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34
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Item 7 contains “forward-looking” statements. See “Forward-Looking Statements” at the beginning of this Annual Report
on Form 10-K. In this document, the words “we,” “our,” “ours” and “us” refer only to HollyFrontier and its consolidated subsidiaries
or to HollyFrontier or an individual subsidiary and not to any other person with certain exceptions. Generally, the words “we,”
“our,” “ours” and “us” include HEP and its subsidiaries as consolidated subsidiaries of HollyFrontier, unless when used in
disclosures of transactions or obligations between HEP and HollyFrontier or its other subsidiaries. This document contains certain
disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations
of HollyFrontier. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.
We merged with Frontier on July 1, 2011. Accordingly, this document includes Frontier, its consolidated subsidiaries and the
operations of the merged Frontier businesses effective July 1, 2011, but not prior to this date.
Overview
We are principally an independent petroleum refiner that produces high-value refined products such as gasoline, diesel fuel, jet
fuel, specialty lubricant products, and specialty and modified asphalt. We own and operate refineries having a combined crude oil
processing capacity of 443,000 barrels per day that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain
regions of the United States. Our refineries are located in El Dorado, Kansas (the El Dorado Refinery), Tulsa, Oklahoma (the Tulsa
Refineries), which comprise two production facilities, the Tulsa West and East facilities, 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 (the Navajo Refinery), Cheyenne, Wyoming (the Cheyenne Refinery) and Woods Cross, Utah (the Woods Cross
Refinery).
For the year ended December 31, 2013, net income attributable to HollyFrontier stockholders was $735.8 million compared to
$1,727.2 million for the year ended December 31, 2012.
Overall gross refining margins per produced product sold decreased 36% over the year ended December 31, 2012 due principally
to significant contraction in WTI to Brent crude differentials as well as lower discounts on heavy sour crudes purchased during
the second and third quarters of 2013.
Net income for the year ended December 31, 2013 reflects pension settlement and debt extinguishment charges of $39.5 million
and $22.1 million, respectively. Also affecting current year net income were the effects of planned turnarounds at our El Dorado,
Tulsa and Navajo Refineries as well as unplanned downtime incurred at each of our El Dorado and Cheyenne Refineries due to
FCC unit issues during the second quarter of 2013.
Our financial and operating results additionally reflect lower crude oil throughput rates for the Southwest region, which averaged
74,370 BPD for the fourth quarter of 2013 compared to 99,610 BPD for the same period last year, as a result of waste water
constraints at our Navajo Refinery during late 2013. This matter was resolved in January 2014 and throughput rates have since
returned to planned levels.
OUTLOOK
Our profitability is affected by the spread, or differential, between the market prices for crude oil on the world market (which is
based on the price for Brent, North Sea Crude) and the price for inland U.S. crude oil (which is based on the price for WTI). This
differential constantly changes and at times can be volatile. While we have experienced wide differentials (with Brent prices in
excess of WTI prices) in recent years, which have significantly enhanced our profitability, the differential between Brent and WTI
narrowed significantly during the second half of 2013 - averaging approximately one-half of the differential experienced during
2012. Differentials are likely to continue to be volatile in the near term. However, we expect the Brent to WTI differential to
rebound upon completion of additional northern tier pipeline capacity into Cushing, Oklahoma, which we believe will create a
surplus of light sweet crude oil on the U.S. Gulf Coast. Ultimately, we believe pipeline tariffs from Cushing to the Gulf Coast plus
marine transportation costs to transport product from the Gulf Coast to alternative markets will set the inland - coastal differential.
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