HollyFrontier 2013 Annual Report Download - page 33

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The energy industry is highly capital intensive, and the entire or partial loss of individual facilities can result in significant costs
to both industry companies, such as us, and their insurance carriers. In recent years, several large energy industry claims have
resulted in significant increases in the level of premium costs and deductible periods for participants in the energy industry. As a
result of large energy industry claims, insurance companies that have historically participated in underwriting energy-related
facilities may discontinue that practice or demand significantly higher premiums or deductible periods to cover these facilities. If
significant changes in the number or financial solvency of insurance underwriters for the energy industry occur, or if other adverse
conditions over which we have no control prevail in the insurance market, we may be unable to obtain and maintain adequate
insurance at reasonable cost. In addition, we cannot assure you that our insurers will renew our insurance coverage on acceptable
terms, if at all, or that we will be able to arrange for adequate alternative coverage in the event of non-renewal. Further, our
underwriters could have credit issues that affect their ability to pay claims. The unavailability of full insurance coverage to cover
events in which we suffer significant losses could have a material adverse effect on our business, financial condition and results
of operations.
The availability and cost of renewable identification numbers could have an adverse effect on our financial condition and
results of operations.
Pursuant to the 2007 Energy Independence and Security Act, the EPA promulgated the Renewable Fuel Standard 2 (“RFS2”)
regulations reflecting the increased volume of renewable fuels mandated to be blended into the nation's fuel supply. The regulations,
in part, require refiners to add annually increasing amounts of “renewable fuels” to their petroleum products or purchase credits,
known as renewable identification numbers (“RINs”), in lieu of such blending. We currently purchase RINs for some fuel categories
on the open market in order to comply with the quantity of renewable fuels we are required to blend under the RFS2. Recently,
due in part to the nation's fuel supply approaching the “blend wall” (the 10% ethanol limit prescribed by most automobile warranties),
the price of RINs has been extremely volatile with the price dramatically increasing in recognition of the decrease in RINs
availability. While we cannot predict the future prices of RINs, the costs to obtain the necessary number of RINs could be material.
If we are unable to pass the costs of compliance with the RFS2 on to our customers, if sufficient RINs are unavailable for purchase,
if we have to pay a significantly higher price for RINs or if we are otherwise unable to meet the RFS2 mandates, our financial
condition and results of operations could be adversely affected.
To successfully operate our petroleum refining facilities, we are required to expend significant amounts for capital outlays and
operating expenditures.
The refining business is characterized by high fixed costs resulting from the significant capital outlays associated with refineries,
terminals, pipelines and related facilities. We are dependent on the production and sale of quantities of refined products at refined
product margins sufficient to cover operating costs, including any increases in costs resulting from future inflationary pressures
or market conditions and increases in costs of fuel and power necessary in operating our facilities. Furthermore, future major
capital investment, various environmental compliance related projects, regulatory requirements or competitive pressures could
result in additional capital expenditures, which may not produce a return on investment. Such capital expenditures may require
significant financial resources that may be contingent on our access to capital markets and commercial bank loans. Additionally,
other matters, such as regulatory requirements or legal actions, may restrict our access to funds for capital expenditures.
Our refineries consist of many processing units, a number of which have been in operation for many years. One or more of the
units may require unscheduled downtime for unanticipated maintenance or repairs that are more frequent than our scheduled
turnaround for such units. Scheduled and unscheduled maintenance could reduce our revenues during the period of time that the
units are not operating. We have taken significant measures to expand and upgrade units in our refineries by installing new
equipment and redesigning older equipment to improve refinery capacity. The installation and redesign of key equipment at our
refineries involves significant uncertainties, including the following: our upgraded equipment may not perform at expected
throughput levels; operating costs of the upgraded equipment may be higher than expected; the yield and product quality of new
equipment may differ from design and/or specifications and redesign, modification or replacement of the equipment may be
required to correct equipment that does not perform as expected, which could require facility shutdowns until the equipment has
been redesigned or modified. Any of these risks associated with new equipment, redesigned older equipment, or repaired equipment
could lead to lower revenues or higher costs or otherwise have a negative impact on our future financial condition and results of
operations.
In addition, we expect to execute turnarounds at our refineries, which involve numerous risks and uncertainties. These risks include
delays and incurrence of additional and unforeseen costs. The turnarounds allow us to perform maintenance, upgrades, overhaul
and repair of process equipment and materials, during which time all or a portion of the refinery will be under scheduled downtime.
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