HollyFrontier 2015 Annual Report Download - page 44

Download and view the complete annual report

Please find page 44 of the 2015 HollyFrontier annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 122

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122

Table of Content
36
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.
Overview
We are principally an independent petroleum refiner that produces high-value refined products such as gasoline, diesel fuel, jet
fuel, specialty lubricant products, and specialty and modified asphalt. We own and operate refineries having a combined nameplate
crude oil processing capacity of 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, Artesia, New Mexico, which
operates in conjunction with crude, vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico
(collectively, the Navajo Refinery), Cheyenne, Wyoming (the Cheyenne Refinery) and Woods Cross, Utah (the Woods Cross
Refinery).
For the year ended December 31, 2015, net income attributable to HollyFrontier stockholders was $740.1 million compared to
$281.3 million and $735.8 million for the years ended December 31, 2014, and 2013, respectively. Overall gross refining margins
per produced product sold for 2015 increased 15% over the year ended December 31, 2014, which was due principally to strong
operational reliability and utilization rates across our refining system. Additionally, net income for the years ended December 31,
2015 and 2014 reflect non-cash charges of $227.0 million ($139.0 million after-tax) and $397.5 million ($244.0 million after-tax),
respectively, to adjust the value of our inventory to the lower of cost or market.
For the year, our reliability and process safety initiatives drove our refinery utilization rate to 97.6%, the highest level achieved
since our merger and a 6% increase compared to 2014. Additionally, improved operational reliability, cost management efforts
and lower natural gas costs contributed to a 7% reduction in operating expenses to $1,060.4 million and gross refining margins
increased to $16.07. Together, strong operational performance, improved realized margins and lower operating costs drove a 74%
increase in earnings per share compared to 2014 (exclusive of inventory valuation charges).
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). We
expect continued volatility in the pricing relationship between inland and coastal crude, which is currently averaging in the range
of $1.00 to $(1.00) per barrel.
Pursuant to the 2007 Energy Independence and Security Act, the EPA promulgated the RFS2 regulations, which increased the
volume of renewable fuels mandated to be blended into the nation's fuel supply. The regulations, in part, require refiners to add
annually increasing amounts of “renewable fuels” to their petroleum products or purchase credits, known as RINs, in lieu of such
blending. Our RINs costs are material and represent a cost of products sold. The price of RINs may be extremely volatile due to
real or perceived future shortages in RINs. As of December 31, 2015, we are purchasing RINs in order to meet approximately half
of our renewable fuel requirements.
A more detailed discussion of our financial and operating results for the years ended December 31, 2015, 2014 and 2013 is presented
in the following sections.