Financial Instruments

6 Months Ended

Jun. 30, 2014

Financial Instruments, Owned, at Fair Value [Abstract]

Financial Instruments

Financial Instruments

Our financial instruments consist of cash and cash equivalents, investments in marketable securities, accounts receivable, accounts payable, debt and derivative instruments. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value. HEP's outstanding credit agreement borrowings also 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 estimated fair values of our investments in marketable securities, derivative instruments and senior notes at June 30, 2014 and December 31, 2013 were as follows:

					Fair Value by Input Level
Financial Instrument	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
June 30, 2014
Assets:
Marketable securities	$	679,668	$	679,668	$	—	$	679,668	$	—
Commodity price swaps	184,250		184,250		—		177,627		6,623
HEP interest rate swaps	834		834		—		834		—
Total assets	$	864,752	$	864,752	$	—	$	858,129	$	6,623
Liabilities:
NYMEX futures contracts	$	3,337	$	3,337	$	3,337	$	—	$	—
Commodity price swaps	104,135		104,135		—		22,071		82,064
Forward sales contracts	196		196		—		—		196
HollyFrontier senior notes	154,606		159,187		—		159,187		—
HEP senior notes	296,253		320,250		—		320,250		—
HEP interest rate swaps	1,629		1,629		—		1,629		—
Total liabilities	$	560,156	$	588,734	$	3,337	$	503,137	$	82,260

					Fair Value by Input Level
Financial Instrument	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
December 31, 2013
Assets:
Marketable securities	$	725,160	$	725,160	$	—	$	725,160	$	—
Commodity price swaps	43,284		43,284		—		36,312		6,972
HEP interest rate swaps	1,670		1,670		—		1,670		—
Total assets	$	770,114	$	770,114	$	—	$	763,142	$	6,972
Liabilities:
NYMEX futures contracts	$	3,569	$	3,569	$	3,569	$	—	$	—
Commodity price swaps	83,349		83,349		—		41,059		42,290
HollyFrontier senior notes	155,054		161,250		—		161,250		—
HEP senior notes	444,630		471,750		—		471,750		—
HEP interest rate swaps	1,814		1,814		—		1,814		—
Total liabilities	$	688,416	$	721,732	$	3,569	$	675,873	$	42,290

Level 1 Financial Instruments

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 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. The fair values of the commodity price and interest rate swap contracts are 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 securities and senior notes is based on values provided by a third-party, which were derived using market quotes for similar type instruments, a Level 2 input.

Level 3 Financial Instruments

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

The following table presents the changes in fair value of our Level 3 assets and liabilities (all related to derivative instruments) for the three and six months ended June 30, 2014 and 2013:

	Three Months Ended June 30,						Six Months Ended June 30,
Level 3 Financial Instruments	2014			2013			2014			2013
	(In thousands)
Liability balance at beginning of period	$	(22,473	)	$	(6,249	)	$	(35,318	)	$	(33,658	)
Change in fair value:
Recognized in other comprehensive income	(90,559		)	50,615			(112,695		)	1,413
Recognized in cost of products sold	(7,084		)	3,662			1,885			47,222
Settlement date fair value of contractual maturities:
Recognized in sales and other revenues	48,942			(3,868		)	74,273			15,316
Recognized in cost of products sold	(4,463		)	(7,034		)	(3,782		)	6,833
Asset (liability) balance at end of period	$	(75,637	)	$	37,126		$	(75,637	)	$	37,126

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 $7.5 million.