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Table of Content
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.
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, 2014, net income attributable to HollyFrontier stockholders was $281.3 million compared to
$735.8 million and $1,727.2 million for the years ended December 31, 2013, and 2012, respectively. Overall gross refining margins
per produced product sold for 2014 decreased 13% and 44% over the respective years ended December 31, 2013 and 2012, which
was due principally to significant contraction in WTI to Brent crude differentials. Additionally, net income for the year ended
December 31, 2014 reflects a $397.5 million ($244.0 million after-tax) non-cash charge to adjust the value of our inventory to the
lower of cost or market at December 31, 2014.
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. After reaching parity in early 2015, we've
already recently witnessed the inland/coastal crude differential widen to more than $9.00 per barrel. We believe new inbound
pipeline capacity, current storage economics and upcoming refinery maintenance activity should continue to drive Cushing
inventories higher and spreads wider throughout 2015.
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. The price of RINs may be extremely volatile as observed in 2013, when prices escalated sharply due to real or perceived
future shortages in RINs. Although our RINs costs remain material, the price of RINs has decreased significantly from 2013 highs,
due in part to regulatory easing of the 2014 annual Renewable Volume Obligation, or RVO. As of December 31, 2014, we are
purchasing RINs in order to meet approximately half of our renewable fuel requirements. Additionally, the EPA has not yet finalized
the 2014 percentage standards under its RFS2 program. We cannot predict with certainty our exposure to increased RINs costs in
the future, nor can we predict the extent by which costs associated with RFS2 will impact our future results of operations.
A more detailed discussion of our financial and operating results for the years ended December 31, 2014, 2013 and 2012 is presented
in the following sections.