Retirement Plan

We sponsor a non-contributory defined benefit retirement plan that covers most legacy Holly non-union employees hired prior to January 1, 2007 and union employees hired prior to July 1, 2010, and was closed to new entrants effective January 1, 2007 for non-union employees and July 1, 2010 for union employees. Effective January 1, 2012, we ceased to accrue additional benefits under this plan for non-union employee participants, and effective May 1, 2012, we ceased to accrue additional benefits for union employee participants, at which time the plan was fully frozen. The changes for union employee participants have been accounted for as a curtailment. Accordingly, we adjusted the projected benefit obligation and accumulated other comprehensive income by $7.1 million and recorded additional pension expense of $0.7 million in the second quarter of 2012. The changes related to the non-union employees were also accounted for as a curtailment, which was recorded in the fourth quarter of 2011. Our funding policy for this defined benefit retirement plan is to make annual contributions of not less than the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Benefits are based on the employee’s years of service and compensation.

In 2012, our Compensation Committee, pursuant to authority delegated to it by the Board of Directors, approved the termination of the HollyFrontier Corporation Pension Plan (the “Plan”). Accordingly, our remaining liability under the Plan is expected to be funded in 2013. Our actual obligations under the Plan are contingent upon the timing of the pension plan termination as well as participant settlement obligations. We expect to record an additional expense on termination of the Plan at the date we are released from the liability, including the amount of actuarial loss currently recorded as accumulated other comprehensive income ($37.6 million, $23.0 million after-tax) at December 31, 2012 plus an amount equal to any contribution we make to the Plan in excess of the $17.7 million accrued pension liability we have recorded at December 31, 2012.

The following table sets forth the changes in the benefit obligation and plan assets of our retirement plan for the years ended December 31, 2012 and 2011:



	Years Ended December 31,
	2012			2011
	(In thousands)
Change in plan's benefit obligation
Pension plan's benefit obligation - beginning of year	$	93,378		$	94,083
Service cost	679			5,070
Interest cost	3,962			5,125
Benefits paid	(1,379		)	(1,347		)
Actuarial loss	13,203			16,108
Settlements paid	(7,256		)	(10,510		)
Curtailment	(7,102		)	(15,151		)
Pension plan's benefit obligation - end of year	$	95,485		$	93,378



	Years Ended December 31,
	2012			2011
	(In thousands)
Change in pension plan assets
Fair value of plan assets - beginning of year	$	61,398		$	64,490
Actual return on plan assets	2,615			(1,235		)
Benefits paid	(1,379		)	(1,347		)
Employer contributions	22,379			10,000
Settlements paid	(7,256		)	(10,510		)
Fair value of plan assets - end of year	$	77,757		$	61,398

Funded status
Under-funded balance	$	(17,728	)	$	(31,980	)

Amounts recognized in consolidated balance sheets
Accrued pension liability	$	(17,728	)	$	(31,980	)

Amounts recognized in accumulated other comprehensive loss
Cumulative actuarial loss	$	(37,589	)	$	(35,094	)
Prior service cost	—			(966		)
Total	$	(37,589	)	$	(36,060	)

The accumulated benefit obligation was $95.5 million and $86.1 million at December 31, 2012 and 2011, respectively. The measurement dates used for our retirement plan were December 31, 2012 and 2011.

The weighted average assumptions used to determine end of period benefit obligations:



	December 31,
	2012		2011

Discount rate	3.95	%	4.60	%
Rate of future compensation increases	N/A		4.00	%

Net periodic pension expense consisted of the following components:



	Years Ended December 31,
	2012			2011			2010
	(In thousands)
Service cost – benefit earned during the year	$	679		$	5,070		$	4,595
Interest cost on projected benefit obligations	3,962			5,125			5,154
Expected return on plan assets	(3,798		)	(5,230		)	(4,576		)
Amortization of prior service cost	67			390			390
Amortization of net loss	1,933			2,126			2,196
Effect of settlements	2,855			3,951			—
Effect of curtailment	899			1,065			—
Net periodic pension expense	$	6,597		$	12,497		$	7,759

The weighted average assumptions used to determine net periodic benefit expense:



	December 31,
	2012		2011		2010

Discount rate	4.60	%	5.65	%	6.20	%
Rate of future compensation increases	4.00	%	4.00	%	4.00	%
Expected long-term rate of return on assets	6.50	%	8.00	%	8.50	%

The estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit expense in 2013 are as follows:



	(In thousands)

Actuarial loss	$	2,771
Prior service cost	—
Total	$	2,771

At year end, our retirement plan assets were allocated as follows:



	Target Allocation		Percentage of Plan Assets at December31,
Asset Category	2013		2012		2011

Cash and cash equivalents	100	%	93	%	—	%
Debt securities	—	%	—	%	62	%
Equity securities	—	%	—	%	30	%
Alternative investments	—	%	7	%	8	%
Total	100	%	100	%	100	%

The investment policy developed for the Plan has been designed exclusively for the purpose of providing the highest probabilities of delivering benefits to Plan members and beneficiaries. Among the factors considered in developing the investment policy are: the Plan’s primary investment goal, rate of return objective, investment risk, investment time horizon, role of asset classes and asset allocation. Due to the expected termination of the Plan, the current target asset allocation is 100% cash and cash equivalents. The overall expected long-term rate of return on Plan assets at December 31, 2012 is 0.25% and is based on estimated returns for cash and cash equivalents, a Level 1 input. See Note 5, Financial Instruments, for information on Level inputs.

In 2012, we established a program for plan participants whose benefits pursuant to the defined benefit plan were frozen. The program provides for payments after year-end for each of the next three years provided the employee remains with us. The payments are based on each employee's years of service and eligible salary. For the year ended December 31, 2012, we recognized transition benefit costs of $15.6 million associated with transition to the new defined contribution plan.

Retirement Restoration Plan

We adopted an unfunded retirement restoration plan that provides for additional payments from us so that total retirement plan benefits for certain executives will be maintained at the levels provided in the retirement plan before the application of Internal Revenue Code limitations. Effective January 1, 2012, we ceased to accrue benefits under this plan. We expensed $0.3 million, $0.6 million and $0.6 million for the years ended December 31, 2012, 2011 and 2010, respectively, in connection with this plan. The accrued liability reflected in the consolidated balance sheets was $7.4 million and $6.7 million at December 31, 2012 and 2011, respectively. As of December 31, 2012, the projected benefit obligation under this plan was $7.4 million. Benefit payments, which reflect expected future service, are expected to be paid as follows: $0.7 million in 2013; $2.2 million in 2014; $0.5 million in 2015; $0.5 million in 2016; $1.5 million in 2017; and $1.4 million in 2018 through 2022.

Defined Contribution Plans

We have defined contribution “401(k)” plans that cover substantially all employees. Our contributions are based on employee's compensation and partially match employee contributions. We expensed $16.0 million, $9.7 million and $5.5 million for the years ended December 31, 2012, 2011 and 2010, respectively, in connection with these plans.

Post-retirement Healthcare Plans

We provide post-retirement medical benefits to certain eligible employees. These plans are unfunded and provide differing levels of healthcare benefits dependent upon hire date and work location. Not all of our employees are covered by these plans at December 31, 2012.

Effective December 31, 2012, we amended the post-retirement healthcare plans for participants retiring after December 31, 2012 by eliminating post-retirement benefits after reaching age 65 and eliminating early retirement benefits for most participants who retire before reaching age 62. In addition, certain future retirees will receive a cash payment in lieu of post-retirement benefits after reaching age 65 and other changes were made generally to conform benefits. We expect to pay $8.3 million during 2013 to participants meeting certain requirements to receive a retiree medical transition payment.

The following table sets forth the changes in the benefit obligation and plan assets of our post-retirement healthcare plans for the years ended December 31, 2012 and 2011:



	Years Ended December 31,
	2012			2011
	(In thousands)
Change in plans' benefit obligation
Post-retirement plans' benefit obligation - beginning of year	$	77,303		$	7,862
Service cost	1,892			1,569
Interest cost	3,519			2,193
Participant contributions	760			460
Amendments	(49,399		)	(5,387		)
Plan benefits paid	(1,275		)	(1,105		)
Plan combinations	—			62,632
Actuarial (gain) loss	(6,003		)	9,079
Post-retirement plans' benefit obligation - end of year	$	26,797		$	77,303

Change in plan assets
Fair value of plan assets - beginning of year	$	—		$	—
Employer contributions	515			645
Participant contributions	760			460
Benefits paid	(1,275		)	$	(1,105	)
Fair value of plan assets - end of year	$	—		$	—

Funded status
Under-funded balance	$	(26,797	)	$	(77,303	)

Amounts recognized in consolidated balance sheets
Accrued post-retirement liability	$	(26,797	)	$	(77,303	)

Amounts recognized in accumulated other comprehensive loss
Actuarial loss	$	5,359		$	11,631
Transition obligation	—			—
Prior service cost	(52,174		)	(4,997		)
Total	$	(46,815	)	$	6,634

The accumulated benefit obligation was $26.8 million and $77.3 million at December 31, 2012 and 2011, respectively. The measurement dates used for our post-retirement healthcare plans were December 31, 2012 and 2011. Benefit payments, which reflect expected future service, are expected to be paid as follows: $9.7 million in 2013; $1.4 million in 2014; $1.3 million in 2015; $1.3 million in 2016; $1.3 million in 2017; and $7.5 million in 2018 through 2022.

The weighted average assumptions used to determine end of period benefit obligations:



	December 31,
	2012		2011

Discount rate	3.45	%	4.60	%
Current health care trend rate	8.10	%	8.40	%
Ultimate health care trend rate	5.00	%	5.00	%
Year rate reaches ultimate trend rate	2023		2023

Net periodic post-retirement expense consisted of the following components:



	Years Ended December 31,
	2012			2011		2010
	(In thousands)
Service cost – benefit earned during the year	$	1,892		$	1,569	$	926
Interest cost on projected benefit obligations	3,519			2,193		351
Amortization of transition obligation	—			44		44
Amortization of prior service cost (credit)	(2,221		)	—		—
Amortization of net loss	269			114		98
Net periodic pension expense	$	3,459		$	3,920	$	1,419

Assumed health care cost trend rates have an effect on the amounts reported for the post-retirement health care benefit plans. The weighted average assumptions used to determine net periodic benefit expense follow:



	Years Ended December 31,
	2012		2011		2010

Discount rate	4.60	%	5.75	%	5.50	%
Current health care trend rate	8.40	%	8.70	%	9.00	%
Ultimate health care trend rate	5.00	%	5.00	%	5.00	%
Year rate reaches ultimate trend rate			2023		2023

The effect of a 1% change in health care cost trend rates is as follows:



	1% Point Increase		1% Point Decrease
	(In thousands)
Service cost	$	506	$	(377	)
Interest cost	$	778	$	(548	)
Year-end accumulated post-retirement benefit obligation	$	1,745	$	(1,461	)