HollyFrontier 2015 Annual Report Download - page 72

Table of Contents HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
64
Intangibles and Goodwill: Intangible assets are assets (other than financial assets) that lack physical substance. Goodwill represents
the excess of the cost of an acquired entity over the fair value of the assets acquired less liabilities assumed. Goodwill acquired in
a business combination and intangible assets with indefinite useful lives are not amortized while, intangible assets with finite useful
lives are amortized on a straight-line basis. Goodwill and intangible assets not subject to amortization are tested for impairment
annually or more frequently if events or changes in circumstances indicate the asset might be impaired. Our analysis entails a
comparison of the estimated fair value of these assets that are derived using a combination of both income (discounted future
expected net cash flows) and comparable market approaches against their respective carrying values. Estimates of future cash
flows and fair value of assets require subjective assumptions with regard to future operating results and actual results could differ
from those estimates.
In addition to goodwill, our consolidated HEP assets include a third-party transportation agreement that currently generates
minimum annual cash inflows of $26.2 million and has an expected remaining term through 2035. The transportation agreement
is being amortized on a straight-line basis through 2035 that results in annual amortization expense of $2.0 million. The balance
of this transportation agreement was $38.5 million and $40.5 million at December 31, 2015 and 2014, respectively, and is presented
net of accumulated amortization of $21.7 million and $19.7 million, respectively, in “Intangibles and other” in our consolidated
balance sheets. There were no impairments of intangible assets or goodwill during the years ended December 31, 2015, 2014 and
2013.
Investments in Joint Ventures: We consolidate the financial and operating results of joint ventures in which we have an ownership
interest of greater than 50% and use the equity method of accounting for investments in which we have a noncontrolling interest.
Under the equity method of accounting, we record our pro-rata share of earnings, and contributions to and distributions from joint
ventures as adjustments to our investment balance.
HEP has a 50% joint venture interest in Frontier Pipeline Company, the owner of a pipeline running from Wyoming to Frontier
Station, Utah (the “Frontier Pipeline”), and a 25% joint venture interest in SLC Pipeline, LLC, the owner of a pipeline (the “SLC
Pipeline”) that serves refineries in the Salt Lake City, Utah area, that are accounted for using the equity method of accounting. As
of December 31, 2015, HEP's underlying equity in the Frontier Pipeline was $12.6 million compared to its recorded investment
balance of $55.2 million, a difference of $42.6 million. The difference is attributable to the fair value of the fixed assets purchased.
As of December 31, 2015, HEP's underlying equity in the SLC Pipeline was $57.7 million compared to its recorded investment
balance of $24.3 million, a difference of $33.4 million. This is attributable to the difference between HEP's contributed capital
and its allocated equity at formation of the SLC Pipeline. The differences are being amortized as adjustments to HEP's pro-rata
share of earnings in the joint ventures.
Revenue Recognition: Refined product sales and related cost of sales are recognized when products are shipped and title has
passed to customers. HEP recognizes pipeline transportation revenues as products are shipped through its pipelines. All revenues
are reported inclusive of shipping and handling costs billed and exclusive of any taxes billed to customers. Shipping and handling
costs incurred are reported in cost of products sold.
Depreciation: Depreciation is provided by the straight-line method over the estimated useful lives of the assets, primarily 20 to
25 years for refining, pipeline and terminal facilities, 10 to 40 years for buildings and improvements, 5 to 30 years for other fixed
assets and 5 years for vehicles.
Cost Classifications: Costs of products sold include the cost of crude oil, other feedstocks, blendstocks and purchased finished
products, inclusive of transportation costs. 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 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 cost. Operating expenses
include direct costs of labor, maintenance materials and services, utilities, marketing expense and other direct operating costs.
General and administrative expenses include compensation, professional services and other support costs.