Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________________________________

FORM 10-Q

_________________________________________________________________

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ____________

Commission File Number 1-3876

_________________________________________________________________

HOLLYFRONTIER CORPORATION

(Exact name of registrant as specified in its charter)



Delaware		75-1056913
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
2828 N. Harwood, Suite 1300
Dallas
Texas		75201
(Address of principal executive offices)		(Zip Code)

(214) 871-3555

(Registrant’s telephone number, including area code)

_________________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)



Securities registered pursuant to 12(b) of the Securities Exchange Act of 1934:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock $0.01 par value	HFC	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

161,389,721 shares of Common Stock, par value $.01 per share, were outstanding on October 25, 2019.

Table of Content

HOLLYFRONTIER CORPORATION

INDEX



	Page

Forward-Looking Statements	3

Definitions	4

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets
September 30, 2019 (Unaudited) and December 31, 2018	5

Consolidated Statements of Income (Unaudited)
Three and Nine Months Ended September 30, 2019 and 2018	6

Consolidated Statements of Comprehensive Income (Unaudited)
Three and Nine Months Ended September 30, 2019 and 2018	7

Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2019 and 2018	8

Consolidated Statements of Equity (Unaudited)
Three and Nine Months Ended September 30, 2019 and 2018	9

Notes to Consolidated Financial Statements (Unaudited)	11

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3. Quantitative and Qualitative Disclosures About Market Risk	56

Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles	56

Item 4. Controls and Procedures	58

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	59

Item 1A. Risk Factors	60

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	61

Item 6. Exhibits	61

Index to Exhibits	62

Signatures	63

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FORWARD-LOOKING STATEMENTS

References herein to HollyFrontier Corporation (“HollyFrontier”) include HollyFrontier and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s (“SEC”) “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words “we,” “our,” “ours” and “us” refer only to HollyFrontier and its consolidated subsidiaries or to HollyFrontier or an individual subsidiary and not to any other person with certain exceptions. Generally, the words “we,” “our,” “ours” and “us” include Holly Energy Partners, L.P. (“HEP”) and its subsidiaries as consolidated subsidiaries of HollyFrontier, unless when used in disclosures of transactions or obligations between HEP and HollyFrontier or its other subsidiaries. This document contains certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of HollyFrontier. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact included in this Form 10-Q, including, but not limited to, those under “Results of Operations,” “Liquidity and Capital Resources” and “Risk Management” in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and those in Part II, Item 1 “Legal Proceedings” are forward-looking statements. Forward-looking statements use words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “intend,” “should,” “would,” “could,” “believe,” “may,” and similar expressions and statements regarding our plans and objectives for future operations. These statements are based on management’s beliefs and assumptions using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks and uncertainties. All statements concerning our expectations for future results of operations are based on forecasts for our existing operations and do not include the potential impact of any future acquisitions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that our expectations will prove to be correct. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in these statements. Any differences could be caused by a number of factors including, but not limited to:


•	risks and uncertainties with respect to the actions of actual or potential competitive suppliers of refined petroleum products in our markets;


•	the demand for and supply of crude oil and refined products;


•	the spread between market prices for refined products and market prices for crude oil;


•	the possibility of constraints on the transportation of refined products;


•	the possibility of inefficiencies, curtailments or shutdowns in refinery operations or pipelines;


•	effects of governmental and environmental regulations and policies;


•	the availability and cost of our financing;


•	the effectiveness of our capital investments and marketing strategies;


•	our efficiency in carrying out construction projects;


•	our ability to acquire refined or lubricant product operations or pipeline and terminal operations on acceptable terms and to integrate any existing or future acquired operations;


•	the possibility of terrorist or cyber attacks and the consequences of any such attacks;


•	general economic conditions; and


•	other financial, operational and legal risks and uncertainties detailed from time to time in our SEC filings.

Cautionary statements identifying important factors that could cause actual results to differ materially from our expectations are set forth in this Form 10-Q, including without limitation, the forward-looking statements that are referred to above. This summary discussion should be read in conjunction with the discussion of the known material risk factors and other cautionary statements under the heading “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 and in conjunction with the discussion in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Liquidity and Capital Resources.” All forward-looking statements included in this Form 10-Q and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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DEFINITIONS

Within this report, the following terms have these specific meanings:

“BPD” means the number of barrels per calendar day of crude oil or petroleum products.

“BPSD” means the number of barrels per stream day (barrels of capacity in a 24 hour period) of crude oil or petroleum products.

“Base oil” is a lubricant grade oil initially produced from refining crude oil or through chemical synthesis that is used in producing lubricant products such as lubricating greases, motor oil and metal processing fluids.

“Black wax crude oil” is a low sulfur, low gravity crude oil produced in the Uintah Basin in Eastern Utah that has certain characteristics that require specific facilities to transport, store and refine into transportation fuels.

“Cracking” means the process of breaking down larger, heavier and more complex hydrocarbon molecules into simpler and lighter molecules.

“Crude oil distillation” means the process of distilling vapor from liquid crudes, usually by heating, and condensing the vapor slightly above atmospheric pressure turning it back to liquid in order to purify, fractionate or form the desired products.

“FCC,” or fluid catalytic cracking, means a refinery process that breaks down large complex hydrocarbon molecules into smaller more useful ones using a circulating bed of catalyst at relatively high temperatures.

“LPG” means liquid petroleum gases.

“Lubricant” or “lube” means a solvent neutral paraffinic product used in commercial heavy duty engine oils, passenger car oils and specialty products for industrial applications such as heat transfer, metalworking, rubber and other general process oil.

“MMBTU” means one million British thermal units.

“Rack back” represents the portion of our Lubricants and Specialty Products business operations that entails the processing of feedstocks into base oils.

“Rack forward” represents the portion of our Lubricants and Specialty Products business operations that entails the processing of base oils into finished lubricants and the packaging, distribution and sale to customers.

“Refinery gross margin” means the difference between average net sales price and average cost per barrel sold. This does not include the associated depreciation and amortization costs.

“RINs” means renewable identification numbers and refers to serial numbers assigned to credits generated from renewable fuel production under the Environmental Protection Agency’s Renewable Fuel Standard (“RFS”) regulations, which require blending renewable fuels into the nation’s fuel supply. In lieu of blending, refiners may purchase these transferable credits in order to comply with the regulations.

“Sour crude oil” means crude oil containing quantities of sulfur greater than 0.4 percent by weight, while “sweet crude oil” means crude oil containing quantities of sulfur equal to or less than 0.4 percent by weight.

“Vacuum distillation” means the process of distilling vapor from liquid crudes, usually by heating, and condensing the vapor below atmospheric pressure turning it back to a liquid in order to purify, fractionate or form the desired products.

“White oil” is an extremely pure, highly-refined petroleum product that has a wide variety of applications ranging from pharmaceutical to cosmetic products.

“WTI” means West Texas Intermediate and is a grade of crude oil used as a common benchmark in oil pricing. WTI is a sweet crude oil and has a relatively low density.

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PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

HOLLYFRONTIER CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



	September 30, 2019			December 31, 2018
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (HEP: $7,469 and $3,045, respectively)	$	981,856		$	1,154,752

Accounts receivable: Product and transportation (HEP: $16,182 and $12,332, respectively)	811,355			635,623
Crude oil resales	28,476			36,078
	839,831			671,701
Inventories: Crude oil and refined products	1,429,911			1,166,404
Materials, supplies and other (HEP: $883 and $858, respectively)	207,148			187,975
	1,637,059			1,354,379
Income taxes receivable	23,591			34,040
Prepayments and other (HEP: $3,896 and $3,452, respectively)	50,429			81,507
Total current assets	3,532,766			3,296,379

Properties, plants and equipment, at cost (HEP: $2,042,185 and $2,058,388, respectively)	7,134,025			6,780,980
Less accumulated depreciation (HEP: $(535,215) and $(489,217), respectively)	(2,336,637		)	(2,098,446		)
	4,797,388			4,682,534
Operating lease right-of-use assets (HEP: $3,454)	453,377			—

Other assets: Turnaround costs	405,043			339,861
Goodwill (HEP: $312,873 and $314,229, respectively)	2,370,406			2,246,435
Intangibles and other (HEP: $166,743 and $176,291, respectively)	632,348			429,392
	3,407,797			3,015,688
Total assets	$	12,191,328		$	10,994,601

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable (HEP: $12,809 and $16,723, respectively)	$	1,229,767		$	872,627
Income taxes payable	18,782			17,636
Operating lease liabilities (HEP: $5,384)	99,622			—
Accrued liabilities (HEP: $28,669 and $27,240, respectively)	357,175			277,892
Total current liabilities	1,705,346			1,168,155

Long-term debt (HEP: $1,431,869 and $1,418,900, respectively)	2,425,234			2,411,540
Noncurrent operating lease liabilities (HEP: $71,022)	355,410			—
Deferred income taxes (HEP: $423 and $488, respectively)	916,520			722,576
Other long-term liabilities (HEP: $60,482 and $63,534, respectively)	247,455			233,271

Equity:
HollyFrontier stockholders’ equity:
Preferred stock, $1.00 par value – 5,000,000 shares authorized; none issued	—			—
Common stock $.01 par value – 320,000,000 shares authorized; 256,036,760 and 256,036,788 shares issued as of September 30, 2019 and December 31, 2018, respectively	2,560			2,560
Additional capital	4,224,770			4,196,125
Retained earnings	4,740,677			4,196,902
Accumulated other comprehensive income	17,217			13,623
Common stock held in treasury, at cost – 94,174,173 and 83,915,297 shares as of September 30, 2019 and December 31, 2018, respectively	(2,965,016		)	(2,490,639		)
Total HollyFrontier stockholders’ equity	6,020,208			5,918,571
Noncontrolling interest	521,155			540,488
Total equity	6,541,363			6,459,059
Total liabilities and equity	$	12,191,328		$	10,994,601

Parenthetical amounts represent asset and liability balances attributable to Holly Energy Partners, L.P. (“HEP”) as of September 30, 2019 and December 31, 2018. HEP is a variable interest entity.

See accompanying notes.

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HOLLYFRONTIER CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018

Sales and other revenues	$	4,424,828		$	4,770,799		$	13,104,690		$	13,370,462
Operating costs and expenses:
Cost of products sold (exclusive of depreciation and amortization):
Cost of products sold (exclusive of lower of cost or market inventory valuation adjustment)	3,403,767			3,752,234			10,307,856			10,695,275
Lower of cost or market inventory valuation adjustment	34,062			17,837			(150,483		)	(192,927		)
	3,437,829			3,770,071			10,157,373			10,502,348
Operating expenses (exclusive of depreciation and amortization)	345,578			317,196			1,010,422			933,699
Selling, general and administrative expenses (exclusive of depreciation and amortization)	87,626			71,130			260,977			204,469
Depreciation and amortization	127,016			108,885			375,345			323,605
Goodwill impairment	—			—			152,712			—
Total operating costs and expenses	3,998,049			4,267,282			11,956,829			11,964,121
Income from operations	426,779			503,517			1,147,861			1,406,341
Other income (expense):
Earnings of equity method investments	1,334			1,114			5,217			4,127
Interest income	6,164			5,136			17,127			10,660
Interest expense	(36,027		)	(32,399		)	(106,938		)	(97,446		)
Gain on foreign currency transactions	395			281			4,873			5,516
Other, net	2,356			741			3,005			3,451
	(25,778		)	(25,127		)	(76,716		)	(73,692		)
Income before income taxes	401,001			478,390			1,071,145			1,332,649
Income tax expense:
Current	58,255			70,595			176,903			216,529
Deferred	44,766			45,663			102,959			102,213
	103,021			116,258			279,862			318,742
Net income	297,980			362,132			791,283			1,013,907
Less net income attributable to noncontrolling interest	36,167			19,666			79,500			57,843
Net income attributable to HollyFrontier stockholders	$	261,813		$	342,466		$	711,783		$	956,064
Earnings per share attributable to HollyFrontier stockholders:
Basic	$	1.60		$	1.95		$	4.23		$	5.42
Diluted	$	1.58		$	1.93		$	4.20		$	5.37
Average number of common shares outstanding:
Basic	163,676			175,097			167,935			175,865
Diluted	165,011			176,927			169,125			177,557

See accompanying notes.

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HOLLYFRONTIER CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018

Net income	$	297,980		$	362,132	$	791,283		$	1,013,907
Other comprehensive income (loss):
Foreign currency translation adjustment	(9,311		)	8,325		4,212			(15,118		)
Hedging instruments:
Change in fair value of cash flow hedging instruments	(1,989		)	4,161		12,909			(4,242		)
Reclassification adjustments to net income on settlement of cash flow hedging instruments	(5,573		)	1,631		(12,537		)	6,038
Net unrealized gain (loss) on hedging instruments	(7,562		)	5,792		372			1,796
Other comprehensive income (loss) before income taxes	(16,873		)	14,117		4,584			(13,322		)
Income tax expense (benefit)	(3,888		)	3,234		990			(2,677		)
Other comprehensive income (loss)	(12,985		)	10,883		3,594			(10,645		)
Total comprehensive income	284,995			373,015		794,877			1,003,262
Less noncontrolling interest in comprehensive income	36,167			19,666		79,500			57,843
Comprehensive income attributable to HollyFrontier stockholders	$	248,828		$	353,349	$	715,377		$	945,419

See accompanying notes.

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HOLLYFRONTIER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income	$	791,283		$	1,013,907
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	375,345			323,605
Goodwill impairment	152,712			—
Lower of cost or market inventory valuation adjustment	(150,483		)	(192,927		)
Earnings of equity method investments, inclusive of distributions	280			463
(Gain) loss on sale of assets	202			(52		)
Deferred income taxes	102,959			102,213
Equity-based compensation expense	30,635			26,096
Change in fair value – derivative instruments	19,880			(3,007		)
(Increase) decrease in current assets:
Accounts receivable	(116,793		)	(136,764		)
Inventories	(47,409		)	(33,856		)
Income taxes receivable	13,704			27,792
Prepayments and other	17,710			(14,089		)
Increase (decrease) in current liabilities:
Accounts payable	321,537			(37,160		)
Income taxes payable	808			76,277
Accrued liabilities	54,779			84,328
Turnaround expenditures	(152,431		)	(114,593		)
Other, net	(3,314		)	7,664
Net cash provided by operating activities	1,411,404			1,129,897

Cash flows from investing activities:
Additions to properties, plants and equipment	(171,229		)	(167,967		)
Additions to properties, plants and equipment – HEP	(23,828		)	(41,111		)
Purchase of Sonneborn, net of cash acquired	(662,665		)	—
Purchase of Red Giant Oil, net of cash acquired	—			(54,088		)
Other, net	958			3,999
Net cash used for investing activities	(856,764		)	(259,167		)

Cash flows from financing activities:
Borrowings under credit agreements	269,500			256,000
Repayments under credit agreements	(257,000		)	(347,000		)
Proceeds from issuance of common units - HEP	—			114,887
Purchase of treasury stock	(471,976		)	(177,710		)
Dividends	(168,008		)	(175,921		)
Distributions to noncontrolling interest	(100,095		)	(93,128		)
Payments on finance leases	(1,158		)	—
Other, net	(600		)	(544		)
Net cash used for financing activities	(729,337		)	(423,416		)

Effect of exchange rate on cash flow	1,801			(2,394		)

Cash and cash equivalents:
Increase (decrease) for the period	(172,896		)	444,920
Beginning of period	1,154,752			630,757
End of period	$	981,856		$	1,075,677

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	(93,929	)	$	(89,553	)
Income taxes, net	$	(163,232	)	$	(112,520	)

See accompanying notes.

HOLLYFRONTIER CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(In thousands)



	HollyFrontier Stockholders' Equity
	Common Stock		Additional Capital			Retained Earnings			Accumulated Other Comprehensive Income			Treasury stock			Non-controlling Interest			Total Equity

Balance at December 31, 2018	$	2,560	$	4,196,125		$	4,196,902		$	13,623		$	(2,490,639	)	$	540,488		$	6,459,059
Net income	—		—			253,055			—			—			23,431			276,486
Dividends ($0.33 declared per common share)	—		—			(56,849		)	—			—			—			(56,849		)
Distributions to noncontrolling interest holders	—		—			—			—			—			(33,673		)	(33,673		)
Other comprehensive income, net of tax	—		—			—			13,775			—			—			13,775
Issuance of common stock under incentive compensation plans, net of tax	—		3			—			—			(3		)	—			—
Equity-based compensation	—		8,713			—			—			—			661			9,374
Purchase of treasury stock	—		—			—			—			(73,225		)	—			(73,225		)
Purchase of HEP units for restricted grants	—		—			—			—			—			(373		)	(373		)
Balance at March 31, 2019	$	2,560	$	4,204,841		$	4,393,108		$	27,398		$	(2,563,867	)	$	530,534		$	6,594,574
Net income	—		—			196,915			—			—			19,902			216,817
Dividends ($0.33 declared per common share)	—		—			(56,659		)	—			—			—			(56,659		)
Distributions to noncontrolling interest holders	—		—			—			—			—			(33,030		)	(33,030		)
Other comprehensive income, net of tax	—		—			—			2,804			—			—			2,804
Equity attributable to HEP common unit issuances, net of tax	—		—			—			—			—			(140		)	(140		)
Issuance of common stock under incentive compensation plans, net of tax	—		(138		)	—			—			138			—			—
Equity-based compensation	—		11,602			—			—			—			586			12,188
Purchase of treasury stock	—		—			—			—			(205,555		)	—			(205,555		)
Balance at June 30, 2019	$	2,560	$	4,216,305		$	4,533,364		$	30,202		$	(2,769,284	)	$	517,852		$	6,530,999
Net income	—		—			261,813			—			—			36,167			297,980
Dividends ($0.33 declared per common share)	—		—			(54,500		)	—			—			—			(54,500		)
Distributions to noncontrolling interest holders	—		—			—			—			—			(33,392		)	(33,392		)
Other comprehensive loss, net of tax	—		—			—			(12,985		)	—			—			(12,985		)
Issuance of common stock under incentive compensation plans, net of tax	—		(80		)	—			—			80			—			—
Equity-based compensation	—		8,545			—			—			—			528			9,073
Purchase of treasury stock	—		—			—			—			(195,812		)	—			(195,812		)
Balance at September 30, 2019	$	2,560	$	4,224,770		$	4,740,677		$	17,217		$	(2,965,016	)	$	521,155		$	6,541,363



	HollyFrontier Stockholders' Equity
	Common Stock		Additional Capital			Retained Earnings			Accumulated Other Comprehensive Income			Treasury stock			Non-controlling Interest			Total Equity

Balance at December 31, 2017	$	2,560	$	4,132,696		$	3,346,615		$	29,869		$	(2,140,911	)	$	526,111		$	5,896,940
Net income	—		—			268,091			—			—			20,771			288,862
Dividends ($0.33 declared per common share)	—		—			(58,856		)	—			—			—			(58,856		)
Distributions to noncontrolling interest holders	—		—			—			—			—			(29,237		)	(29,237		)
Other comprehensive loss, net of tax	—		—			—			(13,580		)	—			—			(13,580		)
Equity attributable to HEP common unit issuances, net of tax	—		41,980			—			—			—			58,031			100,011
Issuance of common stock under incentive compensation plans, net of tax	—		1,057			—			—			(1,057		)	—			—
Equity-based compensation	—		7,961			—			—			—			836			8,797
Purchase of treasury stock	—		—			—			—			(27,520		)	—			(27,520		)
Purchase of HEP units for restricted grants	—		—			—			—			—			(58		)	(58		)
Adoption of accounting standards	—		—			(11,019		)	3,572			—			—			(7,447		)
Other	—		1			(1		)	—			—			—			—
Balance at March 31, 2018	$	2,560	$	4,183,695		$	3,544,830		$	19,861		$	(2,169,488	)	$	576,454		$	6,157,912
Net income	—		—			345,507			—			—			17,406			362,913
Dividends ($0.33 declared per common share)	—		—			(58,644		)	—			—			—			(58,644		)
Distributions to noncontrolling interest holders	—		—			—			—			—			(31,522		)	(31,522		)
Other comprehensive loss, net of tax	—		—			—			(7,948		)	—			—			(7,948		)
Equity attributable to HEP common unit issuances, net of tax	—		221			—			—			—			232			453
Issuance of common stock under incentive compensation plans, net of tax	—		335			—			—			(335		)	—			—
Equity-based compensation	—		7,797			—			—			—			712			8,509
Purchase of treasury stock	—		—			—			—			(28,030		)	—			(28,030		)
Other	—		(3		)	3			—			—			—			—
Balance at June 30, 2018	$	2,560	$	4,192,045		$	3,831,696		$	11,913		$	(2,197,853	)	$	563,282		$	6,403,643
Net income	—		—			342,466			—			—			19,666			362,132
Dividends ($0.33 declared per common share)	—		—			(58,421		)	—			—			—			(58,421		)
Distributions to noncontrolling interest holders	—		—			—			—			—			(32,369		)	(32,369		)
Other comprehensive income, net of tax	—		—			—			10,883			—			—			10,883
Equity attributable to HEP common unit issuances, net of tax	—		—			—			—			—			(61		)	(61		)
Issuance of common stock under incentive compensation plans, net of tax	—		(188		)	—			—			188			—			—
Equity-based compensation	—		8,082			—			—			—			708			8,790
Purchase of treasury stock	—		—			—			—			(131,082		)	—			(131,082		)
Adoption of accounting standards	—		—			(3,110		)	3,110			—			—			—
Other	—		(1		)	(2		)	—			—			—			(3		)
Balance at September 30, 2018	$	2,560	$	4,199,938		$	4,112,629		$	25,906		$	(2,328,747	)	$	551,226		$	6,563,512

See accompanying notes.

Table of Content

HOLLYFRONTIER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


NOTE 1:	Description of Business and Presentation of Financial Statements

References herein to HollyFrontier Corporation (“HollyFrontier”) include HollyFrontier and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s (“SEC”) “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In these financial statements, the words “we,” “our,” “ours” and “us” refer only to HollyFrontier and its consolidated subsidiaries or to HollyFrontier or an individual subsidiary and not to any other person, with certain exceptions. Generally, the words “we,” “our,” “ours” and “us” include Holly Energy Partners, L.P. (“HEP”) and its subsidiaries as consolidated subsidiaries of HollyFrontier, unless when used in disclosures of transactions or obligations between HEP and HollyFrontier or its other subsidiaries. These financial statements contain certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of HollyFrontier. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.

We are an independent petroleum refiner and marketer that produces high-value light products such as gasoline, diesel fuel, jet fuel and other specialty products. We own and operate petroleum refineries that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. In addition, we produce base oils and other specialized lubricants in the United States, Canada and the Netherlands, with retail and wholesale marketing of our products through a global sales network with locations in Canada, the United States, Europe, China and Latin America. As of September 30, 2019, we:

•

owned and operated a petroleum refinery in El Dorado, Kansas (the “El Dorado Refinery”), two refinery facilities located in Tulsa, Oklahoma (collectively, the “Tulsa Refineries”), a refinery in Artesia, New Mexico that is operated in conjunction with crude oil distillation and vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the “Navajo Refinery”), a refinery located in Cheyenne, Wyoming (the “Cheyenne Refinery”) and a refinery in Woods Cross, Utah (the “Woods Cross Refinery”);


•	owned and operated Petro-Canada Lubricants Inc. (“PCLI”) located in Mississauga, Ontario, which produces base oils and other specialized lubricant products;


•	owned and operated Sonneborn with manufacturing facilities in Petrolia, Pennsylvania and the Netherlands;


•	owned and operated Red Giant Oil Company LLC (“Red Giant Oil”), which supplies locomotive engine oil with storage and distribution facilities in Iowa, Kansas, Utah and Wyoming, along with a blending and packaging facility in Texas;


•	owned and operated HollyFrontier Asphalt Company LLC (“HFC Asphalt”), which operates various asphalt terminals in Arizona, New Mexico and Oklahoma; and

•

owned a 57% limited partner interest and a non-economic general partner interest in HEP, a variable interest entity (“VIE”). HEP owns and operates logistic assets consisting of petroleum product and crude oil pipelines, terminals, tankage, loading rack facilities and refinery processing units that principally support our refining and marketing operations in the Mid-Continent, Southwest and Rocky Mountain regions of the United States.

On July 10, 2018, we entered into a definitive agreement to acquire Red Giant Oil, a privately-owned lubricants company. The acquisition closed on August 1, 2018.

We have prepared these consolidated financial statements without audit. In management’s opinion, these consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of our consolidated financial position as of September 30, 2019, the consolidated results of operations, comprehensive income and statements of equity for the three and nine months ended September 30, 2019 and 2018 and consolidated cash flows for the nine months ended September 30, 2019 and 2018 in accordance with the rules and regulations of the SEC. Although certain notes and other information required by generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018 that has been filed with the SEC.

Our results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the results of operations to be realized for the year ending December 31, 2019.

Accounts Receivable: Our accounts receivable consist of amounts due from customers that are primarily companies in the petroleum industry. Credit is extended based on our evaluation of the customer’s financial condition, and in certain circumstances collateral, such as letters of credit or guarantees, is required. We reserve for doubtful accounts based on our historical loss experience as well as specific accounts identified as high risk, which historically have been minimal. Credit losses are charged to the allowance for doubtful accounts when an account is deemed uncollectible. Our allowance for doubtful accounts was $4.4 million at September 30, 2019 and $3.6 million at December 31, 2018.

Inventories: Inventories related to our refining operations are stated at the lower of cost, using the last-in, first-out (“LIFO”) method for crude oil and unfinished and finished refined products, or market. In periods of rapidly declining prices, LIFO inventories may have to be written down to market value due to the higher costs assigned to LIFO layers in prior periods. In addition, the use of the LIFO inventory method may result in increases or decreases to cost of sales in years that inventory volumes decline as the result of charging cost of sales with LIFO inventory costs generated in prior periods. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final year-end LIFO inventory valuation.

Inventories of our Petro-Canada Lubricants and Sonneborn businesses are stated at the lower of cost, using the first-in, first-out (“FIFO”) method, or net realizable value.

Inventories consisting of process chemicals, materials and maintenance supplies and renewable identification numbers (“RINs”) are stated at the lower of weighted-average cost or net realizable value.

Leases: At inception, we determine if an arrangement is or contains a lease. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our payment obligation under the leasing arrangement. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We use our estimated incremental borrowing rate (“IBR”) to determine the present value of lease payments as most of our leases do not contain an implicit rate. Our IBR represents the interest rate which we would pay to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term in a similar economic environment. We use the implicit rate when readily determinable.

Operating leases are recorded in operating lease right-of-use assets and current and noncurrent operating lease liabilities on our consolidated balance sheet. Finance leases are included in properties, plants and equipment and accrued liabilities and other long-term liabilities on our consolidated balance sheet.

Our lease term includes an option to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less are not recorded on our balance sheet and lease expense is accounted for on a straight-line basis. For certain equipment leases, we apply a portfolio approach for the operating lease ROU assets and liabilities. Also, as a lessee, we separate non-lease components that are identifiable and exclude them from the determination of net present value of lease payment obligations. In addition, HEP, as a lessor, does not separate the non-lease (service) component in contracts in which the lease component is the dominant component. HEP treats these combined components as an operating lease.

Goodwill and Long-lived Assets: As of September 30, 2019, our goodwill balance was $2.4 billion, with goodwill assigned to our Refining, Lubricants and Specialty Products and HEP segments of $1,733.5 million, $324.1 million and $312.9 million, respectively. During the nine months ended September 30, 2019, we recognized $279.2 million in goodwill as a result of our Sonneborn acquisition, all of which has been assigned to our Lubricants and Specialty Products segment. See Note 17 for additional information on our segments. The carrying amount of our goodwill may fluctuate from period to period due to the effects of foreign currency translation adjustments on goodwill assigned to our Lubricants and Specialty Products segment. 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 an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our goodwill impairment testing first entails either a quantitative assessment or an optional qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that based on the qualitative factors that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, a quantitative test is performed in which we estimate the fair value of the related reporting unit. If the carrying amount of a reporting unit exceeds its fair value, the goodwill of that reporting unit is impaired, and we measure goodwill impairment as the excess of the carrying amount of reporting unit over the related fair value.

Our long-lived assets principally consist of our refining assets that are organized as refining asset groups and the assets of our Lubricants and Specialty Products asset groups. The refinery asset groups also constitute our individual refinery reporting units that are used for testing and measuring goodwill impairments. Our long-lived assets are evaluated for 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 measured, if any, is equal to the amount by which the asset group’s carrying value exceeds its fair value.

Goodwill impairment

During the second quarter of 2019, we performed interim goodwill impairment testing of the PCLI reporting unit included in our Lubricants and Specialty Products segment. We elected to perform this interim assessment due to the recent reorganization of our reporting unit structure within the Lubricants and Specialty Products segment, combined with the identification of events and circumstances which were indicators of potential goodwill impairment at PCLI, including recent declines in gross margins to lower than historic levels. These recent lower gross margins are in the base oil market which is largely attributed to the increase in global supply of base oils with a current outlook for continued near-term softness.

Our interim goodwill impairment testing was performed as of May 31, 2019. The estimated fair values of our goodwill reporting units within our Lubricants and Specialty Products segment were derived using a combination of both income and market approaches. The income approach reflects expected future cash flows based on estimated future production volumes, selling prices, gross margins, operating costs and capital expenditures. Our market approach includes both the guideline public company and guideline transaction methods. Both methods utilize pricing multiples derived from historical market transactions of other like-kind assets. These fair value measurements involve significant unobservable inputs (Level 3 inputs). See Note 6 for further discussion of Level 3 inputs.

As a result of our impairment testing, we determined that the carrying value of the PCLI reporting unit’s goodwill within our Lubricants and Specialty Products segment was fully impaired and a goodwill impairment charge of $152.7 million was recorded. Our testing did not identify any other impairments.

We performed our annual goodwill impairment testing as of July 1, 2019 and determined there was no additional impairment of goodwill attributable to our reporting units.

Revenue Recognition: Revenue on refined product and excess crude oil sales are recognized when delivered (via pipeline, in-tank or rack) and the customer obtains control of such inventory, which is typically when title passes and the customer is billed. All revenues are reported inclusive of shipping and handling costs billed and exclusive of any taxes billed to customers. Shipping and handling costs incurred are reported as cost of products sold. Additionally, our lubricants and specialty products business has sales agreements with marketers and distributors that provide certain rights of return or provisions for the repurchase of products previously sold to them. Under these agreements, revenues and cost of revenues are deferred until the products have been sold to end customers. Our lubricants and specialty products business also has agreements that create an obligation to deliver products at a future date for which consideration has already been received and recorded as deferred revenue. This revenue is recognized when the products are delivered to the customer.

HEP recognizes revenues as products are shipped through its pipelines and terminals and as other services are rendered. Additionally, HEP has certain throughput agreements that specify minimum volume requirements, whereby HEP bills a customer for a minimum level of shipments in the event a customer ships below their contractual requirements. If there are no future performance obligations, HEP recognizes these deficiency payments as revenue. In certain of these throughput agreements, a customer may later utilize such shortfall billings as credit towards future volume shipments in excess of its minimum levels within its respective contractual shortfall make-up period. Such amounts represent an obligation to perform future services, which may be initially deferred and later recognized as revenue based on estimated future shipping levels, including the likelihood of a customer’s ability to utilize such amounts prior to the end of the contractual shortfall make-up period. HEP recognizes the service portion of these deficiency payments as revenue when HEP does not expect it will be required to satisfy these performance obligations in the future based on the pattern of rights exercised by the customer. Payment terms under our contracts with customers are consistent with industry norms and are typically payable within 30 days of the date of invoice.

Foreign Currency Translation: Assets and liabilities recorded in foreign currencies are translated into U.S. dollars using exchange rates in effect as of the balance sheet date. Revenue and expense accounts are translated using the weighted-average exchange rates during the period presented. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income.

In connection with our PCLI acquisition on February 1, 2017, we issued intercompany notes to initially fund certain of our foreign businesses. Remeasurement adjustments resulting from the conversion of such intercompany financing amounts to functional currencies are recorded as gains and losses as a component of other income (expense) in the income statement. Such adjustments are not recorded to the Lubricants and Specialty Products segment operations, but to Corporate and Other. See Note 17 for additional information on our segments.

Income Taxes: Provisions for income taxes include deferred taxes resulting from temporary differences in income for financial and tax purposes, using the liability method of accounting for income taxes. The liability method requires the effect of tax rate changes on deferred income taxes to be reflected in the period in which the rate change was enacted. The liability method also requires that deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized.

Potential interest and penalties related to income tax matters are recognized in income tax expense. We believe we have appropriate support for the income tax positions taken and to be taken on our income tax returns and that our accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.

Inventory Repurchase Obligations: We periodically enter into same-party sell / buy transactions, whereby we sell certain refined product inventory and subsequently repurchase the inventory in order to facilitate delivery to certain locations. Such sell / buy transactions are accounted for as inventory repurchase obligations under which proceeds received under the initial sell is recognized as an inventory repurchase obligation that is subsequently reversed when the inventory is repurchased. For the nine months ended September 30, 2019 and 2018, we received proceeds of $13.2 million and $38.4 million, respectively, and repaid $12.5 million and $39.3 million, respectively, under these sell / buy transactions.

Accounting Pronouncements - Recently Adopted

Goodwill Impairment Testing

In January 2017, Accounting Standard Update (“ASU”) 2017-04, “Simplifying the Test for Goodwill Impairment,” was issued amending the testing for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. We adopted this standard effective in the second quarter of 2019, and the adoption of this standard resulted in no change to the amount of goodwill impairment recorded in the second quarter of 2019.

Leases

In February 2016, ASU 2016-02, “Leases,” was issued requiring leases to be measured and recognized as a lease liability, with a corresponding ROU asset on the balance sheet. We adopted this standard effective January 1, 2019 using the optional transition method, whereby comparative prior period financial information will not be restated and will continue to be reported under the lease accounting standard in effect during those periods. We also elected practical expedients provided by the new standard, including the package of practical expedients, whereby we did not reassess lease classification or initial indirect lease cost under the new standard. In addition, we elected to exclude short-term leases, which at inception have a lease term of 12 months or less, from the amounts recognized on our balance sheet. In addition, HEP elected an expedient whereby a lessor does not have to separate non-lease (service) components from lease components under certain contracts. Under this expedient, HEP treated the combined components of its leases with third parties (i.e., the contracts that are not eliminated upon consolidation of HEP by HFC) as an operating lease in which the dominant component was a lease in accordance with ASC 842. Upon adoption of this standard, we recognized $433.4 million of lease liabilities and corresponding ROU assets on our consolidated balance sheet. Adoption of this standard did not have a material impact on our results of operations or cash flows. In addition, upon our acquisition of Sonneborn on February 1, 2019, we recognized $15.6 million of lease liabilities and corresponding ROU assets.

Accounting Pronouncements - Not Yet Adopted

Credit Losses Measurement

In June 2016, ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” was issued requiring measurement of all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This standard is effective January 1, 2020, and our preliminary review of historic and expected credit losses indicates the amount of expected credit losses upon adoption would not be materially different from the current allowance for doubtful accounts balance.


NOTE 2:	Acquisitions

On November 12, 2018, we entered into an equity purchase agreement to acquire 100% of the capital stock of Sonneborn. The acquisition closed on February 1, 2019. Sonneborn is a producer of specialty hydrocarbon chemicals such as white oils, petrolatums and waxes with manufacturing facilities in the United States and Europe.

Aggregate consideration totaled $701.6 million and consisted of $662.7 million in cash paid at acquisition, net of cash acquired. Working capital settlement pursuant to the purchase agreement has been finalized.

This transaction is accounted for as a business combination using the acquisition method of accounting, with the purchase price allocated to the fair value of the acquired Sonneborn assets and liabilities as of the February 1 acquisition date, with the excess purchase price recorded as goodwill assigned to our Lubricants and Specialty Products segment.

The following summarizes our preliminary value estimates of the Sonneborn assets and liabilities acquired on February 1, 2019:



	(In millions)
Cash and cash equivalents	$	38.9
Accounts receivable and other current assets	58.6
Inventories	81.0
Properties, plants and equipment	168.2
Goodwill	279.2
Intangibles and other noncurrent assets	231.5
Accounts payable and accrued liabilities	(47.0		)
Deferred income tax liabilities	(84.5		)
Other long-term liabilities	(24.3		)
	$	701.6

The preliminary purchase price allocation resulted in the recognition of $279.2 million in goodwill, which relates to the established workforce and global market presence of the acquired business as well as the expected synergies to be gained upon combining with our existing operations to form an expanded lubricants and specialty products business.

Intangibles include customer relationships, trademarks, patents and technical know-how totaling $214.6 million that are being amortized on a straight-line basis over a 12-year period.

These values, including deferred taxes, are preliminary and, therefore, may change once we complete our valuations.

Our consolidated financial and operating results reflect the Sonneborn operations beginning February 1, 2019. Our results of operations for the three months ended September 30, 2019 included revenues and income before income taxes of $88.1 million and $6.6 million, respectively, and revenue and income before income taxes of $253.5 million and $5.0 million, respectively, for the period from February 1, 2019 through September 30, 2019 related to these operations.

As of September 30, 2019, we have incurred $20.1 million in incremental direct integration and regulatory costs that principally relate to legal, advisory, regulatory and other professional fees and are presented as selling, general and administrative expenses.

The following unaudited pro forma information for the nine months ended September 30, 2019 and the three and nine months ended September 30, 2018 presents the revenues and operating income for our Lubricants and Specialty Products segment assuming the acquisition of Sonneborn had occurred as of January 1, 2018. The proforma effects on consolidated HFC revenue and operating income are not material.



	Three Months Ended September 30,		Nine Months Ended September 30,
	2018		2019			2018
	(In thousands)
Sales and other revenues	$	571,685	$	1,608,648		$	1,679,554
Operating income ⁽¹⁾	$	39,496	$	(127,972	)	$	110,424

(1) For the nine months ended September 30, 2019, includes goodwill impairment of $152.7 million from the PCLI reporting unit of our Lubricants and Specialty Products segment. See Note 1 for additional information on this goodwill impairment.


NOTE 3:	Leases

We have operating and finance leases for land, buildings, pipelines, storage tanks, transportation and other equipment for our operations. Our leases have remaining terms of one to 60 years, some of which include options to extend the leases for up to 10 years. Certain of our leases for pipeline assets include provisions for variable payments which are based on a measure of throughput and also contain a provision for the lessor to adjust the rate per barrel periodically over the life of the lease. These variable costs are not included in the initial measurement of ROU assets and lease liabilities.

The following table presents the amounts and balance sheet locations of our operating and financing leases recorded on our consolidated balance sheet.



	September 30, 2019
	(In thousands)
Operating leases:
Operating lease right-of-use assets	$	453,377

Operating lease liabilities	99,622
Noncurrent operating lease liabilities	355,410
Total operating lease liabilities	$	455,032

Finance leases:
Properties, plants and equipment, at cost	$	12,830
Accumulated amortization	(6,375		)
Properties, plants and equipment, net	$	6,455

Accrued liabilities	$	1,663
Other long-term liabilities	4,929
Total finance lease liabilities	$	6,592

Supplemental balance sheet information related to our leases was as follows:



	September 30, 2019

Weighted average remaining lease term (in years)
Operating leases	7.6
Finance leases	8.2

Weighted average discount rate
Operating leases	4.2	%
Finance leases	5.3	%

The components of lease expense were as follows:



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
	(In thousands)
Operating lease expense	$	28,263	$	83,646
Finance lease expense:
Amortization of right-of-use assets	375		1,150
Interest on lease liabilities	84		255
Variable lease cost	1,862		3,251
Total lease expense	$	30,584	$	88,302

Supplemental cash flow information related to leases was as follows:



	Nine Months Ended September 30, 2019
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	88,500
Operating cash flows from finance leases	$	255
Financing cash flows from finance leases	$	1,158

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	80,211

As of September 30, 2019, minimum future lease payments of our operating and finance lease obligations were as follows:



	Operating		Finance
	(In thousands)
Remainder of 2019	$	29,036	$	500
2020	107,362		1,945
2021	89,194		1,123
2022	75,923		859
2023	70,194		895
2024 and thereafter	172,200		2,772
Future minimum lease payments	543,909		8,094
Less: imputed interest	88,877		1,502
Total lease obligations	455,032		6,592
Less: current obligations	99,622		1,663
Long-term lease obligations	$	355,410	$	4,929

As of September 30, 2019, we have entered into certain leases that have not yet commenced. Such leases include a 15-year lease for plant equipment, with estimated future lease payments of $6.8 million, expected to commence in the second quarter of 2020, and a 5-year lease for office equipment, with estimated future lease payments of $0.4 million, expected to commence in the fourth quarter of 2019.

Our consolidated income statement reflects lease revenue recognized by HEP for contracts with third parties in which HEP is the lessor. Lease income recognized was as follows:



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
	(In thousands)
Operating lease revenues	$	8,374	$	24,840

Annual minimum undiscounted lease payments in which HEP is a lessor to third-party contracts as of September 30, 2019 were as follows:



	(In thousands)
Remainder of 2019	$	8,010
2020	17,542
2021	12,794
2022	11,376
2023	11,248
Thereafter	14,060
Total	$	75,030


NOTE 4:	Holly Energy Partners

HEP is a publicly held master limited partnership that owns and operates logistic assets consisting of petroleum product and crude oil pipelines, terminals, tankage, loading rack facilities and refinery processing units that principally support our refining and marketing operations in the Mid-Continent, Southwest and Rocky Mountain regions of the United States and Delek’s refinery in Big Spring, Texas. Additionally, as of September 30, 2019, HEP owned a 75% interest in UNEV Pipeline, LLC (“UNEV”), the owner of a pipeline running from Woods Cross, Utah to Las Vegas, Nevada (the “UNEV Pipeline”) and associated product terminals, and had a 50% ownership interest in each of Osage Pipe Line Company, LLC, the owner of a pipeline running from Cushing, Oklahoma to El Dorado, Kansas (the “Osage Pipeline”) and Cheyenne Pipeline, LLC, the owner of a pipeline running from Fort Laramie, Wyoming to Cheyenne, Wyoming (the “Cheyenne Pipeline”).

As of September 30, 2019, we owned a 57% limited partner interest and a non-economic general partner interest in HEP. As the general partner of HEP, we have the sole ability to direct the activities that most significantly impact HEP’s financial performance, and therefore as HEP's primary beneficiary, we consolidate HEP.

HEP has two primary customers (including us) and generates revenues by charging tariffs for transporting petroleum products and crude oil through its pipelines, by charging fees for terminalling refined products and other hydrocarbons, and by storing and providing other services at its storage tanks and terminals. Under our long-term transportation agreements with HEP (discussed further below), we accounted for 78% of HEP’s total revenues for the nine months ended September 30, 2019. We do not provide financial or equity support through any liquidity arrangements and / or debt guarantees to HEP.

HEP has outstanding debt under a senior secured revolving credit agreement and its senior notes. HEP’s creditors have no recourse to our assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries. See Note 11 for a description of HEP’s debt obligations.

HEP has risk associated with its operations. If a major customer of HEP were to terminate its contracts or fail to meet desired shipping or throughput levels for an extended period of time, revenue would be reduced and HEP could suffer substantial losses to the extent that a new customer is not found. In the event that HEP incurs a loss, our operating results will reflect HEP’s loss, net of intercompany eliminations, to the extent of our ownership interest in HEP at that point in time.

HEP Private Placement Agreements

On January 25, 2018, HEP entered into a common unit purchase agreement in which certain purchasers agreed to purchase in a private placement 3,700,000 HEP common units, representing limited partner interests, at a price of $29.73 per common unit. The private placement closed on February 6, 2018, at which time HEP received proceeds of $110.0 million, which were used to repay indebtedness under the HEP Credit Agreement.

HEP Common Unit Continuous Offering Program

In May 2016, HEP established a continuous offering program under which HEP may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million. During the nine months ended September 30, 2019, HEP did not issue any common units under this program. As of September 30, 2019, HEP has issued 2,413,153 common units under this program, providing $82.3 million in gross proceeds.

HEP intends to use the net proceeds for general partnership purposes, which may include funding working capital, repayment of debt, acquisitions and capital expenditures. Amounts repaid under HEP’s credit facility may be reborrowed from time to time.

As a result of these transactions and resulting HEP ownership changes, we adjusted additional capital and equity attributable to HEP's noncontrolling interest holders to reallocate HEP's equity among its unitholders.

Cushing Connect Joint Venture

On October 2, 2019, HEP Cushing (“HEP Cushing”), a wholly-owned subsidiary of HEP, and Plains Marketing, L.P. (“PMLP”), a wholly-owned subsidiary of Plains All American Pipeline, L.P. (“Plains”), formed a 50/50 joint venture, Cushing Connect Pipeline & Terminal LLC (the “Joint Venture”), for (i) the development and construction of a new 160,000 barrel per day common carrier crude oil pipeline (the “Pipeline”) that will connect the Cushing, Oklahoma crude oil hub to our Tulsa Refineries and (ii) the ownership and operation of 1.5 million barrels of crude oil storage in Cushing, Oklahoma (the “JV Terminal”). The JV Terminal is expected to be in service during the second quarter of 2020, and the Pipeline is expected to be in service during the first quarter of 2021. Long-term commercial agreements have been entered into to support the Joint Venture assets.

The Joint Venture will contract with an affiliate of HEP to manage the construction and operation of the Pipeline and with an affiliate of Plains to manage the operation of the JV Terminal. The total Joint Venture investment will be shared proportionately among the partners, and HEP estimates its share of the cost of the JV Terminal contributed by Plains and Pipeline construction costs are approximately $65.0 million.

Transportation Agreements

HEP serves our refineries under long-term pipeline, terminal and tankage throughput agreements and refinery processing tolling agreements expiring from 2021 through 2036. Under these agreements, we pay HEP fees to transport, store and process throughput volumes of refined products, crude oil and feedstocks on HEP’s pipeline, terminals, tankage, loading rack facilities and refinery processing units that result in minimum annual payments to HEP including UNEV (a consolidated subsidiary of HEP). Under these agreements, the agreed upon tariff rates are subject to annual tariff rate adjustments on July 1 at a rate based upon the percentage change in Producer Price Index or Federal Energy Regulatory Commission index. As of September 30, 2019, these agreements result in minimum annualized payments to HEP of $349.0 million.

Our transactions with HEP and fees paid under our transportation agreements with HEP and UNEV are eliminated and have no impact on our consolidated financial statements.


NOTE 5:	Revenues

Substantially all revenue-generating activities relate to sales of refined product and excess crude oil inventories sold at market prices (variable consideration) under contracts with customers. Additionally, we have revenues attributable to HEP logistics services provided under petroleum product and crude oil pipeline transportation, processing, storage and terminalling agreements with third parties.

Disaggregated revenues were as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands)
Revenues by type
Refined product revenues
Transportation fuels⁽¹⁾	$	3,354,927	$	3,598,815	$	9,796,334	$	10,193,218
Specialty lubricant products ⁽²⁾	461,669		422,760		1,413,194		1,237,002
Asphalt, fuel oil and other products ⁽³⁾	299,305		288,013		767,023		741,139
Total refined product revenues	4,115,901		4,309,588		11,976,551		12,171,359
Excess crude oil revenues ⁽⁴⁾	264,675		422,122		997,988		1,074,928
Transportation and logistic services	29,868		25,596		89,388		77,799
Other revenues ⁽⁵⁾	14,384		13,493		40,763		46,376
Total sales and other revenues	$	4,424,828	$	4,770,799	$	13,104,690	$	13,370,462



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands)
Refined product revenues by market
United States
Mid-Continent	$	2,191,014	$	2,337,689	$	6,283,488	$	6,458,935
Southwest	913,326		1,016,771		2,772,281		2,865,324
Rocky Mountains	611,003		627,542		1,739,401		1,869,414
Northeast	151,919		85,344		427,926		261,380
Canada	184,784		190,727		536,911		563,088
Europe, Asia and Latin America	63,855		51,515		216,544		153,218
Total refined product revenues	$	4,115,901	$	4,309,588	$	11,976,551	$	12,171,359


(1)	Transportation fuels consist of gasoline, diesel and jet fuel.


(2)	Specialty lubricant products consist of base oil, waxes, finished lubricants and other specialty fluids.

(3)

Asphalt, fuel oil and other products revenue include revenues attributable to our Refining and Lubricants and Specialty Products segments of $231.4 million and $67.9 million, respectively, for the three months ended September 30, 2019, $612.0 million and $155.0 million, respectively, for the nine months ended September 30, 2019, $234.9 million and $53.1 million, respectively, for the three months ended September 30, 2018, and $589.7 million and $151.4 million, respectively, for the nine months ended September 30, 2018.


(4)	Excess crude oil revenues represent sales of purchased crude oil inventory that at times exceeds the supply needs of our refineries.


(5)	Other revenues are principally attributable to our Refining segment.

Our consolidated balance sheet reflects contract liabilities related to unearned revenues attributable to future service obligations under HEP’s third-party transportation agreements and production agreements from the acquisition of Sonneborn on February 1, 2019. The following table presents changes to our contract liabilities during the nine months ended September 30, 2019.



	January 1, 2019		Sonneborn Acquisition	Increase		Recognized as Revenue			September 30, 2019
	(In thousands)
Accrued liabilities	$	132	6,463	$	19,255	$	(21,135	)	$	4,715

As of September 30, 2019, we have long-term contracts with customers that specify minimum volumes of gasoline, diesel, lubricants and specialty products to be sold ratably at market prices through 2021. Such volumes are typically nominated in the month preceding delivery and delivered ratably throughout the following month. Future prices are subject to market fluctuations and therefore, we have elected the exemption to exclude variable consideration under these contracts under Accounting Standards Codification 606-10-50-14A. Aggregate minimum volumes expected to be sold (future performance obligations) under our long-term product sales contracts with customers are as follows:



	Remainder of 2019	2020	2021	Thereafter	Total
	(In thousands)
Refined product sales volumes (barrels)	5,610	7,964	1,847	—	15,421

Additionally, HEP has long-term contracts with third-party customers that specify minimum volumes of product to be transported through its pipelines and terminals that result in fixed-minimum annual revenues through 2022. Annual minimum revenues attributable to HEP’s third-party contracts as of September 30, 2019 are presented below:



	Remainder of 2019		2020		2021		Thereafter		Total
	(In thousands)
HEP contractual minimum revenues	$	10,695	$	28,238	$	22,822	$	38,575	$	100,330


NOTE 6:	Fair Value Measurements

Our financial instruments measured at fair value on a recurring basis consist of derivative instruments and RINs credit obligations.

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 of derivative instruments and RINs credit obligations at September 30, 2019 and December 31, 2018 were as follows:



			Fair Value by Input Level
	Carrying Amount		Level 1		Level 2		Level 3
	(In thousands)
September 30, 2019
Assets:
NYMEX futures contracts	$	2,976	$	2,976	$	—	$	—
Foreign currency forward contracts	2,511		—		2,511		—
Commodity price swaps	18,007		—		18,007		—
Commodity forward contracts	1,453		—		1,453		—
Total assets	$	24,947	$	2,976	$	21,971	$	—

Liabilities:
Foreign currency forward contracts	$	17	$	—	$	17	$	—
Commodity price swaps	1,094		—		1,094		—
Commodity forward contracts	1,367		—		1,367		—
Total liabilities	$	2,478	$	—	$	2,478	$	—



				Fair Value by Input Level
Financial Instrument		Carrying Amount		Level 1		Level 2		Level 3
	(In thousands)
December 31, 2018
Assets:
NYMEX futures contracts		$	2,473	$	2,473	$	—	$	—
Foreign currency forward contracts		25,956		—		25,956		—
Commodity price swaps		10,817		—		10,817		—
Commodity forward contracts		1,034		—		1,034		$	—
Total assets		$	40,280	$	2,473	$	37,807	$	—

Liabilities:
Commodity price swaps		$	956	$	—	$	956	$	—
Commodity forward contracts		1,137		—		1,137		—
RINs credit obligations ⁽¹⁾		4,084		—		4,084		—
Total liabilities		$	6,177	$	—	$	6,177	$	—


(1)	Represent obligations for RINs credits for which we did not have sufficient quantities at December 31, 2018 to satisfy our Environmental Protection Agency (“EPA”) regulatory blending requirements.

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

Derivative instruments consisting of foreign currency forward contracts, commodity price swaps and forward sales and purchase contracts are measured and recorded at fair value using Level 2 inputs. The fair value of the commodity price swap contracts 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 input and quoted forward commodity prices with respect to our commodity price swaps. RINs credit obligations are valued based on current market RINs prices. The fair value of foreign currency forward contracts are based on values provided by a third party, which were derived using market quotes for similar type instruments, a Level 2 input.


NOTE 7:	Earnings Per Share

Basic earnings per share is calculated as net income attributable to HollyFrontier stockholders divided by the average number of shares of common stock outstanding. Diluted earnings per share assumes, when dilutive, the issuance of the net incremental shares from restricted shares and performance share units. The following is a reconciliation of the denominators of the basic and diluted per share computations for net income attributable to HollyFrontier stockholders:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands, except per share data)
Net income attributable to HollyFrontier stockholders	$	261,813	$	342,466	$	711,783	$	956,064
Participating securities’ (restricted stock) share in earnings	385		1,171		1,033		3,321
Net income attributable to common shares	$	261,428	$	341,295	$	710,750	$	952,743
Average number of shares of common stock outstanding	163,676		175,097		167,935		175,865
Effect of dilutive variable restricted shares andperformance share units ⁽¹⁾	1,335		1,830		1,190		1,692
Average number of shares of common stock outstanding assuming dilution	165,011		176,927		169,125		177,557
Basic earnings per share	$	1.60	$	1.95	$	4.23	$	5.42
Diluted earnings per share	$	1.58	$	1.93	$	4.20	$	5.37
⁽¹⁾ Excludes anti-dilutive restricted and performance share units of:	109		—		120		2


NOTE 8:	Stock-Based Compensation

We have a principal share-based compensation plan (the “Long-Term Incentive Compensation Plan”). The compensation cost charged against income for the plan was $9.2 million and $8.1 million for the three months ended September 30, 2019 and 2018, respectively, and $30.0 million and $23.8 million for the nine months ended September 30, 2019 and 2018, respectively. Our accounting policy for the recognition of compensation expense for awards with pro-rata vesting is to expense the costs ratably over the vesting periods.

Additionally, HEP maintains a share-based compensation plan for Holly Logistic Services, L.L.C.’s non-employee directors and certain executives and employees. Compensation cost attributable to HEP’s share-based compensation plan was $0.5 million and $0.7 million for the three months ended September 30, 2019 and 2018, respectively, and $1.8 million and $2.3 million for the nine months ended September 30, 2019 and 2018, respectively.

Restricted Stock and Restricted Stock Units

Under our Long-Term Incentive Compensation Plan, we grant certain officers and other key employees restricted stock unit awards with awards generally vesting over a period of three years. We previously granted restricted stock to certain officers and key employees with awards vesting over a period of three years. Certain restricted stock unit award recipients have the right to receive dividends, however, restricted stock units do not have any other rights of absolute ownership. Restricted stock award recipients are generally entitled to all the rights of absolute ownership of the restricted shares from the date of grant including the right to vote the shares and to receive dividends. Upon vesting, restrictions on the restricted stock and restricted stock units lapse at which time they convert to common shares or cash. In addition, we grant non-employee directors restricted stock unit awards, which typically vest over a period of one year and are payable in stock. The fair value of each restricted stock and restricted stock unit award is measured based on the grant date market price of our common shares and is amortized over the respective vesting period. We account for forfeitures on an estimated basis.

A summary of restricted stock and restricted stock unit activity during the nine months ended September 30, 2019 is presented below:



Restricted Stock and Restricted Stock Units	Grants		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value ($000)

Outstanding at January 1, 2019 (non-vested)	1,196,914		$	46.81
Granted	45,006		52.97
Vesting (transfer/conversion to common stock)	(17,374	)	49.32
Forfeited	(38,600	)	47.97
Outstanding at September 30, 2019 (non-vested)	1,185,946		46.97		$	63,614

For the nine months ended September 30, 2019, restricted stock and restricted stock units vested having a grant date fair value of $0.9 million. As of September 30, 2019, there was $14.4 million of total unrecognized compensation cost related to non-vested restricted stock and restricted stock unit grants. That cost is expected to be recognized over a weighted-average period of 1.0 years.

Performance Share Units

Under our Long-Term Incentive Compensation Plan, we grant certain officers and other key employees performance share units, which are payable in stock or cash upon meeting certain criteria over the service period, and generally vest over a period of three years. Under the terms of our performance share unit grants, awards are subject to “financial performance” and “market performance” criteria. Financial performance is based on our financial performance compared to a peer group of independent refining companies, while market performance is based on the relative standing of total shareholder return achieved by HollyFrontier compared to peer group companies. The number of shares ultimately issued under these awards can range from zero to 200% of target award amounts.

A summary of performance share unit activity during the nine months ended September 30, 2019 is presented below:



Performance Share Units	Grants

Outstanding at January 1, 2019 (non-vested)	662,431
Granted	6,086
Forfeited	(4,516	)
Outstanding at September 30, 2019 (non-vested)	664,001

As of September 30, 2019, there was $7.9 million of total unrecognized compensation cost related to non-vested performance share units having a grant date fair value of $47.24 per unit. That cost is expected to be recognized over a weighted-average period of 0.9 years.


NOTE 9:	Inventories

Inventories consist of the following components:



	September 30, 2019			December 31, 2018
	(In thousands)
Crude oil	$	472,932		$	503,705
Other raw materials and unfinished products⁽¹⁾	306,504			360,124
Finished products⁽²⁾	860,130			662,713
Lower of cost or market reserve	(209,655		)	(360,138		)
Process chemicals⁽³⁾	29,040			31,413
Repair and maintenance supplies and other ⁽⁴⁾	178,108			156,562
Total inventory	$	1,637,059		$	1,354,379


(1)	Other raw materials and unfinished products include feedstocks and blendstocks, other than crude.


(2)	Finished products include gasolines, jet fuels, diesels, lubricants, asphalts, LPG’s and residual fuels.


(3)	Process chemicals include additives and other chemicals.


(4)	Includes RINs.

Our inventories that are valued at the lower of LIFO cost or market reflect a valuation reserve of $209.7 million and $360.1 million at September 30, 2019 and December 31, 2018, respectively. The December 31, 2018 market reserve of $360.1 million was reversed due to the sale of inventory quantities that gave rise to the 2018 reserve. A new market reserve of $209.7 million was established as of September 30, 2019 based on market conditions and prices at that time. The effect of the change in lower of cost or market reserve was an increase to cost of products sold totaling $34.1 million and $17.8 million for the three months ended September 30, 2019 and 2018, respectively, and a decrease to cost of products sold totaling $150.5 million and $192.9 million for the nine months ended September 30, 2019 and 2018, respectively.

At September 30, 2019, the LIFO value of inventory, net of the lower of cost or market reserve, was equal to current costs.

During the three months ended September 30, 2019, the EPA granted the Cheyenne Refinery and the Woods Cross Refinery each a one-year small refinery exemption from the Renewable Fuel Standard (“RFS”) program requirements for the 2018 calendar year end. As a result, the Cheyenne Refinery’s and the Woods Cross Refinery’s gasoline and diesel production are not subject to the Renewable Volume Obligation (“RVO”) for 2018. In the third quarter of 2019, we increased our inventory of RINs and reduced our cost of products sold by $36.6 million representing the net cost of the RINs charge to cost of products sold in 2018, less the loss incurred for selling 2018 vintage RINs in excess of those which we can use subject to the 20% carryover limit.

During the three months ended June 30, 2018, the EPA granted the Woods Cross Refinery a one-year small refinery exemption from the RFS program requirements for the 2017 calendar year end. As a result, the Woods Cross Refinery’s gasoline and diesel production are not subject to the RVO for 2017. In the second quarter of 2018, we increased our inventory of RINs and reduced our cost of products sold by $25.3 million, representing the net cost of the Woods Cross Refinery’s RINs charge to cost of products sold in 2017, less the loss incurred for selling 2017 vintage RINs in excess of those which we can use subject to the 20% carryover limit.

During the three months ended March 31, 2018, the EPA granted the Cheyenne Refinery a one-year small refinery exemption from the RFS program requirements for the 2015 and 2017 calendar years end. As a result, the Cheyenne Refinery’s gasoline and diesel production are not subject to the RVO for those years. At the date we received the 2017 Cheyenne Refinery exemption, we had not yet retired RINs to satisfy the 2017 RVO, which we intended to satisfy, in part, with 2016 vintage RINs subject to the 20% carryover limit. In the first quarter of 2018, we increased our inventory of RINs and reduced our cost of products sold by $37.9 million, representing the net cost of the Cheyenne Refinery’s RINs charged to cost of products sold in 2017, less the loss incurred from selling 2016 vintage RINs prior to their expiration in 2018.

In the first quarter of 2018, the EPA provided us 2018 vintage RINs to replace the RINs previously submitted to meet the Cheyenne Refinery’s 2015 RVO. In the first quarter of 2018, we increased our inventory of RINs and reduced our cost of products sold by $33.8 million representing the fair value of the 2018 replacement RINs obtained from the Cheyenne Refinery’s exemption of its 2015 RVO.

Various subsidiaries of HollyFrontier have intervened in three lawsuits brought by renewable fuel interest groups against the EPA in federal appellate courts alleging violations of the RFS under the Clean Air Act and challenging the EPA’s handling of small refinery exemptions. We believe the EPA correctly applied applicable law to the matters at issue and will vigorously defend the EPA’s position on small refinery exemptions. It is too early to assess whether the cases are expected to have any impact on us.


NOTE 10:	Environmental

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. We have ongoing investigations of environmental matters at various locations and routinely assess our recorded environmental obligations, if any, with respect to such matters. 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 cleanup 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.

We incurred expense of $1.8 million and $3.3 million for the three months ended September 30, 2019 and 2018, respectively, and $5.5 million and $4.9 million for the nine months ended September 30, 2019 and 2018, respectively, for environmental remediation obligations. The accrued environmental liability reflected in our consolidated balance sheets was $109.9 million and $110.2 million at September 30, 2019 and December 31, 2018, respectively, of which $92.4 million and $93.8 million, respectively, were classified as other long-term liabilities. These accruals include remediation and monitoring costs expected to be incurred over an extended period of time (up to 30 years for certain projects). Estimated liabilities could increase in the future when the results of ongoing investigations become known, are considered probable and can be reasonably estimated.


NOTE 11:	Debt

HollyFrontier Credit Agreement

We have a $1.35 billion senior unsecured revolving credit facility maturing in February 2022 (the “HollyFrontier Credit Agreement”). The HollyFrontier Credit Agreement may be used for revolving credit loans and letters of credit from time to time and is available to fund general corporate purposes. At September 30, 2019, we were in compliance with all covenants, had no outstanding borrowings and had outstanding letters of credit totaling $4.9 million under the HollyFrontier Credit Agreement.

HEP Credit Agreement

HEP has a $1.4 billion senior secured revolving credit facility maturing in July 2022 (the “HEP Credit Agreement”) and is available to fund capital expenditures, investments, acquisitions, distribution payments, working capital and for general partnership purposes. It is also available to fund letters of credit up to a $50 million sub-limit and has a $300 million accordion. During the nine months ended September 30, 2019, HEP received advances totaling $269.5 million and repaid $257.0 million under the HEP Credit Agreement. At September 30, 2019, HEP was in compliance with all of its covenants, had outstanding borrowings of $935.5 million and no outstanding letters of credit under the HEP Credit Agreement.

HEP’s obligations under the HEP Credit Agreement are collateralized by substantially all of HEP’s assets and are guaranteed by HEP’s material wholly-owned subsidiaries. Any recourse to the general partner would be limited to the extent of HEP Logistics Holdings, L.P.’s assets, which other than its investment in HEP are not significant. HEP’s creditors have no recourse to our other assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries.

HollyFrontier Senior Notes

Our 5.875% senior notes ($1 billion aggregate principal amount maturing April 2026) (the “HollyFrontier Senior Notes”) are unsecured and unsubordinated obligations of ours and rank equally with all our other existing and future unsecured and unsubordinated indebtedness.

HollyFrontier Financing Arrangements

In December 2018, certain of our wholly-owned subsidiaries entered into financing arrangements whereby such subsidiaries sold a portion of their precious metals catalyst to a financial institution and then leased back the precious metals catalyst in exchange for total cash received of $32.5 million. The volume of the precious metals catalyst and the lease rate are fixed over the one-year term of each lease, and the lease payments are recorded as interest expense. At maturity, we must repurchase the precious metals catalyst at its then fair market value. These financing arrangements are recorded at a Level 2 fair value totaling $36.5 million at September 30, 2019 and are included in “Accrued liabilities” in our consolidated balance sheets. See Note 6 for additional information on Level 2 inputs.

HEP Senior Notes

HEP’s 6.0% senior notes ($500 million aggregate principal amount maturing August 2024) (the “HEP Senior Notes”) are unsecured and impose certain restrictive covenants, including limitations on HEP’s ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. At any time when the HEP Senior Notes are rated investment grade by both Moody’s and Standard & Poor’s and no default or event of default exists, HEP will not be subject to many of the foregoing covenants. Additionally, HEP has certain redemption rights under the HEP Senior Notes.

Indebtedness under the HEP Senior Notes is guaranteed by HEP’s wholly-owned subsidiaries. HEP’s creditors have no recourse to our assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries.

The carrying amounts of long-term debt are as follows:



	September 30, 2019			December 31, 2018
	(In thousands)
HollyFrontier 5.875% Senior Notes
Principal	$	1,000,000		$	1,000,000
Unamortized discount and debt issuance costs	(6,635		)	(7,360		)
	993,365			992,640

HEP Credit Agreement	935,500			923,000

HEP 6% Senior Notes
Principal	500,000			500,000
Unamortized discount and debt issuance costs	(3,631		)	(4,100		)
	496,369			495,900

Total HEP long-term debt	1,431,869			1,418,900

Total long-term debt	$	2,425,234		$	2,411,540

The fair values of the senior notes are as follows:



	September 30, 2019		December 31, 2018
	(In thousands)

HollyFrontier senior notes	$	1,121,460	$	1,019,160

HEP senior notes	$	523,220	$	488,310

These fair values are based on a Level 2 input. See Note 6 for additional information on Level 2 inputs.

We capitalized interest attributable to construction projects of $0.7 million and $1.3 million for the three months ended September 30, 2019 and 2018, respectively, and $1.8 million and $3.3 million for the nine months ended September 30, 2019 and 2018, respectively.

NOTE 12: Derivative Instruments and Hedging Activities

Commodity Price Risk Management

Our primary market risk is commodity price risk. We are exposed to market risks related to the volatility in crude oil and refined products, as well as volatility in the price of natural gas used in our refining operations. We periodically enter into derivative contracts in the form of commodity price swaps, forward purchase and sales and futures contracts to mitigate price exposure with respect to our inventory positions, natural gas purchases, sales prices of refined products and crude oil costs.

Foreign Currency Risk Management

We are exposed to market risk related to the volatility in foreign currency exchange rates. We periodically enter into derivative contracts in the form of foreign exchange forward and foreign exchange swap contracts to mitigate the exposure associated with fluctuations on intercompany notes with our foreign subsidiaries that are not denominated in the U.S. dollar.

Accounting Hedges

We have swap contracts serving as cash flow hedges against price risk on forecasted purchases of natural gas and to lock in basis spread differentials on forecasted purchases of crude oil. We also periodically have forward sales contracts that lock in the prices of future sales of crude oil and refined product. These contracts have been designated as accounting hedges and are measured at fair value with offsetting adjustments (gains/losses) recorded directly to other comprehensive income. These fair value adjustments are later reclassified to earnings as the hedging instruments mature.

The following table presents the pre-tax effect on other comprehensive income (“OCI”) and earnings due to fair value adjustments and maturities of derivatives designated as hedging instruments under hedge accounting:



	Net Unrealized Gain (Loss) Recognized in OCI					Gain (Loss) Reclassified into Earnings
Derivatives Designated as Cash Flow Hedging Instruments	Three Months Ended September 30,					Income Statement Location	Three Months Ended September 30,
Derivatives Designated as Cash Flow Hedging Instruments	2019			2018		Income Statement Location	2019			2018
	(In thousands)
Commodity contracts	$	(7,562	)	$	5,792	Sales and other revenues	$	—		$	(1,422	)
						Cost of products sold	6,027			—
						Operating expenses	(454		)	(209		)
Total	$	(7,562	)	$	5,792		$	5,573		$	(1,631	)



	Net Unrealized Gain (Loss) Recognized in OCI				Gain (Loss) Reclassified into Earnings
Derivatives Designated as Cash Flow Hedging Instruments	Nine Months Ended September 30,				Income Statement Location	Nine Months Ended September 30,
Derivatives Designated as Cash Flow Hedging Instruments	2019		2018		Income Statement Location	2019			2018
	(In thousands)
Commodity contracts	$	372	$	1,796	Sales and other revenues	$	(1,799	)	$	(5,093	)
					Cost of products sold	15,323			—
					Operating expenses	(987		)	(945		)
Total	$	372	$	1,796		$	12,537		$	(6,038	)

Economic Hedges

We have commodity contracts including contracts to lock in basis spread differentials on forecasted purchases of crude oil, swap contracts to lock in the crack spread of WTI and gasoline, NYMEX futures contracts to lock in prices on forecasted purchases and sales of inventory and forward purchase and sell contracts that serve as economic hedges (derivatives used for risk management, but not designated as accounting hedges). We also have forward currency contracts to fix the rate of foreign currency. In addition, our catalyst financing arrangements discussed in Note 11 could require repayment under certain conditions based on the futures price of platinum, which is an embedded derivative. These contracts are measured at fair value with offsetting adjustments (gains/losses) recorded directly to income.

The following table presents the pre-tax effect on income due to maturities and fair value adjustments of our economic hedges:



	Gain (Loss) Recognized in Earnings
Derivatives Not Designated as Hedging Instruments	Income Statement Location	Three Months Ended September 30,						Nine Months Ended September 30,
Derivatives Not Designated as Hedging Instruments	Income Statement Location	2019			2018			2019			2018
		(In thousands)
Commodity contracts	Cost of products sold	$	8,640		$	(8,252	)	$	1,561		$	(20,580	)
	Interest expense	(1,720		)	—			(2,995		)	—
Foreign currency contracts	Gain on foreign currency transactions	5,713			(7,052		)	(8,983		)	18,504
	Total	$	12,633		$	(15,304	)	$	(10,417	)	$	(2,076	)

As of September 30, 2019, we have the following notional contract volumes related to outstanding derivative instruments:



		Notional Contract Volumes by Year of Maturity
	Total Outstanding Notional	2019	2020	2021	Unit of Measure
Derivatives Designated as Hedging Instruments
Natural gas price swaps - long	4,050,000	450,000	1,800,000	1,800,000	MMBTU
Crude oil price swaps (basis spread) - long	5,954,000	1,196,000	4,758,000	—	Barrels
Forward crude oil contracts - short	423,739	423,739	—	—	Barrels

Derivatives Not Designated as Hedging Instruments
NYMEX futures (WTI) - short	1,825,000	1,713,000	112,000	—	Barrels
Crude oil price swaps (basis spread) - long	1,464,000	—	1,464,000	—	Barrels
WTI and gasoline crack spread swaps - short	200,000	200,000	—	—	Barrels
Forward gasoline and diesel contracts - long	538,500	538,500	—	—	Barrels
Forward crude oil contracts - long	140,849	140,849	—	—	Barrels
Physical contracts - long	350,000	350,000	—	—	Barrels
Physical contracts - short	350,000	350,000	—	—	Barrels
Foreign currency forward contracts	434,443,896	114,213,501	320,230,395	—	U.S. dollar
Forward commodity contracts (platinum)	41,147	41,147	—	—	Troy ounces

The following table presents the fair value and balance sheet locations of our outstanding derivative instruments. These amounts are presented on a gross basis with offsetting balances that reconcile to a net asset or liability position in our consolidated balance sheets. We present on a net basis to reflect the net settlement of these positions in accordance with provisions of our master netting arrangements.



	Derivatives in Net Asset Position							Derivatives in Net Liability Position
	Gross Assets		Gross Liabilities Offset in Balance Sheet			Net Assets Recognized in Balance Sheet		Gross Liabilities		Gross Assets Offset in Balance Sheet			Net Liabilities Recognized in Balance Sheet
			(In thousands)
September 30, 2019
Derivatives designated as cash flow hedging instruments:
Commodity price swap contracts	$	13,182	$	(1,576	)	$	11,606	$	1,614	$	(500	)	$	1,114
Commodity forward contracts	—		—			—		258		—			258
	$	13,182	$	(1,576	)	$	11,606	$	1,872	$	(500	)	$	1,372

Derivatives not designated as cash flow hedging instruments:
Foreign currency forward contracts	$	2,511	$	—		$	2,511	$	17	$	—		$	17
NYMEX futures contracts	2,976		—			2,976		—		—			—
Commodity price swap contracts	6,401		—			6,401		—		(20		)	(20		)
Commodity forward contracts	1,453		—			1,453		1,109		—			1,109
	$	13,341	$	—		$	13,341	$	1,126	$	(20	)	$	1,106

Total net balance						$	24,947						$	2,478

Balance sheet classification:	Prepayment and other					$	23,295	Accrued liabilities					$	1,922
	Intangibles and other					1,652		Other long-term liabilities					556
						$	24,947						$	2,478



December 31, 2018
Derivatives designated as cash flow hedging instruments:
Commodity price swap contracts	$	11,790	$	(973	)	$	10,817	$	1,755	$	(799	)	$	956
	$	11,790	$	(973	)	$	10,817	$	1,755	$	(799	)	$	956

Derivatives not designated as cash flow hedging instruments:
Foreign currency forward contracts	$	25,956	$	—		$	25,956	$	—	$	—		$	—
NYMEX futures contracts	2,473		—			2,473		—		—			—
Commodity forward contracts	1,034		—			1,034		1,137		—			1,137
	$	29,463	$	—		$	29,463	$	1,137	$	—		$	1,137

Total net balance						$	40,280						$	2,093

Balance sheet classification:	Prepayment and other					$	37,982	Accrued liabilities					$	1,137
	Intangibles and other					2,298		Other long-term liabilities					956
						$	40,280						$	2,093

At September 30, 2019, we had a pre-tax net unrealized gain of $10.2 million classified in accumulated other comprehensive income that relates to all accounting hedges having contractual maturities through 2021. Assuming commodity prices remain unchanged, an unrealized gain of $10.3 million will be effectively transferred from accumulated other comprehensive income into the statement of income as the hedging instruments contractually mature over the next twelve-month period.


NOTE 13:	Equity

In September 2018, our Board of Directors approved a $1 billion share repurchase program, which replaced all existing share repurchase programs, authorizing us to repurchase common stock in the open market or through privately negotiated transactions. The timing and amount of stock repurchases will depend on market conditions and corporate, regulatory and other relevant considerations. This program may be discontinued at any time by the Board of Directors. As of September 30, 2019, we had remaining authorization to repurchase up to $313.2 million under this stock repurchase program. In addition, we are authorized by our Board of Directors to repurchase shares in an amount sufficient to offset shares issued under our compensation programs.

During the nine months ended September 30, 2019 and 2018, we withheld 5,359 and 12,593, respectively, shares of our common stock under the terms of stock-based compensation agreements to provide funds for the payment of payroll and income taxes due at the vesting of share-based awards.


NOTE 14:	Other Comprehensive Income

The components and allocated tax effects of other comprehensive income are as follows:



	Before-Tax			Tax Expense (Benefit)			After-Tax
	(In thousands)
Three Months Ended September 30, 2019
Net change in foreign currency translation adjustment	$	(9,311	)	$	(1,959	)	$	(7,352	)
Net unrealized loss on hedging instruments	(7,562		)	(1,929		)	(5,633		)
Other comprehensive loss attributable to HollyFrontier stockholders	$	(16,873	)	$	(3,888	)	$	(12,985	)

Three Months Ended September 30, 2018
Net change in foreign currency translation adjustment	$	8,325		$	1,756		$	6,569
Net unrealized gain on hedging instruments	5,792			1,478			4,314
Other comprehensive income attributable to HollyFrontier stockholders	$	14,117		$	3,234		$	10,883

Nine Months Ended September 30, 2019
Net change in foreign currency translation adjustment	$	4,212		$	896		$	3,316
Net unrealized gain on hedging instruments	372			94			278
Other comprehensive income attributable to HollyFrontier stockholders	$	4,584		$	990		$	3,594

Nine Months Ended September 30, 2018
Net change in foreign currency translation adjustment	$	(15,118	)	$	(3,130	)	$	(11,988	)
Net unrealized gain on hedging instruments	1,796			453			1,343
Other comprehensive loss attributable to HollyFrontier stockholders	$	(13,322	)	$	(2,677	)	$	(10,645	)

The following table presents the income statement line item effects for reclassifications out of accumulated other comprehensive income (“AOCI”):



AOCI Component	Gain (Loss) Reclassified From AOCI						Income Statement Line Item
	(In thousands)
	Three Months Ended September 30,
	2019			2018

Hedging instruments:
Commodity price swaps	$	—		$	(1,422	)	Sales and other revenues
	6,027			—			Cost of products sold
	(454		)	(209		)	Operating expenses
	5,573			(1,631		)
	1,421			(416		)	Income tax expense (benefit)
Total reclassifications for the period	$	4,152		$	(1,215	)	Net of tax

	Nine Months Ended September 30,
	2019			2018

Hedging instruments:
Commodity price swaps	$	(1,799	)	$	(5,093	)	Sales and other revenues
	15,323			—			Cost of products sold
	(987		)	(945		)	Operating expenses
	12,537			(6,038		)
	3,197			(1,540		)	Income tax expense (benefit)
Total reclassifications for the period	$	9,340		$	(4,498	)	Net of tax

Accumulated other comprehensive income in the equity section of our consolidated balance sheets includes:



	September 30, 2019			December 31, 2018
	(In thousands)
Foreign currency translation adjustment	$	(9,360	)	$	(12,676	)
Unrealized loss on pension obligation	(1,404		)	(1,404		)
Unrealized gain on post-retirement benefit obligations	20,358			20,358
Unrealized gain on hedging instruments	7,623			7,345
Accumulated other comprehensive income	$	17,217		$	13,623


NOTE 15:	Post-retirement Plans

Our net periodic pension expense consisted of the following components:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(In thousands)
Service cost - benefit earned during the period	$	1,209		$	1,093		$	3,605		$	3,337
Interest cost on projected benefit obligations	450			556			1,325			1,698
Expected return on plan assets	(822		)	(856		)	(2,441		)	(2,615		)
Amortization of loss	15			—			45			—
Net periodic pension expense	$	852		$	793		$	2,534		$	2,420

The expected long-term annual rates of return on plan assets are 5.00% and 2.20% for the PCLI and Sonneborn plans, respectively. These rates were used in measuring 2019 net periodic benefit costs.

The net periodic benefit credit of our post-retirement healthcare and other benefits plans consisted of the following components



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(In thousands)
Service cost – benefit earned during the period	$	387		$	411		$	1,161		$	1,238
Interest cost on projected benefit obligations	267			234			801			705
Amortization of prior service credit	(870		)	(870		)	(2,611		)	(2,611		)
Amortization of gain	(22		)	—			(66		)	—
Net periodic post-retirement credit	$	(238	)	$	(225	)	$	(715	)	$	(668	)

The components, other than service cost, of our net periodic pension expense and net periodic post-retirement credit are recorded in Other, net in our consolidated statements of income.

Sonneborn has various post-retirement benefit plans for employees in the United States and in the Netherlands.

The plans for Sonneborn employees in the Netherlands include a defined benefit pension plan which was frozen and all plan participants became inactive in 2016. The plan assets are in the form of a third-party insurance contract that is valued based on the assets held by the insurer and insures a value which approximates the accrued benefits related to the plan’s accumulated benefit obligation. A new multiemployer pension plan was established in 2016, which is accounted for as a defined contribution plan. Also, in 2016, a new plan was established to provide future indexation benefits to participants who had accrued benefits under the expiring arrangements. Such benefits are funded by Sonneborn Refined Products B.V.

The plans for Sonneborn employees in the United States include a post-retirement medical plan and a multiemployer plan for union employees. These plans are accounted for as defined contribution plans.


NOTE 16:	Contingencies

We are a party to various litigation and legal proceedings which we believe, based on advice of counsel, will not either individually or in the aggregate have a material adverse effect on our financial condition, results of operations or cash flows.

In March 2006, a subsidiary of ours sold the assets of Montana Refining Company under an Asset Purchase Agreement (“APA”). Calumet Montana Refining LLC, the current owner of the assets, submitted requests for reimbursement of approximately $20.0 million pursuant to contractual indemnity provisions under the APA for various costs incurred. Calumet also asserted claims related to environmental matters. We rejected all of the currently pending claims for payment, and selected issues were arbitrated in July 2018. In September 2018, the arbitration panel ruled on the selected issues and held that the APA places a number of important limitations on claims advanced by Calumet. In a ruling dated August 16, 2019, as amended on October 3, 2019, the arbitration panel determined that, with regard to all claims asserted by Calumet, we do not owe any amounts to Calumet. Accordingly, during the third quarter of 2019, estimated costs previously accrued for this matter were reversed into income.

We filed a business interruption claim with our insurance carriers related to a fire at our Woods Cross Refinery that occurred in the first quarter 2018. As of September 30, 2019, we have collected interim payments totaling $56.0 million, but have not reached a final agreement regarding the amounts owed to us pursuant to our business interruption coverage. We have accounted for this claim as a gain contingency and accordingly, we have deferred revenue recognition for the interim payments received until such time that uncertainties regarding the amounts owed to us have been resolved.


NOTE 17:	Segment Information

Our operations are organized into three reportable segments, Refining, Lubricants and Specialty Products and HEP. Our operations that are not included in the Refining, Lubricants and Specialty Products and HEP segments are included in Corporate and Other. Intersegment transactions are eliminated in our consolidated financial statements and are included in Eliminations. Corporate and

Other and Eliminations are aggregated and presented under Corporate, Other and Eliminations column.

The Refining segment represents the operations of the El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries and HFC Asphalt (aggregated as a reportable segment). Refining activities involve the purchase and refining of crude oil and wholesale and branded marketing of refined products, such as gasoline, diesel fuel and jet fuel. These petroleum products are primarily marketed in the Mid-Continent, Southwest and Rocky Mountain regions of the United States. HFC Asphalt operates various asphalt terminals in Arizona, New Mexico and Oklahoma.

The Lubricants and Specialty Products segment involves PCLI’s production operations, located in Mississauga, Ontario, that includes lubricant products such as base oils, white oils, specialty products and finished lubricants, and the operations of our Petro- Canada Lubricants business that includes the marketing of products to both retail and wholesale outlets through a global sales network with locations in Canada, the United States, Europe and China. Additionally, the Lubricants and Specialty Products segment includes specialty lubricant products produced at our Tulsa Refineries that are marketed throughout North America and are distributed in Central and South America. Also, effective with our acquisition that closed August 1, 2018, the Lubricants and Specialty Products segment includes Red Giant Oil, one of the largest suppliers of locomotive engine oil in North America, and effective with our acquisition that closed February 1, 2019, includes Sonneborn, a producer of specialty hydrocarbon chemicals such as white oils, petrolatums and waxes with manufacturing facilities in the United States and Europe.

The HEP segment includes all of the operations of HEP, which owns and operates logistics and refinery assets consisting of petroleum product and crude oil pipelines, terminals, tankage, loading rack facilities and processing units in the Mid-Continent, Southwest and Rocky Mountain regions of the United States. As of September 30, 2019, the HEP segment also includes a 75% ownership interest in UNEV (a consolidated subsidiary of HEP) and 50% ownership interests in each of the Osage Pipeline and the Cheyenne Pipeline. Revenues from the HEP segment are earned through transactions with unaffiliated parties for pipeline transportation, rental and terminalling operations as well as revenues relating to pipeline transportation services provided for our refining operations. Due to certain basis differences, our reported amounts for the HEP segment may not agree to amounts reported in HEP’s periodic public filings.

The accounting policies for our segments are the same as those described in the summary of significant accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2018.



	Refining		Lubricants and Specialty Products		HEP		Corporate, Other and Eliminations			Consolidated Total
	(In thousands)
Three Months Ended September 30, 2019
Sales and other revenues:
Revenues from external customers	$	3,865,399	$	529,561	$	29,868	$	—		$	4,424,828
Intersegment revenues	81,571		8,157		106,027		(195,755		)	—
	$	3,946,970	$	537,718	$	135,895	$	(195,755	)	$	4,424,828
Cost of products sold (exclusive of lower of cost or market inventory)	$	3,177,167	$	397,926	$	—	$	(171,326	)	$	3,403,767
Lower of cost or market inventory valuation adjustment	$	34,062	$	—	$	—	$	—		$	34,062
Operating expenses	$	276,869	$	57,974	$	44,924	$	(34,189	)	$	345,578
Selling, general and administrative expenses	$	31,707	$	43,875	$	2,714	$	9,330		$	87,626
Depreciation and amortization	$	76,765	$	22,700	$	24,121	$	3,430		$	127,016
Income (loss) from operations	$	350,400	$	15,243	$	64,136	$	(3,000	)	$	426,779
Earnings of equity method investments	$	—	$	—	$	1,334	$	—		$	1,334
Capital expenditures	$	53,506	$	8,697	$	6,076	$	6,310		$	74,589

Three Months Ended September 30, 2018
Sales and other revenues:
Revenues from external customers	$	4,270,835	$	474,260	$	25,596	$	108		$	4,770,799
Intersegment revenues	101,334		1,626		100,188		(203,148		)	—
	$	4,372,169	$	475,886	$	125,784	$	(203,040	)	$	4,770,799
Cost of products sold (exclusive of lower of cost or market inventory)	$	3,572,593	$	359,742	$	—	$	(180,101	)	$	3,752,234
Lower of cost or market inventory valuation adjustment	$	17,837	$	—	$	—	$	—		$	17,837
Operating expenses	$	262,010	$	40,288	$	35,995	$	(21,097	)	$	317,196
Selling, general and administrative expenses	$	30,394	$	33,514	$	2,498	$	4,724		$	71,130
Depreciation and amortization	$	70,793	$	11,139	$	24,367	$	2,586		$	108,885
Income (loss) from operations	$	418,542	$	31,203	$	62,924	$	(9,152	)	$	503,517
Earnings of equity method investments	$	—	$	—	$	1,114	$	—		$	1,114
Capital expenditures	$	47,088	$	8,094	$	9,541	$	5,214		$	69,937



	Refining			Lubricants and Specialty Products			HEP		Corporate, Other and Eliminations			Consolidated Total
	(In thousands)
Nine Months Ended September 30, 2019
Sales and other revenues:
Revenues from external customers	$	11,446,841		$	1,568,241		$	89,388	$	220		$	13,104,690
Intersegment revenues	244,799			8,157			311,755		(564,711		)	—
	$	11,691,640		$	1,576,398		$	401,143	$	(564,491	)	$	13,104,690
Cost of products sold (exclusive of lower of cost or market inventory)	$	9,598,539		$	1,202,296		$	—	$	(492,979	)	$	10,307,856
Lower of cost or market inventory valuation adjustment	$	(150,483	)	$	—		$	—	$	—		$	(150,483	)
Operating expenses	$	794,081		$	170,655		$	123,045	$	(77,359	)	$	1,010,422
Selling, general and administrative expenses	$	88,322		$	125,681		$	7,322	$	39,652		$	260,977
Depreciation and amortization	$	227,405		$	65,891		$	72,192	$	9,857		$	375,345
Goodwill impairment	$	—		$	152,712		$	—	$	—		$	152,712
Income (loss) from operations	$	1,133,776		$	(140,837	)	$	198,584	$	(43,662	)	$	1,147,861
Earnings of equity method investments	$	—		$	—		$	5,217	$	—		$	5,217
Capital expenditures	$	129,167		$	25,887		$	23,828	$	16,175		$	195,057

Nine Months Ended September 30, 2018
Sales and other revenues:
Revenues from external customers	$	11,915,797		$	1,376,531		$	77,799	$	335		$	13,370,462
Intersegment revenues	284,538			11,884			295,629		(592,051		)	—
	$	12,200,335		$	1,388,415		$	373,428	$	(591,716	)	$	13,370,462
Cost of products sold (exclusive of lower of cost or market inventory)	$	10,179,509		$	1,040,414		$	—	$	(524,648	)	$	10,695,275
Lower of cost or market inventory valuation adjustment	$	(192,927	)	$	—		$	—	$	—		$	(192,927	)
Operating expenses	$	764,415		$	125,101		$	106,731	$	(62,548	)	$	933,699
Selling, general and administrative expenses	$	82,966		$	99,425		$	8,293	$	13,785		$	204,469
Depreciation and amortization	$	210,957		$	30,023		$	74,117	$	8,508		$	323,605
Income (loss) from operations	$	1,155,415		$	93,452		$	184,287	$	(26,813	)	$	1,406,341
Earnings of equity method investments	$	—		$	—		$	4,127	$	—		$	4,127
Capital expenditures	$	132,050		$	23,138		$	41,111	$	12,779		$	209,078



	Refining		Lubricants and Specialty Products		HEP		Corporate, Other and Eliminations		Consolidated Total
	(In thousands)
September 30, 2019
Cash and cash equivalents	$	21,443	$	170,116	$	7,469	$	782,828	$	981,856
Total assets	$	7,321,741	$	2,139,092	$	2,089,110	$	641,385	$	12,191,328
Long-term debt	$	—	$	—	$	1,431,869	$	993,365	$	2,425,234

December 31, 2018
Cash and cash equivalents	$	7,236	$	80,931	$	3,045	$	1,063,540	$	1,154,752
Total assets	$	6,465,155	$	1,506,209	$	2,142,027	$	881,210	$	10,994,601
Long-term debt	$	—	$	—	$	1,418,900	$	992,640	$	2,411,540

Table of Content


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Item 2 contains “forward-looking” statements. See “Forward-Looking Statements” at the beginning of Part I of this Quarterly Report on Form 10-Q. References herein to HollyFrontier Corporation (“HollyFrontier”) include HollyFrontier and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s (“SEC”) “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words “we,” “our,” “ours” and “us” refer only to HollyFrontier and its consolidated subsidiaries or to HollyFrontier or an individual subsidiary and not to any other person with certain exceptions. Generally, the words “we,” “our,” “ours” and “us” include Holly Energy Partners, L.P. (“HEP”) and its subsidiaries as consolidated subsidiaries of HollyFrontier, unless when used in disclosures of transactions or obligations between HEP and HollyFrontier or its other subsidiaries. This document contains certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of HollyFrontier. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.

OVERVIEW

We are an independent petroleum refiner and marketer that produces high-value light products such as gasoline, diesel fuel, jet fuel and other specialty products. We own and operate refineries located in El Dorado, Kansas (the “El Dorado Refinery”), Tulsa, Oklahoma (the “Tulsa Refineries”), which comprise two production facilities, the Tulsa West and East facilities, Artesia, New Mexico, which operates in conjunction with crude, vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the “Navajo Refinery”), Cheyenne, Wyoming (the “Cheyenne Refinery”) and Woods Cross, Utah (the “Woods Cross Refinery”). We market our refined products principally in the Southwest United States, the Rocky Mountains extending into the Pacific Northwest and in other neighboring Plains states. In addition, we produce base oils and other specialized lubricants in the United States, Canada and the Netherlands, and export products to more than 80 countries. We also own a 57% limited partner interest and a non-economic general partner interest in HEP, a master limited partnership that provides petroleum product and crude oil transportation, terminalling, storage and throughput services to the petroleum industry, including HollyFrontier Corporation subsidiaries.

On November 12, 2018, we entered into an equity purchase agreement to acquire 100% of the issued and outstanding capital stock of Sonneborn US Holdings Inc. and 100% of the membership rights in Sonneborn Coöperatief U.A. (collectively, “Sonneborn”). The acquisition closed on February 1, 2019. Cash consideration paid was $662.7 million. Sonneborn is a producer of specialty hydrocarbon chemicals such as white oils, petrolatums and waxes with manufacturing facilities in the United States and Europe.

On July 10, 2018, we entered into a definitive agreement to acquire Red Giant Oil Company LLC (“Red Giant Oil”), a privately-owned lubricants company. The acquisition closed on August 1, 2018. Cash consideration paid was $54.2 million. Red Giant Oil is one of the largest suppliers of locomotive engine oil in North America and is headquartered in Council Bluffs, Iowa with storage and distribution facilities in Iowa, Kansas, Utah and Wyoming, along with a blending and packaging facility in Texas.

For the three months ended September 30, 2019, net income attributable to HollyFrontier stockholders was $261.8 million compared to $342.5 million for the three months ended September 30, 2018. For the nine months ended September 30, 2019, net income attributable to HollyFrontier stockholders was $711.8 million compared to $956.1 million for the nine months ended September 30, 2018. Overall gross refining margins per produced barrel sold for the three months ended September 30, 2019 decreased 11% over the same period of 2018 due to a decrease in the average per barrel sold sales price during the current year quarter, partially offset by decreased crude oil and feedstock prices. Included in our financial results for the third quarter was an inventory reserve adjustment that decreased pre-tax earnings by $34.1 million.

Pursuant to the 2007 Energy Independence and Security Act, the Environmental Protection Agency (“EPA”) promulgated the Renewable Fuel Standard (“RFS”) regulations, which increased the 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 renewable identification numbers (“RINs”), in lieu of such blending. Compliance with RFS significantly increases our cost of products sold, with RINs costs totaling $8.4 million for the three months ended September 30, 2019, which is net of the $36.6 million cost reduction resulting from small refinery RINs waivers granted by the EPA in 2019 as described in Note 9 “Inventories” in the Notes to Consolidated Financial Statements.

Table of Content

OUTLOOK

For the fourth quarter of 2019, we expect crack spreads to experience typical seasonal weakness as demand for refined products softens. Operationally, we are currently undergoing turnarounds at our El Dorado and Cheyenne refineries, and we expect to run between 380,000 to 390,000 barrels per day of crude oil.

In our Lubricants and Specialty Products segment, we expect the Rack Forward business to perform well based on steady demand for finished products. We expect this to be offset somewhat by oversupply in the base oil markets which will depress Rack Back earnings in the fourth quarter.

At HEP, we anticipate typical seasonal strengthening in the fourth quarter around the UNEV pipeline to drive higher sequential earnings. For 2019 and through 2020, HEP expects to hold the quarterly distribution constant at $0.6725 per unit, or $2.69 on an annualized basis, while maintaining a distribution coverage ratio of 1.0x. HEP’s 2020 distribution guidance reflects growth from contractual tariff escalators and the recently announced Cushing Connect joint venture, offset by lower revenues from Delek and elevated maintenance capital expenditures due to one-time events.

A more detailed discussion of our financial and operating results for the three and nine months ended September 30, 2019 and 2018 is presented in the following sections.

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RESULTS OF OPERATIONS

Financial Data



	Three Months Ended September 30,						Change from 2018
	2019			2018			Change			Percent
	(In thousands, except per share data)
Sales and other revenues	$	4,424,828		$	4,770,799		$	(345,971	)	(7	)%
Operating costs and expenses:
Cost of products sold (exclusive of depreciation and amortization):
Cost of products sold (exclusive of lower of cost or market inventory valuation adjustment)	3,403,767			3,752,234			(348,467		)	(9	)
Lower of cost or market inventory valuation adjustment	34,062			17,837			16,225			91
	3,437,829			3,770,071			(332,242		)	(9	)
Operating expenses (exclusive of depreciation and amortization)	345,578			317,196			28,382			9
Selling, general and administrative expenses (exclusive of depreciation and amortization)	87,626			71,130			16,496			23
Depreciation and amortization	127,016			108,885			18,131			17
Total operating costs and expenses	3,998,049			4,267,282			(269,233		)	(6	)
Income from operations	426,779			503,517			(76,738		)	(15	)
Other income (expense):
Earnings of equity method investments	1,334			1,114			220			20
Interest income	6,164			5,136			1,028			20
Interest expense	(36,027		)	(32,399		)	(3,628		)	11
Gain on foreign currency transactions	395			281			114			41
Other, net	2,356			741			1,615			218
	(25,778		)	(25,127		)	(651		)	3
Income before income taxes	401,001			478,390			(77,389		)	(16	)
Income tax expense	103,021			116,258			(13,237		)	(11	)
Net income	297,980			362,132			(64,152		)	(18	)
Less net income attributable to noncontrolling interest	36,167			19,666			16,501			84
Net income attributable to HollyFrontier stockholders	$	261,813		$	342,466		$	(80,653	)	(24	)%
Earnings per share attributable to HollyFrontier stockholders:
Basic	$	1.60		$	1.95		$	(0.35	)	(18	)%
Diluted	$	1.58		$	1.93		$	(0.35	)	(18	)%
Cash dividends declared per common share	$	0.33		$	0.33		$	—		—	%
Average number of common shares outstanding:
Basic	163,676			175,097			(11,421		)	(7	)%
Diluted	165,011			176,927			(11,916		)	(7	)%

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	Nine Months Ended September 30,						Change from 2018
	2019			2018			Change			Percent
	(In thousands, except per share data)
Sales and other revenues	$	13,104,690		$	13,370,462		$	(265,772	)	(2	)%
Operating costs and expenses:
Cost of products sold (exclusive of depreciation and amortization):
Cost of products sold (exclusive of lower of cost or market inventory valuation adjustment)	10,307,856			10,695,275			(387,419		)	(4	)
Lower of cost or market inventory valuation adjustment	(150,483		)	(192,927		)	42,444			(22	)
	10,157,373			10,502,348			(344,975		)	(3	)
Operating expenses (exclusive of depreciation and amortization)	1,010,422			933,699			76,723			8
Selling, general and administrative expenses (exclusive of depreciation and amortization)	260,977			204,469			56,508			28
Depreciation and amortization	375,345			323,605			51,740			16
Goodwill impairment	152,712			—			152,712			—
Total operating costs and expenses	11,956,829			11,964,121			(7,292		)	—
Income from operations	1,147,861			1,406,341			(258,480		)	(18	)
Other income (expense):
Earnings of equity method investments	5,217			4,127			1,090			26
Interest income	17,127			10,660			6,467			61
Interest expense	(106,938		)	(97,446		)	(9,492		)	10
Gain on foreign currency transactions	4,873			5,516			(643		)	(12	)
Other, net	3,005			3,451			(446		)	(13	)
	(76,716		)	(73,692		)	(3,024		)	4
Income before income taxes	1,071,145			1,332,649			(261,504		)	(20	)
Income tax expense	279,862			318,742			(38,880		)	(12	)
Net income	791,283			1,013,907			(222,624		)	(22	)
Less net income attributable to noncontrolling interest	79,500			57,843			21,657			37
Net income attributable to HollyFrontier stockholders	$	711,783		$	956,064		$	(244,281	)	(26	)%
Earnings per share attributable to HollyFrontier stockholders:
Basic	$	4.23		$	5.42		$	(1.19	)	(22	)%
Diluted	$	4.20		$	5.37		$	(1.17	)	(22	)%
Cash dividends declared per common share	$	0.99		$	0.99		$	—		—	%
Average number of common shares outstanding:
Basic	167,935			175,865			(7,930		)	(5	)%
Diluted	169,125			177,557			(8,432		)	(5	)%

Balance Sheet Data



	September 30, 2019		December 31, 2018
	(Unaudited)
	(In thousands)
Cash and cash equivalents	$	981,856	$	1,154,752
Working capital	$	1,827,420	$	2,128,224
Total assets	$	12,191,328	$	10,994,601
Long-term debt	$	2,425,234	$	2,411,540
Total equity	$	6,541,363	$	6,459,059

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Other Financial Data



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(In thousands)
Net cash provided by operating activities	$	441,854		$	401,752		$	1,411,404		$	1,129,897
Net cash used for investing activities	$	(74,455	)	$	(113,089	)	$	(856,764	)	$	(259,167	)
Net cash used for financing activities	$	(299,473	)	$	(193,701	)	$	(729,337	)	$	(423,416	)
Capital expenditures	$	74,588		$	69,937		$	195,057		$	209,078
EBITDA ⁽¹⁾	$	521,713		$	594,872		$	1,456,801		$	1,685,197

(1)

Earnings before interest, taxes, depreciation and amortization, which we refer to as “EBITDA,” is calculated as net income attributable to HollyFrontier stockholders plus (i) interest expense, net of interest income, (ii) income tax provision, and (iii) depreciation and amortization. EBITDA is not a calculation provided for under GAAP; however, the amounts included in the EBITDA calculation are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies. EBITDA is presented here because it is a widely used financial indicator used by investors and analysts to measure performance. EBITDA is also used by our management for internal analysis and as a basis for financial covenants. EBITDA presented above is reconciled to net income under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.

Segment Operating Data

Our operations are organized into three reportable segments, Refining, Lubricants and Specialty Products and HEP. See Note 17 “Segment Information” in the Notes to Consolidated Financial Statements for additional information on our reportable segments.

Refining Segment Operating Data

Our refinery operations include the El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries. The following tables set forth information, including non-GAAP performance measures, about our consolidated refinery operations. The cost of products and refinery gross and net operating margins do not include the non-cash effects of lower of cost or market inventory valuation adjustments and depreciation and amortization. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Mid-Continent Region (El Dorado and Tulsa Refineries)
Crude charge (BPD) ⁽¹⁾	294,380			262,550			257,590			260,150
Refinery throughput (BPD) ⁽²⁾	307,720			276,560			272,440			274,330
Sales of produced refined products (BPD) ⁽³⁾	290,930			255,840			260,780			259,890
Refinery utilization ⁽⁴⁾	113.2		%	101.0		%	99.1		%	100.1		%

Average per produced barrel ⁽⁵⁾
Refinery gross margin	$	14.61		$	16.43		$	14.55		$	12.99
Refinery operating expenses ⁽⁶⁾	5.05			5.48			5.48			5.18
Net operating margin	$	9.56		$	10.95		$	9.07		$	7.81

Refinery operating expenses per throughput barrel ⁽⁷⁾	$	4.77		$	5.07		$	5.25		$	4.90

Feedstocks:
Sweet crude oil	59		%	59		%	56		%	54		%
Sour crude oil	21		%	21		%	23		%	24		%
Heavy sour crude oil	16		%	15		%	16		%	17		%
Other feedstocks and blends	4		%	5		%	5		%	5		%
Total	100		%	100		%	100		%	100		%

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Mid-Continent Region (El Dorado and Tulsa Refineries)
Sales of produced refined products:
Gasolines	49	%	49	%	51	%	51	%
Diesel fuels	34	%	34	%	32	%	33	%
Jet fuels	6	%	6	%	7	%	6	%
Fuel oil	1	%	1	%	1	%	1	%
Asphalt	4	%	4	%	3	%	3	%
Base oils	4	%	4	%	4	%	4	%
LPG and other	2	%	2	%	2	%	2	%
Total	100	%	100	%	100	%	100	%



Southwest Region (Navajo Refinery)
Crude charge (BPD) ⁽¹⁾	106,860			109,560			107,330			109,200
Refinery throughput (BPD) ⁽²⁾	117,250			117,880			117,660			118,300
Sales of produced refined products (BPD) ⁽³⁾	116,890			122,210			120,760			120,900
Refinery utilization ⁽⁴⁾	106.9		%	109.6		%	107.3		%	109.2		%

Average per produced barrel ⁽⁵⁾
Refinery gross margin	$	18.61		$	22.60		$	19.35		$	17.84
Refinery operating expenses ⁽⁶⁾	5.25			4.53			4.90			4.63
Net operating margin	$	13.36		$	18.07		$	14.45		$	13.21

Refinery operating expenses per throughput barrel ⁽⁷⁾	$	5.23		$	4.69		$	5.03		$	4.73

Feedstocks:
Sweet crude oil	22		%	28		%	21		%	31		%
Sour crude oil	69		%	65		%	70		%	61		%
Other feedstocks and blends	9		%	7		%	9		%	8		%
Total	100		%	100		%	100		%	100		%

Sales of produced refined products:
Gasolines	50		%	49		%	51		%	50		%
Diesel fuels	40		%	41		%	39		%	40		%
Fuel oil	3		%	3		%	3		%	3		%
Asphalt	5		%	5		%	5		%	4		%
LPG and other	2		%	2		%	2		%	3		%
Total	100		%	100		%	100		%	100		%



Rocky Mountain Region (Cheyenne and Woods Cross Refineries)
Crude charge (BPD) ⁽¹⁾	74,790			69,880			78,530			71,000
Refinery throughput (BPD) ⁽²⁾	81,830			76,120			85,300			78,410
Sales of produced refined products (BPD) ⁽³⁾	77,680			69,720			77,890			74,850
Refinery utilization ⁽⁴⁾	77.1		%	72.0		%	81.0		%	73.2		%

Average per produced barrel ⁽⁶⁾
Refinery gross margin ⁽⁸⁾	$	24.97		$	24.75		$	19.73		$	24.95
Refinery operating expenses ⁽⁹⁾	11.95			12.80			11.39			11.97
Net operating margin ⁽⁸⁾	$	13.02		$	11.95		$	8.34		$	12.98

Refinery operating expenses per throughput barrel ⁽¹⁰⁾	$	11.34		$	11.72		$	10.40		$	11.42

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Rocky Mountain Region (Cheyenne and Woods Cross Refineries)
Feedstocks:
Sweet crude oil	38	%	24	%	36	%	25	%
Heavy sour crude oil	30	%	44	%	33	%	44	%
Black wax crude oil	23	%	24	%	23	%	22	%
Other feedstocks and blends	9	%	8	%	8	%	9	%
Total	100	%	100	%	100	%	100	%

Sales of produced refined products:
Gasolines	54	%	54	%	53	%	56	%
Diesel fuels	32	%	34	%	34	%	33	%
Fuel oil	4	%	2	%	4	%	3	%
Asphalt	5	%	7	%	5	%	5	%
LPG and other	5	%	3	%	4	%	3	%
Total	100	%	100	%	100	%	100	%



Consolidated
Crude charge (BPD) ⁽¹⁾	476,030			441,990			443,450			440,350
Refinery throughput (BPD) ⁽²⁾	506,800			470,560			475,400			471,040
Sales of produced refined products (BPD) ⁽³⁾	485,500			447,770			459,440			455,640
Refinery utilization ⁽⁴⁾	104.2		%	96.7		%	97.0		%	96.4		%

Average per produced barrel ⁽⁵⁾
Refinery gross margin	$	17.23		$	19.41		$	16.69		$	16.25
Refinery operating expenses ⁽⁶⁾	6.20			6.36			6.33			6.15
Net operating margin	$	11.03		$	13.05		$	10.36		$	10.10

Refinery operating expenses per throughput barrel ⁽⁷⁾	$	5.94		$	6.05		$	6.12		$	5.94

Feedstocks:
Sweet crude oil	47		%	45		%	44		%	43		%
Sour crude oil	29		%	29		%	30		%	30		%
Heavy sour crude oil	14		%	16		%	15		%	17		%
Black wax crude oil	4		%	4		%	4		%	4		%
Other feedstocks and blends	6		%	6		%	7		%	6		%
Total	100		%	100		%	100		%	100		%



Sales of produced refined products:
Gasolines	50	%	50	%	51	%	52	%
Diesel fuels	35	%	36	%	35	%	35	%
Jet fuels	4	%	3	%	4	%	3	%
Fuel oil	2	%	2	%	2	%	2	%
Asphalt	4	%	5	%	4	%	4	%
Base oils	2	%	2	%	2	%	2	%
LPG and other	3	%	2	%	2	%	2	%
Total	100	%	100	%	100	%	100	%


(1)	Crude charge represents the barrels per day of crude oil processed at our refineries.


(2)	Refinery throughput represents the barrels per day of crude and other refinery feedstocks input to the crude units and other conversion units at our refineries.


(3)	Represents barrels sold of refined products produced at our refineries (including HFC Asphalt) and does not include volumes

of refined products purchased for resale or volumes of excess crude oil sold.


(4)	Represents crude charge divided by total crude capacity (BPSD). Our consolidated crude capacity is 457,000 BPSD.


(5)	Represents average amount per produced barrel sold, which is a non-GAAP measure. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.

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(6)	Represents total refining segment operating expenses, exclusive of depreciation and amortization, divided by sales volumes

of refined products produced at our refineries.


(7)	Represents total refining segment operating expenses, exclusive of depreciation and amortization, divided by refinery throughput.

Lubricants and Specialty Products Operating Data

The following table sets forth information about our lubricants and specialty products operations.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Lubricants and Specialty Products
Throughput (BPD)	23,190		21,410		19,920		20,530
Sales of produced refined products (BPD)	36,160		31,970		34,740		21,340

Sales of produced refined products:
Finished products	50	%	49	%	50	%	48	%
Base oils	24	%	28	%	27	%	31	%
Other	26	%	23	%	23	%	21	%
Total	100	%	100	%	100	%	100	%

Supplemental financial data attributable to our Lubricants and Specialty Products segment is presented below.



	Rack Back ⁽¹⁾			Rack Forward ⁽²⁾		Eliminations ⁽³⁾			Total Lubricants and Specialty Products
	(In thousands)
Three months ended September 30, 2019
Sales and other revenues	$	196,355		$	477,261	$	(135,898	)	$	537,718
Cost of products sold	$	175,976		$	357,848	$	(135,898	)	$	397,926
Operating expenses	$	27,825		$	30,149	$	—		$	57,974
Selling, general and administrative expenses	$	5,862		$	38,013	$	—		$	43,875
Depreciation and amortization	$	11,390		$	11,310	$	—		$	22,700
Income (loss) from operations	$	(24,698	)	$	39,941	$	—		$	15,243

Three months ended September 30, 2018
Sales and other revenues	$	197,226		$	424,386	$	(145,726	)	$	475,886
Cost of products sold	$	177,748		$	327,720	$	(145,726	)	$	359,742
Operating expenses	$	26,748		$	13,540	$	—		$	40,288
Selling, general and administrative expenses	$	7,439		$	26,075	$	—		$	33,514
Depreciation and amortization	$	6,345		$	4,794	$	—		$	11,139
Income (loss) from operations	$	(21,054	)	$	52,257	$	—		$	31,203

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	Rack Back ⁽¹⁾			Rack Forward ⁽²⁾		Eliminations ⁽³⁾			Total Lubricants and Specialty Products
	(In thousands)
Nine months ended September 30, 2019
Sales and other revenues	$	486,035		$	1,428,786	$	(338,423	)	$	1,576,398
Cost of products sold	$	453,519		$	1,087,200	$	(338,423	)	$	1,202,296
Operating expenses	$	87,970		$	82,685	$	—		$	170,655
Selling, general and administrative expenses	$	25,707		$	99,974	$	—		$	125,681
Depreciation and amortization	$	32,991		$	32,900	$	—		$	65,891
Goodwill impairment ⁽⁴⁾	$	152,712		$	—	$	—		$	152,712
Income (loss) from operations	$	(266,864	)	$	126,027	$	—		$	(140,837	)

Nine months ended September 30, 2018
Sales and other revenues	$	546,300		$	1,248,886	$	(406,771	)	$	1,388,415
Cost of products sold	$	482,842		$	964,343	$	(406,771	)	$	1,040,414
Operating expenses	$	82,729		$	42,372	$	—		$	125,101
Selling, general and administrative expenses	$	22,146		$	77,279	$	—		$	99,425
Depreciation and amortization	$	17,986		$	12,037	$	—		$	30,023
Income (loss) from operations	$	(59,403	)	$	152,855	$	—		$	93,452

(1) Rack back consists of our PCLI base oil production activities, by-product sales to third parties and intra-segment base oil sales to rack forward.

(2) Rack forward activities include the purchase of base oils from rack back and the blending, packaging, marketing and distribution and sales of finished lubricants and specialty products to third parties.

(3) Intra-segment sales of rack back produced base oils to rack forward are eliminated under the “Eliminations” column.

(4) During the three months ended June 30, 2019, a goodwill impairment charge of $152.7 million was recorded in the PCLI reporting unit within the Lubricants and Specialty Products segment. We have separately allocated this charge for purposes of management’s discussion and analysis presentation of Rack Back and Rack Forward results entirely to Rack Back.

Results of Operations – Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Summary

Net income attributable to HollyFrontier stockholders for the three months ended September 30, 2019 was $261.8 million ($1.60 per basic and $1.58 per diluted share), a $80.7 million decrease compared to net income of $342.5 million ($1.95 per basic and $1.93 per diluted share) for the three months ended September 30, 2018. Net income decreased due principally to lower gross refining margins offset by higher refining segment sales volumes. For the three months ended September 30, 2019, lower of cost or market inventory reserve adjustments decreased pre-tax earnings by $34.1 million compared to a decrease of $17.8 million for the three months ended September 30, 2018. Refinery gross margins for the three months ended September 30, 2019 decreased to $17.23 per barrel sold from $19.41 for the three months ended September 30, 2018. During the three months ended September 30, 2019, our Cheyenne Refinery and Woods Cross Refinery were each granted a one-year small refinery exemption from the EPA for the 2018 calendar year, at which time we recorded a total $36.6 million reduction to cost of products sold.

Sales and Other Revenues

Sales and other revenues decreased 7% from $4,770.8 million for the three months ended September 30, 2018 to $4,424.8 million for the three months ended September 30, 2019 due to a year-over-year decrease in third quarter sales prices offset by higher refined product sales volumes. Sales and other revenues for the three months ended September 30, 2019 and 2018 included $29.9 million and $25.6 million, respectively, in HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties. Additionally, sales and other revenues included $529.6 million and $474.3 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the three months ended September 30, 2019 and 2018, respectively. Sonneborn contributed $88.1 million in sales and other revenues for the three months ended September 30, 2019.

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Cost of Products Sold

Total cost of products sold decreased 9% from $3,770.1 million for the three months ended September 30, 2018 to $3,437.8 million for the three months ended September 30, 2019, due principally to lower crude oil costs, partially offset by higher refined product sales volumes. Additionally during the third quarter of 2019, we recognized a lower of cost or market inventory valuation charge of $34.1 million compared to $17.8 million for the same period of 2018, resulting in a new $209.7 million inventory reserve at September 30, 2019. The reserve at September 30, 2019 is based on market conditions and prices at that time. Current period cost of products sold includes $48.4 million in costs attributable to our Sonneborn operations. During the third quarter of 2019, we recorded a $36.6 million RINs cost reduction as a result of our Cheyenne Refinery and Woods Cross Refinery small refinery exemptions.

Gross Refinery Margins

Gross refinery margin per barrel sold decreased 11% from $19.41 for the three months ended September 30, 2018 to $17.23 for the three months ended September 30, 2019. This was due to the effects of a decrease in the average per barrel sold sales price during the current year quarter, partially offset by decreased crude oil and feedstock prices. Gross refinery margin does not include the non-cash effects of lower of cost or market inventory valuation adjustments or depreciation and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q for a reconciliation to the income statement of sale prices of products sold and cost of products purchased.

Operating Expenses

Operating expenses, exclusive of depreciation and amortization, increased 9% from $317.2 million for the three months ended September 30, 2018 to $345.6 million for the three months ended September 30, 2019 due principally to higher repair and maintenance costs. Current period operating expenses include $15.2 million in costs attributable to our Sonneborn operations.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 23% from $71.1 million for the three months ended September 30, 2018 to $87.6 million for the three months ended September 30, 2019 due principally to higher legal and professional fees and salary costs. Current period selling, general and administrative expenses include $7.9 million in costs attributable to our Sonneborn operations. Additionally, direct integration and regulatory costs of our recently acquired Sonneborn operations were $3.9 million for the three months ended September 30, 2019.

Depreciation and Amortization Expenses

Depreciation and amortization increased 17% from $108.9 million for the three months ended September 30, 2018 to $127.0 million for the three months ended September 30, 2019. This increase was due principally to depreciation and amortization attributable to capitalized improvement projects and capitalized refinery turnaround costs. Current period depreciation and amortization expenses include $9.1 million in costs attributable to our Sonneborn operations.

Interest Income

Interest income for the three months ended September 30, 2019 was $6.2 million compared to $5.1 million for the three months ended September 30, 2018. This increase was due to higher average cash balances on hand during the current year quarter.

Interest Expense

Interest expense was $36.0 million for the three months ended September 30, 2019 compared to $32.4 million for the three months ended September 30, 2018. This increase was due to interest attributable to higher HEP debt levels during the current year quarter relative to the same period of 2018. For the three months ended September 30, 2019 and 2018, interest expense included $18.8 million and $18.0 million, respectively, in interest costs attributable to HEP operations.

Gain on Foreign Currency Transactions

Remeasurement adjustments resulting from the conversion of the intercompany financing structure on our PCLI acquisition from local currencies to the U.S. dollar resulted in gains of $0.4 million and $0.3 million for the three months ended September 30, 2019 and 2018, respectively. For the three months ended September 30, 2019 and 2018, gain on foreign currency translation included a gain of $5.7 million and a loss of $7.1 million, respectively, on foreign exchange forward contracts (utilized as an economic hedge).

Income Taxes

For the three months ended September 30, 2019, we recorded income tax expense of $103.0 million compared to $116.3 million for the three months ended September 30, 2018. Our effective tax rates, before consideration of earnings attributable to the noncontrolling interest, were 25.7% and 24.3% for the three months ended September 30, 2019 and 2018, respectively.

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Results of Operations – Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Summary

Net income attributable to HollyFrontier stockholders for the nine months ended September 30, 2019 was $711.8 million ($4.23 per basic and $4.20 per diluted share), a $244.3 million decrease compared to net income attributable to HollyFrontier stockholders of $956.1 million ($5.42 per basic and $5.37 per diluted share) for the nine months ended September 30, 2018. Net income decreased due principally to a goodwill impairment charge of $152.7 million, offset by an increase in gross refining margins and refining segment sales volumes. For the nine months ended September 30, 2019, lower of cost or market inventory reserve adjustments increased pre-tax earnings by $150.5 million compared to $192.9 million for the nine months ended September 30, 2018. Refinery gross margins for the nine months ended September 30, 2019 increased to $16.69 per produced barrel from $16.25 for the nine months ended September 30, 2018. During the nine months ended September 30, 2019, our Cheyenne Refinery and Woods Cross Refinery were each granted a one-year small refinery exemption from the EPA for the 2018 calendar year, at which time we recorded a total $36.6 million reduction to cost of products sold. During the nine months ended September 30, 2018, our Cheyenne Refinery was granted a one-year small refinery exemption from the EPA for the 2015 and 2017 calendar years and our Woods Cross Refinery was granted a one-year small refinery exemption for 2017. As a result of these exemptions, we recorded reductions totaling $97.0 million to our cost of products sold in 2018.

Sales and Other Revenues

Sales and other revenues decreased 2% from $13,370.5 million for the nine months ended September 30, 2018 to $13,104.7 million for the nine months ended September 30, 2019 due to a year-over-year decrease in sales prices, partially offset by higher refined product volumes. Sales and other revenues for the nine months ended September 30, 2019 and 2018 include $89.4 million and $77.8 million, respectively, in HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties. Additionally, sales and other revenues included $1,568.2 million and $1,376.5 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the nine months ended September 30, 2019 and 2018, respectively. Sonneborn contributed $253.5 million in sales and other revenues for the nine months ended September 30, 2019.

Cost of Products Sold

Total cost of products sold decreased from $10,502.3 million for the nine months ended September 30, 2018 to $10,157.4 million for the nine months ended September 30, 2019, due principally to lower crude oil costs. Additionally, during the nine months ended September 30, 2019, we recognized a $150.5 million lower of cost or market inventory valuation benefit compared to $192.9 million for the same period of last year, resulting in a new $209.7 million inventory reserve at September 30, 2019. The reserve at September 30, 2019 is based on market conditions and prices at that time. Cost of products sold includes $163.7 million in costs attributable to our Sonneborn operations for the nine months ended September 30, 2019. During the nine months ended September 30, 2019, we recorded a $36.6 million RINs cost reduction as a result of our Cheyenne Refinery and Woods Cross Refinery small refinery exemptions. During the nine months ended September 30, 2018, we recorded a $97.0 million RINs cost reduction as a result of our Cheyenne Refinery and Woods Cross Refinery small refinery exemptions.

Gross Refinery Margins

Gross refinery margin per barrel sold increased 3% from $16.25 for the nine months ended September 30, 2018 to $16.69 for the nine months ended September 30, 2019. This was primarily due to the effects of decreased crude oil and feedstock prices during the current year-to-date period. Gross refinery margin does not include the non-cash effects of lower of cost or market inventory valuation adjustments or depreciation and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q for a reconciliation to the income statement of sales prices of products sold and cost of products purchased.

Operating Expenses

Operating expenses, exclusive of depreciation and amortization, increased 8% from $933.7 million for the nine months ended September 30, 2018 to $1,010.4 million for the nine months ended September 30, 2019 due principally to higher repair and maintenance costs related to a February 2019 fire in an FCC unit at our El Dorado Refinery. Prior year period operating expenses included higher repair and maintenance costs as a result of the Woods Cross Refinery fire and resulting damage in March 2018. Current year operating expenses include $38.6 million in costs attributable to our Sonneborn operations.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 28% from $204.5 million for the nine months ended September 30, 2018 to $261.0 million for the nine months ended September 30, 2019 due principally to higher legal and professional fees and salary costs. Current year selling, general and administrative expenses include $21.0 million in costs attributable to our Sonneborn operations. Additionally, direct integration and regulatory costs of our recently acquired Sonneborn operations were $20.1 million for the nine months ended September 30, 2019. We incurred $3.6 million in integration costs of our PCLI business during the nine months ended September 30, 2018.

Depreciation and Amortization Expenses

Depreciation and amortization increased 16% from $323.6 million for the nine months ended September 30, 2018 to $375.3 million for the nine months ended September 30, 2019. This increase was due principally to depreciation and amortization attributable to capitalized improvement projects and capitalized refinery turnaround costs. Current year depreciation and amortization expenses include $24.4 million in costs attributable to our Sonneborn operations.

Goodwill Impairment

During the nine months ended September 30, 2019, we recorded goodwill impairment charges of $152.7 million that relate to PCLI. See Note 1 “Description of Business and Presentation of Financial Statements” in the Notes to Consolidated Financial Statements for additional information on the PCLI impairment.

Interest Income

Interest income for the nine months ended September 30, 2019 was $17.1 million compared to $10.7 million for the nine months ended September 30, 2018. This increase was due to higher average cash balances during the current year-to-date period.

Interest Expense

Interest expense was $106.9 million for the nine months ended September 30, 2019 compared to $97.4 million for the nine months ended September 30, 2018. This increase was due to interest attributable to higher HEP debt levels during the current year relative to the same period of 2018. For the nine months ended September 30, 2019 and 2018, interest expense included $57.1 million and $53.2 million, respectively, in interest costs attributable to HEP operations.

Gain on Foreign Currency Transactions

Remeasurement adjustments resulting from the conversion of the intercompany financing structure on our PCLI acquisition from local currencies to the U.S. dollar resulted in a $4.9 million gain for the nine months ended September 30, 2019, and a $5.5 million gain for the nine months ended September 30, 2018. For the nine months ended September 30, 2019 and 2018, gain on foreign currency translation included a loss of $9.0 million and a gain of $18.5 million, respectively, on foreign exchange forward contracts (utilized as an economic hedge).

Income Taxes

For the nine months ended September 30, 2019, we recorded income tax expense of $279.9 million compared to $318.7 million for the nine months ended September 30, 2018. Our effective tax rates, before consideration of earnings attributable to the noncontrolling interest, were 26.1% and 23.9% for the nine months ended September 30, 2019 and 2018, respectively. Our current year effective tax rate reflects the effects of the $152.7 million goodwill impairment charge that is not deductible for income tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

HollyFrontier Credit Agreement

HollyFrontier Financing Arrangements

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HEP Credit Agreement

See Note 11 “Debt” in the Notes to Consolidated Financial Statements for additional information on our debt instruments.

HEP Common Unit Continuous Offering Program

In May 2016, HEP established a continuous offering program under which HEP may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million. During the nine months ended September 30, 2019, HEP did not issue any common units under this program. As of September 30, 2019, HEP has issued 2,413,153 units under this program, providing $82.3 million in gross proceeds.

Liquidity

We believe our current cash and cash equivalents, along with future internally generated cash flow and funds available under our credit facilities, will provide sufficient resources to fund currently planned capital projects and our liquidity needs for the foreseeable future. In addition, components of our growth strategy include the expansion of existing units at our facilities and selective acquisition of complementary assets for our refining operations intended to increase earnings and cash flow. We also expect to use cash for repurchases of our common stock under our share repurchase program, support of our master limited partnership and the payment of cash dividends.

As of September 30, 2019, our cash and cash equivalents totaled $981.9 million. We consider all highly-liquid instruments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. These primarily consist of investments in conservative, highly-rated instruments issued by financial institutions, government and corporate entities with strong credit standings and money market funds.

Cash and cash equivalents decreased $172.9 million for the nine months ended September 30, 2019. Net cash used for investing and financing activities of $856.8 million, and $729.3 million, respectively, exceeded net cash provided by operating activities of $1,411.4 million.

Cash Flows – Operating Activities

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Net cash flows provided by operating activities were $1,411.4 million for the nine months ended September 30, 2019 compared to $1,129.9 million for the nine months ended September 30, 2018, an increase of $281.5 million. Net income for the nine months ended September 30, 2019 was $791.3 million, a decrease of $222.6 million compared to $1,013.9 million for the nine months ended September 30, 2018. Non-cash adjustments to net income consisting of depreciation and amortization, goodwill impairment, lower of cost or market inventory valuation adjustment, earnings of equity method investments, inclusive of distributions, gain / loss on sale of assets, deferred income taxes, equity-based compensation expense and fair value changes to derivative instruments totaled $531.5 million for the nine months ended September 30, 2019 compared to $256.4 million for the same period in 2018. Adjusted for non-cash items, changes in working capital increased operating cash flows by $244.3 million and decreased operating cash flows by $33.5 million, for the nine months ended September 30, 2019 and 2018, respectively. Additionally, for the nine months ended September 30, 2019, turnaround expenditures increased to $152.4 million from $114.6 million from the same period of 2018.

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Cash Flows – Investing Activities and Planned Capital Expenditures

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Net cash flows used for investing activities were $856.8 million for the nine months ended September 30, 2019 compared to $259.2 million for the nine months ended September 30, 2018, an increase of $597.6 million. Current year investing activities reflect a net cash outflow of $662.7 million upon the acquisition of Sonneborn, and prior year investing activities reflect a net cash outflow of $54.1 million upon the acquisition of Red Giant Oil. Cash expenditures for properties, plants and equipment for the first nine months of 2019 decreased to $195.1 million from $209.1 million for the same period in 2018. These include HEP capital expenditures of $23.8 million and $41.1 million for the nine months ended September 30, 2019 and 2018, respectively.

Planned Capital Expenditures

HollyFrontier Corporation

Each year our Board of Directors approves our annual capital budget, which includes specific projects that management is authorized to undertake. Additionally, when conditions warrant or as new opportunities arise, additional projects may be approved. The funds appropriated for a particular capital project may be expended over a period of several years, depending on the time required to complete the project. Therefore, our planned capital expenditures for a given year consist of expenditures appropriated in that year’s capital budget plus expenditures for projects appropriated in prior years which have not yet been completed. During 2019, we expect to spend approximately $600.0 million to $640.0 million in cash for capital projects and refinery turnarounds appropriated in 2019 and prior years. Refinery turnaround spending is amortized over the useful life of the turnaround. Our expected capital and turnaround cash spending for 2019 is as follows:



	Expected Cash Spending Range
	(In millions)
Type:
Capital	$	300.0	-	$	320.0
Turnarounds	300.0		-	320.0
Total	$	600.0	-	$	640.0

The refining industry is capital intensive and requires on-going investments to sustain our refining operations. This includes replacement of, or rebuilding, refinery units and components that extend the useful life. We also invest in projects that improve operational reliability and profitability via enhancements that improve refinery processing capabilities as well as production yield and flexibility. Our capital expenditures also include projects related to environmental, health and safety compliance and include initiatives as a result of federal and state mandates.

Our refinery operations and related emissions are highly regulated at both federal and state levels, and we invest in our facilities as needed to remain in compliance with these standards. Additionally, when faced with new emissions or fuels standards, we seek to execute projects that facilitate compliance and also improve the operating costs and / or yields of associated refining processes.

HEP

Each year the Holly Logistic Services, L.L.C. board of directors approves HEP’s annual capital budget, which specifies capital projects that HEP management is authorized to undertake. Additionally, at times when conditions warrant or as new opportunities arise, special projects may be approved. The funds allocated for a particular capital project may be expended over a period in excess of a year, depending on the time required to complete the project. Therefore, HEP’s planned capital expenditures for a given year consist of expenditures approved for capital projects included in its current year capital budget as well as, in certain cases, expenditures approved for capital projects in capital budgets for prior years. The 2019 HEP capital budget is comprised of $7.0 million to $8.0 million for maintenance capital expenditures and $35.0 million expansion capital expenditures. HEP expects the majority of the expansion capital budget to be invested in refined product pipeline expansions, crude system enhancements, new storage tanks and enhanced blending capabilities at its racks. In addition, HEP may spend funds periodically to perform capital upgrades or additions to its assets where a customer reimburses HEP for such costs. The upgrades or additions would generally benefit the customer over the remaining live of the related service agreements.

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Cash Flows – Financing Activities

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Net cash flows used for financing activities were $729.3 million for the nine months ended September 30, 2019 compared to $423.4 million for the nine months ended September 30, 2018, an increase of $305.9 million. During the nine months ended September 30, 2019, we purchased $472.0 million of treasury stock and paid $168.0 million in dividends. Also during this period, HEP received $269.5 million and repaid $257.0 million under the HEP Credit Agreement and paid distributions of $100.1 million to noncontrolling interests. During the nine months ended September 30, 2018, we purchased $177.7 million of treasury stock and paid $175.9 million in dividends. Also during this period, HEP received $256.0 million and repaid $347.0 million under the HEP Credit Agreement, received $114.9 million in proceeds from the issuance of its common units and paid distributions of $93.1 million to noncontrolling interests.

Contractual Obligations and Commitments

HollyFrontier Corporation

There were no significant changes to our long-term contractual obligations during the nine months ended September 30, 2019.

HEP

During the nine months ended September 30, 2019, HEP had net borrowings of $12.5 million resulting in $935.5 million of outstanding borrowings under the HEP Credit Agreement at September 30, 2019. There were no other significant changes to HEP’s long-term contractual obligations during this period.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2018. Certain critical accounting policies that materially affect the amounts recorded in our consolidated financial statements include the use of the last-in, first-out (“LIFO”) method of valuing certain inventories, assessing the possible impairment of certain long-lived assets and goodwill, and assessing contingent liabilities for probable losses.

Inventory Valuation: Inventories related to our refining operations are stated at the lower of cost, using the LIFO method for crude oil and unfinished and finished refined products, or market. In periods of rapidly declining prices, LIFO inventories may have to be written down to market value due to the higher costs assigned to LIFO layers in prior periods. In addition, the use of the LIFO inventory method may result in increases or decreases to cost of sales in years that inventory volumes decline as the result of charging cost of sales with LIFO inventory costs generated in prior periods. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final year-end LIFO inventory valuation.

At September 30, 2019, our lower of cost or market inventory valuation reserve was $209.7 million. This amount, or a portion thereof, is subject to reversal as a reduction to cost of products sold in subsequent periods as inventories giving rise to the reserve are sold, and a new reserve is established.

Inventories consisting of process chemicals, materials and maintenance supplies and RINs are stated at the lower of weighted-average cost or net realizable value. Inventories of our Petro-Canada Lubricants and Sonneborn businesses are stated at the lower of cost, using the FIFO method, or net realizable value.

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Goodwill and Long-lived Assets: As of September 30, 2019, our goodwill balance was $2.4 billion, with goodwill assigned to our Refining, Lubricants and Specialty Products and HEP segments of $1,733.5 million, $324.1 million and $312.9 million, respectively. 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 an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our goodwill impairment testing first entails either a quantitative assessment or an optional qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that based on the qualitative factors that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, a quantitative test is performed in which we estimate the fair value of the related reporting unit. If the carrying amount of a reporting unit exceeds its fair value, the goodwill of that reporting unit is impaired, and we measure goodwill impairment as the excess of the carrying amount of reporting unit over the related fair value.

Our long-lived assets principally consist of our refining assets that are organized as refining asset groups and the assets of our Lubricants and Specialty Products business. The refinery asset groups also constitute our individual refinery reporting units that are used for testing and measuring goodwill impairments. Our long-lived assets are evaluated for 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 measured, if any, is equal to the amount by which the asset group’s carrying value exceeds its fair value.

Goodwill impairment

We performed our annual goodwill impairment testing as of July 1, 2019 and determined there was no additional impairment of goodwill attributable to our reporting units.

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.

RISK MANAGEMENT

We use certain strategies to reduce some commodity price and operational risks. We do not attempt to eliminate all market risk exposures when we believe that the exposure relating to such risk would not be significant to our future earnings, financial position, capital resources or liquidity or that the cost of eliminating the exposure would outweigh the benefit.

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Commodity Price Risk Management

Foreign Currency Risk Management

As of September 30, 2019, we have the following notional contract volumes related to all outstanding derivative instruments used to mitigate commodity price and foreign currency risk:



		Notional Contract Volumes by Year of Maturity
Derivative Instrument	Total Outstanding Notional	2019	2020	2021	Unit of Measure

Natural gas price swaps - long	4,050,000	450,000	1,800,000	1,800,000	MMBTU
Crude oil price swaps (basis spread) - long	7,418,000	1,196,000	6,222,000	—	Barrels
WTI and gasoline crack spread swaps - short	200,000	200,000	—	—	Barrels
NYMEX futures (WTI) - short	1,825,000	1,713,000	112,000	—	Barrels
Forward gasoline and diesel contracts - long	538,500	538,500	—	—	Barrels
Forward crude oil contracts -short	423,739	423,739	—	—	Barrels
Forward crude oil contracts - long	140,849	140,849	—	—	Barrels
Physical contracts - long	350,000	350,000	—	—	Barrels
Physical contracts - short	350,000	350,000	—	—	Barrels
Foreign currency forward contracts	434,443,896	114,213,501	320,230,395	—	U.S. dollar
Forward commodity contracts (platinum) ⁽¹⁾	41,147	41,147	—	—	Troy ounces

(1) Represents an embedded derivative within our catalyst financing arrangements, which may be refinanced or require repayment under certain conditions. See Note 11 “Debt” in the Notes to Consolidated Financial Statements for additional information on these financing arrangements.

The following sensitivity analysis provides the hypothetical effects of market price fluctuations to the commodity positions hedged under our derivative contracts:



	Estimated Change in Fair Value at June 30,
Commodity-based Derivative Contracts	2019		2018
	(In thousands)
Hypothetical 10% change in underlying commodity prices	$	8,432	$	14,837

Interest Rate Risk Management

The market risk inherent in our fixed-rate debt is the potential change arising from increases or decreases in interest rates as discussed below.

For the fixed rate HollyFrontier Senior Notes and HEP Senior Notes, changes in interest rates will generally affect fair value of the debt, but not earnings or cash flows. The outstanding principal, estimated fair value and estimated change in fair value (assuming a hypothetical 10% change in the yield-to-maturity rates) for this debt as of September 30, 2019 is presented below:



	Outstanding Principal		Estimated Fair Value		Estimated Change in Fair Value
	(In thousands)
HollyFrontier Senior Notes	$	1,000,000	$	1,121,460	$	23,042
HEP Senior Notes	$	500,000	$	523,220	$	10,800

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For the variable rate HEP Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. At September 30, 2019, outstanding borrowings under the HEP Credit Agreement were $935.5 million. A hypothetical 10% change in interest rates applicable to the HEP Credit Agreement would not materially affect cash flows.

Our operations are subject to hazards of petroleum processing operations, including fire, explosion and weather-related perils. We maintain various insurance coverages, including business interruption insurance, subject to certain deductibles. We are not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do not justify such expenditures.

Financial information is reviewed on the counterparties in order to review and monitor their financial stability and assess their ongoing ability to honor their commitments under the derivative contracts. We have not experienced, nor do we expect to experience, any difficulty in the counterparties honoring their commitments.

We have a risk management oversight committee consisting of members from our senior management. This committee oversees our risk enterprise program, monitors our risk environment and provides direction for activities to mitigate identified risks that may adversely affect the achievement of our goals.

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Item 3.	Quantitative and Qualitative Disclosures About Market Risk

See “Risk Management” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles

Reconciliations of earnings before interest, taxes, depreciation and amortization (“EBITDA”) to amounts reported under generally accepted accounting principles in financial statements.

Earnings before interest, taxes, depreciation and amortization, which we refer to as EBITDA, is calculated as net income attributable to HollyFrontier stockholders plus (i) interest expense, net of interest income, (ii) income tax provision, and (iii) depreciation and amortization. EBITDA is not a calculation provided for under GAAP; however, the amounts included in the EBITDA calculation are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies. EBITDA is presented here because it is a widely used financial indicator used by investors and analysts to measure performance. EBITDA is also used by our management for internal analysis and as a basis for financial covenants.

Set forth below is our calculation of EBITDA.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(In thousands)
Net income attributable to HollyFrontier stockholders	$	261,813		$	342,466		$	711,783		$	956,064
Add income tax expense	103,021			116,258			279,862			318,742
Add interest expense	36,027			32,399			106,938			97,446
Subtract interest income	(6,164		)	(5,136		)	(17,127		)	(10,660		)
Add depreciation and amortization	127,016			108,885			375,345			323,605
EBITDA	$	521,713		$	594,872		$	1,456,801		$	1,685,197

Reconciliations of refinery operating information (non-GAAP performance measures) to amounts reported under generally accepted accounting principles in financial statements.

Refinery gross margin and net operating margin are non-GAAP performance measures that are used by our management and others to compare our refining performance to that of other companies in our industry. We believe these margin measures are helpful to investors in evaluating our refining performance on a relative and absolute basis. Refinery gross margin per produced barrel sold is total refining segment revenues less total refining segment cost of products sold, exclusive of lower of cost or market inventory valuation adjustments, divided by sales volumes of produced refined products sold. Net operating margin per barrel sold is the difference between refinery gross margin and refinery operating expenses per produced barrel sold. These two margins do not include the non-cash effects of lower of cost or market inventory valuation adjustments or depreciation and amortization. Each of these component performance measures can be reconciled directly to our consolidated statements of income. Other companies in our industry may not calculate these performance measures in the same manner.

Below are reconciliations to our consolidated statements of income for refinery net operating and gross margin and operating expenses, in each case averaged per produced barrel sold. Due to rounding of reported numbers, some amounts may not calculate exactly.

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Reconciliation of average refining segment net operating margin per produced barrel sold to refinery gross margin to total sales

and other revenues



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(Dollars in thousands, except per barrel amounts)
Consolidated
Net operating margin per produced barrel sold	$	11.03		$	13.05		$	10.36		$	10.10
Add average refinery operating expenses per produced barrel sold	6.20			6.36			6.33			6.15
Refinery gross margin per produced barrel sold	17.23			19.41			16.69			16.25
Times produced barrels sold (BPD)	485,500			447,770			459,440			455,640
Times number of days in period	92			92			273			273
Refining segment gross margin	769,595			799,592			2,093,379			2,021,333
Add (subtract) rounding	208			(16		)	(278		)	(507		)
Total refining segment gross margin	769,803			799,576			2,093,101			2,020,826
Add refining segment cost of products sold	3,177,167			3,572,593			9,598,539			10,179,509
Refining segment sales and other revenues	3,946,970			4,372,169			11,691,640			12,200,335
Add lubricants and specialty products segment sales and other revenues	537,718			475,886			1,576,398			1,388,415
Add HEP segment sales and other revenues	135,895			125,784			401,143			373,428
Subtract corporate, other and eliminations	(195,755		)	(203,040		)	(564,491		)	(591,716		)
Sales and other revenues	$	4,424,828		$	4,770,799		$	13,104,690		$	13,370,462

Reconciliation of average refining segment operating expenses per produced barrel sold to total operating expenses



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(Dollars in thousands, except per barrel amounts)
Consolidated
Average refinery operating expenses per produced barrel sold	$	6.20		$	6.36		$	6.33		$	6.15
Times produced barrels sold (BPD)	485,500			447,770			459,440			455,640
Times number of days in period	92			92			273			273
Refinery operating expenses	276,929			261,999			793,954			764,997
Add (subtract) rounding	(60		)	11			127			(582		)
Total refining segment operating expenses	276,869			262,010			794,081			764,415
Add lubricants and specialty products segment operating expenses	57,974			40,288			170,655			125,101
Add HEP segment operating expenses	44,924			35,995			123,045			106,731
Subtract corporate, other and eliminations	(34,189		)	(21,097		)	(77,359		)	(62,548		)
Operating expenses (exclusive of depreciation and amortization)	$	345,578		$	317,196		$	1,010,422		$	933,699

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Item 4.	Controls and Procedures

Evaluation of disclosure controls and procedures. Our principal executive officer and principal financial officer have evaluated, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2019.

Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

In the ordinary course of business, we may become party to legal, regulatory or administrative proceedings or governmental investigations, including environmental and other matters. Damages or penalties may be sought from us in some matters and certain matters may require years to resolve. While the outcome and impact of these proceedings and investigations on us cannot be predicted with certainty, based on advice of counsel and information currently available to us, management believes that the resolution of these proceedings and investigations through settlement or adverse judgment will not either individually or in the aggregate have a material adverse effect on our financial condition, results of operations or cash flows.

The environmental proceedings are reported to comply with SEC regulations which require us to disclose proceedings arising under provisions regulating the discharge of materials into the environment or protecting the environment if we reasonably believe that such proceedings may result in monetary sanctions of $100,000 or more.

Environmental Matters

Cheyenne

HollyFrontier Cheyenne Refining LLC (“HFCR”) has been in discussions with the Wyoming Department of Environmental Quality (“WDEQ”) relating to Notices of Violations issued in late 2016 and 2018 for possible violations of air quality standards related to operation of certain refinery units at the Cheyenne Refinery. On July 18, 2019, HFCR and WDEQ entered into a consent decree pursuant to which HFCR agreed to pay penalties related to alleged violations of air quality limits that occurred during the second quarter of 2016 through the second quarter of 2017. HFCR and WDEQ are in discussions to resolve alleged violations of air quality limits that occurred during the third quarter of 2017 through calendar year 2018.

On August 19, 2019 and October 30, 2019, HFCR received letters from the EPA providing a preliminary estimate of stipulated penalties related to the alleged violations that occurred during the third quarter of 2017 through the second quarter of 2019 pursuant to HFCR’s federal consent decree. HFCR responded to the EPA preliminary estimate of stipulated penalties related to the alleged violations that occurred during the third quarter of 2017 through calendar year 2018 in a letter dated September 18, 2019 and is in dialogue with the EPA and the WDEQ to discuss an appropriate resolution of all alleged violations.

Separately, on October 23, 2019, HFCR received a Notice of Violation from the WDEQ for possible violations of air quality standards during the first and second quarters of 2019, which are not addressed by the federal consent decree. No penalty demand has yet been made by the WDEQ relating to such possible violations. HFCR and WDEQ are working towards settlement of these alleged violations.

It is too soon to predict the outcome of the negotiations and the ultimate penalty amount.

El Dorado

HollyFrontier El Dorado Refining LLC (“HFEDR”) is engaged in discussions with, and has responded to document requests from, the EPA and the U.S. Department of Justice (“DOJ”) regarding potential Clean Air Act civil violations relating to flaring devices and other equipment at the refinery. Topics of the discussions include (a) three information requests for activities beginning in January 2009, (b) Risk Management Program compliance issues relating to a November 2014 inspection and subsequent events, (c) a Notice of Violation issued by the EPA in August 2017 and (d) possible late reporting under the Emergency Planning and Community Right-to-Know Act for the release of sulfur dioxide and visible emissions from October 2018. HFEDR is currently in a dialogue with the EPA about a possible settlement of potential and alleged civil violations for the foregoing items. We are currently unable to estimate the final amount of civil penalties that might be included in any settlement. HFEDR will continue to work with the EPA and DOJ to resolve these civil matters. Some of the foregoing civil investigations resulted from fires that occurred at the El Dorado Refinery in September 2017, October 2018 and March 2019. An employee fatality occurred during the September 2017 event.

The Occupational Safety and Health Administration (“OSHA”) completed an investigation of the March 2019 event and issued one citation to HFEDR on August 29, 2019. HFEDR is currently in dialogue with OSHA about possible settlement. HFEDR previously settled the OSHA claims related to an investigation of the September 2017 event. In April 2019, HFEDR became aware that the EPA also initiated a criminal investigation into one or more of the foregoing events. HFEDR has received a grand jury subpoena requesting certain documents be provided to the EPA with respect to the September 2017 event. We are cooperating with this investigation.

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Tulsa

HollyFrontier Tulsa Refining LLC (“HFTR”) operates under two Consent Decrees with the EPA and the Oklahoma Department of Environmental Quality (“ODEQ”) for the East and West refineries. On December 13, 2017, during a meeting between the parties, ODEQ proposed stipulated penalties related to violations of the two Consent Decrees. The violations concern Clean Air Act regulated fuel gas and flare operations. On July 1, 2019, ODEQ issued a demand letter for stipulated penalties under the East Refinery Consent Decree as proposed in the 2017 meeting. In August 2019, HFTR paid the penalties set forth in the demand letter to ODEQ and the EPA satisfying the requirements of the East Refinery Consent Decree. On September 16, 2019, ODEQ issued a demand letter for stipulated penalties under the West Refinery Consent Decree. HFTR is working with ODEQ to resolve this matter. Additionally, on April 3, 2019, during a meeting between the parties, the EPA notified HFTR of potential monitoring violations of the Consent Decrees. HFTR is working with the ODEQ and the EPA to document a settlement agreement for the additional actions.

Woods Cross

HollyFrontier Woods Cross Refining LLC (“HFWCR”) received an early settlement agreement from the Utah Department of Environmental Quality’s Division of Air Quality (“DAQ”) for alleged violations associated with operation of HFWCR’s diesel-fired emergency engines. HFWCR has reached an agreement in principle with the Utah Attorney General’s office to settle this matter. The agreement is subject to review and approval by the Utah Air Quality Board.

Federal Trade Commission

On July 23, 2019, the Federal Trade Commission (“FTC”) issued a Civil Investigative Demand and a related Subpoena Duce Tecum requesting we provide specified information relating to the Sonneborn acquisition that closed on February 1, 2019. We are in the process of responding to the FTC request. Based on the limited information that we have at this time, we are unable to predict the outcome of this request. On December 14, 2018, we received early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act from the FTC and Department of Justice with respect to the Sonneborn acquisition. On January 17, 2019, we received early termination of the applicable waiting period under the German antitrust laws with respect to the Sonneborn acquisition. Early termination is granted to transactions that the antitrust agencies determine raise no substantive competition concerns.

Renewable Fuel Standard

Various subsidiaries of HollyFrontier have intervened in three lawsuits brought by renewable fuel interest groups against the EPA in federal courts alleging violations of the Renewable Fuel Standard under the Clean Air Act and challenging the EPA’s handling of small refinery exemptions. We believe the EPA correctly applied applicable law to the matters at issue and will vigorously defend the EPA’s position on small refinery exemptions.

Other

We are a party to various other litigation and proceedings that we believe, based on advice of counsel, will not either individually or in the aggregate have a materially adverse impact on our financial condition, results of operations or cash flows.


Item 1A.	Risk Factors

There have been no material changes in our risk factors as previously disclosed in Part 1, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. You should carefully consider the risk factors discussed in our 2018 Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

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Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Under our common stock repurchase programs, repurchases are being made from time to time in the open market or privately negotiated transactions based on market conditions, securities law limitations and other factors. The following table includes repurchases made under these programs during the third quarter of 2019.



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 2019	1,258,100	$	47.94	1,258,100	$	448,563,068
August 2019	1,449,882	$	46.50	1,449,882	$	381,139,885
September 2019	1,328,000	$	51.15	1,328,000	$	313,216,174
Total for July to September 2019	4,035,982			4,035,982


Item 6.	Exhibits

The Exhibit Index on page 63 of this Quarterly Report on Form 10-Q lists the exhibits that are filed or furnished, as applicable, as part of the Quarterly Report on Form 10-Q.

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Exhibit Index



Exhibit Number		Description

3.1		Amended and Restated Certificate of Incorporation of HollyFrontier Corporation (incorporated by reference to Exhibit 3.1 of Registrant’s Current Report on Form 8-K filed July 8, 2011, File No. 1-03876).

3.2		Amended and Restated By-Laws of HollyFrontier Corporation (incorporated by reference to Exhibit 3.1 of Registrant’s Current Report on Form 8-K filed February 20, 2014, File No. 1-03876).

10.1		Fifth Amended and Restated Master Throughput Agreement, dated as of July 1, 2019, by and between HollyFrontier Refining and Marketing LLC and Holly Energy Partners - Operating, L.P. (incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K Current Report filed July 2, 2019, File No. 1-03876).

10.2		Sixth Amended and Restated Master Throughput Agreement, dated as of October 2, 2019, by and between HollyFrontier Refining & Marketing LLC and Holly Energy Partners -Operating, L.P. (incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K Current Report filed October 3, 2019, File No. 1-03876).

10.3		Twentieth Amended and Restated Omnibus Agreement, dated as of October 2, 2019, by and between HollyFrontier Corporation, Holly Energy Partners, L.P. and certain of their respective subsidiaries (incorporated by reference to Exhibit 10.2 of Registrant’s Form 8-K Current Report filed October 3, 2019, File No. 1-03876).

31.1*		Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following financial information from HollyFrontier Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted as inline XBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, and (v) Notes to the Consolidated Financial Statements. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

104		Cover page Interactive Data File (formatted as inline XBRL and contained in exhibit 101).

* Filed herewith.

** Furnished herewith.

+ Filed electronically herewith.

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




	HOLLYFRONTIER CORPORATION
	(Registrant)

Date: October 31, 2019		/s/ Richard L. Voliva III
		Richard L.Voliva III
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Date: October 31, 2019		/s/ J. W. Gann, Jr.
		J. W. Gann, Jr.
		Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer)