The words “we,” “our,” “ours” and “us” generally include Holly Energy Partners, L.P. (“HEP”) and its subsidiaries as consolidated subsidiaries of HollyFrontier with certain exceptions where there are 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 light products such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. Navajo Refining Company, L.L.C., one of our wholly-owned subsidiaries, owns a petroleum refinery in 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”). The Navajo Refinery can process sour (high sulfur) crude oils and serves markets in the southwestern United States and northern Mexico. Our refinery located just north of Salt Lake City, Utah (the “Woods Cross Refinery”) is operated by Holly Refining & Marketing Company – Woods Cross LLC, one of our wholly-owned subsidiaries. This facility is a high conversion refinery that primarily processes regional sweet (lower sulfur) and sour Canadian crude oils. Our refinery located in Tulsa, Oklahoma (the “Tulsa Refinery”) is comprised of two facilities, the Tulsa Refinery west and east facilities.

At June 30, 2011, we owned a 34% interest in HEP, a consolidated variable interest entity (“VIE”), which includes our 2% general partner interest. HEP has logistic assets including petroleum product and crude oil pipelines located in Texas, New Mexico, Oklahoma and Utah; ten refined product terminals; a jet fuel terminal; loading rack facilities at each of our three refineries, a refined products tank farm facility and on-site crude oil tankage at our Navajo, Woods Cross and Tulsa Refineries. Additionally, HEP owns a 25% interest in SLC Pipeline LLC (“SLC Pipeline”), a new 95-mile intrastate pipeline system that serves refineries in the Salt Lake City area.

Our principal source of revenue is from the sale of high value light products such as gasoline, diesel fuel, jet fuel and asphalt products in markets in the Southwest, Rocky Mountain and Mid-Continent regions of the United States and northern Mexico. We also produce specialty lubricant products that are marketed throughout North America and are distributed in Central and South America. For the six months ended June 30, 2011, sales and other revenues were $5,293.7 million and net income attributable to HollyFrontier stockholders was $276.9 million. For the six months ended June 30, 2010, sales and other revenues were $4,020.2 million and the net income attributable to HollyFrontier stockholders was $38.1 million. Our principal expenses are costs of products sold and operating expenses. Our total operating costs and expenses for the six months ended June 30, 2011 were $4,804.4 million compared to $3,910.7 million for the six months ended June 30, 2010.

On February 21, 2011, we entered into a merger agreement providing for a “merger of equals” business combination between us and Frontier. On July 1, 2011, North Acquisition, Inc. a direct wholly-owned subsidiary of Holly merged with and into Frontier, with Frontier surviving as a wholly-owned subsidiary of Holly. Concurrent with the merger, we changed our name to HollyFrontier Corporation and changed the trading symbol

 

- 30 -


Table of Contents

for our common stock traded on the New York Stock Exchange to “HFC.” Subsequent to the merger and following approval by the post-closing board of directors of HollyFrontier, Frontier merged with and into HollyFrontier, with HollyFrontier continuing as the surviving corporation.

In accordance with the merger agreement, we issued approximately 51.4 million shares of HollyFrontier common stock in exchange for outstanding shares of Frontier common stock to former Frontier stockholders. Each outstanding share of Frontier common stock was converted into 0.4811 shares of HollyFrontier common stock with any fractional shares paid in cash. Based on the July 1, 2011 market closing price of $71.86, the aggregate equity consideration paid in connection with the merger was approximately $3.7 billion.

Beginning July 1, 2011, HollyFrontier’s consolidated financial and operating results will reflect the operations of the merged Frontier businesses. This includes a 135,000 barrels per stream day (“bpsd”) refinery located in El Dorado, Kansas (the “El Dorado Refinery”) and a 52,000 bpsd refinery located in Cheyenne, Wyoming (the “Cheyenne Refinery”) that serve markets in the Rocky Mountain and Plains States regions of the United States.

 

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Table of Contents

RESULTS OF OPERATIONS

Financial Data (Unaudited)

 

     Three Months Ended
June 30,
    Change from 2010  
     2011     2010     Change     Percent  
     (In thousands, except per share data)  

Sales and other revenues

   $ 2,967,133      $ 2,145,860      $ 821,273        38.3

Operating costs and expenses:

        

Cost of products sold (exclusive of depreciation and amortization)

     2,447,095        1,848,212        598,883        32.4   

Operating expenses (exclusive of depreciation and amortization)

     139,345        120,831        18,514        15.3   

General and administrative expenses (exclusive of depreciation and amortization)

     18,682        15,829        2,853        18.0   

Depreciation and amortization

     31,832        28,824        3,008        10.4   
  

 

 

   

 

 

   

 

 

   

Total operating costs and expenses

     2,636,954        2,013,696        623,258        31.0   
  

 

 

   

 

 

   

 

 

   

Income from operations

     330,179        132,164        198,015        149.8   

Other income (expense):

        

Equity in earnings of SLC Pipeline

     467        544        (77     (14.2

Interest income

     657        635        22        3.5   

Interest expense

     (15,193     (21,023     5,830        (27.7

Merger transaction costs

     (2,316     —          (2,316     —     
  

 

 

   

 

 

   

 

 

   
     (16,385     (19,844     3,459        (17.4
  

 

 

   

 

 

   

 

 

   

Income before income taxes

     313,794        112,320        201,474        179.4   

Income tax provision

     111,961        39,654        72,307        182.3   
  

 

 

   

 

 

   

 

 

   

Net income

     201,833        72,666        129,167        177.8   

Less net income attributable to noncontrolling interest

     9,598        6,504        3,094        47.6   
  

 

 

   

 

 

   

 

 

   

Net income attributable to HollyFrontier stockholders

   $ 192,235      $ 66,162      $ 126,073        190.6
  

 

 

   

 

 

   

 

 

   

Earnings per share attributable to HollyFrontier stockholders:

        

Basic

   $ 3.60      $ 1.24      $ 2.36        190.3
  

 

 

   

 

 

   

 

 

   

Diluted

   $ 3.58      $ 1.24      $ 2.34        188.7
  

 

 

   

 

 

   

 

 

   

Cash dividends declared per common share

   $ 0.15      $ 0.15      $ —          —  
  

 

 

   

 

 

   

 

 

   

Average number of common shares outstanding:

        

Basic

     53,365        53,206        159        0.3

Diluted

     53,670        53,408        262        0.5

 

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Table of Contents
     Six Months Ended
June 30,
    Change from 2010  
     2011     2010     Change     Percent  
     (In thousands, except per share data)  

Sales and other revenues

   $ 5,293,718      $ 4,020,150      $ 1,273,568        31.7

Operating costs and expenses:

        

Cost of products sold (exclusive of depreciation and amortization)

     4,431,712        3,572,076        859,636        24.1   

Operating expenses (exclusive of depreciation and amortization)

     274,088        248,375        25,713        10.4   

General and administrative expenses (exclusive of depreciation and amortization)

     35,500        33,698        1,802        5.3   

Depreciation and amortization

     63,140        56,581        6,559        11.6   
  

 

 

   

 

 

   

 

 

   

Total operating costs and expenses

     4,804,440        3,910,730        893,710        22.9   
  

 

 

   

 

 

   

 

 

   

Income from operations

     489,278        109,420        379,858        347.2   

Other income (expense):

        

Equity in earnings of SLC Pipeline

     1,207        1,025        182        17.8   

Interest income

     742        694        48        6.9   

Interest expense

     (31,397     (38,745     7,348        (19.0

Merger transaction costs

     (6,014     —          (6,014     —     
  

 

 

   

 

 

   

 

 

   
     (35,462     (37,026     1,564        (4.2
  

 

 

   

 

 

   

 

 

   

Income before income taxes

     453,816        72,394        381,422        526.9   

Income tax provision

     160,972        22,982        137,990        600.4   
  

 

 

   

 

 

   

 

 

   

Net income

     292,844        49,412        243,432        492.7   

Less net income attributable to noncontrolling interest

     15,915        11,344        4,571        40.3   
  

 

 

   

 

 

   

 

 

   

Net income attributable to HollyFrontier stockholders

   $ 276,929      $ 38,068      $ 238,861        627.5
  

 

 

   

 

 

   

 

 

   

Earnings per share attributable to HollyFrontier stockholders:

        

Basic

   $ 5.19      $ 0.72      $ 4.47        620.8
  

 

 

   

 

 

   

 

 

   

Diluted

   $ 5.16      $ 0.71      $ 4.45        626.8
  

 

 

   

 

 

   

 

 

   

Cash dividends declared per common share

   $ 0.30      $ 0.30      $ —          —  
  

 

 

   

 

 

   

 

 

   

Average number of common shares outstanding:

        

Basic

     53,336        53,152        184        0.3

Diluted

     53,643        53,375        268        0.5

Balance Sheet Data (Unaudited)

 

     June 30,
2011
     December 31,
2010
 
     (In thousands)  

Cash, cash equivalents and investments in marketable securities

   $ 517,347       $ 230,444   

Working capital

   $ 467,381       $ 313,580   

Total assets

   $ 4,165,303       $ 3,701,475   

Long-term debt

   $ 838,866       $ 810,561   

Total equity

   $ 1,559,188       $ 1,288,139   

 

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Table of Contents

Other Financial Data (Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (In thousands)  

Net cash provided by operating activities

   $ 327,454      $ 128,370      $ 457,996      $ 38,346   

Net cash used for investing activities

   $ (114,012   $ (45,432   $ (255,062   $ (76,530

Net cash provided by (used for) financing activities

   $ (10,867   $ (36,015   $ (5,346   $ 53,800   

Capital expenditures

   $ 82,267      $ 45,432      $ 156,305      $ 76,530   

EBITDA (1)

   $ 350,564      $ 155,028      $ 531,696      $ 155,682   

 

(1) Earnings before interest, taxes, depreciation and amortization, which we refer to as (“EBITDA”), is calculated as net income 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 and as a basis for financial covenants. 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 currently organized into two reportable segments, Refining and HEP. Our operations that are not included in the Refining and HEP segment are included in Corporate and Other. Intersegment transactions are eliminated in our consolidated financial statements and are included in Eliminations.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (In thousands)  

Sales and other revenues

        

Refining (1)

   $ 2,953,226      $ 2,137,361      $ 5,268,318      $ 4,004,534   

HEP (2)

     50,940        45,483        95,945        86,172   

Corporate and Other

     153        150        801        217   

Eliminations

     (37,186     (37,134     (71,346     (70,773
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

   $ 2,967,133      $ 2,145,860      $ 5,293,718      $ 4,020,150   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income (loss)

        

Refining (1)

   $ 321,032      $ 124,549      $ 473,136      $ 99,969   

HEP (2)

     27,692        22,888        51,303        41,149   

Corporate and Other

     (18,040     (15,111     (34,138     (30,877

Eliminations

     (505     (162     (1,023     (821
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

   $ 330,179      $ 132,164      $ 489,278      $ 109,420   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The Refining segment includes the operations of our Navajo, Woods Cross and Tulsa Refineries and NK Asphalt Partners (“NK Asphalt”) and involves the purchase and refining of crude oil and wholesale and branded marketing of refined products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. The petroleum products are primarily marketed in the Southwest, Rocky Mountain and Mid-Continent regions of the United States and northern Mexico. Additionally, specialty lubricant products produced at our Tulsa Refinery are marketed throughout North America and are distributed in Central and South America. NK Asphalt operates various asphalt terminals in Arizona, New Mexico and Texas.

 

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Table of Contents
(2) The HEP segment involves all of the operations of HEP which owns and operates a system of petroleum product and crude gathering pipelines and refinery tankage in Texas, New Mexico, Oklahoma and Utah, and distribution terminals in Texas, New Mexico, Arizona, Utah, Idaho, Oklahoma and Washington. Revenues are generated by charging tariffs for transporting petroleum products and crude oil through its pipelines and by charging fees for terminalling petroleum products and other hydrocarbons, and storing and providing other services at its storage tanks and terminals. Additionally, HEP owns a 25% interest in the SLC Pipeline that services refineries in the Salt Lake City, Utah area. 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.

Refining Operating Data (Unaudited)

Our refinery operations include the Navajo, Woods Cross and Tulsa Refineries. The following tables set forth information, including non-GAAP performance measures, about our consolidated refinery operations. The cost of products and refinery gross margin do not include the effect of 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,
 
     2011     2010     2011     2010  

Navajo Refinery

      

Crude charge (BPD) (1)

     86,080        82,370        78,070        80,650   

Refinery throughput (BPD) (2)

     94,190        92,440        86,600        91,470   

Refinery production (BPD) (3)

     93,620        91,750        85,220        89,650   

Sales of produced refined products (BPD)

     94,340        93,040        87,130        90,000   

Sales of refined products (BPD) (4)

     98,120        96,280        92,440        93,220   

Refinery utilization (5)

     86.1     82.4     78.1     80.7

Average per produced barrel (6)

        

Net sales

   $ 126.36      $ 91.21      $ 119.35      $ 89.70   

Cost of products (7)

     104.24        82.08        100.30        82.50   
  

 

 

   

 

 

   

 

 

   

 

 

 

Refinery gross margin

     22.12        9.13        19.05        7.20   

Refinery operating expenses (8)

     5.17        4.61        5.71        4.88   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating margin

   $ 16.95      $ 4.52      $ 13.34      $ 2.32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Refinery operating expenses per throughput barrel

   $ 5.18      $ 4.64      $ 5.74      $ 4.80   

Feedstocks:

        

Sour crude oil

     71     85     72     86

Sweet crude oil

     4     4     4     4

Heavy sour crude oil

     16     —       14     —  

Other feedstocks and blends

     9     11     10     10
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Sales of produced refined products:

        

Gasolines

     52     57     52     57

Diesel fuels

     32     31     33     31

Jet fuels

     1     5     1     4

Fuel oil

     7     3     6     4

Asphalt

     4     2     4     2

LPG and other

     4     2     4     2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Woods Cross Refinery

        

Crude charge (BPD) (1)

     26,840        27,450        26,310        26,570   

Refinery throughput (BPD) (2)

     28,740        28,940        28,320        28,030   

Refinery production (BPD) (3)

     28,320        28,850        27,480        27,700   

Sales of produced refined products (BPD)

     27,600        29,070        27,130        28,620   

Sales of refined products (BPD) (4)

     27,600        29,140        27,170        28,750   

Refinery utilization (5)

     86.6     88.5     84.9     85.7

Average per produced barrel (6)

        

Net sales

   $ 128.02      $ 96.62      $ 118.62      $ 93.15   

Cost of products (7)

     99.79        74.26        94.95        74.48   
  

 

 

   

 

 

   

 

 

   

 

 

 

Refinery gross margin

     28.23        22.36        23.67        18.67   

Refinery operating expenses (8)

     6.16        5.30        6.29        5.74   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating margin

   $ 22.07      $ 17.06      $ 17.38      $ 12.93   
  

 

 

   

 

 

   

 

 

   

 

 

 

Refinery operating expenses per throughput barrel

   $ 5.92      $ 5.32      $ 6.03      $ 5.86   

Feedstocks:

        

Sweet crude oil

     61     60     59     60

Heavy sour crude oil

     5     5     5     6

Black wax crude oil

     28     29     29     29

Other feedstocks and blends

     6     6     7     5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Sales of produced refined products:

        

Gasolines

     61     62     61     63

Diesel fuels

     31     31     30     29

Jet fuels

     1     1     1     1

Fuel oil

     3     1     3     1

Asphalt

     2     3     3     3

LPG and other

     2     2     2     3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Tulsa Refinery

        

Crude charge (BPD) (1)

     110,100        118,480        107,860        111,080   

Refinery throughput (BPD) (2)

     111,850        119,800        109,290        112,350   

Refinery production (BPD) (3)

     110,110        112,860        107,050        107,900   

Sales of produced refined products (BPD)

     112,710        111,880        106,400        105,360   

Sales of refined products (BPD) (4)

     114,300        111,880        107,390        106,280   

Refinery utilization (5)

     88.1     94.8     86.3     88.9

Average per produced barrel (6)

        

Net sales

   $ 129.11      $ 90.93      $ 122.65      $ 88.74   

Cost of products (7)

     109.94        81.32        105.53        82.05   
  

 

 

   

 

 

   

 

 

   

 

 

 

Refinery gross margin

     19.17        9.61        17.12        6.69   

Refinery operating expenses (8)

     5.56        4.70        5.76        5.26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating margin

   $ 13.61      $ 4.91      $ 11.36      $ 1.43   
  

 

 

   

 

 

   

 

 

   

 

 

 

Refinery operating expenses per throughput barrel

   $ 5.60      $ 4.39      $ 5.61      $ 4.93   

Feedstocks:

        

Sweet crude oil

     93     89     95     94

Heavy sour crude oil

     5     3     4     1

Sour crude oil

     —       8     —       4

Other feedstocks and blends

     2     —       1     1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Three Months Ended
June 30,
    Six Months Ended
June  30,
 
     2011     2010     2011     2010  

Sales of produced refined products:

        

Gasolines

     38     37     37     39

Diesel fuels

     30     32     30     31

Jet fuels

     8     9     8     9

Lubricants

     10     10     11     10

Gas oil / intermediates

     6     3     6     3

Asphalt

     5     4     5     4

LPG and other

     3     5     3     4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

        

Crude charge (BPD) (1)

     223,020        228,300        212,240        218,300   

Refinery throughput (BPD) (2)

     234,780        241,180        224,210        231,850   

Refinery production (BPD) (3)

     232,050        233,460        219,750        225,250   

Sales of produced refined products (BPD)

     234,650        233,990        220,660        223,980   

Sales of refined products (BPD) (4)

     240,020        237,300        227,000        228,250   

Refinery utilization (5)

     87.1     89.2     82.9     85.3

Average per produced barrel (6)

        

Net sales

   $ 127.87      $ 91.75      $ 120.85      $ 89.69   

Cost of products (7)

     106.45        80.74        102.16        81.26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Refinery gross margin

     21.42        11.01        18.69        8.43   

Refinery operating expenses (8)

     5.48        4.74        5.80        5.17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating margin

   $ 15.94      $ 6.27      $ 12.89      $ 3.26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Refinery operating expenses per throughput barrel

   $ 5.47      $ 4.60      $ 5.71      $ 4.99   

Feedstocks:

        

Sour crude oil

     29     37     28     36

Sweet crude oil

     54     53     55     55

Heavy sour crude oil

     9     2     8     1

Black wax crude oil

     3     3     4     3

Other feedstocks and blends

     5     5     5     5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Sales of produced refined products:

        

Gasolines

     46     48     46     49

Diesel fuels

     31     32     32     31

Jet fuels

     4     6     4     6

Fuel oil

     3     1     3     2

Asphalt

     5     3     4     3

Lubricants

     5     5     5     5

Gas oil / intermediates

     3     2     3     1

LPG and other

     3     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). Our consolidated crude capacity is 256,000 BPSD.
(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 costs billed from HEP are included in cost of products.
(8) Represents operating expenses of our refineries, exclusive of depreciation and amortization.

 

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Results of Operations - Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

Summary

Net income attributable to HollyFrontier stockholders for the three months ended June 30, 2011 was $192.2 million ($3.60 per basic and $3.58 per diluted share), a $126 million increase compared to $66.2 million ($1.24 per basic and diluted share) for the three months ended June 30, 2010. Net income increased due principally to significantly higher refinery gross margins during the three months ended June 30, 2011. Overall refinery gross margins for the three months ended June 30, 2011 increased to $21.42 per produced barrel compared to $11.01 for the three months ended June 30, 2010.

Sales and Other Revenues

Sales and other revenues increased 38% from $2,145.9 million for the three months ended June 30, 2010 to $2,967.1 million for the three months ended June 30, 2011, due principally to the effects of increased sales prices of produced refined products sold. The average sales price we received per produced barrel sold increased 39% from $91.75 for the three months ended June 30, 2010 to $127.87 for the three months ended June 30, 2011. Sales and other revenues for the three months ended June 30, 2011 and 2010, include $13.8 million and $8.4 million, respectively, in HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties.

Additionally included in revenues for the three months ended June 30, 2010 was a final settlement received from SFPP, L.P. in June 2010 of $8.6 million that relates to tariff refunds for shipments of refined products for the period of January 1992 through May 2006.

Cost of Products Sold

Cost of products sold increased 32% from $1,848.2 million for the three months ended June 30, 2010 to $2,447.1 million for the three months ended June 30, 2011, due principally to higher crude oil costs. The average price we paid per barrel for crude oil and feedstocks and the transportation costs of moving the finished products to the market place increased 32% from $80.74 for the three months ended June 30, 2010 to $106.45 for the three months ended June 30, 2011.

Gross Refinery Margins

Gross refinery margin per produced barrel increased 95% from $11.01 for the three months ended June 30, 2010 to $21.42 for the three months ended June 30, 2011 due to the effects of an increase in the average sales price we received per barrel of produced refined products sold, partially offset by an increase in the average per barrel price we paid for crude oil and feedstocks. Our processing of lower priced West Texas Intermediate related crude oil combined with strong diesel and high gasoline margins at all of our refineries helped fuel this margin improvement. Gross refinery margin does not include the effects of depreciation and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part 1 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 15% from $120.8 million for the three months ended June 30, 2010 to $139.3 million for the three months ended June 30, 2011, due principally to increased payroll and maintenance costs.

General and Administrative Expenses

General and administrative expenses increased 18% from $15.8 million for the three months ended June 30, 2010 to $18.7 million for the three months ended June 30, 2011, due principally to higher payroll and equity based compensation costs.

 

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Depreciation and Amortization Expenses

Depreciation and amortization increased 10% from $28.8 million for the three months ended June 30, 2010 to $31.8 million for the three months ended June 30, 2011. The increase was due principally to depreciation and amortization attributable to capitalized improvement projects.

Interest Expense

Interest expense was $15.2 million for the three months ended June 30, 2011 compared to $21 million for the three months ended June 30, 2010. The decrease was due principally to interest capitalized on the UNEV Pipeline project. For the three months ended June 30, 2011 and 2010, interest expense included $9.3 million and $10.1 million, respectively, in interest costs attributable to HEP operations.

Merger Transaction Costs

For the three months ended June 30, 2011, we recognized merger transaction costs of $2.3 million related to our merger with Frontier effective July 1, 2011. These costs relate to legal, advisory and other professional fees that are directly attributable to the merger.

Income Taxes

For the three months ended June 30, 2011, we recorded income tax expense of $112 million compared to $39.7 million for the three months ended June 30, 2010. This increase was due principally to significantly higher pre-tax earnings during the three months ended June 30, 2011 compared to the same period of 2010. Our effective tax rates, before consideration of earnings attributable to the noncontrolling interest, were 35.7% and 35.3% for the three months ended June 30, 2011 and 2010, respectively.

Results of Operations - Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Summary

Net income attributable to HollyFrontier stockholders for the six months ended June 30, 2011 was $276.9 million ($5.19 per basic and $5.16 per diluted share), a $238.8 million increase compared to $38.1 million ($0.72 per basic and $0.71 per diluted share) for the six months ended June 30, 2010. Net income increased due principally to significantly higher refinery gross margins during the six months ended June 30, 2011. Overall refinery gross margins for the six months ended June 30, 2011 increased to $18.69 per produced barrel compared to $8.43 for the six months ended June 30, 2010.

Overall production levels for the six months ended June 30, 2011 decreased slightly over the same period of 2010 due principally to the effects of production downtime at the Navajo Refinery during the current year first quarter. For the six months ended June 30, 2011, overall production levels averaged 219,750 barrels per day (“BPD”) compared to 225,250 BPD for the same period last year.

Sales and Other Revenues

Sales and other revenues increased 32% from $4,020.2 million for the six months ended June 30, 2010 to $5,293.7 million for the six months ended June 30, 2011, due principally to the effects of increased sales prices of produced refined products sold that was partially offset by a slight decrease in year-over-year volumes of produced refined products sold. The average sales price we received per produced barrel sold increased 35% from $89.69 for the six months ended June 30, 2010 to $120.85 for the six months ended June 30, 2011. Sales and other revenues for the six months ended June 30, 2011 and 2010, include $24.7 million and $15.5 million, respectively, in HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties.

Cost of Products Sold

Cost of products sold increased 24% from $3,572.1 million for the six months ended June 30, 2010 to $4,431.7 million for the six months ended June 30, 2011, due principally to higher crude oil costs, partially offset by a slight decrease in volumes of produced refined products sold. The average price we paid per barrel for crude oil and feedstocks and the transportation costs of moving the finished products to the market place increased 26% from $81.26 for the six months ended June 30, 2010 to $102.16 for the six months ended June 30, 2011.

 

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Gross Refinery Margins

Gross refinery margin per produced barrel increased 122% from $8.43 for the six months ended June 30, 2010 to $18.69 for the six months ended June 30, 2011 due to the effects of an increase in the average sales price we received per barrel of produced refined products sold, partially offset by an increase in the average per barrel price we paid for crude oil and feedstocks. Gross refinery margin does not include the effects of depreciation and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part 1 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 10% from $248.4 million for the six months ended June 30, 2010 to $274.1 million for the six months ended June 30, 2011, due principally to increased payroll and maintenance costs during the current year.

General and Administrative Expenses

General and administrative expenses increased 5% from $33.7 million for the six months ended June 30, 2010 to $35.5 million for the six months ended June 30, 2011, due principally to higher compensation costs and professional fees.

Depreciation and Amortization Expenses

Depreciation and amortization increased 12% from $56.6 million for the six months ended June 30, 2010 to $63.1 million for the six months ended June 30, 2011. The increase was due principally to depreciation and amortization attributable to capitalized improvement projects.

Interest Expense

Interest expense was $31.4 million for the six months ended June 30, 2011 compared to $38.7 million for the six months ended June 30, 2010. The decrease was due principally to interest capitalized on the UNEV Pipeline project. For the six months ended June 30, 2011 and 2010, interest expense included $18.4 million and $18.2 million, respectively, in interest costs attributable to HEP operations.

Merger Transaction Costs

For the six months ended June 30, 2011, we recognized merger transaction costs of $6 million that relate to legal, advisory and other professional fees attributable to our merger with Frontier.

Income Taxes

For the six months ended June 30, 2011 we recorded income tax expense of $161 million compared to $23 million for the six months ended June 30, 2010. This increase was due principally to significantly higher pre-tax earnings during the six months ended June 30, 2011 compared to the same period of 2010. Our effective tax rates, before consideration of earnings attributable to the noncontrolling interest, were 35.5% and 31.7% for the six months ended June 30, 2011 and 2010, respectively.

LIQUIDITY AND CAPITAL RESOURCES

HollyFrontier Credit Agreement

On July 1, 2011, we entered into a $1 billion senior secured credit agreement (the “HollyFrontier Credit Agreement”) with Union Bank, N.A. as administrative agent and BNP Paribas as syndication agent, and certain lenders from time to time thereto, and terminated our previous credit agreement discussed below. The HollyFrontier Credit Agreement matures in July 2016 and may be used to fund working capital requirements, capital expenditures, acquisitions and general corporate purposes.

At June 30, 2011, we had a $400 million senior secured credit agreement expiring in March 2013 with Bank of America, N.A. as administrative agent and one of a syndicate of lenders. We were in compliance with all covenants at June 30, 2011. At June 30, 2011, we had no outstanding borrowings and outstanding letters of credit totaling $76.8 million. At that level of usage, the unused commitment was $323.2 million.

 

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Table of Contents

If any particular lender could not honor its commitment under the HollyFrontier Credit Agreement, we believe the unused capacity that would be available from the remaining lenders would be sufficient to meet our borrowing needs. Additionally, we have reviewed publicly available information on our lenders in order to review and monitor their financial stability and assess their ongoing ability to honor their commitments under the HollyFrontier Credit Agreement. We have not experienced, nor do we expect to experience, any difficulty in the lenders’ ability to honor their respective commitments, and if it were to become necessary, we believe there would be alternative lenders or options available.

HEP Credit Agreement

HEP has a $275 million senior secured revolving Credit Agreement (the “HEP Credit Agreement”) that is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. In February 2011, HEP amended its previous credit agreement (expiring in August 2011), extending the expiration date and reducing the size of the credit facility from $300 million to $275 million. The size was reduced based on management’s review of past and forecasted utilization of the facility. The HEP Credit Agreement expires in February 2016; however, in the event that the 6.25% HEP Senior Notes (discussed later) are not repurchased, refinanced, extended or repaid prior to September 1, 2014, the HEP Credit Agreement will expire on that date. At June 30, 2011, HEP had outstanding borrowings totaling $186 million under the HEP Credit Agreement, with unused borrowing capacity of $89 million.

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

If any particular lender could not honor its commitment under the HEP Credit agreement, HEP believes the unused capacity that would be available from the remaining lenders would be sufficient to meet its borrowing needs. Additionally, publicly available information on these lenders is reviewed in order to monitor their financial stability and assess their ongoing ability to honor their commitments under the HEP Credit Agreement. HEP does not expect to experience any difficulty in the lenders’ ability to honor their respective commitments, and if it were to become necessary, HEP believes there would be alternative lenders or options available.

HollyFrontier Senior Notes Due 2017

Our $300 million 9.875% senior notes (the “HollyFrontier 9.875% Senior Notes”) mature in June 2017 and are unsecured and impose certain restrictive covenants, including limitations on our ability to incur additional debt, incur liens, enter into sale-and-leaseback transactions, pay dividends, enter into mergers, sell assets and enter into certain transactions with affiliates. At any time when the HollyFrontier 9.875% Senior Notes are rated investment grade by both Moody’s and Standard & Poor’s and no default or event of default exists, we will not be subject to many of the foregoing covenants. Additionally, we have certain redemption rights under the HollyFrontier 9.875% Senior Notes.

HEP Senior Notes Due 2018 and 2015

In March 2010, HEP issued $150 million in aggregate principal amount of 8.25% senior notes maturing in March 2018 (the “HEP 8.25% Senior Notes”). A portion of the $147.5 million in net proceeds received was used to fund HEP’s $93 million purchase of certain storage assets at our Tulsa Refinery east facility and Navajo Refinery Lovington facility on March 31, 2010. Additionally, HEP used a portion to repay $42 million in outstanding HEP Credit Agreement borrowings, with the remaining proceeds available for general partnership purposes, including working capital and capital expenditures.

HEP also has $185 million in aggregate principal amount outstanding of 6.25% senior notes maturing in March 2015 (the “HEP 6.25% Senior Notes”) that are registered with the SEC. The HEP 6.25% Senior Notes and HEP 8.25% Senior Notes (collectively, the “HEP Senior Notes”) are unsecured and impose certain restrictive covenants, including limitations on HEP’s ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. At any time when the HEP Senior Notes are rated investment grade by both Moody’s and Standard & Poor’s and no default or event of default exists, HEP will not be subject to many of the foregoing covenants. Additionally, HEP has certain redemption rights under the HEP Senior Notes.

 

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

See “Risk Management” for a discussion of HEP’s interest rate swap contracts.

HollyFrontier Financing Obligation

In October 2009, we sold approximately 400,000 barrels of crude oil tankage at our Tulsa Refinery west facility as well as certain crude oil pipeline receiving facilities to an affiliate of Plains All American Pipeline, L.P. (“Plains”) for $40 million in cash. In connection with this transaction, we entered into a 15-year lease agreement with Plains, whereby we agreed to pay a fixed monthly fee for the exclusive use of this tankage as well as a fee for volumes received at the receiving facilities purchased by Plains. Additionally, we have a margin sharing agreement with Plains under which we will equally share contango profits with Plains for crude oil purchased by them and delivered to our Tulsa Refinery west facility for storage. Due to our continuing involvement in these assets, this transaction has been accounted for as a financing obligation. As a result, we retained these assets on our books and recorded a liability representing the $40 million in proceeds received.

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 (including legacy Frontier projects not discussed below) and our liquidity needs for the foreseeable future. In addition, components of our growth strategy may 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. Our ability to acquire complementary assets will be dependent upon several factors, including our ability to identify attractive acquisition candidates, consummate acquisitions on favorable terms, successfully integrate acquired assets and obtain financing to fund acquisitions and to support our growth, and many other factors beyond our control.

We began the third quarter as a combined company with over $1.3 billion in cash, cash equivalents and marketable securities and a new $1 billion revolving credit facility, significantly enhancing our liquidity position. 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, and are invested primarily in conservative, highly-rated instruments issued by financial institutions or government entities with strong credit standings.

During the six months ended June 30, 2011, cash and cash equivalents increased by $197.6 million. Net cash provided by operating activities of $458 million exceeded cash used for investing and financing activities of $255.1 million and $5.3 million, respectively. Working capital increased by $153.8 million during the six months ended June 30, 2011.

Cash Flows - Operating Activities

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Net cash flows provided by operating activities were $458 million for the six months ended June 30, 2011 compared to net cash provided by operating activities of $38.3 million for the six months ended June 30, 2010, an increase of $419.7 million. Net income for the six months ended June 30, 2011 was $292.8 million, an increase of $243.4 million compared to $49.4 million for the six months ended June 30, 2010. Non-cash adjustments consisting of depreciation and amortization, deferred income taxes, equity-based compensation expense and fair value adjustments to derivative instruments resulted in an increase to operating cash flows of $72.3 million for the six months ended June 30, 2011 compared to $46.5 million for the same period in 2010. Additionally, SLC Pipeline earnings, net of distributions decreased and increased operating cash flows by $0.1 million for the six months ended June 30, 2011 and June 30, 2010, respectively. Changes in working capital

 

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items increased cash flows by $105.5 million for the six months ended June 30, 2011 compared to a decrease of $54.2 million for the six months ended June 30, 2010. Additionally, for the six months ended June 30, 2011, turnaround expenditures increased to $19.8 million from $8.7 million in 2010 due primarily to a major maintenance turnaround project at our Tulsa Refinery facilities that was completed in January 2011.

Cash Flows - Investing Activities and Planned Capital Expenditures

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Net cash flows used for investing activities were $255.1 million for the six months ended June 30, 2011 compared to $76.5 million for the six months ended June 30, 2010, an increase of $178.6 million. Cash expenditures for properties, plants and equipment for the first six months of 2011 increased to $156.3 million from $76.5 million for the same period in 2010. These include HEP capital expenditures of $22.9 million and $4.5 million for the six months ended June 30, 2011 and 2010, respectively. Capital expenditures were significantly higher in the six months ending June 30, 2011 due to construction of the UNEV Pipeline system. During the six months ended June 30, 2011, we invested $9.1 million in Sabine Biofuels, a development stage biodiesel production facility. Also, for the six months ended June 30, 2011, we invested $157.8 million in marketable securities and received proceeds of $68.2 million from the sale or maturity of marketable securities.

Planned Capital Expenditures

HollyFrontier Corporation

Each year our Board of Directors approves in our annual capital budget projects that our management is authorized to undertake. Additionally, at times when conditions warrant or as new opportunities arise, other or 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, our planned capital expenditures for a given year consist of expenditures approved for capital projects included in the current year’s capital budget as well as, in certain cases, expenditures approved for capital projects in capital budgets for prior years. As of June 30, 2011, our total capital budget for 2011 is $142.4 million. Additionally, capital costs of $11.7 million have been approved for refinery turnarounds and tank work. We expect to spend approximately $185 million in capital costs in 2011, including capital projects approved in prior years. Our capital spending for 2011 is comprised of $24 million for projects at the Navajo Refinery, $13 million for projects at the Woods Cross Refinery, $70 million for projects at the Tulsa Refinery, $69 million for our portion of the UNEV Pipeline project, $3 million for asphalt plant projects and $6 million for marketing-related and miscellaneous projects. The following summarizes our key capital projects as of June 30, 2011.

We are proceeding with the integration project of our Tulsa Refinery west and east facilities. Upon completion, the Tulsa Refinery will have an integrated crude processing rate of 125,000 BPSD. The integration project involves the installation of interconnect pipelines that will permit us to transfer various intermediate streams between the two facilities. Currently, we are using an existing third-party line for the transfer of intermediates from the west facility to the east facility under a 10-year agreement. These interconnect lines will allow us to eliminate the sale of gas oil at a discount to WTI under our 5-year gas oil off take agreement with a third party, optimize gasoline blending, increase our utilization of better process technology, improve yields and reduce operating costs. HEP is currently constructing five additional interconnect pipelines and we are currently negotiating terms for a long-term agreement with HEP to transfer intermediate products via these pipelines that will commence upon completion of the project. Also, as part of the integration, during the first quarter of 2011 we completed the expansion of the diesel hydrotreating unit at the east facility. This expanded unit will permit the processing of all high sulfur diesel produced to ULSD once the interconnecting pipelines are complete and available to move high sulfur diesel and hydrogen produced in the west facility to the east facility. We are currently planning to complete the integration projects by the end of this summer.

The Tulsa Refinery facilities also will be required to comply with new MSAT2 regulations in order to meet new federal benzene reduction requirements for gasoline. We have decided to primarily use existing equipment at the Tulsa Refinery east facility to split reformate from reformers at both west and east facilities and install a new benzene saturation unit to achieve the required benzene reduction at an estimated cost of $29 million. We will be required to buy benzene credits to get the gasoline pool below 0.62% by volume until this project is complete, as required by law, beginning in 2011. There is an additional requirement to average 1.3% benzene levels on an annual basis beginning in July 2012.

 

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Our consent decree with the EPA requires recovery of sulfur from the refinery fuel gas system and the shutdown or replacement of two low pressure boilers at the Tulsa Refinery west facility by the end of 2013. Our Board of Directors have approved a project for $44 million which would meet these requirements as well as increase our ability to run additional lower priced sour crude types at the Tulsa Refinery east facility. Also, we are evaluating the best solution to the low pressure boiler issue. In addition to the consent decree requirements, flare gas recovery and coker blowdown modifications are required to comply with new flare regulations at an estimated cost of $10 million.

The Navajo Refinery currently plans to comply with the new MSAT2 regulations by the fractionation of naphtha by revamping an existing fractionation unit to achieve benzene in gasoline levels below 1.3%. The Navajo Refinery will purchase or use credits generated at the Tulsa Refinery to reduce benzene content to the required 0.62%. Due to our acquisition of the Tulsa Refinery facilities from Sunoco and Sinclair, our Navajo Refinery has until the end of 2011 to comply with the MSAT2 regulations because we no longer qualify for the small refiner’s exemption. Also, we will be installing a new storm water surge tank and upgrading several other processes at the refinery’s Artesia waste water treatment plant. These projects are expected to cost approximately $17 million.

Our Woods Cross Refinery is required to install a wet gas scrubber on its FCC unit by the end of 2012. We estimate the total cost to be $15 million. The MSAT2 solution for the refinery involves revamping its naphtha fractionation unit and installing a benzene saturation unit at an estimated cost of $18 million. These projects will reduce benzene levels in gasoline below the 1.3% annual average level. The Woods Cross Refinery will purchase credits to meet the 0.62% benzene requirement. Like our Navajo Refinery, our Woods Cross Refinery has until the end of 2011 to comply with the MSAT2 regulations.

Under a definitive agreement with Sinclair, we are jointly building the UNEV Pipeline, a 12-inch refined products pipeline from Salt Lake City, Utah to Las Vegas, Nevada, together with terminal facilities in the Cedar City, Utah and North Las Vegas areas. Under the agreement, we own a 75% interest in the joint venture pipeline with Sinclair, our joint venture partner, owning the remaining 25% interest. The initial capacity of the pipeline will be 62,000 BPD (based on gasoline equivalents), with the capacity for further expansion to 120,000 BPD. The current total cost of the pipeline project including terminals is expected to be approximately $385 million, with our share of the cost totaling $289 million. This project includes the construction of ethanol blending and storage facilities at the Cedar City terminal. The pipeline is in the final construction phase and is expected to be mechanically complete in the fourth quarter of 2011.

In connection with this project, we have entered into a 10-year commitment to ship an annual average of 15,000 barrels per day of refined products on the UNEV Pipeline at an agreed tariff. Our commitment for each year is subject to reduction by up to 5,000 barrels per day in specified circumstances relating to shipments by other shippers. We have an option agreement with HEP granting them an option to purchase all of our equity interests in this joint venture pipeline effective for a 180-day period commencing when the UNEV Pipeline becomes operational, at a purchase price equal to our investment in this joint venture pipeline plus interest at 7% per annum.

Regulatory compliance items or other presently existing or future environmental regulations / consent decrees could cause us to make additional capital investments beyond those described above and incur additional operating costs to meet applicable requirements.

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

 

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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 2011 HEP capital budget is comprised of $5.8 million for maintenance capital expenditures and $20.1 million for expansion capital expenditures.

As described under our Tulsa Refinery integration project, HEP is currently constructing five interconnecting pipelines between our Tulsa east and west refining facilities. The project is expected to cost approximately $35 million with completion in the late summer of 2011. We are finalizing terms for a long-term agreement with HEP to transfer intermediate products via these pipelines that will commence upon completion of the project.

Additionally, HEP has two expansion projects to provide 60,000 bpd of additional crude pipeline take-away capacity resulting from increased Delaware Basin drilling activity in southeast New Mexico. The first project will increase one of HEP’s existing crude oil trunk lines from 35,000 bpd to 60,000 bpd. This 35-mile pipeline transports crude oil from its gathering system in southeast New Mexico to our New Mexico refining facilities. The scope of the project includes the replacement of 5 miles of existing pipe with larger diameter pipe and the addition of a higher horsepower pump. HEP will commence shortly and is expected to be completed during the first half of 2012. The second project will consist of the reactivation and conversion to crude oil service a 70-mile, 8-inch petroleum products pipeline owned by HEP. Once in service, this pipeline would be capable of transporting up to 35,000 bpd of crude oil from rapidly developing Delaware Basin production in the Carlsbad, New Mexico area to either a third party common carrier pipeline station for transport to major crude oil markets or to our New Mexico refining facilities. The scope of this project is in the process of being finalized. It is anticipated that this project, subject to receipt of acceptable shipper support and board approval, could also be completed during the first half of 2012. These two expansion projects are currently estimated to cost approximately $15 million.

Cash Flows - Financing Activities

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Net cash flows used for financing activities were $5.3 million for the six months ended June 30, 2011 compared to net cash flows provided by financing activities of $53.8 million for the six months ended June 30, 2010, a decrease of $59.1 million. During the six months ended June 30, 2011, we paid $0.6 million under our financing obligation to Plains, purchased $3 million in common stock from employees to provide funds for the payment of payroll and income taxes due upon the vesting of certain share-based incentive awards, paid $16 million in dividends, received an $16.5 million contribution from our UNEV Pipeline joint venture partner and recognized $1.4 million excess taxes on our equity based compensation. During the six months ended June 30, 2011, HEP received $64 million and repaid $37 million under the HEP Credit Agreement, paid distributions of $25.1 million to noncontrolling interests, incurred $3.3 million in deferred financing costs and purchased $1.4 million in HEP common units in the open market for recipients of its restricted unit grants. During the six months ended June 30, 2010, we received and repaid $310 million in advances under the HollyFrontier Credit Agreement, paid $0.4 million under our financing obligation to Plains, paid $15.9 million in dividends, purchased $1.3 million in common stock from employees to provide funds for the payment of payroll and income taxes due upon the vesting of certain share-based incentive awards, received a $5 million contribution from our UNEV Pipeline joint venture partner and recognized $1.3 million in excess tax expense on our equity based compensation. During the six months ended June 30, 2010, HEP received $147.5 million in net proceeds upon the issuance of the HEP 8.25% Senior Notes, received $39 million and repaid $90 million under the HEP Credit Agreement, paid distributions of $23.9 million to noncontrolling interests and purchased $2.3 million in HEP common units in the open market for recipients of its restricted unit grants. Additionally, $2.7 million in deferred financing costs were incurred in connection with the issuance of the HEP 8.25% Senior Notes in March 2010 and an amendment to the HollyFrontier Credit Agreement.

Contractual Obligations and Commitments

HollyFrontier Corporation

There were no significant changes to our contractual obligations during the six months ended June 30, 2011.

 

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HEP

During the six months ended June 30, 2011, HEP received net advances of $27 million resulting in $186 million of outstanding borrowings under the HEP Credit Agreement at June 30, 2011.

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.

Our significant accounting policies are described in “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, 2010. Certain critical accounting policies that materially affect the amounts recorded in our consolidated financial statements are the use of the 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 assessing contingent liabilities for probable losses. There have been no changes to these policies in 2011.

We use the LIFO method of valuing inventory. Under the LIFO method, an actual valuation of inventory can only be made at the end of each year based on the inventory levels. 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.

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 to mitigate price exposure with respect to:

 

   

our inventory positions;

 

   

natural gas purchases;

 

   

costs of crude oil;

 

   

prices of refined products; and

 

   

our refining margins.

As of June 30, 2011, we have outstanding commodity price swap contracts serving as economic hedges to protect the value of temporary inventory builds of 210,000 barrels against price volatility and to lock in the spread between WTS and WTI crude oil with respect to forecasted purchases of 3.5 million barrels of crude oil. These contracts are measured quarterly at fair value with offsetting adjustments (gains / losses) recorded directly to cost of products sold.

 

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Interest Rate Risk Management

HEP uses interest rate swaps to manage its exposure to interest rate risk.

As of June 30, 2011, HEP has an interest rate swap that hedges its exposure to the cash flow risk caused by the effects of LIBOR changes on a $155 million HEP Credit Agreement advance. This interest rate swap effectively converts $155 million of LIBOR based debt to fixed rate debt having an interest rate of 3.74% plus an applicable margin, currently 2.50%, which equaled an effective interest rate of 6.24% as of June 30, 2011. This interest rate swap contract has been designated as a cash flow hedge and matures in February 2013.

This contract initially hedged variable LIBOR interest on $171 million in outstanding HEP Credit Agreement debt. In May 2010, HEP repaid $16 million of the HEP Credit Agreement debt and also settled a corresponding portion of its interest rate swap agreement having a notional amount of $16 million for $1.1 million. Upon payment, HEP reduced its swap liability and reclassified a $1.1 million charge from accumulated other comprehensive loss to interest expense, representing the application of hedge accounting prior to settlement.

The following table presents balance sheet locations and related fair values of outstanding derivative instruments.

 

Derivative Instruments

  

Balance Sheet

Location

   Fair Value     

Location of Offsetting

Balance

   Offsetting
Amount
 
     (Dollars in thousands)  

June 30, 2011

           

Derivative designated as cash flow hedging instrument:

           

Variable-to-fixed interest rate swap contract ($155 million LIBOR based debt interest payments)

  

Other long-term liabilities

   $ 8,472      

Accumulated other comprehensive loss

   $ 8,472   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments:

           

Variable-to-fixed commodity price swap contracts (various inventory positions)

  

Prepayments and other current assets

   $ 7,958      

Cost of products sold (decrease)

   $ 7,958   
     

 

 

       

 

 

 

Fixed/variable-to-variable/fixed commodity price contracts (various inventory positions)

  

Accrued liabilities

   $ 1,300      

Cost of products sold (increase)

   $ 1,300   
     

 

 

       

 

 

 

December 31, 2010

           

Derivatives designated as cash flow hedging instruments:

           

Variable-to-fixed commodity price swap contracts (forecasted volumes of natural gas purchases)

  

Accrued liabilities

   $ 38      

Accumulated other comprehensive loss

   $ 38   
     

 

 

       

 

 

 

Variable-to-fixed interest rate swap contract ($155 million LIBOR based debt interest payments)

  

Other long-term liabilities

   $ 10,026      

Accumulated other comprehensive loss

   $ 10,026   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments:

           

Fixed-to-variable rate swap contracts (various inventory positions)

  

Accrued liabilities

   $ 497      

Cost of products sold (increase)

   $ 497   
     

 

 

       

 

 

 

For the three and six months ended June 30, 2011, maturities and fair value adjustments attributable to our economic hedges resulted in a $3 million decrease and a $0.7 million increase, respectively, to costs of products sold.

For the three and six months ended June 30, 2010, HEP recognized $1.5 million in charges to interest expense as a result of fair value changes to interest rate swap contracts that were settled in the first quarter of 2010.

There was no ineffectiveness on the cash flow hedges during the periods covered in these consolidated financial statements.

Publicly available 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 swap contracts. These counterparties are large financial institutions. We have not experienced, nor do we expect to experience, any difficulty in the counterparties honoring their commitments.

 

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

At June 30, 2011, outstanding principal under the HollyFrontier 9.875% Senior Notes, HEP 6.25% Senior Notes and HEP 8.25% Senior Notes was $300 million, $185 million and $150 million, respectively. For these fixed rate notes, changes in interest rates will generally affect fair value of the debt, but not our earnings or cash flows. At June 30, 2011, the estimated fair values of the HollyFrontier 9.875% Senior Notes, HEP 6.25% Senior Notes and HEP 8.25% Senior Notes were $333.8 million, $184.1 million and $159.4 million, respectively. We estimate that a hypothetical 10% change in the yield-to-maturity rates applicable to these notes would result in a fair value change to the notes of approximately $12.7 million, $4.3 million and $6.2 million, respectively.

For the variable rate HEP Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. At June 30, 2011, borrowings outstanding under the HEP Credit Agreement were $186 million. By means of its cash flow hedge, HEP has effectively converted the variable rate on $155 million of outstanding principal to a fixed rate of 6.24%. For the unhedged $31 million portion, a hypothetical 10% change in interest rates applicable to the HEP Credit Agreement would not materially affect cash flows.

At June 30, 2011, cash and cash equivalents included investments in investment grade, highly liquid investments with maturities of three months or less at the time of purchase and hence the interest rate market risk implicit in these cash investments is low. Due to the short-term nature of our cash and cash equivalents, a hypothetical 10% increase in interest rates would not have a material effect on the fair market value of our portfolio. Since we have the ability to liquidate this portfolio, we do not expect our operating results or cash flows to be materially affected by the effect of a sudden change in market interest rates on our investment portfolio.

Our operations are subject to normal hazards of 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.

We have a risk management oversight committee that is made up 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.

 

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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 financial statements.

Earnings before interest, taxes, depreciation and amortization, which we refer to as EBITDA, is calculated as net income 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 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 and as a basis for financial covenants.

Set forth below is our calculation of EBITDA.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (In thousands)  

Net income attributable to HollyFrontier stockholders

   $ 192,235      $ 66,162      $ 276,929      $ 38,068   

Add income tax provision

     111,961        39,654        160,972        22,982   

Add interest expense

     15,193        21,023        31,397        38,745   

Subtract interest income

     (657     (635     (742     (694

Add depreciation and amortization

     31,832        28,824        63,140        56,581   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 350,564      $ 155,028      $ 531,696      $ 155,682   
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

We calculate refinery gross margin and net operating margin using net sales, cost of products and operating expenses, in each case averaged per produced barrel sold. These two margins do not include the effect of 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.

 

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Refinery Gross Margin

Refinery gross margin per barrel is the difference between average net sales price and average cost of products per barrel of produced refined products. Refinery gross margin for each of our refineries and for our three refineries on a consolidated basis is calculated as shown below.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Average per produced barrel:

           

Navajo Refinery

           

Net sales

   $ 126.36       $ 91.21       $ 119.35       $ 89.70   

Less cost of products

     104.24         82.08         100.30         82.50   
  

 

 

    

 

 

    

 

 

    

 

 

 

Refinery gross margin

   $ 22.12       $ 9.13       $ 19.05       $ 7.20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Woods Cross Refinery

           

Net sales

   $ 128.02       $ 96.62       $ 118.62       $ 93.15   

Less cost of products

     99.79         74.26         94.95         74.48   
  

 

 

    

 

 

    

 

 

    

 

 

 

Refinery gross margin

   $ 28.23       $ 22.36       $ 23.67       $ 18.67   
  

 

 

    

 

 

    

 

 

    

 

 

 

Tulsa Refinery

           

Net sales

   $ 129.11       $ 90.93       $ 122.65       $ 88.74   

Less cost of products

     109.94         81.32         105.53         82.05   
  

 

 

    

 

 

    

 

 

    

 

 

 

Refinery gross margin

   $ 19.17       $ 9.61       $ 17.12       $ 6.69   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated

           

Net sales

   $ 127.87       $ 91.75       $ 120.85       $ 89.69   

Less cost of products

     106.45         80.74         102.16         81.26   
  

 

 

    

 

 

    

 

 

    

 

 

 

Refinery gross margin

   $ 21.42       $ 11.01       $ 18.69       $ 8.43   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Operating Margin

Net operating margin per barrel is the difference between refinery gross margin and refinery operating expenses per barrel of produced refined products. Net operating margin for each of our refineries and for our three refineries on a consolidated basis is calculated as shown below.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Average per produced barrel:

           

Navajo Refinery

           

Refinery gross margin

   $ 22.12       $ 9.13       $ 19.05       $ 7.20   

Less refinery operating expenses

     5.17         4.61         5.71         4.88   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net operating margin

   $ 16.95       $ 4.52       $ 13.34       $ 2.32   
  

 

 

    

 

 

    

 

 

    

 

 

 

Woods Cross Refinery

           

Refinery gross margin

   $ 28.23       $ 22.36       $ 23.67       $ 18.67   

Less refinery operating expenses

     6.16         5.30         6.29         5.74   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net operating margin

   $ 22.07       $ 17.06       $ 17.38       $ 12.93   
  

 

 

    

 

 

    

 

 

    

 

 

 

Tulsa Refinery

           

Refinery gross margin

   $ 19.17       $ 9.61       $ 17.12       $ 6.69   

Less refinery operating expenses

     5.56         4.70         5.76         5.26   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net operating margin

   $ 13.61       $ 4.91       $ 11.36       $ 1.43   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated

           

Refinery gross margin

   $ 21.42       $ 11.01       $ 18.69       $ 8.43   

Less refinery operating expenses

     5.48         4.74         5.80         5.17   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net operating margin

   $ 15.94       $ 6.27       $ 12.89       $ 3.26   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Below are reconciliations to our Consolidated Statements of Income for (i) net sales, cost of products 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.

Reconciliations of refined product sales from produced products sold to total sales and other revenues

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (Dollars in thousands, except per barrel amounts)  

Navajo Refinery

        

Average sales price per produced barrel sold

   $ 126.36      $ 91.21      $ 119.35      $ 89.70   

Times sales of produced refined products sold (BPD)

     94,340        93,040        87,130        90,000   

Times number of days in period

     91        91        181        181   
  

 

 

   

 

 

   

 

 

   

 

 

 

Refined product sales from produced products sold

   $ 1,084,793      $ 772,242      $ 1,882,213      $ 1,461,213   
  

 

 

   

 

 

   

 

 

   

 

 

 

Woods Cross Refinery

        

Average sales price per produced barrel sold

   $ 128.02      $ 96.62      $ 118.62      $ 93.15   

Times sales of produced refined products sold (BPD)

     27,600        29,070        27,130        28,620   

Times number of days in period

     91        91        181        181   
  

 

 

   

 

 

   

 

 

   

 

 

 

Refined product sales from produced products sold

   $ 321,535      $ 255,596      $ 582,487      $ 482,537   
  

 

 

   

 

 

   

 

 

   

 

 

 

Tulsa Refinery

        

Average sales price per produced barrel sold

   $ 129.11      $ 90.93      $ 122.65      $ 88.74   

Times sales of produced refined products sold (BPD)

     112,710        111,880        106,400        105,360   

Times number of days in period

     91        91        181        181   
  

 

 

   

 

 

   

 

 

   

 

 

 

Refined product sales from produced products sold

   $ 1,324,231      $ 925,766      $ 2,362,043      $ 1,692,286   
  

 

 

   

 

 

   

 

 

   

 

 

 

Sum of refined product sales from produced products sold from our three refineries (1)

   $ 2,730,559      $ 1,953,604      $ 4,826,743      $ 3,636,036   

Add refined product sales from purchased products and rounding (2)

     63,038        27,296        138,659        68,680   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total refined product sales

     2,793,597        1,980,900        4,965,402        3,704,716   

Add direct sales of excess crude oil (3)

     138,492        114,155        273,901        249,017   

Add other refining segment revenue (4)

     21,137        42,306        29,015        50,801   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total refining segment revenue

     2,953,226        2,137,361        5,268,318        4,004,534   

Add HEP segment sales and other revenues

     50,940        45,483        95,945        86,172   

Add corporate and other revenues

     153        150        801        217   

Subtract consolidations and eliminations

     (37,186     (37,134     (71,346     (70,773
  

 

 

   

 

 

   

 

 

   

 

 

 

Sales and other revenues

   $ 2,967,133      $ 2,145,860      $ 5,293,718      $ 4,020,150   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The above calculations of refined product sales from produced products sold can also be computed on a consolidated basis. These amounts may not calculate exactly due to rounding of reported numbers.
(2) We purchase finished products when opportunities arise that provide a profit on the sale of such products, or to meet delivery commitments.
(3) 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, 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 carryover cost.
(4) Other refining segment revenue includes the revenues associated with NK Asphalt and revenue derived from feedstock and sulfur credit sales.

 

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Table of Contents
    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2011     2010     2011     2010  
    (Dollars in thousands, except per barrel amounts)  

Average sales price per produced barrel sold

  $ 127.87      $ 91.75      $ 120.85      $ 89.69   

Times sales of produced refined products sold (BPD)

    234,650        233,990        220,660        223,980   

Times number of days in period

    91        91        181        181   
 

 

 

   

 

 

   

 

 

   

 

 

 

Refined product sales from produced products sold

  $ 2,730,559      $ 1,953,604      $ 4,826,743      $ 3,636,036   
 

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of average cost of products per produced barrel sold to total cost of products sold

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2011     2010     2011     2010  
    (Dollars in thousands, except per barrel amounts)  

Navajo Refinery

       

Average cost of products per produced barrel sold

  $ 104.24      $ 82.08      $ 100.30      $ 82.50   

Times sales of produced refined products sold (BPD)

    94,340        93,040        87,130        90,000   

Times number of days in period

    91        91        181        181   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of products for produced products sold

  $ 894,894      $ 694,942      $ 1,581,784      $ 1,343,925   
 

 

 

   

 

 

   

 

 

   

 

 

 

Woods Cross Refinery

       

Average cost of products per produced barrel sold

  $ 99.79      $ 74.26      $ 94.95      $ 74.48   

Times sales of produced refined products sold (BPD)

    27,600        29,070        27,130        28,620   

Times number of days in period

    91        91        181        181   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of products for produced products sold

  $ 250,633      $ 196,445      $ 466,255      $ 385,823   
 

 

 

   

 

 

   

 

 

   

 

 

 

Tulsa Refinery

       

Average cost of products per produced barrel sold

  $ 109.94      $ 81.32      $ 105.53      $ 82.05   

Times sales of produced refined products sold (BPD)

    112,710        111,880        106,400        105,360   

Times number of days in period

    91        91        181        181   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of products for produced products sold

  $ 1,127,612      $ 827,925      $ 2,032,339      $ 1,564,707   
 

 

 

   

 

 

   

 

 

   

 

 

 

Sum of cost of products for produced products sold from our three refineries (1)

  $ 2,273,139      $ 1,719,312      $ 4,080,378      $ 3,294,455   

Add refined product costs from purchased products sold and rounding (2)

    64,110        27,827        139,583        69,329   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total refined cost of products sold

    2,337,249        1,747,139        4,219,961        3,363,784   

Add crude oil cost of direct sales of excess crude oil (3)

    135,981        112,885        268,861        246,552   

Add other refining segment cost of products sold (4)

    10,205        24,738        12,539        30,859   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total refining segment cost of products sold

    2,483,435        1,884,762        4,501,361        3,641,195   

Subtract consolidations and eliminations

    (36,340     (36,550     (69,649     (69,119
 

 

 

   

 

 

   

 

 

   

 

 

 

Costs of products sold (exclusive of depreciation and amortization)

  $ 2,447,095      $ 1,848,212      $ 4,431,712      $ 3,572,076   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The above calculations of cost of products for produced products sold can also be computed on a consolidated basis. These amounts may not calculate exactly due to rounding of reported numbers.
(2) We purchase finished products when opportunities arise that provide a profit on the sale of such products, or to meet delivery commitments.
(3) 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, 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 carryover cost.
(4) Other refining segment cost of products sold includes the cost of products for NK Asphalt and costs attributable to feedstock and sulfur credit sales.

 

- 52 -


Table of Contents
    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2011     2010     2011     2010  
    (Dollars in thousands, except per barrel amounts)  

Average cost of products per produced barrel sold

  $ 106.45      $ 80.74      $ 102.16      $ 81.26   

Times sales of produced refined products sold (BPD)

    234,650        233,990        220,660        223,980   

Times number of days in period

    91        91        181        181   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of products for produced products sold

  $ 2,273,139      $ 1,719,312      $ 4,080,378      $ 3,294,455   
 

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of average refinery operating expenses per produced barrel sold to total operating expenses

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2011     2010     2011     2010  
    (Dollars in thousands, except per barrel amounts)  

Navajo Refinery

       

Average refinery operating expenses per produced barrel sold

  $ 5.17      $ 4.61      $ 5.71      $ 4.88   

Times sales of produced refined products sold (BPD)

    94,340        93,040        87,130        90,000   

Times number of days in period

    91        91        181        181   
 

 

 

   

 

 

   

 

 

   

 

 

 

Refinery operating expenses for produced products sold

  $ 44,384      $ 39,031      $ 90,050      $ 79,495   
 

 

 

   

 

 

   

 

 

   

 

 

 

Woods Cross Refinery

       

Average refinery operating expenses per produced barrel sold

  $ 6.16      $ 5.30      $ 6.29      $ 5.74   

Times sales of produced refined products sold (BPD)

    27,600        29,070        27,130        28,620   

Times number of days in period

    91        91        181        181   
 

 

 

   

 

 

   

 

 

   

 

 

 

Refinery operating expenses for produced products sold

  $ 15,471      $ 14,020      $ 30,887      $ 29,734   
 

 

 

   

 

 

   

 

 

   

 

 

 

Tulsa Refinery

       

Average refinery operating expenses per produced barrel sold

  $ 5.56      $ 4.70      $ 5.76      $ 5.26   

Times sales of produced refined products sold (BPD)

    112,710        111,880        106,400        105,360   

Times number of days in period

    91        91        181        181   
 

 

 

   

 

 

   

 

 

   

 

 

 

Refinery operating expenses for produced products sold

  $ 57,027      $ 47,851      $ 110,928      $ 100,309   
 

 

 

   

 

 

   

 

 

   

 

 

 

Sum of refinery operating expenses per produced products sold from our three refineries (1)

  $ 116,882      $ 100,902      $ 231,865      $ 209,538   

Add other refining segment operating expenses and rounding (2)

    8,399        6,549        15,495        12,507   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total refining segment operating expenses

    125,281        107,451        247,360        222,045   

Add HEP segment operating expenses

    14,366        13,495        27,162        26,555   

Add corporate and other costs

    (168     12        (174     18   

Subtract consolidations and eliminations

    (134     (127     (260     (243
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses (exclusive of depreciation and amortization)

  $ 139,345      $ 120,831      $ 274,088      $ 248,375   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The above calculations of refinery operating expenses from produced products sold can also be computed on a consolidated basis. These amounts may not calculate exactly due to rounding of reported numbers.
(2) Other refining segment operating expenses include the marketing costs associated with our refining segment and the operating expenses of NK Asphalt.

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2011     2010     2011     2010  
    (Dollars in thousands, except per barrel amounts)  

Average refinery operating expenses per produced barrel sold

  $ 5.48      $ 4.74      $ 5.80      $ 5.17   

Times sales of produced refined products sold (BPD)

    234,650        233,990        220,660        223,980   

Times number of days in period

    91        91        181        181   
 

 

 

   

 

 

   

 

 

   

 

 

 

Refinery operating expenses for produced products sold

  $ 116,882      $ 100,902      $ 231,865      $ 209,538   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

- 53 -


Table of Contents

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,
 
    2011     2010     2011     2010  
    (Dollars in thousands, except per barrel amounts)  

Navajo Refinery

       

Net operating margin per barrel

  $ 16.95      $ 4.52      $ 13.34      $ 2.32   

Add average refinery operating expenses per produced barrel

    5.17        4.61        5.71        4.88   
 

 

 

   

 

 

   

 

 

   

 

 

 

Refinery gross margin per barrel

    22.12        9.13        19.05        7.20   

Add average cost of products per produced barrel sold

    104.24        82.08        100.30        82.50   
 

 

 

   

 

 

   

 

 

   

 

 

 

Average sales price per produced barrel sold

  $ 126.36      $ 91.21      $ 119.35      $ 89.70   

Times sales of produced refined products sold (BPD)

    94,340        93,040        87,130        90,000   

Times number of days in period

    91        91        181        181   
 

 

 

   

 

 

   

 

 

   

 

 

 

Refined product sales from produced products sold

  $ 1,084,793      $ 772,242      $ 1,882,213      $ 1,461,213   
 

 

 

   

 

 

   

 

 

   

 

 

 

Woods Cross Refinery

       

Net operating margin per barrel

  $ 22.07      $ 17.06      $ 17.38      $ 12.93   

Add average refinery operating expenses per produced barrel

    6.16        5.30        6.29        5.74   
 

 

 

   

 

 

   

 

 

   

 

 

 

Refinery gross margin per barrel

    28.23        22.36        23.67        18.67   

Add average cost of products per produced barrel sold

    99.79        74.26        94.95        74.48   
 

 

 

   

 

 

   

 

 

   

 

 

 

Average sales price per produced barrel sold

  $ 128.02      $ 96.62      $ 118.62      $ 93.15   

Times sales of produced refined products sold (BPD)

    27,600        29,070        27,130        28,620   

Times number of days in period

    91        91        181        181   
 

 

 

   

 

 

   

 

 

   

 

 

 

Refined product sales from produced products sold

  $ 321,535      $ 255,596      $ 582,487      $ 482,537   
 

 

 

   

 

 

   

 

 

   

 

 

 

Tulsa Refinery

       

Net operating margin per barrel

  $ 13.61      $ 4.91      $ 11.36      $ 1.43   

Add average refinery operating expenses per produced barrel

    5.56        4.70        5.76        5.26   
 

 

 

   

 

 

   

 

 

   

 

 

 

Refinery gross margin per barrel

    19.17        9.61        17.12        6.69   

Add average cost of products per produced barrel sold

    109.94        81.32        105.53        82.05   
 

 

 

   

 

 

   

 

 

   

 

 

 

Average sales price per produced barrel sold

  $ 129.11      $ 90.93      $ 122.65      $ 88.74   

Times sales of produced refined products sold (BPD)

    112,710        111,880        106,400        105,360   

Times number of days in period

    91        91        181        181   
 

 

 

   

 

 

   

 

 

   

 

 

 

Refined product sales from produced products sold

  $ 1,324,231      $ 925,766      $ 2,362,043      $ 1,692,286   
 

 

 

   

 

 

   

 

 

   

 

 

 

Sum of refined product sales from produced products sold from our three refineries (1)

  $ 2,730,559      $ 1,953,604      $ 4,826,743      $ 3,636,036   

Add refined product sales from purchased products and rounding (2)

    63,038        27,296        138,659        68,680   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total refined product sales

    2,793,597        1,980,900        4,965,402        3,704,716   

Add direct sales of excess crude oil (3)

    138,492        114,155        273,901        249,017   

Add other refining segment revenue (4)

    21,137        42,306        29,015        50,801   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total refining segment revenue

    2,953,226        2,137,361        5,268,318        4,004,534   

Add HEP segment sales and other revenues

    50,940        45,483        95,945        86,172   

Add corporate and other revenues

    153        150        801        217   

Subtract consolidations and eliminations

    (37,186     (37,134     (71,346     (70,773
 

 

 

   

 

 

   

 

 

   

 

 

 

Sales and other revenues

  $ 2,967,133      $ 2,145,860      $ 5,293,718      $ 4,020,150   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The above calculations of refined product sales from produced products sold can also be computed on a consolidated basis. These amounts may not calculate exactly due to rounding of reported numbers.
(2) We purchase finished products when opportunities arise that provide a profit on the sale of such products or to meet delivery commitments.
(3) 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, 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 carryover cost.
(4) Other refining segment revenue includes the revenues associated with NK Asphalt and revenue derived from feedstock and sulfur credit sales.

 

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    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2011     2010     2011     2010  
    (Dollars in thousands, except per barrel amounts)  

Net operating margin per barrel

  $ 15.94      $ 6.27      $ 12.89      $ 3.26   

Add average refinery operating expenses per produced barrel

    5.48        4.74        5.80        5.17   
 

 

 

   

 

 

   

 

 

   

 

 

 

Refinery gross margin per barrel

    21.42        11.01        18.69        8.43   

Add average cost of products per produced barrel sold

    106.45        80.74        102.16        81.26   
 

 

 

   

 

 

   

 

 

   

 

 

 

Average sales price per produced barrel sold

  $ 127.87      $ 91.75      $ 120.85      $ 89.69   

Times sales of produced refined products sold (BPD)

    234,650        233,990        220,660        223,980   

Times number of days in period

    91        91        181        181   
 

 

 

   

 

 

   

 

 

   

 

 

 

Refined product sales from produced products sold

  $ 2,730,559      $ 1,953,604      $ 4,826,743      $ 3,636,036   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 as of June 30, 2011.

Changes in internal control over financial reporting. 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.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

Commitment and Contingency Reserves

When deemed necessary, we 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, management believes that the resolution of these proceedings through settlement or adverse judgment will not have a material adverse effect on our consolidated financial position or cash flow. Operating results, however, could be significantly impacted in the reporting periods in which such matters are resolved.

SFPP Litigation

 

  a. The Early Complaint Cases

In May 2007, the United States Court of Appeals for the District of Columbia Circuit (“Court of Appeals”) issued its decision on petitions for review, brought by us and other parties, concerning rulings by the FERC in proceedings brought by us and other parties against SFPP. These proceedings relate to tariffs of common carrier pipelines, which are owned and operated by SFPP, for shipments of refined products from El Paso, Texas to Tucson and Phoenix, Arizona and from points in California to points in Arizona. We are one of several refiners that regularly utilize the SFPP pipeline to ship refined products from El Paso, Texas to Tucson and Phoenix, Arizona on SFPP’s East Line. The Court of Appeals in its May 2007 decision approved a FERC position, which is adverse to us, on the treatment of income taxes in the calculation of allowable rates for pipelines operated as limited partnerships and ruled in our favor on an issue relating to our rights to reparations when it is determined that certain tariffs we paid to SFPP in the past were too high. The case was remanded to FERC and consolidated with other cases that together addressed SFPP’s rates for the period from January 1992 through May 2006. In 2003 we received an initial payment of $15.3 million from SFPP as reparations for the period from 1992 through July 2000. On April 16, 2010, a settlement among us, SFPP, and other shippers was filed with FERC for its approval. FERC approved the settlement on May 28, 2010. Pursuant to the settlement, we received an additional settlement payment of $8.6 million. This settlement finally resolves the amount of additional payments SFPP owes us for the period January 1992 through May 2006.

 

  b. Other Settlements

We and other shippers also engaged in settlement discussions with SFPP relating to East Line service in the FERC proceedings that address periods after May 2006. A partial settlement regarding the East Line’s Phase I expansion rates covering the period June 2006 through November 2007, which became final in February 2008, resulted in a payment from SFPP to us of $1.3 million in April 2008. On October 22, 2008, we and other shippers jointly filed at the FERC with SFPP a settlement regarding the East Line’s Phase II expansion rates covering the period from December 2007 through November 2010. The FERC approved the settlement on January 29, 2009. The settlement reduced SFPP’s current rates and required SFPP to make additional payments to us of $2.9 million, which were received on May 18, 2009.

 

  c. The Latest Rate Proceeding

On June 2, 2009, SFPP notified us that it would terminate the October 22, 2008 settlement, as provided under the settlement, effective August 31, 2009. On July 31, 2009, SFPP filed substantial rate increases for East Line service to become effective September 1, 2009. We and several other shippers filed protests at the FERC, challenging the rate increase and asking the FERC to suspend the effectiveness of the increased rates. On August 31, 2009, the FERC issued an order suspending the effective date of the rate increase until January 1,

 

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2010, on which date the rate increase was placed into effect subject to refund, and setting the rate increase for a full evidentiary hearing. The hearing was held from June 29, 2010 to August 2, 2010. On September 15, 2010, the FERC approved an interim partial settlement pursuant to which SFPP reduced its rates for the East Line service, effective September 1, 2010. The rates placed in effect on January 1, 2010, and the lower rates put into effect on September 1, 2010, remain subject to refund subject to the outcome of the evidentiary hearing. On February 10, 2011, the Administrative Law Judge that presided over the evidentiary hearing issued an initial decision holding that certain elements of SFPP’s rate increases are unjust and unreasonable. The initial decision is subject to review by the FERC and the courts. We are not in a position to predict the ultimate outcome of the rate proceeding.

Cut Bank Hill Environmental Claims

Prior to the sale by Holly Corporation of the Montana Refining Company (“MRC”) assets in 2006, MRC, along with other companies was the subject of several environmental claims at the Cut Bank Hill site in Montana. These claims include: (1) a U.S. Environmental Protection Agency administrative order requiring MRC and other companies to undertake cleanup actions; (2) a U.S. Coast Guard claim against MRC and other companies for response costs of $0.3 million in connection with its cleanup efforts at the Cut Bank Hill site; and (3) a unilateral order by the Montana Department of Environmental Quality (“MDEQ”) directing MRC and other companies to complete a remedial investigation and a request by the MDEQ that MRC and other companies pay $0.2 million to reimburse the State’s costs for remedial actions. MRC has denied responsibility for the requested EPA and the MDEQ cleanup actions and the MDEQ and Coast Guard response costs. MRC is considering an invitation by the other companies to participate in the group based on an allocation of 9.16 percent of the group’s past and ongoing investigation and other costs.

Navajo Tank Fire

On March 2, 2010, a tank caught fire while under construction. At the time of the incident, four individuals were working on top of the tank. These individuals were all employees of a third-party contractor who was placing insulation on the tank. Two individuals sustained injuries and two individuals died as a result of the incident. Two wrongful death lawsuits and two personal injury lawsuits seeking damages, including punitive damages, were filed on behalf of the estates of the two deceased workers and on behalf of the two survivors in state court in Dallas County, Texas (two lawsuits) and state court in Eddy County, New Mexico (two lawsuits). A confidential settlement has been reached in the two Texas cases, and the Texas cases were dismissed on August 4, 2011. One of the cases in New Mexico is set for trial in March of 2012. The other case is not set for trial. At the date of this report, it is not possible to predict the percentage of fault that may be attributed to Navajo, though fault can be expected. This matter is being reported due to the serious nature of the injuries and potential verdicts. Because of our insurance coverage, the total cost to the Company for these cases is not expected to be material.

New Mexico OHSB Complaint — Navajo Tank Fire

On March 3, 2010, the New Mexico Occupational Health and Safety Bureau (“OHSB”), the New Mexico regulatory agency responsible for enforcing certain state occupational health and safety regulations, which are identical to Federal Occupational Safety and Health Administration (“OSHA”) regulations, commenced an inspection in relation to the tank fire that took place on March 2, 2010 at the Navajo facility in Artesia, New Mexico. On August 31, 2010, OHSB issued two citations to Navajo Refining Company, LLC (“Navajo”), alleging 10 willful violations and 1 serious violation of various construction safety standards. OHSB proposed penalties in the amount of $0.7 million. Navajo filed a notice of contest, challenging the citations. An informal administrative review of the citations took place on November 17, 2010, at which time counsel for the parties discussed possible settlement options. The parties were unable to reach an agreement. Thus, OHSB filed an administrative complaint with New Mexico’s Occupational Health and Safety Review Commission (“OHSRC”) on December 20, 2010. Navajo will challenge the citations before the OHSRC, and filed its answer to the complaint on January 6, 2011. Discovery is under way at this time. OHSRC granted the parties’ joint request that a hearing commence no sooner than September 5, 2011, but the specific hearing date has not yet been established.

 

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OSHA Inspections — Tulsa Refinery

In June 2007, OSHA announced a national emphasis program (“NEP”) for inspecting approximately 80 refineries within its jurisdiction. As part of the NEP, OSHA conducted an inspection of Sinclair Tulsa Refining Company’s (“Sinclair Tulsa”) refinery in Tulsa, Oklahoma (our Tulsa Refinery east facility) from February 4, 2009 through August 3, 2009. On August 4, 2009, OSHA issued two citations to Sinclair Tulsa, alleging 51 serious violations and 1 willful violation of various safety standards including the Process Safety Management (“PSM”) standard and the General Duty Clause. OSHA proposed penalties totaling $0.2 million. Sinclair filed a notice of contest, challenging the citations.

Our subsidiary, Holly Refining & Marketing — Tulsa LLC (“HRM-Tulsa”), entered into an Asset Sale & Purchase Agreement (the “Agreement”) with Sinclair Tulsa dated October 19, 2009 to acquire the Tulsa Refinery east facility, and the sale closed on December 1, 2009. HRM-Tulsa intervened in the case against Sinclair Tulsa pending before the OHSRC shortly after the sale closed. Under the terms of the Agreement, Sinclair retains responsibility for defending the OSHA citations and paying any penalties, and HRM-Tulsa has the discretion to select the means and methods of improving the PSM program. HRM-Tulsa has evaluated the feasibility of various PSM program improvements and developed a plan to implement a number of safety enhancements at the Tulsa Refinery east facility. HRM-Tulsa management presented its safety improvement plan to OSHA and OSHA approved the plan. HRM-Tulsa and OSHA negotiated a settlement agreement which memorializes OSHA’s approval of the safety improvement plan. The settlement agreement between HRM-Tulsa and OSHA was filed with the OHSRC on August 11, 2010. On August 23, 2010, the OHSRC entered an order approving both the settlement agreement between Sinclair Tulsa and OSHA and the agreement between HRM-Tulsa and OSHA.

OSHA conducted an inspection of our Tulsa Refinery west facility from January 20, 2010 through June 9, 2010. On July 12, 2010, OSHA issued a citation, alleging 10 serious violations of various safety standards, including the PSM standard. OSHA proposed penalties totaling $57,150. HRM-Tulsa filed a notice of contest, and challenged each citation item. The matter has been assigned to Judge Patrick B. Augustine. Discovery is in progress. The parties met to discuss settlement options on July 7, 2011. Although they were unable to reach an agreement at the meeting, the parties have continued to engage in settlement discussions. If a settlement cannot be reached, the hearing in this matter is scheduled to begin on October 25, 2011.

OSHA began the NEP inspection of our Tulsa Refinery west facility on September 14, 2010. On March 14, 2011, OSHA issued a citation alleging 15 serious violations of federal workplace standards. OSHA proposed penalties totaling $62,500. On April 4, 2011 a settlement was reached that was favorable to HRM-Tulsa and the penalty was reduced to $31,750.

On March 28, 2011, OSHA issued a serious citation to HRM-Tulsa with respect to the Tulsa west facility, alleging one facility siting and two housekeeping violations, which stemmed from its investigation of an employee complaint that it received during the NEP inspection. OSHA proposed penalties of $6,275. HRM Tulsa engaged in informal settlement negotiations with OSHA, but was unable to reach a resolution and filed its notice of contest, challenging each citation item, on April 15, 2011. Discovery is underway. Judge John H. Schumacher is presiding over this matter, and he has scheduled the hearing to commence January 10, 2012.

Discharge Permit Appeal — Tulsa Refinery West Facility

Our subsidiary, HRM-Tulsa is party to parallel Oklahoma administrative and state district court proceedings involving a challenge to the terms of the Oklahoma Department of Environmental Quality (“ODEQ”) permit that governs the discharge of industrial wastewater from our Tulsa Refinery west facility. Pursuant to a settlement agreement between HRM-Tulsa and ODEQ, both proceedings have been stayed to allow ODEQ to issue a revised permit that modifies the existing permit’s requirements for toxicity testing and for managing storm flows. The parties are now in discussions regarding the appropriate changes in the permit language to accomplish these modifications. Once agreed-upon revisions are made and become effective, both proceedings will be dismissed. Any changes to refinery processes that result from the permit revisions are subject to regulatory review and approval. Accordingly, it is not possible to estimate the costs of compliance with the new permit provisions at this time.

 

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Clean Air Act Notice of Violation — Tulsa Refinery East and West Facilities

HRM Tulsa received a notification from the ODEQ that the agency intends to seek a fine of $192,500 for alleged violations of the Clean Air Act at the Tulsa Refinery West Facility. The ODEQ’s primary area of concern is the number of valves that the facility has classed as “Difficult to Monitor.” The agency maintains that no more than 3% of valves can be so designated. HRM Tulsa interprets the applicable regulation as instead only imposing the 3% cap on new units. The parties have asked for a formal regulatory interpretation from the Environmental Protection Agency to assist them in resolving the dispute. HRM Tulsa believes that even if the ODEQ’s interpretation is correct, the proposed fine is excessive. The Company will seek to have the fine reduced. The same notification also disclosed the agency’s intent to seek a separate fine of $17,500 for alleged Clean Air Act violations at the Tulsa Refinery East Facility. These alleged violations include a failure to conduct monthly monitoring of components previously found to be leaking and the discovery of three open ended lines, one of which was alleged to be leaking at the time of discovery. HRM Tulsa is currently in discussions with ODEQ regarding the alleged violations at the East Facility and believes that the proposed fine will be substantially reduced. However, it is not possible at this point to estimate what amount, if any, will ultimately be assessed for any of the foregoing items.

Litigation Related to the Merger with Frontier Oil Corporation

Twelve substantially similar shareholder lawsuits styled as class actions have been filed by alleged Frontier shareholders challenging our proposed “merger of equals” with Frontier and naming as defendants Frontier, its board of directors and, in certain instances, Holly and our then wholly owned subsidiary, North Acquisition, Inc., as aiders and abettors. Further, in the three federal court cases discussed more fully below, we and/or North Acquisition, Inc. also are alleged to have violated Section 14(a) of the Exchange Act of 1934 by soliciting proxies based on an allegedly false and/or misleading proxy statement concerning the proposed merger. To date, such shareholder actions have been filed in Harris County, Texas, Laramie County, Wyoming, the U.S. District Court for the Northern District of Texas, and the U.S. District Court for the Southern District of Texas.

The lawsuits filed in the District Courts of Harris County, Texas are entitled: Adam Walker, Individually and On Behalf of All Others Similarly Situated vs. Frontier Oil Corporation, et al. (filed February 22, 2011), Andrew Goldberg, on Behalf of Himself and All Other Similarly Situated Shareholders of Frontier Oil Corporation v. Frontier Oil Corporation, et al. (filed February 24, 2011), L.A. Murphy, On Behalf of Herself and All Others Similarly Situated v. Paul B. Loyd, Jr., et al. (filed February 24, 2011), Zhixin Huang v. Frontier Oil Corp., et al. (filed February 24, 2011), Robert Pettigrew, individually and on behalf of all others similarly situated v. Frontier Oil Corporation, et al. (filed February 25, 2011), Walter E. Ryan, Jr., On Behalf of Himself and All Others Similarly Situated v. Frontier Oil Corporation, et al. (filed February 25, 2011), Christopher Borrelli, Individually and on Behalf of All Others Similarly Situated v. Frontier Oil Corporation, et al. (filed March 2, 2011), and Randy Whitman, Individually and on behalf of all others similarly situated v. Frontier Oil Corporation, et al. (filed on March 8, 2011). The lawsuit filed in the District Court of Laramie County, Wyoming is entitled Thomas Greulich, Individually and on Behalf of All Others Similarly Situated v. Frontier Oil Corporation, et al. (filed March 1, 2011). The lawsuit filed in the U.S. District Court for the Northern District of Texas is entitled Angelo Chiarelli, On Behalf of Himself and All Others Similarly Situated v. Holly Corporation, et al. (filed on March 2, 2011). The lawsuits filed in the U.S. District Court for the Southern District of Texas are entitled Tim Wilcox, Individually and on behalf of all others similarly situated v. Frontier Oil Corporation, et al. (filed on March 7, 2011), and Jackie A. Rhymes, individually and on behalf of others similarly situated v. Michael Jennings, et al. (filed on March 17, 2011).

These lawsuits generally allege that (1) the consideration to be received by Frontier’s shareholders in the merger is inadequate, (2) the Frontier directors breached their fiduciary duties by, among other things, approving the merger at an inadequate price under circumstances involving certain alleged conflicts of interest, (3) the merger agreement includes preclusive deal protection provisions, and (4) Frontier, and in some cases we and North Acquisition, Inc., aided and abetted Frontier’s board of directors in breaching its fiduciary duties to Frontier’s shareholders. The shareholder actions seek various remedies, including enjoining the transaction from being consummated in accordance with its agreed-upon terms, compensatory damages, and costs and disbursements relating to the lawsuits.

 

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In the cases pending in Texas state court, on March 21, 2011, plaintiff in the Walker lawsuit filed an amended petition alleging that Frontier’s current directors also breached their fiduciary duties by failing to disclose material information or making materially inadequate disclosures concerning the proposed merger in the registration statement on Form S-4. On March 25, 2011, the lawsuits pending in the District Court of Harris County, Texas, were consolidated under the style In re: Frontier Oil Corp., Cause No. 2011-11451, and interim class counsel was appointed on April 12, 2011. On May 9, 2011, Holly answered the consolidated amended petition, generally denying the allegations and asserting affirmative defenses. Some limited discovery occurred.

On June 17, 2011, the defendants in the consolidated state court lawsuit reached an agreement-in-principle with the plaintiffs regarding the settlement of that lawsuit. In connection with the settlement, certain additional disclosures were made to Frontier’s shareholders on June 20, 2011. The parties contemplate that the agreement-in-principle will be documented by the parties, that the written agreement will contain customary provisions and further agree that approval of the settlement must, and will, be sought from the court following notice to the shareholders of Frontier and consummation of the merger. In connection with the approval of the settlement, a hearing will be scheduled at which the court will consider the fairness, reasonableness and adequacy of the settlement which, if finally approved by the court, will resolve all of the claims that were or could have been brought in the actions being settled, including all claims relating to the merger, the merger agreement and any disclosure made in connection therewith. In addition, in connection with the settlement, the parties contemplate that plaintiff’s counsel will petition the court for an award of attorneys’ fees and expenses to be paid by the defendants. We cannot be certain that the parties will ultimately enter into a written settlement agreement or that the court will approve the settlement even if the parties were to enter into such an agreement. If the court does not approve the settlement, the proposed settlement as contemplated by the agreement-in-principle may be terminated.

The settlement will not affect the amount of merger consideration paid in the merger.

With respect to the federal lawsuits, on June 22, 2011 the United States District Court for the Southern District of Texas granted the plaintiffs’ motion to consolidate the Wilcox and Rhymes cases. In addition to the claims described in general above, these lawsuits also allege that the defendants violated Sections 14(a) and 20(a) of the Exchange Act by making untrue statements of material fact and omitting to state material facts necessary to make the statements that were made not misleading in the registration statement on Form S-4. On April 21, 2011, we and our wholly owned subsidiary moved to dismiss the amended class action complaints filed in the Wilcox and Rhymes cases. That motion remains pending.

On May 6, 2011, we also moved to dismiss the original class action complaint filed in the Chiarelli case; our subsidiary was not named as a defendant in that action. Rather than respond to that motion, the plaintiff sought and obtained the court’s permission to file an amended complaint, which was filed on June 29, 2011. On July 29, 2011, the parties filed an agreed motion to stay the Chiarelli case so that the proposed settlement in the consolidated state court action could be considered and resolved by the court in Harris County. That motion was granted on August 4, 2011.

On June 22, 2011, the plaintiffs in the Wilcox and Rhymes cases filed a motion for a temporary restraining order and preliminary injunction to enjoin the proposed merger and to prevent Frontier’s shareholders from voting on the proposed merger at a shareholders meeting on June 28, 2011. After a hearing on June 24, 2011, the court denied the plaintiffs’ motion. The federal lawsuits remain pending.

The defendants intend to vigorously defend these and any future lawsuits, as they believe that they have valid defenses to all claims and that the lawsuits are entirely without merit.

Unclaimed Property Audit

A multi-state audit of our unclaimed property compliance and reporting is being conducted by Kelmar Associates, LLC on behalf of eleven states. We are currently in the third year of this ongoing audit that covers the period 1981 — 2004. It is not yet possible to accurately estimate the amount, if any, that is owed to each of the states.

 

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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. The legal proceedings included herein are as of June 30, 2011 and, thus, do not include legal proceedings for Frontier since the merger had not been consummated as of June 30, 2011.

 

Item 6. Exhibits

The Exhibit Index on page 63 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.

 

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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 8, 2011      

/s/ Douglas S. Aron

      Douglas S. Aron
      Executive Vice President and
      Chief Financial Officer
      (Principal Financial Officer)
     

/s/ Scott C. Surplus

      Scott C. Surplus
      Vice President and Controller
      (Principal Accounting Officer)

 

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Exhibit Index

 

Exhibit
Number

 

Description

  4.1+   First Supplemental Indenture, dated June 14, 2011, among Holly Corporation, the subsidiary guarantors named therein and U.S. Bank Trust National Association, as trustee, relating to HollyFrontier Corporation’s 9.875% Senior Notes due 2017.
10.1*   Second Amendment to the Holly Corporation Long-Term Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed May 18, 2011, File No. 1-03876).
31.1+   Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+   Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1++   Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2++   Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
101**   The following financial information from HollyFrontier Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Comprehensive Income, and (v) Notes to the Consolidated Financial Statements.

 

+ Filed herewith.
++ Furnished herewith.
* Constitutes management contract or compensatory plan or arrangement.
** Furnished electronically herewith.

 

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