Financial Instruments

9 Months Ended

Sep. 30, 2012

Financial Instruments, Owned, at Fair Value [Abstract]

Financial Instruments

Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value. HEP's outstanding credit agreement borrowings approximate fair value as interest rates are reset frequently at current interest rates.

Fair value measurements are derived using inputs (assumptions that market participants would use in pricing an asset or liability, including assumptions about risk). GAAP categorizes inputs used in fair value measurements into three broad levels as follows:

• (Level 1) Quoted prices in active markets for identical assets or liabilities.

• (Level 2) Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, similar assets and liabilities in markets that are not active or can be corroborated by observable market data.

• (Level 3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes valuation techniques that involve significant unobservable inputs.

The carrying amounts and related estimated fair values of our investments in marketable securities, derivative instruments and the senior notes at September 30, 2012 and December 31, 2011 were as follows:

					Fair Value by Input Level
Financial Instrument	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
			(In thousands)
September 30, 2012
Assets:
Marketable debt securities	$	285,928	$	285,928	$	—	$	285,928	$	—
NYMEX futures contracts	4,126		4,126		4,126		—		—
Total assets	$	290,054	$	290,054	$	4,126	$	285,928	$	—
Liabilities:
Commodity price swaps	$	57,457	$	57,457	$	—	$	29,409	$	28,048
HollyFrontier senior notes	435,139		475,977		—		475,977		—
HEP senior notes	443,434		473,625		—		473,625		—
HEP interest rate swaps	3,764		3,764		—		3,764		—
Total liabilities	$	939,794	$	1,010,823	$	—	$	982,775	$	28,048

December 31, 2011
Assets:
Equity securities	$	753	$	753	$	753	$	—	$	—
Marketable debt securities	260,953		260,953		—		260,953		—
Commodity price swaps	175,654		175,654		—		144,038		31,616
Total assets	$	437,360	$	437,360	$	753	$	404,991	$	31,616
Liabilities:
NYMEX futures contracts	$	1,252	$	1,252	$	1,252	$	—	$	—
HollyFrontier senior notes	651,262		693,979		—		693,979		—
HEP senior notes	325,860		344,350		—		344,350		—
HEP interest rate swaps	520		520		—		520		—
Total liabilities	$	978,894	$	1,040,101	$	1,252	$	1,038,849	$	—

Level 1 Financial Instruments

Our investments in equity securities and our NYMEX futures contracts are exchange traded and are measured and recorded at fair value using quoted market prices, a Level 1 input.

Level 2 Financial Instruments

Investments in marketable debt securities and derivative instruments consisting of commodity price swaps and HEP's interest rate swaps are measured and recorded at fair value using Level 2 inputs. With respect to the commodity price and interest rate swap contracts, fair value is based on the net present value of expected future cash flows related to both variable and fixed rate legs of the respective swap agreements. The measurements are computed using market-based observable inputs, quoted forward commodity prices with respect to our commodity price swaps and the forward London Interbank Offered Rate (“LIBOR”) yield curve with respect to HEP's interest rate swaps. The fair value of the marketable debt securities and senior notes is based on values provided by a third-party bank, which were derived using market quotes for similar type instruments, a Level 2 input.

Level 3 Financial Instruments

We have entered into certain commodity price swap contracts related to forecasted sales of diesel and unleaded gasoline for which quoted forward market prices are not readily available. The forward rate used to value these price swaps was derived using a projected forward rate using quoted market rates for similar products, adjusted for regional pricing differentials, a Level 3 input.

The following table presents the changes in fair value of the Level 3 assets and liabilities (all related to commodity price swap contracts) for the three and nine months ended September 30, 2012:

Level 3 Financial Instruments	Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
	(In thousands)
Asset balance at beginning of period	$	119,461		$	31,616
Change in fair value	(192,446		)	(158,893		)
Settlement date fair value of contracts open at beginning of period	44,937			99,229
Liability balance at end of period	$	(28,048	)	$	(28,048	)

A hypothetical change of 10% to the estimated future cash flows attributable to our Level 3 commodity price swaps would result in an estimated fair value change of approximately $4.0 million.