Fair Value Measurements

6 Months Ended

Jun. 30, 2016

Financial Instruments, Owned, at Fair Value [Abstract]

Financial Instruments

Fair Value Measurements

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 and HFC’s term loan also approximate fair value as interest rates are reset frequently at current interest rates on both debt instruments.

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 marketable securities, derivative instruments and senior notes at June 30, 2016 and December 31, 2015 were as follows:

					Fair Value by Input Level
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
June 30, 2016
Assets:
Marketable securities	$	81,328	$	81,328	$	—	$	81,328	$	—
NYMEX futures contracts	115		115		115		—		—
Commodity price swaps	23,075		23,075		—		23,075		—
Forward contracts	442		442		—		442		—
Total assets	$	104,960	$	104,960	$	115	$	104,845	$	—
Liabilities:
Commodity price swaps	$	47,082	$	47,082	$	—	$	47,082	$	—
Forward contracts	933		933		—		933		—
HollyFrontier senior notes	246,174		265,313		—		265,313		—
HEP senior notes	297,136		301,500		—		301,500		—
HEP interest rate swaps	405		405		—		405		—
Total liabilities	$	591,730	$	615,233	$	—	$	615,233	$	—

December 31, 2015
Assets:
Marketable securities	$	144,019	$	144,019	$	—	$	144,019	$	—
NYMEX futures contracts	3,469		3,469		3,469		—		—
Commodity price swaps	37,097		37,097		—		37,097		—
HEP interest rate swaps	304		304		—		304		—
Total assets	$	184,889	$	184,889	$	3,469	$	181,420	$	—
Liabilities:
Commodity price swaps	$	98,930	$	98,930	$	—	$	98,930	$	—
HEP senior notes	296,752		295,500		—		295,500		—
HEP interest rate swaps	114		114		—		114		—
Total liabilities	$	395,796	$	394,544	$	—	$	394,544	$	—

Level 1 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 Instruments

Investments in marketable securities, derivative instruments consisting of commodity price swaps and forward sales and purchase contracts 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 Instruments

We at times have forward commodity sales and purchase contracts for which quoted forward market prices are not readily available. The forward rate used to value these forward sales and purchase contracts are 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, 2015:

	Three Months Ended June 30, 2015			Six Months Ended June 30, 2015
Level 3 Instruments
	(In thousands)
Liability balance at beginning of period	$	(2,552	)	$	—
Change in fair value:
Recognized in other comprehensive income	6,404			3,852
Settlement date fair value of contractual maturities:
Recognized in sales and other revenues	(3,852		)	(3,852		)
Liability balance at end of period	$	—		$	—

During the six months ended June 30, 2016, we recognized goodwill and long-lived asset impairment charges based on fair value measurements (see Note 1). Also, we recognized a non-recurring fair value measurement of $44.4 million that relates to HEP’s equity interest in Osage in February 2016. The fair value measurements were based on a combination of valuation methods including discounted cash flows, and the guideline public company and guideline transaction methods, Level 3 inputs.