HollyFrontier 2014 Annual Report Download - page 52

Table of Content
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(1) Amounts shown do not include commitments to deliver barrels of crude oil held for other parties at our refineries. We periodically hold crude
oil owned by third parties in the storage tanks at our refineries, which may be run through production. We will be obligated to deliver these stored
barrels of crude oil upon the other party's request.
(2) Our long-term debt consists of the $150.0 million principal balance on our 6.875% senior notes and a long-term financing obligation having a
principal balance of $33.2 million at December 31, 2014.
(3) Interest payments consist of interest on our 6.875% senior notes and on our long-term financing obligation.
(4) We have long-term supply agreements to secure certain quantities of crude oil, feedstock and other resources used in the production process at
market prices. We have estimated future payments under these fixed-quantity agreements expiring between 2015 and 2025 using current market
rates. Additionally, commitments include purchases of 20,000 BPD of crude oil under a 10-year agreement to supply our Woods Cross Refinery that
is expected to commence upon completion of our expansion project in the fourth quarter of 2015.
(5) Consists of contractual obligations under agreements with third parties for the transportation of crude oil, natural gas and feedstocks to our refineries
and for terminal and storage services under contracts expiring between 2015 and 2033.
(6) HEP's long-term debt consists of the $300.0 million principal balance on the 6.5% HEP senior notes and $571.0 million of outstanding borrowings
under the HEP Credit Agreement. The HEP Credit Agreement expires in 2018.
(7) Interest payments consist of interest on the 6.5% HEP senior notes and interest on long-term debt under the HEP Credit Agreement. Interest on the
HEP Credit Agreement debt is based on the weighted average rate of 2.15% at December 31, 2014.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of
these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities as of the date of the financial statements. Actual
results may differ from these estimates under different assumptions or conditions. We consider the following policies to be the
most critical to understanding the judgments that are involved and the uncertainties that could impact our results of operations,
financial condition and cash flows. For additional information, see Note 1 “Description of Business and Summary of Significant
Accounting Policies” in the Notes to Consolidated Financial Statements.
Variable Interest Entities
HEP is a VIE as defined under GAAP. A VIE is a legal entity whose equity owners do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial support or, as a group, the equity holders lack the power,
through voting rights, to direct the activities that most significantly impact the entity's financial performance. As the general partner
of HEP, we have the sole ability to direct the activities of HEP that most significantly impact HEP's financial performance, and
therefore we consolidate HEP.
Derivative Instruments
We have commodity price swap, interest rate swap and NYMEX futures contracts that are measured at fair value and recognized
as other assets or liabilities in our consolidated balance sheets. Changes in fair value to derivative instruments are recognized in
earnings unless specific hedge accounting criteria is met. Derivatives meeting certain hedge accounting criteria are designated as
“accounting hedges” and changes in fair value are recorded directly to other comprehensive income. These gains or losses are
reclassified to earnings as the hedging instruments mature. Also, on a quarterly basis, hedge ineffectiveness on our accounting
hedges is measured by comparing the change in fair value of the derivative contracts against the expected future cash inflows/
outflows on the respective transaction being hedged. Any hedge ineffectiveness is recognized in earnings. See Note 12 “Derivative
Instruments and Hedging Activities” in the Notes to Consolidated Financial Statements.
Inventory Valuation
Our crude oil and refined product inventories are stated at the lower of cost or market. Cost is determined using the LIFO inventory
valuation methodology and market is determined using current replacement costs. Under the LIFO method, the most recently
incurred costs are charged to cost of sales and inventories are valued at the earliest acquisition costs. In periods of rapidly declining
prices, LIFO inventories may have to be written down to market value due to the higher costs assigned to LIFO layers in prior
periods. In addition, the use of the LIFO inventory method may result in increases or decreases to cost of sales in years when
inventory volumes decline and result in charging cost of sales with LIFO inventory costs generated in prior periods. At December 31,
2014, market values had fallen below historical LIFO inventory costs and, as a result, we recognized a non-cash pretax loss of
$397.5 million. Such losses are subject to reversal in subsequent periods, not to exceed historical LIFO costs, if prices recover.
Deferred Maintenance Costs
Our refinery units require regular major maintenance and repairs that are commonly referred to as “turnarounds.” Catalysts used
in certain refinery processes also require routine “change-outs.” The required frequency of the maintenance varies by unit and by
catalyst, but generally is every two to five years. In order to minimize downtime during turnarounds, we often utilize contract
labor as well as our maintenance personnel on a continuous 24 hour basis. Whenever possible, turnarounds are scheduled so that