HollyFrontier 2014 Annual Report Download - page 53

Table of Content
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some units continue to operate while others are down for maintenance. We record the costs of turnarounds as deferred charges
and amortize the deferred costs over the expected periods of benefit.
Long-lived Assets
We calculate depreciation and amortization based on estimated useful lives of our assets. When assets are placed into service, we
make estimates with respect to their useful lives that we believe are reasonable. However, factors such as competition, regulation
or environmental matters could cause us to change our estimates, thus impacting the future calculation of depreciation and
amortization. We evaluate long-lived assets for potential impairment by identifying whether indicators of impairment exist and,
if so, assessing whether the long-lived assets are recoverable from estimated future undiscounted cash flows. The actual amount
of impairment loss, if any, to be recorded is equal to the amount by which a long-lived asset's carrying value exceeds its fair value,
which is generally determined under an income approach using forecasted cash flows associated with the underlying asset. Estimates
of future cash flows require subjective assumptions with regard to future operating results and actual results could differ from
those estimates. No impairments of long-lived assets were recorded during the years ended December 31, 2014, 2013 and 2012.
Goodwill
We have goodwill that primarily arose from our merger with Frontier Oil Corporation on July 1, 2011. Goodwill represents the
excess of the cost of an acquired entity over the fair value of the assets acquired and liabilities assumed. Goodwill is not subject
to amortization and is tested annually or more frequently if events or circumstances indicate the possibility of impairment.
We performed our annual goodwill impairment testing as of July 1, 2014, which entailed an assessment of our reporting unit fair
values relative to their respective carrying values that were derived using a combination of both income and market approaches.
Our income approach utilizes the discounted future expected cash flows and has an 80% weighting. Our market approach, which
includes both the guideline public company and guideline transaction methods, each having a 10% weighting, utilizes pricing
multiples derived from historical market transactions of similar assets. Our discounted cash flows reflect estimates of future cash
flows based on both historical and forward crack-spreads, forecasted production levels, operating costs and capital expenditures.
Our goodwill is allocated by reporting unit as follows: El Dorado, $1.7 billion; Cheyenne, $0.3 billion; and HEP, $0.3 billion.
Based on our testing as of July 1, 2014, the fair value of our Cheyenne reporting unit exceeded its carrying cost by slightly less
than 20%, and the fair value of our El Dorado and HEP reporting units exceeded their respective carrying values by a much larger
percentage. There were no impairments of goodwill during the years December 31, 2014, 2013 and 2012.
Historically, the refining industry has experienced significant fluctuations in operating results over an extended business cycle
including changes in prices of crude oil and refined products, changes in operating costs including natural gas and higher costs of
complying with government regulations. It is reasonably possible that at some future downturn in refining operations that the
goodwill related to our Cheyenne Refinery will be determined to be impaired. A prolonged operating margin decrease of 8% to
10% could potentially result in impairment to goodwill allocated to our Cheyenne reporting unit and such impairment charges
could be significant.
Environmental Costs
Environmental costs are charged to operating expenses if they relate to an existing condition caused by past operations and do not
contribute to current or future revenue generation. Liabilities are recorded when site restoration and environmental remediation,
cleanup and other obligations are either known or considered probable and can be reasonably estimated. Such estimates are
undiscounted and require judgment with respect to costs, time frame and extent of required remedial and clean-up activities and
are subject to periodic adjustments based on currently available information. Recoveries of environmental costs through insurance,
indemnification arrangements or other sources are included in other assets to the extent such recoveries are considered probable.
Contingencies
We are subject to proceedings, lawsuits and other claims related to environmental, labor, product and other matters. We are required
to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A
determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual
issue. The required reserves may change in the future due to new developments in each matter or changes in approach such as a
change in settlement strategy in dealing with these matters.
Pursuant to the 2007 Energy Independence and Security Act, the EPA promulgated the RFS2 regulations reflecting the increased
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 EPA has not yet finalized the 2014 percentage standards under its RFS2 program. The estimated quantity of renewable
fuels or RINs that we are required to purchase and that have been accrued for as of and for the year ended December 31, 2014 are
based on quantities proposed by the EPA in November 2013.