HollyFrontier 2015 Annual Report Download - page 31

Table of Content
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Additionally, due to the seasonality of refined products markets and refinery maintenance schedules, results of operations for any
particular quarter of a fiscal year are not necessarily indicative of results for the full year and can vary year to year in the event of
unseasonably cool weather in the summer months and / or unseasonably warm weather in the winter months in the markets in
which we sell our petroleum products. In general, prices for refined products are influenced by the price of crude oil. Although
an increase or decrease in the price for crude oil may result in a similar increase or decrease in prices for refined products, there
may be a time lag in the realization of the similar increase or decrease in prices for refined products. The effect of changes in crude
oil prices on operating results, therefore, depends in part on how quickly refined product prices adjust to reflect these changes. A
substantial or prolonged increase in crude oil prices without a corresponding increase in refined product prices, a substantial or
prolonged decrease in refined product prices without a corresponding decrease in crude oil prices, or a substantial or prolonged
decrease in demand for refined products could have a significant negative effect on our earnings and cash flow. Also, crude oil
supply contracts are generally short-term contracts with market-responsive pricing provisions. We purchase our refinery feedstocks
weeks before manufacturing and selling the refined products. Price level changes during the period between purchasing feedstocks
and selling the manufactured refined products from these feedstocks could have a significant effect on our financial condition and
results of operations. Also, our crude oil and refined products inventories are valued at the lower of cost or market under the last-
in, first-out (“LIFO”) inventory valuation methodology. If the market value of our inventory were to decline to an amount less
than our LIFO cost, we would record a write-down of inventory and a non-cash charge to cost of products sold even when there
is no underlying economic impact at that point in time. For example, we recorded a non-cash increase to cost of products sold in
the amounts of $227.0 million and $397.5 million for the years ended December 31, 2015 and 2014, respectively. Continued
volatility in crude oil and refined products prices could result in additional lower of cost or market inventory charges in the future,
or in reversals reducing cost of products sold in subsequent periods should prices recover.
A material decrease in the supply of crude oil or other raw materials available to our refineries could significantly reduce our
production levels and negatively affect our operations.
To maintain or increase production levels at our refineries, we must continually contract for crude oil supplies from third parties.
A material decrease in crude oil production from the fields that supply our refineries, as a result of depressed commodity prices,
lack of drilling activity, natural production declines or otherwise, could result in a decline in the volume of crude oil available to
our refineries. In addition, any prolonged disruption of a significant pipeline that is used in supplying crude oil to our refineries
or the potential operation of a new, converted or expanded crude oil pipeline that transports crude oil to other markets could result
in a decline in the volume of crude oil available to our refineries. Such an event could result in an overall decline in volumes of
refined products processed at our refineries and therefore a corresponding reduction in our cash flow. In addition, the future growth
of our operations will depend in part upon whether we can contract for additional supplies of crude oil at a greater rate than the
rate of natural decline in our currently connected supplies. If we are unable to secure additional crude oil supplies of sufficient
quality or crude pipeline expansion to our refineries, we will be unable to take full advantage of current and future expansion of
our refineries' production capacities.
For certain raw materials and utilities used by our refineries, there are a limited number of suppliers and, in some cases, the supplies
are specific to the particular geographic region in which a facility is located. It is also common in the refining industry for a facility
to have a sole, dedicated source for its utilities, such as steam, electricity, water and gas. Having a sole or limited number of
suppliers may limit our negotiating power, particularly in the case of rising raw material costs. Any new supply agreements we
enter into may not have terms as favorable as those contained in our current supply agreements.
Additionally, there is growing concern over the reliability of water sources. The decreased availability or less favorable pricing
for water as a result of population growth, drought or regulation could negatively impact our operations.
If our raw material, utility or water supplies were disrupted, our businesses may incur increased costs to procure alternative supplies
or incur excessive downtime, which would have a direct negative impact on our operations.