UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________
FORM 10-Q
_________________________________________________________________
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30, 2012
OR
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from __________ to ____________
Commission File Number
1-3876
_________________________________________________________________
HOLLYFRONTIER CORPORATION
(Exact name of registrant as specified in its charter)
_________________________________________________________________
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Delaware
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75-1056913
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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2828 N. Harwood, Suite 1300
Dallas, Texas
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75201
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(Address of principal executive offices)
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(Zip Code)
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(214) 871-3555
Registrant’s telephone number, including area code
_________________________________________________________________
Former name, former address and former fiscal year, if changed since last report
_________________________________________________________________
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
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No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes
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No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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203,553,780
shares of Common Stock, par value
$.01
per share, were outstanding on
July 31, 2012
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HOLLYFRONTIER CORPORATION
INDEX
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Page
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Consolidated Balance Sheets
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Consolidated Statements of Comprehensive Income (Unaudited)
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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. 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. 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:
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risks and uncertainties with respect to the actions of actual or potential competitive suppliers of refined petroleum products in our markets;
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the demand for and supply of crude oil and refined products;
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the spread between market prices for refined products and market prices for crude oil;
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the possibility of constraints on the transportation of refined products;
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the possibility of inefficiencies, curtailments or shutdowns in refinery operations or pipelines;
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effects of governmental and environmental regulations and policies;
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the availability and cost of our financing;
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the effectiveness of our capital investments and marketing strategies;
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our efficiency in carrying out construction projects;
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our ability to acquire refined product operations or pipeline and terminal operations on acceptable terms and to integrate any existing or future acquired operations;
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the possibility of terrorist attacks and the consequences of any such attacks;
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general economic conditions; and
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other financial, operational and legal risks and uncertainties detailed from time to time in our SEC filings.
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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, 2011
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.
PART I. FINANCIAL INFORMATION
DEFINITIONS
Within this report, the following terms have these specific meanings:
“
Alkylation
” means the reaction of propylene or butylene (olefins) with isobutane to form an iso-paraffinic gasoline (inverse of cracking).
“
Aromatic oil
” is long chain oil that is highly aromatic in nature that is used to manufacture tires and in the production of asphalt.
“
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.
"
Biodiesel
" means a clean alternative fuel produced from renewable biological resources.
“
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.
“
Catalytic reforming
” means a refinery process which uses a precious metal (such as platinum) based catalyst to convert low octane naphtha to high octane gasoline blendstock and hydrogen. The hydrogen produced from the reforming process is used to desulfurize other refinery oils and is a primary source of hydrogen for the refinery.
“
Cracking
” means the process of breaking down larger, heavier and more complex hydrocarbon molecules into simpler and lighter molecules.
“
Crude 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.
“
Delayed coker unit
” is a refinery unit that removes carbon from the bottom cuts of crude oil to produce unfinished light transportation fuels and petroleum coke.
“
Ethanol
” means a high octane gasoline blend stock that is used to make various grades of gasoline.
“
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.
“
Hydrocracker
” means a refinery unit that breaks down large complex hydrocarbon molecules into smaller more useful ones using a fixed bed of catalyst at high pressure and temperature with hydrogen.
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Hydrodesulfurization
” means to remove sulfur and nitrogen compounds from oil or gas in the presence of hydrogen and a catalyst at relatively high temperatures.
“
Hydrogen plant
” means a refinery unit that converts natural gas and steam to high purity hydrogen, which is then used in the hydrodesulfurization, hydrocracking and isomerization processes.
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HF alkylation
,” or hydrofluoric alkylation, means a refinery process which combines isobutane and C3/C4 olefins using HF acid as a catalyst to make high octane gasoline blend stock.
“
Isomerization
” means a refinery process for rearranging the structure of C5/C6 molecules without changing their size or chemical composition and is used to improve the octane of C5/C6 gasoline blendstocks.
“
LPG
” means liquid petroleum gases.
“
Lubricant
” or “
lube
” means a solvent neutral paraffinic product used in passenger and commercial vehicle engine oils, specialty products for metal working or heat transfer and other industrial applications.
"MSAT2"
means Control of Hazardous Air Pollutants from Mobile Sources, a rule issued by the U.S. Environmental Protection Agency to reduce hazardous emissions from motor vehicles and motor vehicle fuels.
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MEK
” means a lube process that separates waxy oil from non-waxy oils using methyl ethyl ketone as a solvent.
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MMBTU
” means one million British thermal units.
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Natural gasoline
” means a low octane gasoline blend stock that is purchased and used to blend with other high octane stocks produced to make various grades of gasoline.
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PPM
” means parts-per-million.
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Paraffinic oil
” is a high paraffinic, high gravity oil produced by extracting aromatic oils and waxes from gas oil and is used in producing high-grade lubricating oils.
“
Refinery gross margin
” means the difference between average net sales price and average product costs per produced barrel of refined products sold. This does not include the associated depreciation and amortization costs.
“
Reforming
” means the process of converting gasoline type molecules into aromatic, higher octane gasoline blend stocks while producing hydrogen in the process.
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Roofing flux
” is produced from the bottom cut of crude oil and is the base oil used to make roofing shingles for the housing industry.
“
RFS2
” or advanced renewable fuel standard is a regulatory mandate required by the Energy Independence and Security Act of 2007 that requires 36 billion gallons of renewable fuel to be blended into transportation fuels by 2022. New mandated blending requirements for this standard became effective July 1, 2010.
“
ROSE
,” or “
Solvent deasphalter / residuum oil supercritical extraction
,” means a refinery unit that uses a light hydrocarbon like propane or butane to extract non-asphaltene heavy oils from asphalt or atmospheric reduced crude. These deasphalted oils are then further converted to gasoline and diesel in the FCC process. The remaining asphaltenes are either sold, blended to fuel oil or blended with other asphalt as a hardener.
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Scanfiner
” is a refinery unit that removes sulfur from gasoline to produce low sulfur gasoline blendstock.
“
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.
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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.
"WCS"
means Western Canada Select crude oil and is made up
o
f Canadian heavy conventional and bitumen crude oils blended with sweet synthetic and condensate diluents.
"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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Item 1.
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Financial Statements
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HOLLYFRONTIER CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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June 30,
2012
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December 31, 2011
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(Unaudited)
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As Adjusted (see Note 2)
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ASSETS
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Current assets:
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Cash and cash equivalents
(HEP: $4,216 and $3,269, respectively)
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$
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1,372,198
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$
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1,578,904
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Marketable securities
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266,483
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211,639
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Accounts receivable: Product and transportation
(HEP: $30,169 and $34,071, respectively)
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578,024
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703,691
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Crude oil resales
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25,702
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5,166
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603,726
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708,857
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Inventories: Crude oil and refined products
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1,253,807
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1,052,084
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Materials and supplies
(HEP: $1,326 and $1,483, respectively)
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56,012
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62,535
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1,309,819
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1,114,619
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Income taxes receivable
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93,648
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87,277
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Prepayments and other
(HEP: $2,084 and $1,161, respectively)
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59,818
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219,450
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Total current assets
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3,705,692
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3,920,746
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Properties, plants and equipment, at cost
(HEP: $689,381 and $679,852, respectively)
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3,751,384
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3,631,787
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Less accumulated depreciation
(HEP: $(104,679) and $(89,609), respectively)
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(663,078
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(578,882
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3,088,306
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3,052,905
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Marketable securities (long-term)
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9,765
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50,067
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Other assets: Turnaround costs
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72,460
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57,060
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Goodwill
(HEP: $288,991 and $288,991, respectively)
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2,338,302
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2,336,510
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Intangibles and other
(HEP: $77,182 and $75,902, respectively)
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168,007
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158,955
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2,578,769
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2,552,525
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Total assets
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$
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9,382,532
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$
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9,576,243
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LIABILITIES AND EQUITY
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Current liabilities:
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Accounts payable
(HEP: $9,695 and $11,406, respectively)
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$
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1,096,216
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$
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1,504,694
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Income taxes payable
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162,265
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40,366
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Accrued liabilities
(HEP: $17,749 and $16,285, respectively)
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133,818
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169,940
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Deferred income tax liabilities
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169,386
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175,683
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Total current liabilities
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1,561,685
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1,890,683
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Long-term debt
(HEP: $613,195 and $598,761, respectively)
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1,295,163
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1,214,742
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Deferred income taxes
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416,028
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463,721
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Other long-term liabilities
(HEP: $6,195 and $4,000, respectively)
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162,031
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171,197
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Equity:
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HollyFrontier stockholders’ equity:
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Preferred stock, $1.00 par value – 5,000,000 shares authorized; none issued
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—
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—
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Common stock $.01 par value – 320,000,000 shares authorized; 255,962,866 shares issued as of June 30, 2012 and December 31, 2011
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2,560
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2,563
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Additional capital
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3,765,963
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3,859,367
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Retained earnings
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2,440,448
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1,964,656
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Accumulated other comprehensive income
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5,575
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77,873
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Common stock held in treasury, at cost – 52,346,837 and 46,630,220 shares as of June 30, 2012 and December 31, 2011, respectively
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(885,085
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(700,449
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)
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Total HollyFrontier stockholders’ equity
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5,329,461
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5,204,010
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Noncontrolling interest
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618,164
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631,890
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Total equity
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5,947,625
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5,835,900
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Total liabilities and equity
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$
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9,382,532
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$
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9,576,243
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Parenthetical amounts represent asset and liability balances attributable to Holly Energy Partners, L.P. (“HEP”) as of
June 30, 2012
and
December 31, 2011
. HEP is a consolidated variable interest entity.
See accompanying notes.
HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
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Three Months Ended June 30,
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Six Months Ended June 30,
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2012
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2011
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2012
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2011
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Sales and other revenues
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$
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4,806,681
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$
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2,967,133
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$
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9,738,419
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$
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5,293,718
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Operating costs and expenses:
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Cost of products sold (exclusive of depreciation and amortization)
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3,681,764
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2,447,095
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7,868,681
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4,431,712
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Operating expenses (exclusive of depreciation and amortization)
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222,726
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139,345
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464,353
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274,088
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General and administrative expenses (exclusive of depreciation and amortization)
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32,106
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18,682
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59,634
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35,500
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Depreciation and amortization
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56,948
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31,832
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113,050
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63,140
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Total operating costs and expenses
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3,993,544
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2,636,954
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8,505,718
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4,804,440
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Income from operations
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813,137
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330,179
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1,232,701
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489,278
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Other income (expense):
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Earnings of equity method investments
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886
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467
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1,603
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1,207
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Interest income
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681
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657
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1,141
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|
742
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Interest expense
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(26,942
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)
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(15,193
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)
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(60,257
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)
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(31,397
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)
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Gain on sale of marketable equity securities
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326
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—
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326
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—
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Merger transaction costs
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—
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(2,316
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)
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—
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(6,014
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)
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(25,049
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)
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(16,385
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)
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(57,187
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)
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(35,462
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)
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Income before income taxes
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788,088
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313,794
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1,175,514
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453,816
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Income tax provision:
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Current
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285,937
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115,051
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428,807
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164,540
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Deferred
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(219
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)
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(3,090
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)
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(2,683
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)
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(3,568
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)
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285,718
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111,961
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426,124
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160,972
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Net income
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502,370
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201,833
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749,390
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292,844
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Less net income attributable to noncontrolling interest
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8,871
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9,598
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14,195
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15,915
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Net income attributable to HollyFrontier stockholders
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$
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493,499
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$
|
192,235
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$
|
735,195
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$
|
276,929
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Earnings per share attributable to HollyFrontier stockholders:
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Basic
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$
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2.40
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$
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1.80
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$
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3.55
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$
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2.60
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Diluted
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$
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2.39
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$
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1.79
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$
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3.54
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$
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2.58
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Cash dividends declared per common share
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$
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0.65
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$
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0.075
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$
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1.25
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$
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0.15
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Average number of common shares outstanding:
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Basic
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205,727
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106,730
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207,129
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106,672
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Diluted
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206,481
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107,340
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207,938
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107,286
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See accompanying notes.
HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
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Three Months Ended June 30,
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|
Six Months Ended June 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
502,370
|
|
|
$
|
201,833
|
|
|
$
|
749,390
|
|
|
$
|
292,844
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Net unrealized loss on available-for-sale securities
|
|
(404
|
)
|
|
(459
|
)
|
|
(216
|
)
|
|
(317
|
)
|
Unrealized gain (loss), net of reclassifications from contract settlements on hedging instruments
|
|
30,801
|
|
|
271
|
|
|
(124,814
|
)
|
|
1,592
|
|
Pension curtailment adjustment
|
|
7,102
|
|
|
—
|
|
|
7,102
|
|
|
—
|
|
Other comprehensive income (loss) before income taxes
|
|
37,499
|
|
|
(188
|
)
|
|
(117,928
|
)
|
|
1,275
|
|
Income tax expense (benefit)
|
|
14,640
|
|
|
(144
|
)
|
|
(46,030
|
)
|
|
98
|
|
Other comprehensive income (loss)
|
|
22,859
|
|
|
(44
|
)
|
|
(71,898
|
)
|
|
1,177
|
|
Total comprehensive income
|
|
525,229
|
|
|
201,789
|
|
|
677,492
|
|
|
294,021
|
|
Less noncontrolling interest in comprehensive income
|
|
8,734
|
|
|
9,776
|
|
|
14,595
|
|
|
16,935
|
|
Comprehensive income attributable to HollyFrontier stockholders
|
|
$
|
516,495
|
|
|
$
|
192,013
|
|
|
$
|
662,897
|
|
|
$
|
277,086
|
|
See accompanying notes.
HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2012
|
|
2011
|
|
|
|
|
As Adjusted (See Note 2)
|
Cash flows from operating activities:
|
|
|
|
|
Net income
|
|
$
|
749,390
|
|
|
$
|
292,844
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
113,050
|
|
|
63,140
|
|
Earnings of equity method investments, net of distributions
|
|
(104
|
)
|
|
(82
|
)
|
Gain on sale of marketable equity securities
|
|
(326
|
)
|
|
—
|
|
Deferred income taxes
|
|
(2,683
|
)
|
|
(3,568
|
)
|
Equity-based compensation expense
|
|
17,491
|
|
|
5,562
|
|
Change in fair value – derivative instruments
|
|
10,289
|
|
|
7,155
|
|
(Increase) decrease in current assets:
|
|
|
|
|
Accounts receivable
|
|
103,674
|
|
|
(38,017
|
)
|
Inventories
|
|
(195,200
|
)
|
|
(94,933
|
)
|
Income taxes receivable
|
|
365
|
|
|
51,034
|
|
Prepayments and other
|
|
17,928
|
|
|
(13,088
|
)
|
Increase (decrease) in current liabilities:
|
|
|
|
|
Accounts payable
|
|
(418,937
|
)
|
|
160,760
|
|
Income taxes payable
|
|
121,899
|
|
|
23,002
|
|
Accrued liabilities
|
|
(34,870
|
)
|
|
16,712
|
|
Turnaround expenditures
|
|
(46,995
|
)
|
|
(19,824
|
)
|
Other, net
|
|
(5,468
|
)
|
|
7,299
|
|
Net cash provided by operating activities
|
|
429,503
|
|
|
457,996
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Additions to properties, plants and equipment
|
|
(116,012
|
)
|
|
(133,405
|
)
|
Additions to properties, plants and equipment – HEP
|
|
(12,008
|
)
|
|
(22,900
|
)
|
Investment in Sabine Biofuels
|
|
(2,000
|
)
|
|
(9,125
|
)
|
Purchases of marketable securities
|
|
(166,429
|
)
|
|
(157,782
|
)
|
Sales and maturities of marketable securities
|
|
151,996
|
|
|
68,150
|
|
Net cash used for investing activities
|
|
(144,453
|
)
|
|
(255,062
|
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
Borrowings under credit agreement – HEP
|
|
99,000
|
|
|
64,000
|
|
Repayments under credit agreement – HEP
|
|
(129,000
|
)
|
|
(37,000
|
)
|
Net proceeds from issuance of senior notes – HEP
|
|
294,750
|
|
|
—
|
|
Repurchase of senior notes – HFC
|
|
(5,000
|
)
|
|
—
|
|
Principal tender on senior notes – HEP
|
|
(185,000
|
)
|
|
—
|
|
Purchase of treasury stock
|
|
(189,771
|
)
|
|
(2,996
|
)
|
Net prepayment related to structured stock repurchase arrangement
|
|
(100,000
|
)
|
|
—
|
|
Contribution from joint venture partner
|
|
6,000
|
|
|
16,500
|
|
Dividends
|
|
(249,958
|
)
|
|
(15,984
|
)
|
Distributions to noncontrolling interest
|
|
(28,944
|
)
|
|
(25,133
|
)
|
Excess tax benefit from equity-based compensation
|
|
4,762
|
|
|
498
|
|
Purchase of units for incentive grants – HEP
|
|
(4,533
|
)
|
|
(1,379
|
)
|
Deferred financing costs
|
|
(3,229
|
)
|
|
(3,289
|
)
|
Other
|
|
(833
|
)
|
|
(563
|
)
|
Net cash used for financing activities
|
|
(491,756
|
)
|
|
(5,346
|
)
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
Increase (decrease) for the period
|
|
(206,706
|
)
|
|
197,588
|
|
Beginning of period
|
|
1,578,904
|
|
|
229,101
|
|
End of period
|
|
$
|
1,372,198
|
|
|
$
|
426,689
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
Interest
|
|
$
|
48,928
|
|
|
$
|
34,264
|
|
Income taxes
|
|
$
|
301,854
|
|
|
$
|
89,935
|
|
See accompanying notes.
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 merged with Frontier Oil Corporation (“Frontier”) effective July 1, 2011. Concurrent with the merger, we changed our name from Holly Corporation (“Holly”) to HollyFrontier and changed the ticker symbol for our common stock traded on the New York Stock Exchange to "HFC" (see Note 3). Accordingly, these financial statements include Frontier, its consolidated subsidiaries and the operations of the merged Frontier businesses effective July 1, 2011, but not prior to this date.
We are principally an independent petroleum refiner that produces high-value light products such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. We own and operate petroleum refineries that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. As of
June 30, 2012
, 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 NK Asphalt Partners (“NK Asphalt”) which operates various asphalt terminals in Arizona and New Mexico;
|
|
|
•
|
owned a
75%
interest in a
12
-inch refined products pipeline from Salt Lake City, Utah to Las Vegas, Nevada, together with terminal facilities in the Cedar City, Utah and North Las Vegas areas (the “UNEV Pipeline”). On July 12, 2012, we sold our
75%
ownership interest in the UNEV Pipeline to HEP (see Note 4);
|
|
|
•
|
owned Ethanol Management Company (“EMC”), a products terminal and blending facility near Denver, Colorado and a
50%
interest in Sabine Biofuels II, LLC (“Sabine Biofuels”), a biodiesel production facility located in Port Arthur, Texas; and
|
|
|
•
|
owned a
42%
interest in HEP, a consolidated variable interest entity (“VIE”), which includes our
2%
general partner interest. HEP owns and operates logistic assets consisting of petroleum product and crude oil pipelines and terminal, tankage and loading rack facilities that principally support our refining and marketing operations in the Mid-Continent, Southwest and Rocky Mountain regions of the United States and Alon USA, Inc.'s (“Alon”) refinery in Big Spring, Texas. Additionally, HEP owns a
25%
interest in SLC Pipeline LLC (the “SLC Pipeline”), a
95
-mile intrastate pipeline system that serves refineries in the Salt Lake City area.
|
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
June 30, 2012
, the consolidated results of operations and comprehensive income for the
three
and
six
months ended
June 30, 2012
and
2011
and consolidated cash flows for the
six
months ended
June 30, 2012
and
2011
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, 2011
that has been filed with the SEC.
Our results of operations for the
six
months ended
June 30, 2012
are not necessarily indicative of the results of operations to be realized for the year ending
December 31, 2012
.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
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
$2.5 million
and $
3.5 million
at
June 30, 2012
and
December 31, 2011
, respectively.
Inventories:
We use the last-in, first-out (“LIFO”) method of valuing inventory. Under the LIFO method, an actual valuation of inventory can only be 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.
Goodwill:
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 events or circumstances indicate the possibility of impairment. As of
June 30, 2012
, there have been no impairments to goodwill.
|
|
NOTE 2:
|
Change in Accounting Principle
|
In the first quarter of 2012, we changed our policy of reporting certain same-party accounts receivable and payable balances in the consolidated balance sheets to reflect a net amount due under contractual netting agreements. Prior to this change, we reported such balances on a gross basis with a same-party receivable and payable balance presented separately in our balance sheet. GAAP permits a reporting entity to elect a policy of offsetting same-party receivables and payables when such amounts are net settled under legally enforceable contractual setoff provisions. We believe that a net presentation is preferable because it more appropriately presents our economic resources (accounts receivable) and claims against us (accounts payable) and the future cash flows associated with such assets and liabilities. Additionally, we believe a net presentation of such amounts conforms to the predominant practices used by other companies in our industry. We have applied this change in accounting principle on a retrospective basis and have recast our prior period financial statements.
The following table summarizes the line items affected in our consolidated balance sheet at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Originally Reported
|
|
As Adjusted
|
|
Effect of Change
|
|
(In thousands)
|
Accounts receivable: Crude oil resales
|
$
|
743,544
|
|
|
$
|
5,166
|
|
|
$
|
(738,378
|
)
|
Total current assets
|
4,659,124
|
|
|
3,920,746
|
|
|
(738,378
|
)
|
Total assets
|
$
|
10,314,621
|
|
|
$
|
9,576,243
|
|
|
$
|
(738,378
|
)
|
|
|
|
|
|
|
Accounts payable
|
$
|
2,243,072
|
|
|
$
|
1,504,694
|
|
|
$
|
(738,378
|
)
|
Total current liabilities
|
2,629,061
|
|
|
1,890,683
|
|
|
(738,378
|
)
|
Total liabilities and equity
|
$
|
10,314,621
|
|
|
$
|
9,576,243
|
|
|
$
|
(738,378
|
)
|
The following table summarizes the line items affected in our consolidated statement of cash flow for the
six
months ended
June 30, 2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Originally Reported
|
|
As Adjusted
|
|
Effect of Change
|
|
(In thousands)
|
(Increase) decrease in current assets:
|
|
|
|
|
|
Accounts receivable
|
$
|
(10,411
|
)
|
|
$
|
(38,017
|
)
|
|
$
|
(27,606
|
)
|
|
|
|
|
|
|
Increase (decrease) in current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
133,154
|
|
|
$
|
160,760
|
|
|
$
|
27,606
|
|
At
June 30, 2012
, our accounts payable balance is presented net of
$673.8 million
in crude oil receivables subject to contractual setoff provisions. There was no cumulative impact to retained earnings since this change in accounting principle did not affect earnings.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
|
|
NOTE 3:
|
Holly-Frontier Merger
|
On February 21, 2011, we entered into a merger agreement providing for a “merger of equals” business combination between us and Frontier. The legacy Frontier business operations consist of crude oil refining and the wholesale marketing of refined petroleum products produced at the El Dorado and Cheyenne Refineries and serve markets in the Rocky Mountain and Plains States regions of the United States. On July 1, 2011, North Acquisition, Inc., a direct wholly-owned subsidiary of Holly, merged with and into Frontier, with Frontier surviving as a wholly-owned subsidiary of Holly. Subsequent to the merger and following approval by the post-closing board of directors of HollyFrontier, Frontier merged with and into HollyFrontier, with HollyFrontier continuing as the surviving corporation.
In accordance with the merger agreement, we issued approximately
102.8 million
shares of HollyFrontier common stock in exchange for outstanding shares of Frontier common stock to former Frontier stockholders. Each outstanding share of Frontier common stock was converted into
0.4811
shares of HollyFrontier common stock with any fractional shares paid in cash. The aggregate consideration paid in connection with the merger was approximately
$3.7 billion
. This is based on our July 1, 2011 market closing price of
$35.93
and includes a portion of the fair value of the outstanding equity-based awards assumed from Frontier that relates to pre-merger services.
The merger has been accounted for using the acquisition method of accounting with Holly being considered the acquirer of Frontier for accounting purposes. Therefore, the purchase price was allocated to the fair value of the acquired assets and assumed liabilities at the acquisition date, with the excess purchase price being recorded as goodwill. The goodwill resulting from the merger is primarily due to the favorable location of the acquired refining facilities and the expected synergies to be gained from our combined business operations. Goodwill related to this merger is not deductible for income tax purposes.
Our consolidated financial and operating results reflect the operations of the merged Frontier businesses beginning July 1, 2011. Assuming the merger had been consummated on
January 1, 2011
, pro forma revenues, net income and basic and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2011
|
|
Six Months Ended June 30, 2011
|
|
|
(In thousands, except per share amounts)
|
Sales and other revenues
|
|
$
|
5,037,660
|
|
|
$
|
9,272,899
|
|
Net income attributable to HollyFrontier stockholders
|
|
$
|
369,039
|
|
|
$
|
603,105
|
|
Basic earnings per share
|
|
$
|
1.76
|
|
|
$
|
2.88
|
|
Diluted earnings per share
|
|
$
|
1.75
|
|
|
$
|
2.87
|
|
Adjustments made to derive pro forma net income primarily relate to depreciation and amortization expense to reflect our new basis in the legacy Frontier refining facilities.
|
|
NOTE 4:
|
Holly Energy Partners
|
HEP, a consolidated VIE, is a publicly held master limited partnership that was formed to acquire, own and operate the petroleum product and crude oil pipeline and terminal, tankage and loading rack facilities that support our refining and marketing operations in the Mid-Continent, Southwest and Rocky Mountain regions of the United States. HEP also owns and operates refined product pipelines and terminals, located primarily in Texas, that serve Alon's refinery in Big Spring, Texas.
As of
June 30, 2012
, we owned a
42%
interest in HEP, including the
2%
general partner interest. We are the primary beneficiary of HEP's earnings and cash flows and therefore we consolidate HEP. See Note 19 for supplemental guarantor/non-guarantor financial information, including HEP balances included in these consolidated financial statements. All intercompany transactions with HEP are eliminated in our consolidated financial statements.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
HEP has
two
primary customers (including us) and generates revenues by charging tariffs for transporting petroleum products and crude oil though its pipelines, by charging fees for terminalling refined products and other hydrocarbons, and 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
84%
of HEP’s total revenues for the
six
months ended
June 30, 2012
. We do not provide financial or equity support through any liquidity arrangements and /or guarantees to HEP.
HEP has outstanding debt under a senior secured revolving credit agreement and its senior notes. With the exception of the assets of HEP Logistics Holdings, L.P., one of our wholly-owned subsidiaries and HEP’s general partner, HEP’s creditors have no recourse to our assets. Any recourse to HEP’s 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. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries. See Note 12 for a description of HEP’s debt obligations.
At
June 30, 2012
, we have an agreement to pledge up to
6,000,000
of our HEP common units to collateralize certain crude oil purchases. These units represent a
21%
ownership interest in HEP.
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.
UNEV Pipeline Interest Transaction
On July 12, 2012, we sold our
75%
interest in the UNEV Pipeline to HEP. Consideration received consisted of
$260.0 million
in cash and approximately 1 million HEP common units. As a result of this transaction, our ownership interest in HEP increased to
44%
, which includes the 2% general partner interest.
Legacy Frontier Tankage and Terminal Asset Transaction
On November 9, 2011, HEP acquired from us certain tankage, loading rack and crude receiving assets located at our El Dorado and Cheyenne Refineries.
Transportation Agreements
HEP serves our refineries under long-term pipeline and terminal, tankage and throughput agreements expiring from 2019 through 2026. Under these agreements, we pay HEP fees to transport, store and throughput volumes of refined product and crude oil on HEP's pipeline and terminal, tankage and loading rack facilities that result in minimum annual payments to 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 (“PPI”) or Federal Energy Regulatory Commission (“FERC”) index. As of
July 1, 2012
, these agreements result in minimum annualized payments to HEP of
$200.3 million
.
Since HEP is a consolidated VIE, our transactions with HEP including fees paid under our transportation agreements with HEP are eliminated and have no impact on our consolidated financial statements.
|
|
NOTE 5:
|
Financial Instruments
|
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and HEP's credit agreement borrowings approximate fair value. HEP's outstanding credit agreement borrowings approximate fair value as interest rates are reset frequently at current interest rates.
Fair value measurements are derived using inputs (assumptions that market participants would use in pricing an asset or liability, including assumptions about risk). GAAP categorizes inputs used in fair value measurements into three broad levels as follows:
|
|
•
|
(Level 1) Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
(Level 2) Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, similar assets and liabilities in markets that are not active or can be corroborated by observable market data.
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
|
|
•
|
(Level 3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes valuation techniques that involve significant unobservable inputs.
|
The carrying amounts and related estimated fair values of our investments in marketable securities, derivative instruments and the senior notes at
June 30, 2012
and
December 31, 2011
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value by Input Level
|
Financial Instrument
|
|
Carrying Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
(In thousands)
|
June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Marketable debt securities
|
|
$
|
276,248
|
|
|
$
|
276,248
|
|
|
$
|
—
|
|
|
$
|
276,248
|
|
|
$
|
—
|
|
NYMEX futures contracts
|
|
3,683
|
|
|
3,683
|
|
|
3,683
|
|
|
—
|
|
|
—
|
|
Commodity price swaps
|
|
119,461
|
|
|
119,461
|
|
|
—
|
|
|
—
|
|
|
119,461
|
|
Total assets
|
|
$
|
399,392
|
|
|
$
|
399,392
|
|
|
$
|
3,683
|
|
|
$
|
276,248
|
|
|
$
|
119,461
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Commodity price swaps
|
|
$
|
89,194
|
|
|
$
|
89,194
|
|
|
—
|
|
|
$
|
89,194
|
|
|
$
|
—
|
|
HollyFrontier senior notes
|
|
644,982
|
|
|
686,628
|
|
|
—
|
|
|
686,628
|
|
|
—
|
|
HEP senior notes
|
|
443,195
|
|
|
461,625
|
|
|
—
|
|
|
461,625
|
|
|
—
|
|
HEP interest rate swap
|
|
2,382
|
|
|
2,382
|
|
|
—
|
|
|
2,382
|
|
|
—
|
|
Total liabilities
|
|
$
|
1,179,753
|
|
|
$
|
1,239,829
|
|
|
$
|
—
|
|
|
$
|
1,239,829
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
753
|
|
|
$
|
753
|
|
|
$
|
753
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Marketable debt securities
|
|
260,953
|
|
|
260,953
|
|
|
—
|
|
|
260,953
|
|
|
—
|
|
Commodity price swaps
|
|
175,654
|
|
|
175,654
|
|
|
—
|
|
|
144,038
|
|
|
31,616
|
|
Total assets
|
|
$
|
437,360
|
|
|
$
|
437,360
|
|
|
$
|
753
|
|
|
$
|
404,991
|
|
|
$
|
31,616
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
NYMEX futures contracts
|
|
$
|
1,252
|
|
|
$
|
1,252
|
|
|
$
|
1,252
|
|
|
$
|
—
|
|
|
$
|
—
|
|
HollyFrontier senior notes
|
|
651,262
|
|
|
693,979
|
|
|
—
|
|
|
693,979
|
|
|
—
|
|
HEP senior notes
|
|
325,860
|
|
|
344,350
|
|
|
—
|
|
|
344,350
|
|
|
—
|
|
HEP interest rate swap
|
|
520
|
|
|
520
|
|
|
—
|
|
|
520
|
|
|
—
|
|
Total liabilities
|
|
$
|
978,894
|
|
|
$
|
1,040,101
|
|
|
$
|
1,252
|
|
|
$
|
1,038,849
|
|
|
$
|
—
|
|
Level 1 Financial Instruments
Our investments in equity securities and our NYMEX futures contracts are exchange traded and are measured and recorded at fair value using quoted market prices, a Level 1 input.
Level 2 Financial Instruments
Investments in marketable debt securities and derivative instruments consisting of commodity price swaps and HEP's interest rate swap are measured and recorded at fair value using Level 2 inputs. With respect to the commodity price and interest rate swap contracts, fair value is based on the net present value of expected future cash flows related to both variable and fixed rate legs of the respective swap agreements. The measurements are computed using market-based observable inputs, quoted forward commodity prices with respect to our commodity price swaps and the forward London Interbank Offered Rate (“LIBOR”) yield curve with respect to HEP's interest rate swap. The fair value of the marketable debt securities and senior notes is based on values provided by a third-party bank, which were derived using market quotes for similar type instruments, a Level 2 input.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Level 3 Financial Instruments
We have entered into certain commodity price swap contracts related to forecasted sales of diesel and unleaded gasoline for which quoted forward market prices are not readily available. The forward rate used to value these price swaps was derived using a projected forward rate using quoted market rates for similar products, adjusted for regional pricing differentials, a Level 3 input.
The following table presents the changes in fair value of the Level 3 assets and liabilities (all related to commodity price swap contracts) for the three and
six
months ended
June 30, 2012
:
|
|
|
|
|
|
|
|
|
Level 3 Financial Instruments
|
Three Months Ended June 30, 2012
|
|
Six Months Ended June 30, 2012
|
|
(In thousands)
|
Asset (liability) balance at beginning of period
|
$
|
(149,278
|
)
|
|
$
|
31,616
|
|
Change in fair value
|
248,572
|
|
|
33,553
|
|
Fair value on date of settlement of open contracts at beginning of period
|
20,167
|
|
|
54,292
|
|
Asset balance at end of period
|
$
|
119,461
|
|
|
$
|
119,461
|
|
A hypothetical change of
10%
to the estimated future cash flows attributable to our Level 3 commodity price swaps would result in an estimated fair value change of approximately
$12.0 million
.
|
|
NOTE 6:
|
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 variable restricted and variable performance shares. 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 June 30,
|
|
Six Months Ended June 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
(In thousands, except per share data)
|
Earnings attributable to HollyFrontier stockholders
|
|
$
|
493,499
|
|
|
$
|
192,235
|
|
|
$
|
735,195
|
|
|
$
|
276,929
|
|
Average number of shares of common stock outstanding
|
|
205,727
|
|
|
106,730
|
|
|
207,129
|
|
|
106,672
|
|
Effect of dilutive variable restricted shares and performance share units
|
|
754
|
|
|
610
|
|
|
809
|
|
|
614
|
|
Average number of shares of common stock outstanding assuming dilution
|
|
206,481
|
|
|
107,340
|
|
|
207,938
|
|
|
107,286
|
|
Basic earnings per share
|
|
$
|
2.40
|
|
|
$
|
1.80
|
|
|
$
|
3.55
|
|
|
$
|
2.60
|
|
Diluted earnings per share
|
|
$
|
2.39
|
|
|
$
|
1.79
|
|
|
$
|
3.54
|
|
|
$
|
2.58
|
|
|
|
NOTE 7:
|
Stock-Based Compensation
|
As of
June 30, 2012
, we have two principal share-based compensation plans including the Frontier plan that was retained upon the July 1, 2011 merger (collectively, the “Long-Term Incentive Compensation Plan”).
The compensation cost charged against income for these plans was
$7.3 million
and
$3.4 million
for the
three
months ended
June 30, 2012
and
2011
, respectively, and
$15.9 million
and
$4.5 million
for the
six
months ended
June 30, 2012
and
2011
, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was
$2.8 million
and
$1.3 million
for the three months ended
June 30, 2012
and
2011
, respectively, and
$6.2 million
and
$1.8 million
for the
six
months ended
June 30, 2012
and
2011
, respectively. Our accounting policy for the recognition of compensation expense for awards with pro-rata vesting (substantially all of our awards) is to expense the costs ratably over the vesting periods.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Additionally, HEP maintains a share-based compensation plan for HEP directors and select Holly Logistic Services, L.L.C. executives and employees. Compensation cost attributable to HEP’s share-based compensation plan was
$0.7 million
and
$0.4 million
for the
three
months ended
June 30, 2012
and
2011
, respectively, and
$1.6 million
and
$1.1 million
for the
six
months ended
June 30, 2012
and
2011
, respectively.
Restricted Stock
Under our Long-Term Incentive Compensation Plan, we grant certain officers, other key employees and non-employee directors restricted stock awards with most awards vesting over a period of
one
to
three
years. Although ownership of the shares does not transfer to the recipients until after the shares vest, recipients generally have dividend rights on these shares from the date of grant. The vesting for certain key executives is contingent upon certain performance targets being realized. The fair value of each share of restricted stock awarded, including the shares issued to the key executives, is measured based on the market price as of the date of grant and is amortized over the respective vesting period.
A summary of restricted stock activity and changes during the
six
months ended
June 30, 2012
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Grants
|
|
Weighted Average Grant Date Fair Value
|
|
Aggregate Intrinsic Value ($000)
|
|
|
|
|
|
|
|
Outstanding at January 1, 2012 (non-vested)
|
|
1,122,350
|
|
|
$
|
25.48
|
|
|
|
Granted
|
|
407,037
|
|
|
33.81
|
|
|
|
Vesting and transfer of ownership to recipients
|
|
(571,238
|
)
|
|
23.40
|
|
|
|
Forfeited
|
|
(3,975
|
)
|
|
33.06
|
|
|
|
Outstanding at June 30, 2012 (non-vested)
|
|
954,174
|
|
|
$
|
30.25
|
|
|
$
|
33,806
|
|
For the
six
months ended
June 30, 2012
, we issued
571,238
shares of our common stock upon the vesting of restricted stock grants having a grant date fair value of
$13.4 million
. As of
June 30, 2012
, there was
$16.2 million
of total unrecognized compensation cost related to non-vested restricted stock grants. That cost is expected to be recognized over a weighted-average period of
1.4
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 upon meeting certain criteria over the service period, and generally vest over a period of
one
to
three
years. Under the terms of our performance share unit grants, awards are subject to either a "financial performance" or "market performance" criteria, or both.
The fair value of performance share unit awards subject to financial performance criteria is computed using the grant date closing stock price of each respective award grant and will apply to the number of units ultimately awarded. The number of shares ultimately issued for each award will be based on our financial performance as compared to peer group companies over the performance period and can range from
zero
to
200%
. As of
June 30, 2012
, estimated share payouts for outstanding non-vested performance share unit awards ranged from
107%
to
190%
.
For the performance share units subject to market performance criteria, performance is calculated as the total shareholder return achieved by HollyFrontier stockholders compared with the average shareholder return achieved by an equally-weighted peer group of independent refining companies over a
three
-year period. These share unit awards are valued using a Monte Carlo valuation model, which simulates future stock price movements using key inputs including grant date stock prices, expected stock price performance, expected rate of return and volatility of our stock price relative to a peer group over a
three
-year performance period. These units are payable in stock based on share price performance relative to the defined peer group and can range from
zero
to
200%
of the initial target award.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
A summary of performance share unit activity and changes during the
six
months ended
June 30, 2012
is presented below:
|
|
|
|
|
Performance Share Units
|
|
Grants
|
|
|
|
Outstanding at January 1, 2012 (non-vested)
|
|
774,788
|
|
Granted
|
|
293,559
|
|
Vesting and transfer of ownership to recipients
|
|
(240,019
|
)
|
Forfeited
|
|
(5,057
|
)
|
Outstanding at June 30, 2012 (non-vested)
|
|
823,271
|
|
For the
six
months ended
June 30, 2012
, we issued
459,737
shares of our common stock, representing a
192%
payout on vested performance share units having a grant date fair value of
$2.8 million
. Based on the weighted-average grant date fair value of
$28.13
per share, there was
$17.4 million
of total unrecognized compensation cost related to non-vested performance share units. That cost is expected to be recognized over a weighted-average period of
1.4
years.
|
|
NOTE 8:
|
Cash and Cash Equivalents and Investments in Marketable Securities
|
Our investment portfolio at
June 30, 2012
consisted of cash, cash equivalents and investments in debt securities primarily issued by government and municipal entities.
We invest in highly-rated marketable debt securities, primarily issued by government and municipal entities that have maturities at the date of purchase of greater than three months. We also invest in other marketable debt securities with the maximum maturity or put date of any individual issue generally not greater than
two
years from the date of purchase. All of these instruments, including investments in equity securities, are classified as available-for-sale. As a result, they are reported at fair value using quoted market prices. Interest income is recorded as earned. Unrealized gains and losses, net of related income taxes, are reported as a component of accumulated other comprehensive income. Upon sale, realized gains and losses on the sale of marketable securities are computed based on the specific identification of the underlying cost of the securities sold and the unrealized gains and losses previously reported in other comprehensive income are reclassified to current earnings.
The following is a summary of our available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities
|
|
|
Amortized Cost
|
|
Gross Unrealized Gain
|
|
Gross Unrealized Loss
|
|
Fair Value
(Net Carrying Amount)
|
|
|
(In thousands)
|
June 30, 2012
|
|
|
|
|
|
|
|
|
Marketable debt securities (state and political subdivisions)
|
|
$
|
276,248
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
276,248
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Marketable debt securities (state and political subdivisions)
|
|
$
|
260,879
|
|
|
$
|
74
|
|
|
$
|
—
|
|
|
$
|
260,953
|
|
Equity securities
|
|
610
|
|
|
143
|
|
|
—
|
|
|
753
|
|
Total marketable securities
|
|
$
|
261,489
|
|
|
$
|
217
|
|
|
$
|
—
|
|
|
$
|
261,706
|
|
For the
six
months ended
June 30, 2012
, we invested
$166.4 million
in marketable debt securities and received a total of
$152.0 million
from sales and maturities of equity and marketable debt securities.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Inventory consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2012
|
|
December 31, 2011
|
|
|
(In thousands)
|
Crude oil
|
|
$
|
471,228
|
|
|
$
|
400,952
|
|
Other raw materials and unfinished products
(1)
|
|
164,730
|
|
|
137,356
|
|
Finished products
(2)
|
|
617,849
|
|
|
513,776
|
|
Process chemicals
(3)
|
|
2,943
|
|
|
1,180
|
|
Repairs and maintenance supplies and other
|
|
53,069
|
|
|
61,355
|
|
Total inventory
|
|
$
|
1,309,819
|
|
|
$
|
1,114,619
|
|
|
|
(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.
|
The following table provides a summary of changes to our goodwill balance by segment for the
six
months ended
June 30, 2012
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining Segment
|
|
HEP
|
|
Total
|
|
(In thousands)
|
Balance at January 1, 2012
|
$
|
2,047,519
|
|
|
$
|
288,991
|
|
|
$
|
2,336,510
|
|
Adjustment to goodwill related to Frontier merger
|
1,792
|
|
|
—
|
|
|
1,792
|
|
Balance at June 30, 2012
|
$
|
2,049,311
|
|
|
$
|
288,991
|
|
|
$
|
2,338,302
|
|
During the first quarter of 2012, we adjusted goodwill upon finalizing certain fair value estimates that primarily relate to income tax receivables, properties, plants and equipment and environmental liabilities that were recognized upon our July 1, 2011 merger with Frontier.
We expensed
$1.0 million
and
$0.1 million
for the three months ended
June 30, 2012
and
2011
, respectively, and
$15.2 million
and
$0.1 million
for the
six
months ended
June 30, 2012
and
2011
, respectively, for environmental remediation obligations. The accrued environmental liability reflected in our consolidated balance sheets was
$61.4 million
and
$42.2 million
at
June 30, 2012
and
December 31, 2011
, respectively, of which
$48.7 million
and
$31.7 million
, respectively, were classified as other long-term liabilities. These accruals include remediation costs expected to be incurred over an extended period of time. It also includes
$15.6 million
in environmental liabilities that were assumed upon our merger with Frontier.
HollyFrontier Credit Agreement
We have a
$1 billion
senior secured credit agreement (the “HollyFrontier Credit Agreement”) with Union Bank, N.A. as administrative agent and certain lenders from time to time party thereto. The HollyFrontier Credit Agreement matures in July 2016 and may be used to fund working capital requirements, capital expenditures, acquisitions and general corporate purposes. Obligations under the HollyFrontier Credit Agreement are collateralized by our inventory, accounts receivables and certain deposit accounts and guaranteed by our material, wholly-owned subsidiaries.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
We were in compliance with all covenants at
June 30, 2012
. At
June 30, 2012
, we had no outstanding borrowings and outstanding letters of credit totaled
$27.9 million
under the HollyFrontier Credit Agreement. At that level of usage, the unused commitment was
$972.1 million
at
June 30, 2012
.
HEP Credit Agreement
In June 2012, HEP amended its previous credit agreement, increasing the size of the credit facility from
$375 million
to
$550 million
. HEP's
$550 million
senior secured revolving credit facility expires in June 2017 (the “HEP Credit Agreement”) and is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. It is also available to fund letters of credit up to a
$50 million
sub-limit and to fund distributions to unitholders up to a
$60 million
sub-limit. At
June 30, 2012
, the HEP Credit Agreement had outstanding borrowings of
$170.0 million
.
HEP’s obligations under the HEP Credit Agreement are collateralized by substantially all of HEP’s assets (presented parenthetically in our consolidated balance sheets). Indebtedness under the HEP Credit Agreement is recourse to HEP Logistics Holdings, L.P., its general partner, and guaranteed by HEP’s 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 other recourse to our assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries.
HollyFrontier Senior Notes
Our senior notes consist of the following:
|
|
•
|
9.875%
senior notes (
$286.8 million
principal amount maturing June 2017)
|
|
|
•
|
6.875%
senior notes (
$150 million
principal amount maturing November 2018)
|
|
|
•
|
8.5%
senior notes (
$200 million
principal amount maturing September 2016)
|
These senior notes (collectively, the “HollyFrontier Senior Notes”) are unsecured and impose certain restrictive covenants, including limitations on our ability to incur additional debt, incur liens, enter into sale-and-leaseback transactions, pay dividends, enter into mergers, sell assets and enter into certain transactions with affiliates. At any time when the HollyFrontier Senior Notes are rated investment grade by both Moody’s and Standard & Poor’s and no default or event of default exists, we will not be subject to many of the foregoing covenants. Additionally, we have certain redemption rights under the HollyFrontier Senior Notes.
HollyFrontier Financing Obligation
We have a financing obligation that relates to a sale and lease-back of certain crude oil tankage that we sold to an affiliate of Plains All American Pipeline, L.P. (“Plains”) in October 2009. Under this transaction, the
$40.0 million
in cash proceeds received was recorded as a liability. Monthly lease payments are recorded as a reduction in principal over the
15
-year lease term ending in 2024.
HEP Senior Notes
HEP’s senior notes consist of the following:
|
|
•
|
6.5%
HEP senior notes (
$300 million
principal amount maturing March 2020)
|
|
|
•
|
8.25%
HEP senior notes (
$150 million
principal amount maturing March 2018)
|
In March 2012, HEP issued
$300 million
in aggregate principal amount of
6.5%
HEP senior notes maturing March 2020. The
$294.8 million
in net proceeds were used to repay
$157.8 million
aggregate principal amount of
6.25%
HEP senior notes,
$72.9 million
in promissory notes due to HollyFrontier, related fees, expenses and accrued interest in connection with these transactions and to repay borrowings under the HEP Credit Agreement. In April 2012, HEP called for redemption the
$27.3 million
aggregate principal amount outstanding of
6.25%
HEP senior notes.
The
6.5%
HEP and
8.25%
HEP senior notes (collectively, 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.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Indebtedness under the HEP Senior Notes is recourse to HEP Logistics Holdings, L.P., its general partner, and guaranteed by HEP’s wholly-owned subsidiaries. However, 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 other 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:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2012
|
|
December 31,
2011
|
|
|
(In thousands)
|
9.875% Senior Notes
|
|
|
|
|
Principal
|
|
$
|
286,812
|
|
|
$
|
291,812
|
|
Unamortized discount
|
|
(8,100
|
)
|
|
(8,930
|
)
|
|
|
278,712
|
|
|
282,882
|
|
6.875% Senior Notes
|
|
|
|
|
Principal
|
|
150,000
|
|
|
150,000
|
|
Unamortized premium
|
|
5,901
|
|
|
6,490
|
|
|
|
155,901
|
|
|
156,490
|
|
8.5% Senior Notes
|
|
|
|
|
Principal
|
|
199,985
|
|
|
199,985
|
|
Unamortized premium
|
|
10,384
|
|
|
11,905
|
|
|
|
210,369
|
|
|
211,890
|
|
Financing Obligation
|
|
36,986
|
|
|
37,620
|
|
|
|
|
|
|
Total HollyFrontier long-term debt
|
|
681,968
|
|
|
688,882
|
|
|
|
|
|
|
HEP Credit Agreement
|
|
170,000
|
|
|
200,000
|
|
|
|
|
|
|
HEP 8.25% Senior Notes
|
|
|
|
|
Principal
|
|
150,000
|
|
|
150,000
|
|
Unamortized discount
|
|
(1,754
|
)
|
|
(1,907
|
)
|
|
|
148,246
|
|
|
148,093
|
|
HEP 6.5% Senior Notes
|
|
|
|
|
Principal
|
|
300,000
|
|
|
—
|
|
Unamortized discount
|
|
(5,051
|
)
|
|
—
|
|
|
|
294,949
|
|
|
—
|
|
HEP 6.25% Senior Notes
|
|
|
|
|
Principal
|
|
—
|
|
|
185,000
|
|
Unamortized discount
|
|
—
|
|
|
(8,331
|
)
|
Unamortized premium – designated fair value hedge
|
|
—
|
|
|
1,098
|
|
|
|
—
|
|
|
177,767
|
|
|
|
|
|
|
Total HEP long-term debt
|
|
613,195
|
|
|
525,860
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,295,163
|
|
|
$
|
1,214,742
|
|
We capitalized interest attributable to construction projects of
$2.3 million
and
$4.3 million
for the three months ended
June 30, 2012
and
2011
, respectively, and
$3.9 million
and
$7.9 million
for the
six
months ended
June 30, 2012
and
2011
, respectively.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 13: 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 and futures contracts to mitigate price exposure with respect to:
|
|
•
|
our inventory positions;
|
|
|
•
|
costs of crude oil and related grade differentials;
|
|
|
•
|
prices of refined products; and
|
Accounting Hedges
We have swap contracts serving as cash flow hedges against price risk on forecasted purchases of WTI crude oil and forecasted sales of ultra-low sulfur diesel and conventional unleaded gasoline. These contracts have been designated as accounting hedges and are measured quarterly at fair value with offsetting adjustments (gains/losses) recorded directly to other comprehensive income. These fair value adjustments are later reclassified in the statement of income as the hedging instruments mature. Also on a quarterly basis, hedge ineffectiveness is measured by comparing the change in fair value of the swap contracts against the expected future cash inflows/outflows on the respective transaction being hedged.
The following table presents the pre-tax effect on comprehensive income ("OCI") and earnings due to fair value adjustments and maturities of commodity price swaps under hedge accounting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss) Recognized in OCI
|
|
Gain (Loss) Recognized in Earnings Due to Settlements
|
|
Gain (Loss) Attributable to Hedge Ineffectiveness Recognized in Earnings
|
|
|
Location
|
|
Amount
|
|
Location
|
|
Amount
|
|
|
|
(In thousands)
|
Three Months Ended June 30, 2012
|
|
|
|
|
|
|
|
|
|
Commodity price swaps
|
|
|
|
|
|
|
|
|
|
Change in fair value
|
$
|
27,044
|
|
|
Sales and other revenues
|
|
$
|
(20,167
|
)
|
|
Sales and other revenues
|
|
$
|
2,984
|
|
Loss reclassified to earnings due to settlements
|
3,992
|
|
|
Cost of products sold
|
|
16,175
|
|
|
Cost of products sold
|
|
(6,317
|
)
|
Total
|
$
|
31,036
|
|
|
|
|
$
|
(3,992
|
)
|
|
|
|
$
|
(3,333
|
)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
Commodity price swaps
|
$
|
—
|
|
|
Operating expenses
|
|
$
|
—
|
|
|
Operating expenses
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2012
|
|
|
|
|
|
|
|
|
|
Commodity price swaps
|
|
|
|
|
|
|
|
|
|
Change in fair value
|
$
|
(113,076
|
)
|
|
Sales and other revenues
|
|
$
|
(54,292
|
)
|
|
Sales and other revenues
|
|
$
|
1,655
|
|
Gain reclassified to earnings due to settlements
|
(12,423
|
)
|
|
Cost of products sold
|
|
66,715
|
|
|
Cost of products sold
|
|
(6,317
|
)
|
Total
|
$
|
(125,499
|
)
|
|
|
|
$
|
12,423
|
|
|
|
|
$
|
(4,662
|
)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
Commodity price swaps
|
|
|
|
|
|
|
|
|
|
Change in fair value
|
$
|
(128
|
)
|
|
|
|
|
|
|
|
|
Loss reclassified to earnings due to settlements
|
166
|
|
|
Operating expenses
|
|
$
|
(166
|
)
|
|
Operating expenses
|
|
$
|
—
|
|
Total
|
$
|
38
|
|
|
|
|
$
|
(166
|
)
|
|
|
|
$
|
—
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
As of
June 30, 2012
, we have the following notional contract volumes (stated in barrels) related to outstanding swap contracts serving as cash flow hedges against price risk on forecasted purchases of crude oil and sales of refined products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Contract Volumes by Year of Maturity
|
|
|
Commodity Price Swaps
|
|
Total Outstanding Notional
|
|
2012
|
|
2013
|
|
Unit of Measure
|
|
|
|
|
|
|
|
|
|
WTI crude oil - long
|
|
10,096,000
|
|
|
9,016,000
|
|
|
1,080,000
|
|
|
Barrels
|
Ultra-low sulfur diesel - short
|
|
5,048,000
|
|
|
4,508,000
|
|
|
540,000
|
|
|
Barrels
|
Conventional unleaded gasoline - short
|
|
5,048,000
|
|
|
4,508,000
|
|
|
540,000
|
|
|
Barrels
|
Economic Hedges
We also have swap contracts that serve as economic hedges to fix our purchase price on forecasted crude oil, natural gas and butane purchases, and to lock in the spread between WCS and WTI crude oil on forecasted purchases. Also, we have NYMEX futures contracts to lock in prices on forecasted sales and purchases of inventory. These contracts are measured quarterly at fair value with offsetting adjustments (gains/losses) recorded directly to net income.
The following table present the pre-tax effect on income due to maturities and fair value adjustments of our economic hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
Location of Gain (Loss) Recognized in Income
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
(In thousands)
|
Cost of products sold
|
|
$
|
50,863
|
|
|
$
|
3,045
|
|
|
$
|
35,869
|
|
|
$
|
(652
|
)
|
Operating expenses
|
|
1,543
|
|
|
—
|
|
|
(158
|
)
|
|
—
|
|
Total
|
|
$
|
52,406
|
|
|
$
|
3,045
|
|
|
$
|
35,711
|
|
|
$
|
(652
|
)
|
As of
June 30, 2012
, we have the following notional contract volumes related to our outstanding swap contracts serving as economic hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Contract Volumes by Year of Maturity
|
|
|
Derivative Instrument
|
|
Total Outstanding Notional
|
|
2012
|
|
2013
|
|
Unit of Measure
|
|
|
|
|
|
|
|
|
|
Commodity price swap (natural gas) - long
|
|
6,624,000
|
|
|
6,624,000
|
|
|
—
|
|
|
MMBTU
|
Commodity price swap (WCS spread) - long
|
|
6,422,500
|
|
|
765,000
|
|
|
5,657,500
|
|
|
Barrels
|
Commodity price swap (WTI) - short
|
|
150,000
|
|
|
—
|
|
|
150,000
|
|
|
Barrels
|
Commodity price swap (gasoline) - short
|
|
630,000
|
|
|
150,000
|
|
|
480,000
|
|
|
Barrels
|
Commodity price swap (butane) - long
|
|
540,000
|
|
|
540,000
|
|
|
—
|
|
|
Barrels
|
NYMEX futures (WTI) - long
|
|
380,000
|
|
|
146,000
|
|
|
234,000
|
|
|
Barrels
|
NYMEX futures (WTI)- short
|
|
1,008,000
|
|
|
1,008,000
|
|
|
—
|
|
|
Barrels
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Interest Rate Risk Management
HEP uses interest rate swaps to manage its exposure to interest rate risk.
As of
June 30, 2012
, HEP has an interest rate swap contract that hedges its exposure to the cash flow risk caused by the effects of LIBOR changes on a
$155.0 million
credit agreement advance. This interest rate swap effectively converts
$155.0 million
of LIBOR based debt to fixed rate debt having an interest rate of
0.99%
plus an applicable margin, of
2.00%
as of
June 30, 2012
, which equaled an effective interest rate of
2.99%
. This swap matures in February 2016 and has been designated as a cash flow hedge. To date, there has been no ineffectiveness on this cash flow hedge.
At
June 30, 2012
, HEP had a pre-tax unrealized loss recorded in accumulated other comprehensive income of
$5.8 million
that relates to its current and previous cash flow hedging instruments. Of this amount,
$3.4 million
relates to a cash flow hedge terminated in December 2011 and represents the application of hedge accounting prior to termination. This amount will be amortized as a charge to interest expense through February 2013, the remaining term of the terminated swap contract.
The following table presents the pre-tax effect on other comprehensive income and earnings due to fair value adjustments and maturities of interest rate swaps under cash flow hedge accounting:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss) Recognized in OCI
|
|
Gain (Loss) Recognized in Earnings Due to Settlements
|
|
|
Location
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Three Months Ended June 30, 2012
|
|
|
|
|
|
Interest rate swap
|
|
|
|
|
|
Change in fair value
|
$
|
(1,802
|
)
|
|
|
|
|
Loss reclassified to earnings due to settlements
|
1,567
|
|
|
Interest expense
|
|
$
|
(1,567
|
)
|
Total
|
$
|
(235
|
)
|
|
|
|
$
|
(1,567
|
)
|
|
|
|
|
|
|
Three Months Ended June 30, 2011
|
|
|
|
|
|
Interest rate swap
|
|
|
|
|
|
Change in fair value
|
$
|
(1,110
|
)
|
|
|
|
|
Loss reclassified to earnings due to settlements
|
1,381
|
|
|
Interest expense
|
|
$
|
(1,381
|
)
|
Total
|
$
|
271
|
|
|
|
|
$
|
(1,381
|
)
|
|
|
|
|
|
|
Six Months Ended June 30, 2012
|
|
|
|
|
|
Interest rate swap
|
|
|
|
|
|
Change in fair value
|
$
|
(2,438
|
)
|
|
|
|
|
Loss reclassified to earnings due to settlements
|
3,123
|
|
|
Interest expense
|
|
$
|
(3,123
|
)
|
Total
|
$
|
685
|
|
|
|
|
$
|
(3,123
|
)
|
|
|
|
|
|
|
Six Months Ended June 30, 2011
|
|
|
|
|
|
Interest rate swap
|
|
|
|
|
|
Change in fair value
|
$
|
(1,175
|
)
|
|
|
|
|
Loss reclassified to earnings due to settlements
|
2,729
|
|
|
Interest expense
|
|
$
|
(2,729
|
)
|
Total
|
$
|
1,554
|
|
|
|
|
$
|
(2,729
|
)
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
The following table presents balance sheet locations and related fair values of outstanding derivative instruments. These amounts are presented on a gross basis in accordance with GAAP disclosure requirements and do not reflect the netting of asset or liability positions permitted under the terms of master netting arrangements. Therefore, they are not equal to amounts presented in our consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
|
(In thousands)
|
June 30, 2012
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
Commodity price swap contracts
|
|
Prepayments and other current assets
|
|
$
|
119,461
|
|
|
Prepayments and other current assets
|
|
$
|
75,840
|
|
Variable-to-fixed interest rate swap contract
|
|
|
|
|
|
Other long-term liabilities
|
|
2,382
|
|
Total
|
|
|
|
$
|
119,461
|
|
|
|
|
$
|
78,222
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
Commodity price swap contracts
|
|
Prepayments and other current assets
|
|
$
|
6,372
|
|
|
Prepayments and other current assets
|
|
$
|
16,043
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
Derivatives designated as cash flow hedging instruments:
|
Commodity price swap contracts
|
|
Prepayments and other current assets
|
|
$
|
173,784
|
|
|
|
|
|
Variable-to-fixed interest rate swap contract
|
|
|
|
|
|
Other long-term liabilities
|
|
$
|
520
|
|
Total
|
|
|
|
$
|
173,784
|
|
|
|
|
$
|
520
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
Commodity price swap contracts
|
|
Prepayments and other current assets
|
|
$
|
1,870
|
|
|
Accrued liabilities
|
|
$
|
1,252
|
|
At
June 30, 2012
, there was a pre-tax net unrealized gain of
$41.2 million
classified in accumulated other comprehensive income that relates to all accounting hedges. Assuming commodity prices and interest rates remain unchanged, an unrealized gain of approximately
$43.0 million
will be effectively transferred from accumulated other comprehensive income into the statement of income as the hedging instruments mature over the next
twelve
-month period.
Changes to equity during the
six
months ended
June 30, 2012
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HollyFrontier
Stockholders’
Equity
|
|
Noncontrolling
Interest
|
|
Total
Equity
|
|
|
(In thousands)
|
Balance at December 31, 2011
|
|
$
|
5,204,010
|
|
|
$
|
631,890
|
|
|
$
|
5,835,900
|
|
Net income
|
|
735,195
|
|
|
14,195
|
|
|
749,390
|
|
Other comprehensive income (loss)
|
|
(72,298
|
)
|
|
400
|
|
|
(71,898
|
)
|
Dividends
|
|
(259,403
|
)
|
|
—
|
|
|
(259,403
|
)
|
Distributions to noncontrolling interest holders
|
|
—
|
|
|
(28,944
|
)
|
|
(28,944
|
)
|
Contribution from joint venture partner
|
|
—
|
|
|
3,000
|
|
|
3,000
|
|
Equity-based compensation
|
|
15,862
|
|
|
1,629
|
|
|
17,491
|
|
Excess tax benefit attributable to equity-based compensation
|
|
4,762
|
|
|
—
|
|
|
4,762
|
|
Purchase of treasury stock
(1)
|
|
(198,667
|
)
|
|
—
|
|
|
(198,667
|
)
|
Net prepayment related to structured share repurchase arrangement
|
|
(100,000
|
)
|
|
—
|
|
|
(100,000
|
)
|
Purchase of HEP units for restricted grants
|
|
—
|
|
|
(4,006
|
)
|
|
(4,006
|
)
|
Balance at June 30, 2012
|
|
$
|
5,329,461
|
|
|
$
|
618,164
|
|
|
$
|
5,947,625
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
|
|
(1)
|
Includes
305,037
shares withheld 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.
|
In January 2012, our Board of Directors approved a
$350 million
stock repurchase program, and in June 2012, approved an additional
$350 million
repurchase program that authorizes 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, corporate, regulatory and other relevant considerations. These programs may be discontinued at any time by the Board of Directors. As of
June 30, 2012
, we have repurchased
6,351,498
shares at a cost of
$189.8 million
under these stock repurchase programs.
In connection with these stock repurchase programs, we entered into a structured share repurchase arrangement with a financial institution in May 2012. Under the arrangement, we have provided an up-front cash payment of
$100.0 million
and depending on market conditions, will receive either shares of our common stock or cash at the expiration of the agreement. This prepayment is currently recorded as a component of additional capital in our consolidated balance sheets.
|
|
NOTE 15:
|
Other Comprehensive Income (Loss)
|
The components and allocated tax effects of other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before-Tax
|
|
Tax Expense
(Benefit)
|
|
After-Tax
|
|
|
(In thousands)
|
Three Months Ended June 30, 2012
|
|
|
|
|
|
|
Unrealized loss, net of reclassifications from sale or maturity, on available-for-sale securities
|
|
$
|
(404
|
)
|
|
$
|
(158
|
)
|
|
$
|
(246
|
)
|
Unrealized gain on hedging activities
|
|
30,801
|
|
|
12,035
|
|
|
18,766
|
|
Pension plan curtailment
|
|
7,102
|
|
|
2,763
|
|
|
4,339
|
|
Other comprehensive income
|
|
37,499
|
|
|
14,640
|
|
|
22,859
|
|
Less other comprehensive loss attributable to noncontrolling interest
|
|
(137
|
)
|
|
—
|
|
|
(137
|
)
|
Other comprehensive income attributable to HollyFrontier stockholders
|
|
$
|
37,636
|
|
|
$
|
14,640
|
|
|
$
|
22,996
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2011
|
|
|
|
|
|
|
Unrealized loss on available-for-sale securities
|
|
$
|
(459
|
)
|
|
$
|
(179
|
)
|
|
$
|
(280
|
)
|
Unrealized gain on hedging activities
|
|
271
|
|
|
35
|
|
|
236
|
|
Other comprehensive loss
|
|
(188
|
)
|
|
(144
|
)
|
|
(44
|
)
|
Less other comprehensive income attributable to noncontrolling interest
|
|
178
|
|
|
—
|
|
|
178
|
|
Other comprehensive loss attributable to HollyFrontier stockholders
|
|
$
|
(366
|
)
|
|
$
|
(144
|
)
|
|
$
|
(222
|
)
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2012
|
|
|
|
|
|
|
Unrealized loss, net of reclassifications from sale or maturity, on available-for-sale securities
|
|
$
|
(216
|
)
|
|
$
|
(84
|
)
|
|
$
|
(132
|
)
|
Unrealized loss on hedging activities
|
|
(124,814
|
)
|
|
(48,709
|
)
|
|
(76,105
|
)
|
Pension plan curtailment
|
|
7,102
|
|
|
2,763
|
|
|
4,339
|
|
Other comprehensive loss
|
|
(117,928
|
)
|
|
(46,030
|
)
|
|
(71,898
|
)
|
Less other comprehensive income attributable to noncontrolling interest
|
|
400
|
|
|
—
|
|
|
400
|
|
Other comprehensive loss attributable to HollyFrontier stockholders
|
|
$
|
(118,328
|
)
|
|
$
|
(46,030
|
)
|
|
$
|
(72,298
|
)
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2011
|
|
|
|
|
|
|
Unrealized loss on available-for-sale securities
|
|
$
|
(317
|
)
|
|
$
|
(124
|
)
|
|
$
|
(193
|
)
|
Unrealized gain on hedging activities
|
|
1,592
|
|
|
222
|
|
|
1,370
|
|
Other comprehensive income
|
|
1,275
|
|
|
98
|
|
|
1,177
|
|
Less other comprehensive income attributable to noncontrolling interest
|
|
1,020
|
|
|
—
|
|
|
1,020
|
|
Other comprehensive income attributable to HollyFrontier stockholders
|
|
$
|
255
|
|
|
$
|
98
|
|
|
$
|
157
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
The temporary unrealized gain (loss) on available-for-sale securities is due to changes in market prices of securities.
Accumulated other comprehensive income in the equity section of our consolidated balance sheets includes:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2012
|
|
December 31,
2011
|
|
|
(In thousands)
|
Pension obligation adjustment
|
|
$
|
(18,376
|
)
|
|
$
|
(22,715
|
)
|
Retiree medical obligation adjustment
|
|
(4,042
|
)
|
|
(4,042
|
)
|
Unrealized gain on available-for-sale securities
|
|
2
|
|
|
134
|
|
Unrealized gain on hedging activities, net of noncontrolling interest
|
|
27,991
|
|
|
104,496
|
|
Accumulated other comprehensive income
|
|
$
|
5,575
|
|
|
$
|
77,873
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
We sponsor a non-contributory defined benefit retirement plan that covers most legacy Holly non-union employees hired prior to January 1, 2007 and union employees hired prior to July 1, 2010, which was closed to new entrants effective January 1, 2007 for non-union employees and July 1, 2010 for union employees. Effective January 1, 2012, no additional benefits will be accrued under this plan for non-union employee participants and effective May 1, 2012, no additional benefits will be accrued for union employee participants, at which time the plan was fully frozen. The changes to the union employee participants have been accounted for as a curtailment. Accordingly, we adjusted the projected benefit obligation and accumulated other comprehensive income by
$7.1 million
and recorded additional pension expense of
$0.7 million
in the second quarter of 2012. The changes related to the non-union employees were also accounted for as a curtailment, which was recorded in the fourth quarter of 2011. Our funding policy for this defined benefit retirement plan is to make annual contributions of not less than the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Benefits are based on the employee’s years of service and compensation.
The net periodic pension expense consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
(In thousands)
|
Service cost – benefit earned during the period
|
|
$
|
509
|
|
|
$
|
1,268
|
|
|
$
|
679
|
|
|
$
|
2,535
|
|
Interest cost on projected benefit obligations
|
|
1,061
|
|
|
1,281
|
|
|
2,052
|
|
|
2,562
|
|
Expected return on plan assets
|
|
(949
|
)
|
|
(1,339
|
)
|
|
(1,899
|
)
|
|
(2,678
|
)
|
Amortization of prior service cost
|
|
50
|
|
|
97
|
|
|
67
|
|
|
195
|
|
Amortization of net loss
|
|
620
|
|
|
533
|
|
|
1,103
|
|
|
1,066
|
|
Estimated effect of curtailment
|
|
674
|
|
|
—
|
|
|
899
|
|
|
—
|
|
Net periodic pension expense
|
|
$
|
1,965
|
|
|
$
|
1,840
|
|
|
$
|
2,901
|
|
|
$
|
3,680
|
|
The expected long-term annual rate of return on plan assets is
6.5%
, which is the rate is used in measuring
2012
net periodic benefit costs. We contributed
$22.4 million
to the retirement plan in June
2012
.
In 2012, we established a program for non-union plan participants whose benefits pursuant to the defined benefit plan were frozen. The program provides for payments after year-end of each of the next three years provided the employee remains with the us. The payments are based on each employee's years of service and eligible salary. For the three and
six
months ended
June 30, 2012
, we recognized transition benefit costs of
$3.5 million
and
$6.9 million
, respectively, that relates to our transition to the new defined contribution plan.
We have a post-retirement healthcare and other benefits plan that is available to certain eligible employees who were hired before certain defined dates and satisfy certain age and service requirements.The net periodic benefit expense of this plan consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2012
|
|
Six Months Ended June 30, 2012
|
|
|
(In thousands)
|
Service cost – benefit earned during the period
|
|
$
|
475
|
|
|
$
|
950
|
|
Interest cost on projected benefit obligations
|
|
875
|
|
|
1,750
|
|
Amortization of prior service credit
|
|
(550
|
)
|
|
(1,100
|
)
|
Amortization of net loss
|
|
75
|
|
|
150
|
|
Net periodic pension expense
|
|
$
|
875
|
|
|
$
|
1,750
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
We are a party to various litigation and proceedings which we believe, based on advice of counsel, will not either individually or in the aggregate have a materially adverse effect on our financial condition, results of operations or cash flows.
|
|
NOTE 18:
|
Segment Information
|
Our operations are organized into
two
reportable segments, Refining and HEP. Our operations that are not included in the Refining and HEP segments are included in Corporate and Other. Intersegment transactions are eliminated in our consolidated financial statements and are included in Consolidations and Eliminations.
The Refining segment represents the operations of the El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries and NK Asphalt. 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. Additionally, the Refining segment includes specialty lubricant products produced at our Tulsa Refineries that are marketed throughout North America and are distributed in Central and South America. NK Asphalt operates various asphalt terminals in Arizona and New Mexico.
The HEP segment includes all of the operations of HEP, a consolidated VIE, which owns and operates logistic assets consisting of petroleum product and crude oil pipelines and terminal, tankage and loading rack facilities in the Mid-Continent, Southwest and Rocky Mountain regions of the United States. Revenues are generated by charging tariffs for transporting petroleum products and crude oil through its pipelines, by leasing certain pipeline capacity to Alon USA, Inc., by charging fees for terminalling refined products and other hydrocarbons and storing and providing other services at its storage tanks and terminals. The HEP segment also includes a
25%
interest in SLC Pipeline that services refineries in the Salt Lake City, Utah area. 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. Our revaluation of HEP’s assets and liabilities at March 1, 2008 (date of reconsolidation) resulted in basis adjustments to our consolidated HEP balances. Therefore, 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, 2011
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
(1)
|
|
HEP
|
|
Corporate
and Other
|
|
Consolidations
and Eliminations
|
|
Consolidated
Total
|
|
|
(In thousands)
|
Three Months Ended June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
Sales and other revenues
|
|
$
|
4,795,469
|
|
|
$
|
63,692
|
|
|
$
|
4,411
|
|
|
$
|
(56,891
|
)
|
|
$
|
4,806,681
|
|
Depreciation and amortization
|
|
$
|
43,665
|
|
|
$
|
8,728
|
|
|
$
|
4,762
|
|
|
$
|
(207
|
)
|
|
$
|
56,948
|
|
Income (loss) from operations
|
|
$
|
812,936
|
|
|
$
|
34,554
|
|
|
$
|
(33,756
|
)
|
|
$
|
(597
|
)
|
|
$
|
813,137
|
|
Capital expenditures
|
|
$
|
56,262
|
|
|
$
|
5,681
|
|
|
$
|
4,690
|
|
|
$
|
—
|
|
|
$
|
66,633
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
Sales and other revenues
|
|
$
|
2,953,226
|
|
|
$
|
50,940
|
|
|
$
|
153
|
|
|
$
|
(37,186
|
)
|
|
$
|
2,967,133
|
|
Depreciation and amortization
|
|
$
|
23,478
|
|
|
$
|
7,309
|
|
|
$
|
1,252
|
|
|
$
|
(207
|
)
|
|
$
|
31,832
|
|
Income (loss) from operations
|
|
$
|
321,032
|
|
|
$
|
27,692
|
|
|
$
|
(18,040
|
)
|
|
$
|
(505
|
)
|
|
$
|
330,179
|
|
Capital expenditures
|
|
$
|
25,152
|
|
|
$
|
11,425
|
|
|
$
|
45,690
|
|
|
$
|
—
|
|
|
$
|
82,267
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
Sales and other revenues
|
|
$
|
9,715,200
|
|
|
$
|
127,207
|
|
|
$
|
8,635
|
|
|
$
|
(112,623
|
)
|
|
$
|
9,738,419
|
|
Depreciation and amortization
|
|
$
|
85,197
|
|
|
$
|
18,587
|
|
|
$
|
9,680
|
|
|
$
|
(414
|
)
|
|
$
|
113,050
|
|
Income (loss) from operations
|
|
$
|
1,228,062
|
|
|
$
|
69,183
|
|
|
$
|
(63,505
|
)
|
|
$
|
(1,039
|
)
|
|
$
|
1,232,701
|
|
Capital expenditures
|
|
$
|
101,796
|
|
|
$
|
12,008
|
|
|
$
|
14,216
|
|
|
$
|
—
|
|
|
$
|
128,020
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
Sales and other revenues
|
|
$
|
5,268,318
|
|
|
$
|
95,945
|
|
|
$
|
801
|
|
|
$
|
(71,346
|
)
|
|
$
|
5,293,718
|
|
Depreciation and amortization
|
|
$
|
46,461
|
|
|
$
|
14,544
|
|
|
$
|
2,549
|
|
|
$
|
(414
|
)
|
|
$
|
63,140
|
|
Income (loss) from operations
|
|
$
|
473,136
|
|
|
$
|
51,303
|
|
|
$
|
(34,138
|
)
|
|
$
|
(1,023
|
)
|
|
$
|
489,278
|
|
Capital expenditures
|
|
$
|
45,784
|
|
|
$
|
22,900
|
|
|
$
|
87,621
|
|
|
$
|
—
|
|
|
$
|
156,305
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
(1)
|
|
HEP
|
|
Corporate and Other
|
|
Consolidations and Eliminations
|
|
Consolidated Total
|
|
|
(in thousands)
|
June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and investments in marketable securities
|
|
$
|
19
|
|
|
$
|
4,216
|
|
|
$
|
1,644,211
|
|
|
$
|
—
|
|
|
$
|
1,648,446
|
|
Total assets
|
|
$
|
7,213,749
|
|
|
$
|
988,670
|
|
|
$
|
1,222,787
|
|
|
$
|
(42,674
|
)
|
|
$
|
9,382,532
|
|
Long-term debt
|
|
$
|
—
|
|
|
$
|
613,195
|
|
|
$
|
698,156
|
|
|
$
|
(16,188
|
)
|
|
$
|
1,295,163
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and investments in marketable securities
|
|
$
|
—
|
|
|
$
|
3,269
|
|
|
$
|
1,837,341
|
|
|
$
|
—
|
|
|
$
|
1,840,610
|
|
Total assets
|
|
$
|
6,280,426
|
|
|
$
|
995,120
|
|
|
$
|
2,421,140
|
|
|
$
|
(120,443
|
)
|
|
$
|
9,576,243
|
|
Long-term debt
|
|
$
|
—
|
|
|
$
|
598,761
|
|
|
$
|
705,331
|
|
|
$
|
(89,350
|
)
|
|
$
|
1,214,742
|
|
(1) The Refining segment reflects the operations of the El Dorado and Cheyenne Refineries beginning July 1, 2011 (date of Holly-Frontier merger).
HEP segment revenues from external customers were
$9.5 million
and
$13.8 million
for the three months ended
June 30, 2012
and
2011
, respectively, and
$20.2 million
and
$24.7 million
for the
six
months ended
June 30, 2012
and
2011
, respectively.
|
|
NOTE 19:
|
Supplemental Guarantor/Non-Guarantor Financial Information
|
Our obligations under the HollyFrontier Senior Notes have been jointly and severally guaranteed by the substantial majority of our existing and future restricted subsidiaries (“Guarantor Restricted Subsidiaries”). These guarantees are full and unconditional. HEP, in which we have a
42%
ownership interest at June 30, 2012, and its subsidiaries (collectively, “Non-Guarantor Non-Restricted Subsidiaries”), and certain of our other subsidiaries (“Non-Guarantor Restricted Subsidiaries”) have not guaranteed these obligations.
The following condensed consolidating financial information is provided for HollyFrontier Corporation (the “Parent”), the Guarantor Restricted Subsidiaries, the Non-Guarantor Restricted Subsidiaries and the Non-Guarantor Non-Restricted Subsidiaries. The information has been presented as if the Parent accounted for its ownership in the Guarantor Restricted Subsidiaries, and the Guarantor Restricted Subsidiaries accounted for the ownership of the Non-Guarantor Restricted Subsidiaries and Non-Guarantor Non-Restricted Subsidiaries, using the equity method of accounting. The Guarantor Restricted Subsidiaries and the Non-Guarantor Restricted Subsidiaries are collectively the “Restricted Subsidiaries.”
Our revaluation of HEP’s assets and liabilities at March 1, 2008 (date of reconsolidation) resulted in basis adjustments to our consolidated HEP balances. Therefore, our reported amounts for the HEP segment may not agree to amounts reported in HEP’s periodic public filings.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
June 30, 2012
|
|
Parent
|
|
Guarantor
Restricted
Subsidiaries
|
|
Non-
Guarantor
Restricted
Subsidiaries
|
|
Eliminations
|
|
HollyFrontier
Corp. Before
Consolidation
of HEP
|
|
Non-Guarantor
Non-Restricted
Subsidiaries
(HEP Segment)
|
|
Eliminations
|
|
Consolidated
|
|
|
(In thousands)
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,366,416
|
|
|
$
|
1,564
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
1,367,982
|
|
|
$
|
4,216
|
|
|
$
|
—
|
|
|
$
|
1,372,198
|
|
Marketable securities
|
|
266,477
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
266,483
|
|
|
—
|
|
|
—
|
|
|
266,483
|
|
Accounts receivable, net
|
|
2,771
|
|
|
600,822
|
|
|
1,051
|
|
|
—
|
|
|
604,644
|
|
|
30,169
|
|
|
(31,087
|
)
|
|
603,726
|
|
Intercompany accounts receivable (payable)
|
|
2,378,862
|
|
|
(2,686,908
|
)
|
|
308,046
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Inventories
|
|
—
|
|
|
1,308,493
|
|
|
—
|
|
|
—
|
|
|
1,308,493
|
|
|
1,326
|
|
|
—
|
|
|
1,309,819
|
|
Income taxes receivable
|
|
93,644
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
93,648
|
|
|
—
|
|
|
—
|
|
|
93,648
|
|
Prepayments and other
|
|
13,396
|
|
|
47,437
|
|
|
1,043
|
|
|
—
|
|
|
61,876
|
|
|
2,084
|
|
|
(4,142
|
)
|
|
59,818
|
|
Total current assets
|
|
4,121,566
|
|
|
(728,586
|
)
|
|
310,146
|
|
|
—
|
|
|
3,703,126
|
|
|
37,795
|
|
|
(35,229
|
)
|
|
3,705,692
|
|
Properties, plants and equip, net
|
|
20,116
|
|
|
2,085,903
|
|
|
403,452
|
|
|
—
|
|
|
2,509,471
|
|
|
584,702
|
|
|
(5,867
|
)
|
|
3,088,306
|
|
Marketable securities (long-term)
|
|
9,765
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,765
|
|
|
—
|
|
|
—
|
|
|
9,765
|
|
Investment in subsidiaries
|
|
2,331,322
|
|
|
629,603
|
|
|
(244,218
|
)
|
|
(2,716,707
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Intangibles and other assets
|
|
9,804
|
|
|
2,204,370
|
|
|
25,000
|
|
|
(25,000
|
)
|
|
2,214,174
|
|
|
366,173
|
|
|
(1,578
|
)
|
|
2,578,769
|
|
Total assets
|
|
$
|
6,492,573
|
|
|
$
|
4,191,290
|
|
|
$
|
494,380
|
|
|
$
|
(2,741,707
|
)
|
|
$
|
8,436,536
|
|
|
$
|
988,670
|
|
|
$
|
(42,674
|
)
|
|
$
|
9,382,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
28,972
|
|
|
$
|
1,086,102
|
|
|
$
|
2,534
|
|
|
$
|
—
|
|
|
$
|
1,117,608
|
|
|
$
|
9,695
|
|
|
$
|
(31,087
|
)
|
|
$
|
1,096,216
|
|
Income taxes payable
|
|
13,712
|
|
|
148,553
|
|
|
—
|
|
|
—
|
|
|
162,265
|
|
|
—
|
|
|
—
|
|
|
162,265
|
|
Accrued liabilities
|
|
67,237
|
|
|
48,259
|
|
|
4,715
|
|
|
—
|
|
|
120,211
|
|
|
17,749
|
|
|
(4,142
|
)
|
|
133,818
|
|
Deferred income tax liabilities
|
|
185,777
|
|
|
(16,381
|
)
|
|
(10
|
)
|
|
—
|
|
|
169,386
|
|
|
—
|
|
|
—
|
|
|
169,386
|
|
Total current liabilities
|
|
295,698
|
|
|
1,266,533
|
|
|
7,239
|
|
|
—
|
|
|
1,569,470
|
|
|
27,444
|
|
|
(35,229
|
)
|
|
1,561,685
|
|
Long-term debt
|
|
669,983
|
|
|
28,173
|
|
|
—
|
|
|
—
|
|
|
698,156
|
|
|
613,195
|
|
|
(16,188
|
)
|
|
1,295,163
|
|
Deferred income tax liabilities
|
|
163,090
|
|
|
247,020
|
|
|
967
|
|
|
—
|
|
|
411,077
|
|
|
—
|
|
|
4,951
|
|
|
416,028
|
|
Other long-term liabilities
|
|
90,426
|
|
|
93,132
|
|
|
—
|
|
|
(25,000
|
)
|
|
158,558
|
|
|
6,195
|
|
|
(2,722
|
)
|
|
162,031
|
|
Investment in HEP
|
|
—
|
|
|
225,110
|
|
|
—
|
|
|
—
|
|
|
225,110
|
|
|
—
|
|
|
(225,110
|
)
|
|
—
|
|
Equity – HollyFrontier
|
|
5,273,376
|
|
|
2,331,322
|
|
|
486,174
|
|
|
(2,817,496
|
)
|
|
5,273,376
|
|
|
341,836
|
|
|
(285,751
|
)
|
|
5,329,461
|
|
Equity – noncontrolling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100,789
|
|
|
100,789
|
|
|
—
|
|
|
517,375
|
|
|
618,164
|
|
Total liabilities and equity
|
|
$
|
6,492,573
|
|
|
$
|
4,191,290
|
|
|
$
|
494,380
|
|
|
$
|
(2,741,707
|
)
|
|
$
|
8,436,536
|
|
|
$
|
988,670
|
|
|
$
|
(42,674
|
)
|
|
$
|
9,382,532
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Parent
|
|
Guarantor
Restricted
Subsidiaries
|
|
Non-
Guarantor
Restricted
Subsidiaries
|
|
Eliminations
|
|
HollyFrontier
Corp. Before
Consolidation
of HEP
|
|
Non-Guarantor
Non-Restricted
Subsidiaries
(HEP Segment)
|
|
Eliminations
|
|
Consolidated
|
|
|
(In thousands)
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,575,891
|
|
|
$
|
(3,358
|
)
|
|
$
|
3,102
|
|
|
$
|
—
|
|
|
$
|
1,575,635
|
|
|
$
|
3,269
|
|
|
$
|
—
|
|
|
$
|
1,578,904
|
|
Marketable securities
|
|
210,886
|
|
|
753
|
|
|
—
|
|
|
—
|
|
|
211,639
|
|
|
—
|
|
|
—
|
|
|
211,639
|
|
Accounts receivable, net
|
|
8,317
|
|
|
699,056
|
|
|
3,074
|
|
|
—
|
|
|
710,447
|
|
|
34,071
|
|
|
(35,661
|
)
|
|
708,857
|
|
Intercompany accounts receivable (payable)
|
|
3,075,563
|
|
|
(3,374,597
|
)
|
|
299,034
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Inventories
|
|
—
|
|
|
1,113,136
|
|
|
—
|
|
|
—
|
|
|
1,113,136
|
|
|
1,483
|
|
|
—
|
|
|
1,114,619
|
|
Income taxes receivable
|
|
87,273
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
87,277
|
|
|
—
|
|
|
—
|
|
|
87,277
|
|
Prepayments and other
|
|
19,379
|
|
|
202,428
|
|
|
1,089
|
|
|
—
|
|
|
222,896
|
|
|
1,161
|
|
|
(4,607
|
)
|
|
219,450
|
|
Total current assets
|
|
4,977,309
|
|
|
(1,362,578
|
)
|
|
306,299
|
|
|
—
|
|
|
3,921,030
|
|
|
39,984
|
|
|
(40,268
|
)
|
|
3,920,746
|
|
Properties, plants and equip, net
|
|
26,702
|
|
|
2,043,257
|
|
|
398,984
|
|
|
—
|
|
|
2,468,943
|
|
|
590,243
|
|
|
(6,281
|
)
|
|
3,052,905
|
|
Marketable securities (long-term)
|
|
50,067
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50,067
|
|
|
—
|
|
|
—
|
|
|
50,067
|
|
Investment in subsidiaries
|
|
1,160,801
|
|
|
593,118
|
|
|
(240,060
|
)
|
|
(1,513,859
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Intangibles and other assets
|
|
19,329
|
|
|
2,242,197
|
|
|
—
|
|
|
—
|
|
|
2,261,526
|
|
|
364,893
|
|
|
(73,894
|
)
|
|
2,552,525
|
|
Total assets
|
|
$
|
6,234,208
|
|
|
$
|
3,515,994
|
|
|
$
|
465,223
|
|
|
$
|
(1,513,859
|
)
|
|
$
|
8,701,566
|
|
|
$
|
995,120
|
|
|
$
|
(120,443
|
)
|
|
$
|
9,576,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
23,497
|
|
|
$
|
1,494,453
|
|
|
$
|
10,999
|
|
|
$
|
—
|
|
|
$
|
1,528,949
|
|
|
$
|
11,406
|
|
|
$
|
(35,661
|
)
|
|
$
|
1,504,694
|
|
Income taxes payable
|
|
(109,320
|
)
|
|
149,686
|
|
|
—
|
|
|
—
|
|
|
40,366
|
|
|
—
|
|
|
—
|
|
|
40,366
|
|
Accrued liabilities
|
|
53,390
|
|
|
103,636
|
|
|
1,236
|
|
|
—
|
|
|
158,262
|
|
|
16,285
|
|
|
(4,607
|
)
|
|
169,940
|
|
Deferred income tax liabilities
|
|
192,073
|
|
|
(16,390
|
)
|
|
—
|
|
|
—
|
|
|
175,683
|
|
|
—
|
|
|
—
|
|
|
175,683
|
|
Total current liabilities
|
|
159,640
|
|
|
1,731,385
|
|
|
12,235
|
|
|
—
|
|
|
1,903,260
|
|
|
27,691
|
|
|
(40,268
|
)
|
|
1,890,683
|
|
Long-term debt
|
|
651,261
|
|
|
54,070
|
|
|
—
|
|
|
—
|
|
|
705,331
|
|
|
598,761
|
|
|
(89,350
|
)
|
|
1,214,742
|
|
Deferred income tax liabilities
|
|
162,021
|
|
|
295,893
|
|
|
856
|
|
|
—
|
|
|
458,770
|
|
|
—
|
|
|
4,951
|
|
|
463,721
|
|
Other long-term liabilities
|
|
116,443
|
|
|
52,892
|
|
|
—
|
|
|
—
|
|
|
169,335
|
|
|
4,000
|
|
|
(2,138
|
)
|
|
171,197
|
|
Investment in HEP
|
|
—
|
|
|
220,953
|
|
|
—
|
|
|
—
|
|
|
220,953
|
|
|
—
|
|
|
(220,953
|
)
|
|
—
|
|
Equity – HollyFrontier Corporation
|
|
5,144,843
|
|
|
1,160,801
|
|
|
452,132
|
|
|
(1,612,933
|
)
|
|
5,144,843
|
|
|
364,668
|
|
|
(305,501
|
)
|
|
5,204,010
|
|
Equity – noncontrolling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
99,074
|
|
|
99,074
|
|
|
—
|
|
|
532,816
|
|
|
631,890
|
|
Total liabilities and equity
|
|
$
|
6,234,208
|
|
|
$
|
3,515,994
|
|
|
$
|
465,223
|
|
|
$
|
(1,513,859
|
)
|
|
$
|
8,701,566
|
|
|
$
|
995,120
|
|
|
$
|
(120,443
|
)
|
|
$
|
9,576,243
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Income and Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2012
|
|
Parent
|
|
Guarantor
Restricted
Subsidiaries
|
|
Non-
Guarantor
Restricted
Subsidiaries
|
|
Eliminations
|
|
HollyFrontier
Corp. Before
Consolidation
of HEP
|
|
Non-Guarantor
Non-Restricted
Subsidiaries
(HEP Segment)
|
|
Eliminations
|
|
Consolidated
|
|
|
(In thousands)
|
Sales and other revenues
|
|
$
|
100
|
|
|
$
|
4,795,719
|
|
|
$
|
4,061
|
|
|
$
|
(2,670
|
)
|
|
$
|
4,797,210
|
|
|
$
|
63,692
|
|
|
$
|
(54,221
|
)
|
|
$
|
4,806,681
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
—
|
|
|
3,737,717
|
|
|
—
|
|
|
(2,596
|
)
|
|
3,735,121
|
|
|
—
|
|
|
(53,357
|
)
|
|
3,681,764
|
|
Operating expenses
|
|
—
|
|
|
201,876
|
|
|
3,061
|
|
|
—
|
|
|
204,937
|
|
|
17,923
|
|
|
(134
|
)
|
|
222,726
|
|
General and administrative
|
|
29,451
|
|
|
146
|
|
|
22
|
|
|
—
|
|
|
29,619
|
|
|
2,487
|
|
|
—
|
|
|
32,106
|
|
Depreciation and amortization
|
|
876
|
|
|
43,963
|
|
|
3,588
|
|
|
—
|
|
|
48,427
|
|
|
8,728
|
|
|
(207
|
)
|
|
56,948
|
|
Total operating costs and expenses
|
|
30,327
|
|
|
3,983,702
|
|
|
6,671
|
|
|
(2,596
|
)
|
|
4,018,104
|
|
|
29,138
|
|
|
(53,698
|
)
|
|
3,993,544
|
|
Income (loss) from operations
|
|
(30,227
|
)
|
|
812,017
|
|
|
(2,610
|
)
|
|
(74
|
)
|
|
779,106
|
|
|
34,554
|
|
|
(523
|
)
|
|
813,137
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of equity method investments
|
|
823,251
|
|
|
11,927
|
|
|
13,613
|
|
|
(835,086
|
)
|
|
13,705
|
|
|
794
|
|
|
(13,613
|
)
|
|
886
|
|
Interest income (expense)
|
|
(13,424
|
)
|
|
(944
|
)
|
|
176
|
|
|
—
|
|
|
(14,192
|
)
|
|
(12,665
|
)
|
|
596
|
|
|
(26,261
|
)
|
Gain on sale of marketable securities
|
|
—
|
|
|
326
|
|
|
—
|
|
|
—
|
|
|
326
|
|
|
—
|
|
|
—
|
|
|
326
|
|
|
|
809,827
|
|
|
11,309
|
|
|
13,789
|
|
|
(835,086
|
)
|
|
(161
|
)
|
|
(11,871
|
)
|
|
(13,017
|
)
|
|
(25,049
|
)
|
Income before income taxes
|
|
779,600
|
|
|
823,326
|
|
|
11,179
|
|
|
(835,160
|
)
|
|
778,945
|
|
|
22,683
|
|
|
(13,540
|
)
|
|
788,088
|
|
Income tax provision
|
|
285,643
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
285,643
|
|
|
75
|
|
|
—
|
|
|
285,718
|
|
Net income
|
|
493,957
|
|
|
823,326
|
|
|
11,179
|
|
|
(835,160
|
)
|
|
493,302
|
|
|
22,608
|
|
|
(13,540
|
)
|
|
502,370
|
|
Less net income attributable to noncontrolling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(656
|
)
|
|
(656
|
)
|
|
—
|
|
|
9,527
|
|
|
8,871
|
|
Net income attributable to HollyFrontier stockholders
|
|
$
|
493,957
|
|
|
$
|
823,326
|
|
|
$
|
11,179
|
|
|
$
|
(834,504
|
)
|
|
$
|
493,958
|
|
|
$
|
22,608
|
|
|
$
|
(23,067
|
)
|
|
$
|
493,499
|
|
Comprehensive income attributable to HollyFrontier stockholders
|
|
$
|
509,400
|
|
|
$
|
830,977
|
|
|
$
|
11,179
|
|
|
$
|
(834,504
|
)
|
|
$
|
517,052
|
|
|
$
|
22,373
|
|
|
$
|
(22,930
|
)
|
|
$
|
516,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Income and Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2011
|
|
Parent
|
|
Guarantor
Restricted
Subsidiaries
|
|
Non-
Guarantor
Restricted
Subsidiaries
|
|
Eliminations
|
|
HollyFrontier
Corp. Before
Consolidation
of HEP
|
|
Non-Guarantor
Non-Restricted
Subsidiaries
(HEP Segment)
|
|
Eliminations
|
|
Consolidated
|
|
|
(In thousands)
|
Sales and other revenues
|
|
$
|
153
|
|
|
$
|
2,953,226
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,953,379
|
|
|
$
|
50,940
|
|
|
$
|
(37,186
|
)
|
|
$
|
2,967,133
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
—
|
|
|
2,483,435
|
|
|
—
|
|
|
—
|
|
|
2,483,435
|
|
|
—
|
|
|
(36,340
|
)
|
|
2,447,095
|
|
Operating expenses
|
|
—
|
|
|
124,992
|
|
|
121
|
|
|
—
|
|
|
125,113
|
|
|
14,366
|
|
|
(134
|
)
|
|
139,345
|
|
General and administrative
|
|
16,976
|
|
|
133
|
|
|
—
|
|
|
—
|
|
|
17,109
|
|
|
1,573
|
|
|
—
|
|
|
18,682
|
|
Depreciation and amortization
|
|
907
|
|
|
23,644
|
|
|
179
|
|
|
—
|
|
|
24,730
|
|
|
7,309
|
|
|
(207
|
)
|
|
31,832
|
|
Total operating costs and expenses
|
|
17,883
|
|
|
2,632,204
|
|
|
300
|
|
|
—
|
|
|
2,650,387
|
|
|
23,248
|
|
|
(36,681
|
)
|
|
2,636,954
|
|
Income (loss) from operations
|
|
(17,730
|
)
|
|
321,022
|
|
|
(300
|
)
|
|
—
|
|
|
302,992
|
|
|
27,692
|
|
|
(505
|
)
|
|
330,179
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of equity method investments
|
|
329,496
|
|
|
9,268
|
|
|
9,480
|
|
|
(338,764
|
)
|
|
9,480
|
|
|
467
|
|
|
(9,480
|
)
|
|
467
|
|
Interest income (expense)
|
|
(5,063
|
)
|
|
(795
|
)
|
|
13
|
|
|
—
|
|
|
(5,845
|
)
|
|
(9,286
|
)
|
|
595
|
|
|
(14,536
|
)
|
Merger transaction costs
|
|
(2,316
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,316
|
)
|
|
—
|
|
|
—
|
|
|
(2,316
|
)
|
|
|
322,117
|
|
|
8,473
|
|
|
9,493
|
|
|
(338,764
|
)
|
|
1,319
|
|
|
(8,819
|
)
|
|
(8,885
|
)
|
|
(16,385
|
)
|
Income before income taxes
|
|
304,387
|
|
|
329,495
|
|
|
9,193
|
|
|
(338,764
|
)
|
|
304,311
|
|
|
18,873
|
|
|
(9,390
|
)
|
|
313,794
|
|
Income tax provision
|
|
111,943
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
111,943
|
|
|
18
|
|
|
—
|
|
|
111,961
|
|
Net income
|
|
192,444
|
|
|
329,495
|
|
|
9,193
|
|
|
(338,764
|
)
|
|
192,368
|
|
|
18,855
|
|
|
(9,390
|
)
|
|
201,833
|
|
Less net income attributable to noncontrolling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(75
|
)
|
|
(75
|
)
|
|
—
|
|
|
9,673
|
|
|
9,598
|
|
Net income attributable to HollyFrontier stockholders
|
|
$
|
192,444
|
|
|
$
|
329,495
|
|
|
$
|
9,193
|
|
|
$
|
(338,689
|
)
|
|
$
|
192,443
|
|
|
$
|
18,855
|
|
|
$
|
(19,063
|
)
|
|
$
|
192,235
|
|
Comprehensive income attributable to HollyFrontier stockholders
|
|
$
|
192,510
|
|
|
$
|
329,113
|
|
|
$
|
9,193
|
|
|
$
|
(338,689
|
)
|
|
$
|
192,127
|
|
|
$
|
19,126
|
|
|
$
|
(19,240
|
)
|
|
$
|
192,013
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Income and Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2012
|
|
Parent
|
|
Guarantor
Restricted
Subsidiaries
|
|
Non-
Guarantor
Restricted
Subsidiaries
|
|
Eliminations
|
|
HollyFrontier
Corp. Before
Consolidation
of HEP
|
|
Non-Guarantor
Non-Restricted
Subsidiaries
(HEP Segment)
|
|
Eliminations
|
|
Consolidated
|
|
|
(In thousands)
|
Sales and other revenues
|
|
$
|
199
|
|
|
$
|
9,715,457
|
|
|
$
|
8,179
|
|
|
$
|
(5,614
|
)
|
|
$
|
9,718,221
|
|
|
$
|
127,207
|
|
|
$
|
(107,009
|
)
|
|
$
|
9,738,419
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
—
|
|
|
7,979,509
|
|
|
—
|
|
|
(5,540
|
)
|
|
7,973,969
|
|
|
—
|
|
|
(105,288
|
)
|
|
7,868,681
|
|
Operating expenses
|
|
—
|
|
|
423,667
|
|
|
6,117
|
|
|
(75
|
)
|
|
429,709
|
|
|
34,911
|
|
|
(267
|
)
|
|
464,353
|
|
General and administrative
|
|
54,424
|
|
|
662
|
|
|
22
|
|
|
—
|
|
|
55,108
|
|
|
4,526
|
|
|
—
|
|
|
59,634
|
|
Depreciation and amortization
|
|
1,979
|
|
|
85,774
|
|
|
7,124
|
|
|
—
|
|
|
94,877
|
|
|
18,587
|
|
|
(414
|
)
|
|
113,050
|
|
Total operating costs and expenses
|
|
56,403
|
|
|
8,489,612
|
|
|
13,263
|
|
|
(5,615
|
)
|
|
8,553,663
|
|
|
58,024
|
|
|
(105,969
|
)
|
|
8,505,718
|
|
Income (loss) from operations
|
|
(56,204
|
)
|
|
1,225,845
|
|
|
(5,084
|
)
|
|
1
|
|
|
1,164,558
|
|
|
69,183
|
|
|
(1,040
|
)
|
|
1,232,701
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of equity method investments
|
|
1,247,902
|
|
|
23,131
|
|
|
26,577
|
|
|
(1,271,055
|
)
|
|
26,555
|
|
|
1,625
|
|
|
(26,577
|
)
|
|
1,603
|
|
Interest income (expense)
|
|
(27,447
|
)
|
|
(1,400
|
)
|
|
375
|
|
|
—
|
|
|
(28,472
|
)
|
|
(31,835
|
)
|
|
1,191
|
|
|
(59,116
|
)
|
Gain on sale of marketable securities
|
|
—
|
|
|
326
|
|
|
—
|
|
|
—
|
|
|
326
|
|
|
—
|
|
|
—
|
|
|
326
|
|
|
|
1,220,455
|
|
|
22,057
|
|
|
26,952
|
|
|
(1,271,055
|
)
|
|
(1,591
|
)
|
|
(30,210
|
)
|
|
(25,386
|
)
|
|
(57,187
|
)
|
Income before income taxes
|
|
1,164,251
|
|
|
1,247,902
|
|
|
21,868
|
|
|
(1,271,054
|
)
|
|
1,162,967
|
|
|
38,973
|
|
|
(26,426
|
)
|
|
1,175,514
|
|
Income tax provision
|
|
425,974
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
425,974
|
|
|
150
|
|
|
—
|
|
|
426,124
|
|
Net income
|
|
738,277
|
|
|
1,247,902
|
|
|
21,868
|
|
|
(1,271,054
|
)
|
|
736,993
|
|
|
38,823
|
|
|
(26,426
|
)
|
|
749,390
|
|
Less net income attributable to noncontrolling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,285
|
)
|
|
(1,285
|
)
|
|
—
|
|
|
15,480
|
|
|
14,195
|
|
Net income attributable to HollyFrontier stockholders
|
|
$
|
738,277
|
|
|
$
|
1,247,902
|
|
|
$
|
21,868
|
|
|
$
|
(1,269,769
|
)
|
|
$
|
738,278
|
|
|
$
|
38,823
|
|
|
$
|
(41,906
|
)
|
|
$
|
735,195
|
|
Comprehensive income attributable to HollyFrontier stockholders
|
|
$
|
673,129
|
|
|
$
|
1,240,467
|
|
|
$
|
21,868
|
|
|
$
|
(1,269,769
|
)
|
|
$
|
665,695
|
|
|
$
|
39,508
|
|
|
$
|
(42,306
|
)
|
|
$
|
662,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Income and Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2011
|
|
Parent
|
|
Guarantor
Restricted
Subsidiaries
|
|
Non-
Guarantor
Restricted
Subsidiaries
|
|
Eliminations
|
|
HollyFrontier
Corp. Before
Consolidation
of HEP
|
|
Non-Guarantor
Non-Restricted
Subsidiaries
(HEP Segment)
|
|
Eliminations
|
|
Consolidated
|
|
|
(In thousands)
|
Sales and other revenues
|
|
$
|
801
|
|
|
$
|
5,268,318
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,269,119
|
|
|
$
|
95,945
|
|
|
$
|
(71,346
|
)
|
|
$
|
5,293,718
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
—
|
|
|
4,501,361
|
|
|
—
|
|
|
—
|
|
|
4,501,361
|
|
|
—
|
|
|
(69,649
|
)
|
|
4,431,712
|
|
Operating expenses
|
|
—
|
|
|
246,677
|
|
|
509
|
|
|
—
|
|
|
247,186
|
|
|
27,162
|
|
|
(260
|
)
|
|
274,088
|
|
General and administrative
|
|
32,329
|
|
|
235
|
|
|
—
|
|
|
—
|
|
|
32,564
|
|
|
2,936
|
|
|
—
|
|
|
35,500
|
|
Depreciation and amortization
|
|
1,847
|
|
|
46,805
|
|
|
358
|
|
|
—
|
|
|
49,010
|
|
|
14,544
|
|
|
(414
|
)
|
|
63,140
|
|
Total operating costs and expenses
|
|
34,176
|
|
|
4,795,078
|
|
|
867
|
|
|
—
|
|
|
4,830,121
|
|
|
44,642
|
|
|
(70,323
|
)
|
|
4,804,440
|
|
Income (loss) from operations
|
|
(33,375
|
)
|
|
473,240
|
|
|
(867
|
)
|
|
—
|
|
|
438,998
|
|
|
51,303
|
|
|
(1,023
|
)
|
|
489,278
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of equity method investments
|
|
488,453
|
|
|
16,831
|
|
|
17,500
|
|
|
(505,284
|
)
|
|
17,500
|
|
|
1,207
|
|
|
(17,500
|
)
|
|
1,207
|
|
Interest income (expense)
|
|
(11,872
|
)
|
|
(1,618
|
)
|
|
26
|
|
|
—
|
|
|
(13,464
|
)
|
|
(18,398
|
)
|
|
1,207
|
|
|
(30,655
|
)
|
Merger transaction costs
|
|
(6,014
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,014
|
)
|
|
—
|
|
|
—
|
|
|
(6,014
|
)
|
|
|
470,567
|
|
|
15,213
|
|
|
17,526
|
|
|
(505,284
|
)
|
|
(1,978
|
)
|
|
(17,191
|
)
|
|
(16,293
|
)
|
|
(35,462
|
)
|
Income before income taxes
|
|
437,192
|
|
|
488,453
|
|
|
16,659
|
|
|
(505,284
|
)
|
|
437,020
|
|
|
34,112
|
|
|
(17,316
|
)
|
|
453,816
|
|
Income tax provision
|
|
160,726
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
160,726
|
|
|
246
|
|
|
—
|
|
|
160,972
|
|
Net income
|
|
276,466
|
|
|
488,453
|
|
|
16,659
|
|
|
(505,284
|
)
|
|
276,294
|
|
|
33,866
|
|
|
(17,316
|
)
|
|
292,844
|
|
Less net income attributable to noncontrolling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(172
|
)
|
|
(172
|
)
|
|
—
|
|
|
16,087
|
|
|
15,915
|
|
Net income attributable to HollyFrontier stockholders
|
|
$
|
276,466
|
|
|
$
|
488,453
|
|
|
$
|
16,659
|
|
|
$
|
(505,112
|
)
|
|
$
|
276,466
|
|
|
$
|
33,866
|
|
|
$
|
(33,403
|
)
|
|
$
|
276,929
|
|
Comprehensive income attributable to HollyFrontier stockholders
|
|
$
|
276,337
|
|
|
$
|
488,204
|
|
|
$
|
16,659
|
|
|
$
|
(505,111
|
)
|
|
$
|
276,089
|
|
|
$
|
36,440
|
|
|
$
|
(35,443
|
)
|
|
$
|
277,086
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flows
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2012
|
|
Parent
|
|
Guarantor
Restricted
Subsidiaries
|
|
Non-
Guarantor
Restricted
Subsidiaries
|
|
HollyFrontier
Corp. Before
Consolidation
of HEP
|
|
Non-Guarantor
Non-Restricted
Subsidiaries
(HEP Segment)
|
|
Eliminations
|
|
Consolidated
|
|
|
(In thousands)
|
Cash flows from operating activities
|
|
$
|
347,534
|
|
|
$
|
45,516
|
|
|
$
|
(6,489
|
)
|
|
$
|
386,561
|
|
|
$
|
73,500
|
|
|
$
|
(30,558
|
)
|
|
$
|
429,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to properties, plants and equip
|
|
(1,679
|
)
|
|
(102,722
|
)
|
|
(11,611
|
)
|
|
(116,012
|
)
|
|
—
|
|
|
—
|
|
|
(116,012
|
)
|
Additions to properties, plants and equip – HEP
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,008
|
)
|
|
—
|
|
|
(12,008
|
)
|
Investment in Sabine Biofuels
|
|
—
|
|
|
(2,000
|
)
|
|
—
|
|
|
(2,000
|
)
|
|
—
|
|
|
—
|
|
|
(2,000
|
)
|
Purchases of marketable securities
|
|
(166,429
|
)
|
|
—
|
|
|
—
|
|
|
(166,429
|
)
|
|
—
|
|
|
—
|
|
|
(166,429
|
)
|
Sales and maturities of marketable securities
|
|
151,066
|
|
|
930
|
|
|
—
|
|
|
151,996
|
|
|
—
|
|
|
—
|
|
|
151,996
|
|
|
|
(17,042
|
)
|
|
(103,792
|
)
|
|
(11,611
|
)
|
|
(132,445
|
)
|
|
(12,008
|
)
|
|
—
|
|
|
(144,453
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayments under credit agreement – HEP
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(30,000
|
)
|
|
—
|
|
|
(30,000
|
)
|
Repayment of promissory notes
|
|
—
|
|
|
72,900
|
|
|
—
|
|
|
72,900
|
|
|
(72,900
|
)
|
|
—
|
|
|
—
|
|
Net proceeds from issuance of senior notes - HEP
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
294,750
|
|
|
—
|
|
|
294,750
|
|
Repayment of senior notes - HFC
|
|
(5,000
|
)
|
|
—
|
|
|
—
|
|
|
(5,000
|
)
|
|
—
|
|
|
—
|
|
|
(5,000
|
)
|
Principal tender on senior notes - HEP
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(185,000
|
)
|
|
—
|
|
|
(185,000
|
)
|
Purchase of treasury stock
|
|
(189,771
|
)
|
|
—
|
|
|
—
|
|
|
(189,771
|
)
|
|
—
|
|
|
—
|
|
|
(189,771
|
)
|
Net prepayment related to structured stock repurchase agreement
|
|
(100,000
|
)
|
|
—
|
|
|
—
|
|
|
(100,000
|
)
|
|
—
|
|
|
—
|
|
|
(100,000
|
)
|
Contribution from joint venture partner
|
|
—
|
|
|
(9,000
|
)
|
|
15,000
|
|
|
6,000
|
|
|
—
|
|
|
—
|
|
|
6,000
|
|
Dividends
|
|
(249,958
|
)
|
|
—
|
|
|
—
|
|
|
(249,958
|
)
|
|
—
|
|
|
—
|
|
|
(249,958
|
)
|
Distributions to noncontrolling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(59,977
|
)
|
|
31,033
|
|
|
(28,944
|
)
|
Excess tax benefit from equity-based compensation
|
|
4,762
|
|
|
—
|
|
|
—
|
|
|
4,762
|
|
|
—
|
|
|
—
|
|
|
4,762
|
|
Purchase of units for restricted grants - HEP
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,533
|
)
|
|
—
|
|
|
(4,533
|
)
|
Deferred financing costs
|
|
—
|
|
|
(67
|
)
|
|
—
|
|
|
(67
|
)
|
|
(3,162
|
)
|
|
—
|
|
|
(3,229
|
)
|
Other
|
|
—
|
|
|
(635
|
)
|
|
—
|
|
|
(635
|
)
|
|
277
|
|
|
(475
|
)
|
|
(833
|
)
|
|
|
(539,967
|
)
|
|
63,198
|
|
|
15,000
|
|
|
(461,769
|
)
|
|
(60,545
|
)
|
|
30,558
|
|
|
(491,756
|
)
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) for the period
|
|
(209,475
|
)
|
|
4,922
|
|
|
(3,100
|
)
|
|
(207,653
|
)
|
|
947
|
|
|
—
|
|
|
(206,706
|
)
|
Beginning of period
|
|
1,575,891
|
|
|
(3,358
|
)
|
|
3,102
|
|
|
1,575,635
|
|
|
3,269
|
|
|
—
|
|
|
1,578,904
|
|
End of period
|
|
$
|
1,366,416
|
|
|
$
|
1,564
|
|
|
$
|
2
|
|
|
$
|
1,367,982
|
|
|
$
|
4,216
|
|
|
$
|
—
|
|
|
$
|
1,372,198
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flows
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2011
|
|
Parent
|
|
Guarantor
Restricted
Subsidiaries
|
|
Non-
Guarantor
Restricted
Subsidiaries
|
|
HollyFrontier
Corp. Before
Consolidation
of HEP
|
|
Non-Guarantor
Non-Restricted
Subsidiaries
(HEP Segment)
|
|
Eliminations
|
|
Consolidated
|
|
|
(In thousands)
|
Cash flows from operating activities
|
|
$
|
304,061
|
|
|
$
|
122,324
|
|
|
$
|
5,051
|
|
|
$
|
431,436
|
|
|
$
|
46,289
|
|
|
$
|
(19,729
|
)
|
|
$
|
457,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to properties, plants and equip
|
|
(2,623
|
)
|
|
(51,382
|
)
|
|
(79,400
|
)
|
|
(133,405
|
)
|
|
—
|
|
|
—
|
|
|
(133,405
|
)
|
Additions to properties, plants and equip – HEP
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(22,900
|
)
|
|
—
|
|
|
(22,900
|
)
|
Investment in Sabine Biofuels
|
|
(9,125
|
)
|
|
—
|
|
|
—
|
|
|
(9,125
|
)
|
|
—
|
|
|
—
|
|
|
(9,125
|
)
|
Purchases of marketable securities
|
|
(157,782
|
)
|
|
—
|
|
|
—
|
|
|
(157,782
|
)
|
|
—
|
|
|
—
|
|
|
(157,782
|
)
|
Sales and maturities of marketable securities
|
|
68,150
|
|
|
—
|
|
|
—
|
|
|
68,150
|
|
|
—
|
|
|
—
|
|
|
68,150
|
|
|
|
(101,380
|
)
|
|
(51,382
|
)
|
|
(79,400
|
)
|
|
(232,162
|
)
|
|
(22,900
|
)
|
|
—
|
|
|
(255,062
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings under credit agreement – HEP
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27,000
|
|
|
—
|
|
|
27,000
|
|
Purchase of treasury stock
|
|
(2,996
|
)
|
|
—
|
|
|
—
|
|
|
(2,996
|
)
|
|
—
|
|
|
—
|
|
|
(2,996
|
)
|
Contribution from joint venture partner
|
|
—
|
|
|
(63,000
|
)
|
|
79,500
|
|
|
16,500
|
|
|
—
|
|
|
—
|
|
|
16,500
|
|
Dividends
|
|
(15,984
|
)
|
|
—
|
|
|
—
|
|
|
(15,984
|
)
|
|
—
|
|
|
—
|
|
|
(15,984
|
)
|
Distributions to noncontrolling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(44,862
|
)
|
|
19,729
|
|
|
(25,133
|
)
|
Excess tax benefit from equity-based compensation
|
|
498
|
|
|
—
|
|
|
—
|
|
|
498
|
|
|
—
|
|
|
—
|
|
|
498
|
|
Purchase of units for restricted grants - HEP
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,379
|
)
|
|
—
|
|
|
(1,379
|
)
|
Deferred financing costs
|
|
(140
|
)
|
|
—
|
|
|
—
|
|
|
(140
|
)
|
|
(3,149
|
)
|
|
—
|
|
|
(3,289
|
)
|
Other
|
|
—
|
|
|
(563
|
)
|
|
—
|
|
|
(563
|
)
|
|
—
|
|
|
—
|
|
|
(563
|
)
|
|
|
(18,622
|
)
|
|
(63,563
|
)
|
|
79,500
|
|
|
(2,685
|
)
|
|
(22,390
|
)
|
|
19,729
|
|
|
(5,346
|
)
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) for the period:
|
|
184,059
|
|
|
7,379
|
|
|
5,151
|
|
|
196,589
|
|
|
999
|
|
|
—
|
|
|
197,588
|
|
Beginning of period
|
|
230,082
|
|
|
(9,035
|
)
|
|
7,651
|
|
|
228,698
|
|
|
403
|
|
|
—
|
|
|
229,101
|
|
End of period
|
|
$
|
414,141
|
|
|
$
|
(1,656
|
)
|
|
$
|
12,802
|
|
|
$
|
425,287
|
|
|
$
|
1,402
|
|
|
$
|
—
|
|
|
$
|
426,689
|
|
|
|
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.
We merged with Frontier Oil Corporation (“Frontier”) effective July 1, 2011. Accordingly, this document includes Frontier, its consolidated subsidiaries and the operations of the merged Frontier businesses effective July 1, 2011, but not prior to this date.
OVERVIEW
We are principally an independent petroleum refiner that produces high-value refined products such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. We own and operate refineries having a combined crude oil processing capacity of 443,000 barrels per day that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. Our refineries are 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, a petroleum refinery in 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”).
On February 21, 2011, we entered into a merger agreement providing for a “merger of equals” business combination between us and Frontier. On July 1, 2011, North Acquisition, Inc. a direct wholly-owned subsidiary of Holly Corporation ("Holly") merged with and into Frontier, with Frontier surviving as a wholly-owned subsidiary of Holly. Concurrent with the merger, we changed our name to HollyFrontier Corporation and changed the ticker symbol for our common stock traded on the New York Stock Exchange to “HFC.” Subsequent to the merger and following approval by the post-closing board of directors of HollyFrontier, Frontier merged with and into HollyFrontier, with HollyFrontier continuing as the surviving corporation. This merger combined the legacy Frontier refinery operations consisting of the El Dorado and Cheyenne Refineries, with Holly’s legacy refinery operations to form HollyFrontier.
In accordance with the merger agreement, we issued approximately 102.8 million shares of HollyFrontier common stock in exchange for outstanding shares of Frontier common stock to former Frontier stockholders. Based on the July 1, 2011 market closing price of $35.93, the aggregate equity consideration paid in connection with the merger was approximately $3.7 billion.
Our discussion of financial and operating results for the three and
six
months ended
June 30, 2012
and
2011
is presented in the following section.
RESULTS OF OPERATIONS
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Change from 2011
|
|
|
2012
|
|
2011
(1)
|
|
Change
|
|
Percent
|
|
|
(In thousands, except per share data)
|
Sales and other revenues
|
|
$
|
4,806,681
|
|
|
$
|
2,967,133
|
|
|
$
|
1,839,548
|
|
|
62.0
|
%
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of products sold (exclusive of depreciation and amortization)
|
|
3,681,764
|
|
|
2,447,095
|
|
|
1,234,669
|
|
|
50.5
|
|
Operating expenses (exclusive of depreciation and amortization)
|
|
222,726
|
|
|
139,345
|
|
|
83,381
|
|
|
59.8
|
|
General and administrative expenses (exclusive of depreciation and amortization)
|
|
32,106
|
|
|
18,682
|
|
|
13,424
|
|
|
71.9
|
|
Depreciation and amortization
|
|
56,948
|
|
|
31,832
|
|
|
25,116
|
|
|
78.9
|
|
Total operating costs and expenses
|
|
3,993,544
|
|
|
2,636,954
|
|
|
1,356,590
|
|
|
51.4
|
|
Income from operations
|
|
813,137
|
|
|
330,179
|
|
|
482,958
|
|
|
146.3
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Equity in earnings of SLC Pipeline
|
|
886
|
|
|
467
|
|
|
419
|
|
|
89.7
|
|
Interest income
|
|
681
|
|
|
657
|
|
|
24
|
|
|
3.7
|
|
Interest expense
|
|
(26,942
|
)
|
|
(15,193
|
)
|
|
(11,749
|
)
|
|
77.3
|
|
Gain on sale of marketable securities
|
|
326
|
|
|
—
|
|
|
326
|
|
|
—
|
|
Merger transaction costs
|
|
—
|
|
|
(2,316
|
)
|
|
2,316
|
|
|
(100.0
|
)
|
|
|
(25,049
|
)
|
|
(16,385
|
)
|
|
(8,664
|
)
|
|
52.9
|
|
Income before income taxes
|
|
788,088
|
|
|
313,794
|
|
|
474,294
|
|
|
151.1
|
|
Income tax provision
|
|
285,718
|
|
|
111,961
|
|
|
173,757
|
|
|
155.2
|
|
Net income
|
|
502,370
|
|
|
201,833
|
|
|
300,537
|
|
|
148.9
|
|
Less net income attributable to noncontrolling interest
|
|
8,871
|
|
|
9,598
|
|
|
(727
|
)
|
|
(7.6
|
)
|
Net income attributable to HollyFrontier stockholders
|
|
$
|
493,499
|
|
|
$
|
192,235
|
|
|
$
|
301,264
|
|
|
156.7
|
%
|
Earnings per share attributable to HollyFrontier stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.40
|
|
|
$
|
1.80
|
|
|
$
|
0.60
|
|
|
33.3
|
%
|
Diluted
|
|
$
|
2.39
|
|
|
$
|
1.79
|
|
|
$
|
0.60
|
|
|
33.5
|
%
|
Cash dividends declared per common share
|
|
$
|
0.65
|
|
|
$
|
0.075
|
|
|
$
|
0.575
|
|
|
766.7
|
%
|
Average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
205,727
|
|
|
106,730
|
|
|
98,997
|
|
|
92.8
|
%
|
Diluted
|
|
206,481
|
|
|
107,340
|
|
|
99,141
|
|
|
92.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Change from 2011
|
|
|
2012
|
|
2011
(1)
|
|
Change
|
|
Percent
|
|
|
(In thousands, except per share data)
|
Sales and other revenues
|
|
$
|
9,738,419
|
|
|
$
|
5,293,718
|
|
|
$
|
4,444,701
|
|
|
84.0
|
%
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of products sold (exclusive of depreciation and amortization)
|
|
7,868,681
|
|
|
4,431,712
|
|
|
3,436,969
|
|
|
77.6
|
|
Operating expenses (exclusive of depreciation and amortization)
|
|
464,353
|
|
|
274,088
|
|
|
190,265
|
|
|
69.4
|
|
General and administrative expenses (exclusive of depreciation and amortization)
|
|
59,634
|
|
|
35,500
|
|
|
24,134
|
|
|
68.0
|
|
Depreciation and amortization
|
|
113,050
|
|
|
63,140
|
|
|
49,910
|
|
|
79.0
|
|
Total operating costs and expenses
|
|
8,505,718
|
|
|
4,804,440
|
|
|
3,701,278
|
|
|
77.0
|
|
Income from operations
|
|
1,232,701
|
|
|
489,278
|
|
|
743,423
|
|
|
151.9
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Equity in earnings of SLC Pipeline
|
|
1,603
|
|
|
1,207
|
|
|
396
|
|
|
32.8
|
|
Interest income
|
|
1,141
|
|
|
742
|
|
|
399
|
|
|
53.8
|
|
Interest expense
|
|
(60,257
|
)
|
|
(31,397
|
)
|
|
(28,860
|
)
|
|
91.9
|
|
Gain on sale of marketable securities
|
|
326
|
|
|
—
|
|
|
326
|
|
|
—
|
|
Merger transaction costs
|
|
—
|
|
|
(6,014
|
)
|
|
6,014
|
|
|
(100.0
|
)
|
|
|
(57,187
|
)
|
|
(35,462
|
)
|
|
(21,725
|
)
|
|
61.3
|
|
Income before income taxes
|
|
1,175,514
|
|
|
453,816
|
|
|
721,698
|
|
|
159.0
|
|
Income tax provision
|
|
426,124
|
|
|
160,972
|
|
|
265,152
|
|
|
164.7
|
|
Net income
|
|
749,390
|
|
|
292,844
|
|
|
456,546
|
|
|
155.9
|
|
Less net income attributable to noncontrolling interest
|
|
14,195
|
|
|
15,915
|
|
|
(1,720
|
)
|
|
(10.8
|
)
|
Net income attributable to HollyFrontier stockholders
|
|
$
|
735,195
|
|
|
$
|
276,929
|
|
|
$
|
458,266
|
|
|
165.5
|
%
|
Earnings per share attributable to HollyFrontier stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.55
|
|
|
$
|
2.60
|
|
|
$
|
0.95
|
|
|
36.5
|
%
|
Diluted
|
|
$
|
3.54
|
|
|
$
|
2.58
|
|
|
$
|
0.96
|
|
|
37.2
|
%
|
Cash dividends declared per common share
|
|
$
|
1.25
|
|
|
$
|
0.15
|
|
|
$
|
1.10
|
|
|
733.3
|
%
|
Average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
207,129
|
|
|
106,672
|
|
|
100,457
|
|
|
94.2
|
%
|
Diluted
|
|
207,938
|
|
|
107,286
|
|
|
100,652
|
|
|
93.8
|
%
|
(1) Our consolidated financial and operating results reflect the operations of the merged Frontier businesses beginning July 1, 2011. Assuming the merger had been consummated on January 1, 2011, pro forma revenues and net income for the three and the six months ended
June 30, 2011
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2011
|
|
Six Months Ended June 30, 2011
|
|
|
(In thousands)
|
Sales and other revenues
|
|
$
|
5,037,660
|
|
|
$
|
9,272,899
|
|
Net income attributable to HollyFrontier stockholders
|
|
$
|
369,039
|
|
|
$
|
603,105
|
|
Balance Sheet Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2012
|
|
December 31, 2011
|
|
|
(In thousands)
|
Cash, cash equivalents and investments in marketable securities
|
|
$
|
1,648,446
|
|
|
$
|
1,840,610
|
|
Working capital
|
|
$
|
2,144,007
|
|
|
$
|
2,030,063
|
|
Total assets
|
|
$
|
9,382,532
|
|
|
$
|
9,576,243
|
|
Long-term debt
|
|
$
|
1,295,163
|
|
|
$
|
1,214,742
|
|
Total equity
|
|
$
|
5,947,625
|
|
|
$
|
5,835,900
|
|
Other Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
(In thousands)
|
Net cash provided by operating activities
|
|
$
|
175,598
|
|
|
$
|
327,454
|
|
|
$
|
429,503
|
|
|
$
|
457,996
|
|
Net cash used for investing activities
|
|
$
|
(75,773
|
)
|
|
$
|
(114,012
|
)
|
|
$
|
(144,453
|
)
|
|
$
|
(255,062
|
)
|
Net cash used for financing activities
|
|
$
|
(387,177
|
)
|
|
$
|
(10,867
|
)
|
|
$
|
(491,756
|
)
|
|
$
|
(5,346
|
)
|
Capital expenditures
|
|
$
|
66,633
|
|
|
$
|
82,267
|
|
|
$
|
128,020
|
|
|
$
|
156,305
|
|
EBITDA
(1)
|
|
$
|
862,426
|
|
|
$
|
350,564
|
|
|
$
|
1,333,485
|
|
|
$
|
531,696
|
|
|
|
(1)
|
Earnings before interest, taxes, depreciation and amortization, which we refer to as "EBITDA", is calculated as net income 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.
|
Our operations are organized into two reportable segments, Refining and HEP. See Note 18 "Segment Information" in the Notes to Consolidated Financial Statements for additional information on our reportable segments.
Refining Operating Data (Unaudited)
The following tables set forth information, including non-GAAP performance measures, about our refinery operations. The cost of products and refinery gross margin do not include the effect of 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 June 30,
|
|
Six Months Ended June 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Mid-Continent Region (El Dorado and Tulsa Refineries)
|
|
|
|
|
|
|
|
|
Crude charge (BPD)
(1)
|
|
243,150
|
|
|
110,100
|
|
|
249,710
|
|
|
107,860
|
|
Refinery throughput (BPD)
(2)
|
|
259,250
|
|
|
111,850
|
|
|
266,020
|
|
|
109,290
|
|
Refinery production (BPD)
(3)
|
|
251,870
|
|
|
110,110
|
|
|
260,070
|
|
|
107,050
|
|
Sales of produced refined products (BPD)
|
|
242,560
|
|
|
112,710
|
|
|
250,810
|
|
|
106,400
|
|
Sales of refined products (BPD)
(4)
|
|
246,130
|
|
|
114,300
|
|
|
255,260
|
|
|
107,390
|
|
Refinery utilization
(5)
|
|
93.5
|
%
|
|
88.1
|
%
|
|
96.0
|
%
|
|
86.3
|
%
|
|
|
|
|
|
|
|
|
|
Average per produced barrel
(6)
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
118.72
|
|
|
$
|
129.11
|
|
|
$
|
119.38
|
|
|
$
|
122.65
|
|
Cost of products
(7)
|
|
94.16
|
|
|
109.94
|
|
|
98.31
|
|
|
105.53
|
|
Refinery gross margin
|
|
24.56
|
|
|
19.17
|
|
|
21.07
|
|
|
17.12
|
|
Refinery operating expenses
(8)
|
|
4.63
|
|
|
5.56
|
|
|
4.73
|
|
|
5.76
|
|
Net operating margin
|
|
$
|
19.93
|
|
|
$
|
13.61
|
|
|
$
|
16.34
|
|
|
$
|
11.36
|
|
|
|
|
|
|
|
|
|
|
Refinery operating expenses per throughput barrel
(9)
|
|
$
|
4.33
|
|
|
$
|
5.60
|
|
|
$
|
4.46
|
|
|
$
|
5.61
|
|
|
|
|
|
|
|
|
|
|
Feedstocks:
|
|
|
|
|
|
|
|
|
Sweet crude oil
|
|
71
|
%
|
|
93
|
%
|
|
71
|
%
|
|
95
|
%
|
Sour crude oil
|
|
7
|
%
|
|
—
|
%
|
|
8
|
%
|
|
—
|
%
|
Heavy sour crude oil
|
|
16
|
%
|
|
5
|
%
|
|
15
|
%
|
|
4
|
%
|
Other feedstocks and blends
|
|
6
|
%
|
|
2
|
%
|
|
6
|
%
|
|
1
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Mid-Continent Region (El Dorado and Tulsa Refineries)
|
|
|
|
|
|
|
|
|
Sales of produced refined products:
|
|
|
|
|
|
|
|
|
Gasolines
|
|
46
|
%
|
|
38
|
%
|
|
46
|
%
|
|
37
|
%
|
Diesel fuels
|
|
28
|
%
|
|
30
|
%
|
|
30
|
%
|
|
30
|
%
|
Jet fuels
|
|
10
|
%
|
|
8
|
%
|
|
9
|
%
|
|
8
|
%
|
Asphalt
|
|
2
|
%
|
|
5
|
%
|
|
2
|
%
|
|
5
|
%
|
Lubricants
|
|
5
|
%
|
|
10
|
%
|
|
5
|
%
|
|
11
|
%
|
Gas oil / intermediates
|
|
—
|
%
|
|
6
|
%
|
|
—
|
%
|
|
6
|
%
|
LPG and other
|
|
9
|
%
|
|
3
|
%
|
|
8
|
%
|
|
3
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southwest Region (Navajo Refinery)
|
|
|
|
|
|
|
|
|
Crude charge (BPD)
(1)
|
|
92,960
|
|
|
86,080
|
|
|
87,050
|
|
|
78,070
|
|
Refinery throughput (BPD)
(2)
|
|
101,090
|
|
|
94,190
|
|
|
95,740
|
|
|
86,600
|
|
Refinery production (BPD)
(3)
|
|
100,960
|
|
|
93,620
|
|
|
94,010
|
|
|
85,220
|
|
Sales of produced refined products (BPD)
|
|
98,680
|
|
|
94,340
|
|
|
92,970
|
|
|
87,130
|
|
Sales of refined products (BPD)
(4)
|
|
103,380
|
|
|
98,120
|
|
|
98,250
|
|
|
92,440
|
|
Refinery utilization
(5)
|
|
93.0
|
%
|
|
86.1
|
%
|
|
87.1
|
%
|
|
78.1
|
%
|
|
|
|
|
|
|
|
|
|
Average per produced barrel
(6)
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
123.25
|
|
|
$
|
126.36
|
|
|
$
|
124.50
|
|
|
$
|
119.35
|
|
Cost of products
(7)
|
|
94.98
|
|
|
104.24
|
|
|
100.33
|
|
|
100.30
|
|
Refinery gross margin
|
|
28.27
|
|
|
22.12
|
|
|
24.17
|
|
|
19.05
|
|
Refinery operating expenses
(8)
|
|
5.06
|
|
|
5.17
|
|
|
5.81
|
|
|
5.71
|
|
Net operating margin
|
|
$
|
23.21
|
|
|
$
|
16.95
|
|
|
$
|
18.36
|
|
|
$
|
13.34
|
|
|
|
|
|
|
|
|
|
|
Refinery operating expenses per throughput barrel
(9)
|
|
$
|
4.94
|
|
|
$
|
5.18
|
|
|
$
|
5.64
|
|
|
$
|
5.74
|
|
|
|
|
|
|
|
|
|
|
Feedstocks:
|
|
|
|
|
|
|
|
|
Sweet crude oil
|
|
4
|
%
|
|
4
|
%
|
|
2
|
%
|
|
4
|
%
|
Sour crude oil
|
|
80
|
%
|
|
71
|
%
|
|
80
|
%
|
|
72
|
%
|
Heavy sour crude oil
|
|
8
|
%
|
|
16
|
%
|
|
9
|
%
|
|
14
|
%
|
Other feedstocks and blends
|
|
8
|
%
|
|
9
|
%
|
|
9
|
%
|
|
10
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Sales of produced refined products:
|
|
|
|
|
|
|
|
|
Gasolines
|
|
49
|
%
|
|
52
|
%
|
|
51
|
%
|
|
52
|
%
|
Diesel fuels
|
|
40
|
%
|
|
32
|
%
|
|
38
|
%
|
|
33
|
%
|
Jet fuels
|
|
—
|
%
|
|
1
|
%
|
|
—
|
%
|
|
1
|
%
|
Fuel oil
|
|
6
|
%
|
|
7
|
%
|
|
6
|
%
|
|
6
|
%
|
Asphalt
|
|
2
|
%
|
|
4
|
%
|
|
2
|
%
|
|
4
|
%
|
LPG and other
|
|
3
|
%
|
|
4
|
%
|
|
3
|
%
|
|
4
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rocky Mountain Region (Cheyenne and Woods Cross Refineries)
|
|
|
|
|
|
|
|
|
Crude charge (BPD)
(1)
|
|
75,680
|
|
|
26,840
|
|
|
72,960
|
|
|
26,310
|
|
Refinery throughput (BPD)
(2)
|
|
83,860
|
|
|
28,740
|
|
|
81,300
|
|
|
28,320
|
|
Refinery production (BPD)
(3)
|
|
82,270
|
|
|
28,320
|
|
|
79,730
|
|
|
27,480
|
|
Sales of produced refined products (BPD)
|
|
80,230
|
|
|
27,600
|
|
|
78,440
|
|
|
27,130
|
|
Sales of refined products (BPD)
(4)
|
|
82,360
|
|
|
27,600
|
|
|
80,840
|
|
|
27,170
|
|
Refinery utilization
(5)
|
|
91.2
|
%
|
|
86.6
|
%
|
|
87.9
|
%
|
|
84.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Rocky Mountain Region (Cheyenne and Woods Cross Refineries)
|
|
|
|
|
|
|
|
|
Average per produced barrel
(6)
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
120.97
|
|
|
$
|
128.02
|
|
|
$
|
115.98
|
|
|
$
|
118.62
|
|
Cost of products
(7)
|
|
85.93
|
|
|
99.79
|
|
|
91.24
|
|
|
94.95
|
|
Refinery gross margin
|
|
35.04
|
|
|
28.23
|
|
|
24.74
|
|
|
23.67
|
|
Refinery operating expenses
(8)
|
|
6.05
|
|
|
6.16
|
|
|
6.30
|
|
|
6.29
|
|
Net operating margin
|
|
$
|
28.99
|
|
|
$
|
22.07
|
|
|
$
|
18.44
|
|
|
$
|
17.38
|
|
|
|
|
|
|
|
|
|
|
Refinery operating expenses per throughput barrel
(9)
|
|
$
|
5.79
|
|
|
$
|
5.92
|
|
|
$
|
6.08
|
|
|
$
|
6.03
|
|
|
|
|
|
|
|
|
|
|
Feedstocks:
|
|
|
|
|
|
|
|
|
Sweet crude oil
|
|
43
|
%
|
|
61
|
%
|
|
44
|
%
|
|
59
|
%
|
Sour crude oil
|
|
2
|
%
|
|
—
|
%
|
|
2
|
%
|
|
—
|
%
|
Heavy sour crude oil
|
|
34
|
%
|
|
5
|
%
|
|
33
|
%
|
|
5
|
%
|
Black wax crude oil
|
|
11
|
%
|
|
28
|
%
|
|
11
|
%
|
|
29
|
%
|
Other feedstocks and blends
|
|
10
|
%
|
|
6
|
%
|
|
10
|
%
|
|
7
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Sales of produced refined products:
|
|
|
|
|
|
|
|
|
Gasolines
|
|
54
|
%
|
|
61
|
%
|
|
55
|
%
|
|
61
|
%
|
Diesel fuels
|
|
33
|
%
|
|
31
|
%
|
|
32
|
%
|
|
30
|
%
|
Jet fuels
|
|
—
|
%
|
|
1
|
%
|
|
—
|
%
|
|
1
|
%
|
Fuel oil
|
|
1
|
%
|
|
3
|
%
|
|
2
|
%
|
|
3
|
%
|
Asphalt
|
|
6
|
%
|
|
2
|
%
|
|
5
|
%
|
|
3
|
%
|
LPG and other
|
|
6
|
%
|
|
2
|
%
|
|
6
|
%
|
|
2
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
Crude charge (BPD)
(1)
|
|
411,790
|
|
|
223,020
|
|
|
409,720
|
|
|
212,240
|
|
Refinery throughput (BPD)
(2)
|
|
444,200
|
|
|
234,780
|
|
|
443,060
|
|
|
224,210
|
|
Refinery production (BPD)
(3)
|
|
435,100
|
|
|
232,050
|
|
|
433,810
|
|
|
219,750
|
|
Sales of produced refined products (BPD)
|
|
421,470
|
|
|
234,650
|
|
|
422,220
|
|
|
220,660
|
|
Sales of refined products (BPD)
(4)
|
|
431,870
|
|
|
240,020
|
|
|
434,350
|
|
|
227,000
|
|
Refinery utilization
(5)
|
|
93.0
|
%
|
|
87.1
|
%
|
|
92.5
|
%
|
|
82.9
|
%
|
|
|
|
|
|
|
|
|
|
Average per produced barrel
(6)
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
120.21
|
|
|
$
|
127.87
|
|
|
$
|
119.87
|
|
|
$
|
120.85
|
|
Cost of products
(7)
|
|
92.78
|
|
|
106.45
|
|
|
97.44
|
|
|
102.16
|
|
Refinery gross margin
|
|
27.43
|
|
|
21.42
|
|
|
22.43
|
|
|
18.69
|
|
Refinery operating expenses
(8)
|
|
5.00
|
|
|
5.48
|
|
|
5.26
|
|
|
5.80
|
|
Net operating margin
|
|
$
|
22.43
|
|
|
$
|
15.94
|
|
|
$
|
17.17
|
|
|
$
|
12.89
|
|
|
|
|
|
|
|
|
|
|
Refinery operating expenses per throughput barrel
(9)
|
|
$
|
4.75
|
|
|
$
|
5.47
|
|
|
$
|
5.01
|
|
|
$
|
5.71
|
|
|
|
|
|
|
|
|
|
|
Feedstocks:
|
|
|
|
|
|
|
|
|
Sweet crude oil
|
|
51
|
%
|
|
54
|
%
|
|
51
|
%
|
|
55
|
%
|
Sour crude oil
|
|
22
|
%
|
|
29
|
%
|
|
22
|
%
|
|
28
|
%
|
Heavy sour crude oil
|
|
18
|
%
|
|
9
|
%
|
|
17
|
%
|
|
8
|
%
|
Black wax crude oil
|
|
2
|
%
|
|
3
|
%
|
|
2
|
%
|
|
4
|
%
|
Other feedstocks and blends
|
|
7
|
%
|
|
5
|
%
|
|
8
|
%
|
|
5
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Consolidated
|
|
|
|
|
|
|
|
|
Sales of produced refined products:
|
|
|
|
|
|
|
|
|
Gasolines
|
|
48
|
%
|
|
46
|
%
|
|
49
|
%
|
|
46
|
%
|
Diesel fuels
|
|
32
|
%
|
|
31
|
%
|
|
32
|
%
|
|
32
|
%
|
Jet fuels
|
|
6
|
%
|
|
4
|
%
|
|
6
|
%
|
|
4
|
%
|
Fuel oil
|
|
2
|
%
|
|
3
|
%
|
|
2
|
%
|
|
3
|
%
|
Asphalt
|
|
3
|
%
|
|
5
|
%
|
|
2
|
%
|
|
4
|
%
|
Lubricants
|
|
3
|
%
|
|
5
|
%
|
|
3
|
%
|
|
5
|
%
|
Gas oil / intermediates
|
|
—
|
%
|
|
3
|
%
|
|
—
|
%
|
|
3
|
%
|
LPG and other
|
|
6
|
%
|
|
3
|
%
|
|
6
|
%
|
|
3
|
%
|
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)
|
Refinery production represents the barrels per day of refined products yielded from processing crude and other refinery feedstocks through the crude units and other conversion units at our refineries.
|
|
|
(4)
|
Includes refined products purchased for resale.
|
|
|
(5)
|
Represents crude charge divided by total crude capacity (BPSD). As a result of our merger effective July 1, 2011, our consolidated crude capacity increased from 256,000 BPSD to 443,000 BPSD.
|
|
|
(6)
|
Represents average per barrel amount for produced refined products 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.
|
|
|
(7)
|
Transportation, terminal and refinery storage costs billed from HEP are included in cost of products.
|
|
|
(8)
|
Represents operating expenses of our refineries, exclusive of depreciation and amortization.
|
|
|
(9)
|
Represents refinery operating expenses, exclusive of depreciation and amortization, divided by refinery throughput.
|
Results of Operations – Three Months Ended
June 30, 2012
Compared to Three Months Ended
June 30, 2011
Summary
Net income attributable to HollyFrontier stockholders for the three months ended
June 30, 2012
was
$493.5 million
(
$2.40
per basic and
$2.39
per diluted share), a
$301.3 million
increase compared to
$192.2 million
(
$1.80
per basic and
$1.79
per diluted share) for the three months ended
June 30, 2011
. Net income increased due principally to increased operating scale following our July 1, 2011 merger and strong second quarter refining margins. Refinery gross margins for the three months ended
June 30, 2012
increased to
$27.43
per produced barrel compared to
$21.42
for the three months ended
June 30, 2011
.
Sales and Other Revenues
Sales and other revenues increased
62%
from
$2,967.1 million
for the three months ended
June 30, 2011
to
$4,806.7 million
for the three months ended
June 30, 2012
, due principally to $1,827.8 million in revenues attributable to the El Dorado and Cheyenne Refinery operations and higher sales volumes of refined products produced from the legacy Holly refineries, slightly offset by the effects of a decrease in refined product sales prices. The average sales price we received per produced barrel sold decreased
6%
from
$127.87
for the three months ended
June 30, 2011
to
$120.21
for the three months ended
June 30, 2012
. Sales and other revenues for the three months ended
June 30, 2012
and
2011
include
$9.5 million
and
$13.8 million
, respectively, in HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties.
Cost of Products Sold
Cost of products sold increased
50%
from
$2,447.1 million
for the three months ended
June 30, 2011
to
$3,681.8 million
for the three months ended
June 30, 2012
, due principally to sales volumes attributable to the El Dorado and Cheyenne Refineries, partially offset by lower crude oil costs. The average price we paid per barrel for crude oil and feedstocks and the transportation costs of moving the finished products to the market place decreased
13%
from
$106.45
for the three months ended
June 30, 2011
to
$92.78
for the three months ended
June 30, 2012
.
Gross Refinery Margins
Gross refinery margin per produced barrel increased
28%
from
$21.42
for the three months ended
June 30, 2011
to
$27.43
for the three months ended
June 30, 2012
. This is due to the effects of a greater decrease in crude oil and feedstock prices relative to the average sales price we received per barrel of produced refined products sold. Gross refinery margin does not include the effects of depreciation and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part 1 of this Form 10-Q for a reconciliation to the income statement of prices of refined products sold and cost of products purchased.
Operating Expenses
Operating expenses, exclusive of depreciation and amortization, increased
60%
from
$139.3 million
for the three months ended
June 30, 2011
to
$222.7 million
for the three months ended
June 30, 2012
, due principally to the inclusion of the El Dorado and Cheyenne Refinery operations. Also contributing to a much lesser extent were increased payroll and maintenance costs attributable to the legacy Holly refining operations.
General and Administrative Expenses
General and administrative expenses increased
72%
from
$18.7 million
for the three months ended
June 30, 2011
to
$32.1 million
for the three months ended
June 30, 2012
, due principally to higher employee benefit and equity-based compensation costs and increased corporate staffing levels as a result of our July 1, 2011 merger.
Depreciation and Amortization Expenses
Depreciation and amortization increased
79%
from
$31.8 million
for the three months ended
June 30, 2011
to
$56.9 million
for the three months ended
June 30, 2012
. The increase was due principally to depreciation and amortization attributable to the El Dorado and Cheyenne Refinery assets and capitalized improvement projects.
Interest Expense
Interest expense was
$26.9 million
for the three months ended
June 30, 2012
compared to
$15.2 million
for the three months ended
June 30, 2011
. This increase reflects interest on the senior notes assumed upon our merger with Frontier. For the three months ended
June 30, 2012
and
2011
, interest expense included
$12.7 million
and
$9.3 million
, respectively, in interest costs attributable to HEP operations.
Merger Transaction Costs
For the three months ended
June 30, 2011
, we recognized merger transaction costs of
$2.3 million
related to our merger with Frontier effective July 1, 2011. These costs relate to legal, advisory and other professional fees that were directly attributable to the merger. There were no such costs incurred for the three months ended
June 30, 2012
.
Income Taxes
For the three months ended
June 30, 2012
, we recorded income tax expense of
$285.7 million
compared to
$112.0 million
for the three months ended
June 30, 2011
. This increase was due principally to significantly higher pre-tax earnings during the three months ended
June 30, 2012
compared to the same period of
2011
. Our effective tax rates, before consideration of earnings attributable to the noncontrolling interest, were
36.3%
and
35.7%
for the three months ended
June 30, 2012
and
2011
, respectively.
Results of Operations –
Six
Months Ended
June 30, 2012
Compared to
Six
Months Ended
June 30, 2011
Summary
Net income attributable to HollyFrontier stockholders for the
six
months ended
June 30, 2012
was
$735.2 million
(
$3.55
per basic and
$3.54
per diluted share), a
$458.3 million
increase compared to
$276.9 million
(
$2.60
per basic and
$2.58
per diluted share) for the
six
months ended
June 30, 2011
. Net income increased due principally to increased operating scale following our July 1, 2011 merger and higher refining margins in the current year. Refinery gross margins for the
six
months ended
June 30, 2012
increased to
$22.43
per produced barrel compared to
$18.69
for the
six
months ended
June 30, 2011
.
Sales and Other Revenues
Sales and other revenues increased
84%
from
$5,293.7 million
for the
six
months ended
June 30, 2011
to
$9,738.4 million
for the
six
months ended
June 30, 2012
, due principally to $3,723.6 million in revenues attributable to the El Dorado and Cheyenne Refinery operations, higher sales volumes of refined products produced from the legacy Holly refineries and slightly higher year-to-date refined product sales prices. The average sales price we received per produced barrel sold decreased
1%
from
$120.85
for the
six
months ended
June 30, 2011
to
$119.87
for the
six
months ended
June 30, 2012
. Sales and other revenues for the
six
months ended
June 30, 2012
and
2011
include
$20.2 million
and
$24.7 million
, respectively, in HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties.
Cost of Products Sold
Cost of products sold increased
78%
from
$4,431.7 million
for the
six
months ended
June 30, 2011
to
$7,868.7 million
for the
six
months ended
June 30, 2012
, due principally to sales volumes attributable to the El Dorado and Cheyenne Refineries, partially offset by lower crude oil costs. The average price we paid per barrel for crude oil and feedstocks and the transportation costs of moving the finished products to the market place decreased
5%
from
$102.16
for the
six
months ended
June 30, 2011
to
$97.44
for the
six
months ended
June 30, 2012
.
Gross Refinery Margins
Gross refinery margin per produced barrel increased
20%
from
$18.69
for the
six
months ended
June 30, 2011
to
$22.43
for the
six
months ended
June 30, 2012
. This is due to the effects of a greater decrease in crude oil and feedstock prices relative to the average sales price we received per barrel of produced refined products sold. Gross refinery margin does not include the effects of depreciation and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part 1 of this Form 10-Q for a reconciliation to the income statement of prices of refined products sold and cost of products purchased.
Operating Expenses
Operating expenses, exclusive of depreciation and amortization, increased
69%
from
$274.1 million
for the
six
months ended
June 30, 2011
to
$464.4 million
for the
six
months ended
June 30, 2012
, due principally to the inclusion of the legacy Frontier refinery operations. Also contributing to a much lesser extent were increases to our long-term environmental remediation cost estimates and increased payroll and maintenance costs attributable to the legacy Holly refining operations.
General and Administrative Expenses
General and administrative expenses increased
68%
from
$35.5 million
for the
six
months ended
June 30, 2011
to
$59.6 million
for the
six
months ended
June 30, 2012
, due principally to higher employee benefit and equity-based compensation costs and increased corporate staffing levels as a result of our July 1, 2011 merger.
Depreciation and Amortization Expenses
Depreciation and amortization increased
79%
from
$63.1 million
for the
six
months ended
June 30, 2011
to
$113.1 million
for the
six
months ended
June 30, 2012
. The increase was due principally to depreciation and amortization attributable to the legacy
Frontier refinery assets and capitalized improvement projects.
Interest Expense
Interest expense was
$60.3 million
for the
six
months ended
June 30, 2012
compared to
$31.4 million
for the
six
months ended
June 30, 2011
. This increase reflects interest on the senior notes assumed upon our merger with Frontier. For the
six
months ended
June 30, 2012
and
2011
, interest expense included
$31.8 million
and
$18.4 million
, respectively, in interest costs attributable to HEP operations.
Merger Transaction Costs
For the
six
months ended
June 30, 2011
, we recognized merger transaction costs of
$6.0 million
related to our merger with Frontier effective July 1, 2011. These costs relate to legal, advisory and other professional fees that were directly attributable to the merger. There were no such costs incurred for the
six
months ended
June 30, 2012
.
Income Taxes
For the
six
months ended
June 30, 2012
, we recorded income tax expense of
$426.1 million
compared to
$161.0 million
for the
six
months ended
June 30, 2011
. This increase was due principally to significantly higher pre-tax earnings during the
six
months ended
June 30, 2012
compared to the same period of
2011
. Our effective tax rates, before consideration of earnings attributable to the noncontrolling interest, were
36.3%
and
35.5%
for the
six
months ended
June 30, 2012
and
2011
, respectively.
LIQUIDITY AND CAPITAL RESOURCES
HollyFrontier Credit Agreement
We have a $1 billion senior secured credit agreement (the “HollyFrontier Credit Agreement”) with Union Bank, N.A. as administrative agent and certain lenders from time to time thereto. The HollyFrontier Credit Agreement matures in July 2016 and may be used to fund working capital requirements, capital expenditures, acquisitions and general corporate purposes. Obligations under the HollyFrontier Credit Agreement are collateralized by our inventory, accounts receivables and certain deposit accounts and guaranteed by our material, wholly-owned subsidiaries.
We were in compliance with all covenants at
June 30, 2012
. At
June 30, 2012
, we had no outstanding borrowings and outstanding letters of credit totaled
$27.9 million
under the HollyFrontier Credit Agreement. At that level of usage, the unused commitment was
$972.1 million
at
June 30, 2012
.
HEP Credit Agreement
In June 2012, HEP amended its previous credit agreement increasing the size of the credit facility from $375 million to $550 million. HEP's $550 million senior secured revolving credit facility expires in June 2017 (the “HEP Credit Agreement”) and is available to fund capital expenditures, investments, acquisitions, distribution payments and working capital and for general partnership purposes. It is also available to fund letters of credit up to a $50 million sub-limit and to fund distributions to unitholders up to a $60 million sub-limit. At
June 30, 2012
, the HEP Credit Agreement had outstanding borrowings of
$170.0 million
HEP’s obligations under the HEP Credit Agreement are collateralized by substantially all of HEP’s assets (presented parenthetically in our consolidated balance sheets). Indebtedness under the HEP Credit Agreement is recourse to HEP Logistics Holdings, L.P., its general partner, and guaranteed by HEP’s 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 other recourse to our assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries.
HollyFrontier Senior Notes
Our senior notes consist of the following:
|
|
•
|
9.875% senior notes (
$286.8 million
principal amount maturing June 2017)
|
|
|
•
|
6.875% senior notes (
$150 million
principal amount maturing November 2018)
|
|
|
•
|
8.5% senior notes (
$200 million
principal amount maturing September 2016)
|
These senior notes (collectively the “HollyFrontier Senior Notes”) are unsecured and impose certain restrictive covenants, including limitations on our ability to incur additional debt, incur liens, enter into sale-and-leaseback transactions, pay dividends, enter into mergers, sell assets and enter into certain transactions with affiliates. At any time when the HollyFrontier Senior Notes are rated investment grade by both Moody’s and Standard & Poor’s and no default or event of default exists, we will not be subject to many of the foregoing covenants. Additionally, we have certain redemption rights under the HollyFrontier Senior Notes.
HollyFrontier Financing Obligation
We have a financing obligation that relates to a sale and lease-back of certain crude oil tankage that we sold to an affiliate of Plains All American Pipeline, L.P. (“Plains”) in October 2009. Under this transaction, the
$40.0 million
in cash proceeds received was recorded as a liability. Monthly lease payments are recorded as a reduction in principal over the
15
-year lease term ending in 2024.
HEP Senior Notes
HEP’s senior notes consist of the following:
|
|
•
|
6.5% HEP senior notes (
$300 million
principal amount maturing March 2020)
|
|
|
•
|
8.25% HEP senior notes (
$150 million
principal amount maturing March 2018)
|
In March 2012, HEP issued $300 million in aggregate principal amount of 6.5% HEP senior notes maturing March 2020. The $294.8 million in net proceeds were used to repay $157.8 million aggregate principal amount of 6.25% HEP senior notes, $72.9 million in promissory notes due to HollyFrontier, related fees, expenses and accrued interest in connection with these transactions and to repay borrowings under the HEP Credit Agreement. In April 2012, HEP called for redemption the $27.3 million aggregate principal amount outstanding of 6.25% HEP senior notes.
The 6.5% and 8.25% HEP senior notes (collectively, 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 recourse to HEP Logistics Holdings, L.P., its general partner, and guaranteed by HEP’s wholly-owned subsidiaries. However, 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 other recourse to our assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries.
See “Risk Management” for a discussion of HEP’s interest rate swap contracts.
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 construction of new refinery processing units and 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. Our ability to acquire complementary assets will be dependent upon several factors, including our ability to identify attractive acquisition candidates, consummate acquisitions on favorable terms, successfully integrate acquired assets and obtain financing to fund acquisitions and to support our growth, and many other factors beyond our control.
As of
June 30, 2012
, our cash, cash equivalents and investments in marketable securities totaled
$1.6 billion
. 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, and are invested primarily in conservative, highly-rated instruments issued by financial institutions or government entities with strong credit standings.
In January 2012, our Board of Directors approved a $350 million stock repurchase program, and in June 2012, approved an additional $350 million repurchase program that authorizes 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, corporate, regulatory and other relevant considerations. These programs may be discontinued at any time by the Board of Directors. As of
June 30, 2012
, we have repurchased
6,351,498
shares at a cost of
$189.8 million
under these stock repurchase programs.
In connection with these stock repurchase programs, we entered into a structured share repurchase arrangement with a financial institution in May 2012. Under the arrangement, we have provided an up-front cash payment of $100.0 million and depending on market conditions, will receive either shares of our common stock or cash at the expiration of the agreement. This prepayment has been recorded as a component of additional capital in our consolidated balance sheets.
Cash and cash equivalents decreased by
$206.7 million
for the
six
months ended
June 30, 2012
. Net cash used for investing and financing activities of
$144.5 million
and
$491.8 million
, respectively exceeded cash provided by operating activities of
$429.5 million
. Working capital increased by
$113.9 million
during the
six
months ended
June 30, 2012
.
Cash Flows – Operating Activities
Six
Months Ended
June 30, 2012
Compared to
Six
Months Ended
June 30, 2011
Net cash flows provided by operating activities were
$429.5 million
for the
six
months ended
June 30, 2012
compared to
$458.0 million
for the
six
months ended
June 30, 2011
, an increase of
$28.5 million
. Net income for the
six
months ended
June 30, 2012
was
$749.4 million
, an increase of
$456.5 million
compared to
$292.8 million
for the
six
months ended
June 30, 2011
. Non-cash adjustments consisting of depreciation and amortization, gain on sale of equity securities, deferred income taxes, equity-based compensation expense and fair value changes to derivative instruments resulted in an increase to operating cash flows of
$137.8 million
for the
six
months ended
June 30, 2012
compared to
$72.3 million
for the same period in
2011
. Changes in working capital items decreased cash flows by
$405.1 million
for the
six
months ended
June 30, 2012
compared to an increase of
$105.5 million
for the
six
months ended
June 30, 2011
. The decrease in working capital items for the
six
months ended
June 30, 2012
included a
$418.9 million
reduction in accounts payable caused by lower volumes of crude purchased and lower crude prices in the second quarter of 2012 compared to year-end 2011. Additionally, for the
six
months ended
June 30, 2012
, turnaround expenditures increased to
$47.0 million
from
$19.8 million
for the same period of
2011
.
Cash Flows – Investing Activities and Planned Capital Expenditures
Six
Months Ended
June 30, 2012
Compared to
Six
Months Ended
June 30, 2011
Net cash flows used for investing activities were
$144.5 million
for the
six
months ended
June 30, 2012
compared to
$255.1 million
for the
six
months ended
June 30, 2011
, a decrease of
$110.6 million
. Cash expenditures for properties, plants and equipment for the first
six
months of
2012
decreased to
$128.0 million
from
$156.3 million
for the same period in
2011
. These include HEP capital expenditures of
$12.0 million
and
$22.9 million
for the
six
months ended
June 30, 2012
and
2011
, respectively. Also for the
six
months ended
June 30, 2012
and
2011
, we invested
$166.4 million
and
$157.8 million
, respectively, in marketable securities and received proceeds of
$152.0 million
and
$68.2 million
, respectively, from the sale or maturity of marketable securities.
Planned Capital Expenditures
HollyFrontier Corporation
Each year our Board of Directors approves our annual capital budget which includes specific projects that our 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. Our appropriated capital budget for
2012
is
$257.0 million
including both sustaining capital and major capital projects. We expect to spend approximately
$350.0 million
in cash for capital projects in
2012
, including projects approved in prior years, and this spending is comprised of
$101.0 million
at the Tulsa Refineries,
$85.0 million
at the Woods Cross Refinery,
$55.0 million
at the El Dorado Refinery,
$46.0 million
at the Cheyenne Refinery,
$38.0 million
at the Navajo Refinery,
$16.0 million
for our portion of the UNEV Pipeline and
$9.0 million
for miscellaneous projects. In addition, we expect to spend
$120.0 million
on refinery turnarounds and tank maintenance.
A significant portion of our current capital spending is associated with compliance-oriented capital improvements. This spending is required due to existing consent decrees (for projects including FCC unit flue gas scrubbers and tail gas treatment units), federal fuels regulations (particularly, MSAT2 which mandates a reduction in the benzene content of blended gasoline), refinery waste water treatment improvements and other similar initiatives. 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.
El Dorado Refinery
Newly appropriated capital projects at the El Dorado Refinery include naphtha splitting and aromatics recovery unit revamps to reduce benzene in gasoline (MSAT2 compliance) and installation of a new tail gas treatment unit with our sulfur recovery facilities as required under an existing EPA consent decree. Also included in the 2012 capital budget are yield improvement projects that address both the FCC unit and the Coker. A previously appropriated project which we expect to complete during 2012 is the replacement of an existing Coker furnace with more current furnace technology. This project is expected to improve Coker on-stream factor and reduce fuel consumption. We expect to complete this project in late 2012.
Tulsa Refineries
The most significant newly appropriated capital project for our Tulsa Refineries is conversion of a propane de-asphalt unit to ROSE technology. This project is expected to cost $25.0 million and will increase processing of vacuum tower bottoms, increase the production of bright stock lube, reduce energy consumption, and allow the shutdown of a low-pressure steam boiler. Projects still underway from prior appropriations include a $58.0 million project to recover sulfur from the refinery fuel gas system and to shut down another low-pressure steam boiler by electrification of turbine drivers. The sulfur recovery project is required to comply with our EPA consent decree but is being enhanced so as to increase our capacity to run lower priced sour / heavy crude in Tulsa. Other projects underway in Tulsa involve replacement of an existing vacuum tower and improvements to our wastewater treatment plants and storm water retention systems.
Navajo Refinery
We have approved a new project for the Navajo Refinery to remove sulfur and other contaminants from the crude unit off-gas stream that will improve liquid yields and reduce refinery fuel costs. Current spending on previously appropriated projects includes an MSAT2 project (naphtha splitting and benzene saturation) to reduce reliance on benzene credits purchases, as well as expenditures to improve the Artesia waste water handling and processing facilities.
Cheyenne Refinery
We have approved four new compliance projects for the Cheyenne Refinery including wastewater treatment plant improvements, a wet gas scrubber for the FCC unit to reduce particulate and other emissions, MSAT2 related investments to reduce benzene in gasoline, and spending for additional tail gas unit associated with our sulfur recovery facilities. We also plan to improve metallurgy on portions of the Cheyenne Refinery’s delayed coking unit. These new major capital appropriations total approximately $60.0 million, and we expect to spend approximately 30% of this amount on these projects during 2012. Expenditures for MSAT2 compliance projects were accelerated by approximately one year at each of the Cheyenne and El Dorado Refineries due to the Holly-Frontier merger, which resulted in our loss of a small refiner exemption that previously provided for delayed compliance with this standard.
Woods Cross Refinery
We plan to significantly expand our Woods Cross Refinery in response to increased availability of locally-produced black wax crude oil. We have announced a 10-year crude supply agreement with Newfield Exploration Company under which we will purchase 20,000 BPD of waxy crudes (black and yellow wax). Our expansion project will increase crude processing capacity of Woods Cross from 31,000 BPD to 45,000 BPD. Most of the incremental crude supply is expected to be waxy crude, and the expansion is being configured to create high liquid yields and relatively large proportions of additional gasoline and diesel fuel in comparison to the increased crude charge. We expect this $225.0 million project to have a pre-tax payback period of approximately two years, and we expect to complete the expansion in approximately the fourth quarter of 2014. Our execution of this project is subject to certain contingencies, including our receipt of required emissions and other permits. Also at Woods Cross, we have two significant compliance projects authorized in prior year appropriations. The first of these involves installation of a wet gas scrubber on the FCC unit to reduce particulate and other emissions and the second relates to MSAT2 compliance which will require naphtha fractionation and benzene saturation.
UNEV
The UNEV Pipeline and associated product terminals in Cedar City, Utah and Las Vegas, Nevada were operational during the first quarter of 2012. On July 12, 2012, we sold our 75% interest in the UNEV Pipeline to HEP. Consideration received consisted of $260.0 million in cash and approximately 1 million HEP common units. Our 75% share of the total installed cost of the pipeline was $310.0 million.
Regulatory compliance items or other presently existing or future environmental regulations / consent decrees could cause us to make additional capital investments beyond those described above and incur additional operating costs to meet applicable requirements.
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 of several years, 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
2012
HEP capital budget is comprised of
$8.9 million
for maintenance capital expenditures and
$25.8 million
for expansion capital expenditures.
HEP has recently made certain modifications to its crude oil gathering and trunk line system that have effectively increased HEP’s ability to gather and transport an additional 10,000 BPD of Delaware Basin crude oil in response to increased drilling activity in southeast New Mexico. Furthermore, HEP has developed a project to replace a 5-mile section of this pipeline system that will allow for an additional 15,000 BPD of capacity that will be executed as needed if Delaware Basin crude volumes continue to increase. This project is estimated to cost approximately $2.0 million. HEP has a second project which consists of the reactivation and conversion to crude oil service of a 70-mile, 8-inch petroleum products pipeline owned by HEP. Once in service, this pipeline will initially be capable of transporting up to 35,000 BPD of crude oil from southeast New Mexico to third-party common carrier pipelines in west Texas for further transport to major crude oil markets. The scope of this project is being finalized. Subject to receipt of acceptable shipper support and board approval, this project could be operational in early 2013.
Cash Flows – Financing Activities
Six
Months Ended
June 30, 2012
Compared to
Six
Months Ended
June 30, 2011
Net cash flows used for financing activities were
$491.8 million
for the
six
months ended
June 30, 2012
compared to
$5.3 million
for the
six
months ended
June 30, 2011
, an increase of
$486.4 million
. During the
six
months ended
June 30, 2012
, we purchased
$189.8 million
in common stock, paid
$250.0 million
in dividends, provided a
$100.0 million
up-front payment pursuant to a structured share repurchase arrangement, paid
$5.0 million
in principal on HFC's 9.875% senior notes, received a
$6.0 million
contribution from our UNEV Pipeline joint venture partner and recognized
$4.8 million
excess tax benefits on our equity-based compensation. Also during this period, HEP received
$294.8 million
in net proceeds upon the issuance of the HEP 6.5% senior notes, paid
$185.0 million
in principal on the HEP 6.25% senior notes, received
$99.0 million
and repaid
$129.0 million
under the HEP Credit Agreement, paid distributions of
$28.9 million
to noncontrolling interests, incurred
$3.2 million
in deferred financing costs and purchased
$4.5 million
in HEP common units in the open market for recipients of its incentive grants. During the
six
months ended
June 30, 2011
, we purchased
$3.0 million
in common stock, paid
$16.0 million
in dividends, received a
$16.5 million
contribution from our UNEV Pipeline joint venture partner and recognized
$0.5 million
excess tax benefits on our equity-based compensation. Also during this period, HEP received
$64.0 million
and repaid
$37.0 million
under the HEP Credit Agreement, paid distributions of
$25.1 million
to noncontrolling interests, incurred
$3.3 million
in deferred financing costs and purchased
$1.4 million
in HEP common units in the open market for recipients of its incentive grants.
Contractual Obligations and Commitments
HollyFrontier Corporation
There were no significant changes to our contractual obligations during the
six
months ended
June 30, 2012
.
HEP
In June 2012, HEP amended its credit agreement increasing the size of the credit facility from $375 million to $550 million. The HEP Credit Agreement expires in June 2017. During the
six
months ended
June 30, 2012
, HEP repaid net advances of
$30.0 million
resulting in
$170.0 million
of outstanding borrowings under the HEP Credit Agreement at
June 30, 2012
.
In March 2012, HEP issued $300 million in aggregate principal amount of 6.5% senior notes maturing March 2020.
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, 2011
. Certain critical accounting policies that materially affect the amounts recorded in our consolidated financial statements include the assessment and consolidation of variable interest entities, the use of the LIFO method of valuing certain inventories, the amortization of deferred costs for regular major maintenance and repairs at our refineries, assessing the possible impairment of certain long-lived assets and goodwill, accounting for derivative instruments and assessing contingent liabilities for probable losses.
In the first quarter of 2012, we changed our policy of reporting certain same-party accounts receivable and payable amounts in the consolidated balance sheets to reflect a net amount due under contractual netting agreements. Prior to this change, we reported such amounts on a gross basis with a same-party receivable and payable balance presented separately in our balance sheet. GAAP permits a reporting entity to elect a policy of offsetting same party receivables and payables when such amounts are net settled under legally enforceable contractual setoff provisions. We believe that a net presentation is preferable because it more appropriately presents our economic resources (accounts receivable) and claims against us (accounts payable) and the future cash flows associated with such assets and liabilities. Additionally, we believe a net presentation of such amounts conforms to the predominant practices used by others in our industry. We have applied this change in accounting principle on a retrospective basis and have recast our prior period financial statements. See Note 2 to our Consolidated Financial Statements under Item 8 for a summary of line items affected in our prior period financial statements.
We use the LIFO method of valuing inventory. Under the LIFO method, an actual valuation of inventory can only be 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.
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 events or circumstances indicate the possibility of impairment. As of
June 30, 2012
, there have been no impairments to goodwill.
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.
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 and futures contracts to mitigate price exposure with respect to:
|
|
•
|
our inventory positions;
|
|
|
•
|
costs of crude oil and related grade differentials;
|
|
|
•
|
prices of refined products; and
|
We have swap contracts serving as cash flow hedges against price risk on forecasted purchases of WTI crude oil and forecasted sales of ultra-low sulfur diesel and conventional unleaded gasoline. These contracts have been designated as accounting hedges and are measured quarterly at fair value with offsetting adjustments (gains/losses) recorded directly to other comprehensive income. These fair value adjustments are later reclassified in the statement of income as the hedging instruments mature. Also on a quarterly basis, hedge ineffectiveness is measured by comparing the change in fair value of the swap contracts against the expected future cash inflows/outflows on the respective transaction being hedged.
As of
June 30, 2012
, we have the following notional contract volumes (stated in barrels) related to outstanding swap contracts serving as cash flow hedges against price risk on forecasted purchases of crude oil and sales of refined products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Contract Volumes by Year of Maturity
|
|
|
Commodity Price Swaps
|
|
Total Outstanding Notional
|
|
2012
|
|
2013
|
|
Unit of Measure
|
|
|
|
|
|
|
|
|
|
WTI crude oil - long
|
|
10,096,000
|
|
|
9,016,000
|
|
|
1,080,000
|
|
|
Barrels
|
Ultra-low sulfur diesel - short
|
|
5,048,000
|
|
|
4,508,000
|
|
|
540,000
|
|
|
Barrels
|
Conventional unleaded gasoline - short
|
|
5,048,000
|
|
|
4,508,000
|
|
|
540,000
|
|
|
Barrels
|
We also have swap contracts that serve as economic hedges to fix our purchase price on forecasted crude oil, natural gas and butane purchases, and to lock in the spread between WCS and WTI crude oil on forecasted purchases. Also, we have NYMEX futures contracts to lock in prices on forecasted sales and purchases of inventory. These contracts are measured quarterly at fair value with offsetting adjustments (gains/losses) recorded directly to net income.
As of
June 30, 2012
, we have the following notional contract volumes related to our outstanding swap contracts serving as economic hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Contract Volumes by Year of Maturity
|
|
|
Derivative Instrument
|
|
Total Outstanding Notional
|
|
2012
|
|
2013
|
|
Unit of Measure
|
|
|
|
|
|
|
|
|
|
Commodity price swap (natural gas) - long
|
|
6,624,000
|
|
|
6,624,000
|
|
|
—
|
|
|
MMBTU
|
Commodity price swap (WCS spread) - long
|
|
6,422,500
|
|
|
765,000
|
|
|
5,657,500
|
|
|
Barrels
|
Commodity price swap (WTI) - short
|
|
150,000
|
|
|
—
|
|
|
150,000
|
|
|
Barrels
|
Commodity price swap (gasoline) - short
|
|
630,000
|
|
|
150,000
|
|
|
480,000
|
|
|
Barrels
|
Commodity price swap (butane) - long
|
|
540,000
|
|
|
540,000
|
|
|
—
|
|
|
Barrels
|
NYMEX futures (WTI) - long
|
|
380,000
|
|
|
146,000
|
|
|
234,000
|
|
|
Barrels
|
NYMEX futures (WTI)- short
|
|
1,008,000
|
|
|
1,008,000
|
|
|
—
|
|
|
Barrels
|
Interest Rate Risk Management
HEP uses interest rate swaps to manage its exposure to interest rate risk.
As of
June 30, 2012
, HEP has an interest rate swap contract that hedges its exposure to the cash flow risk caused by the effects of LIBOR changes on a
$155.0 million
credit agreement advance. This interest rate swap effectively converts
$155.0 million
of LIBOR based debt to fixed rate debt having an interest rate of
0.99%
plus an applicable margin, of
2.00%
as of
June 30, 2012
, which equaled an effective interest rate of
2.99%
. This swap matures in February 2016.
Publicly available 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 swap contracts. These counterparties are large financial institutions. We have not experienced, nor do we expect to experience, any difficulty in the counterparties honoring their commitments.
The market risk inherent in our fixed-rate debt and positions 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 our 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 these debt instruments as of
June 30, 2012
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Principal
|
|
Estimated
Fair Value
|
|
Estimated
Change in
Fair Value
|
|
|
(In thousands)
|
HollyFrontier Senior Notes
|
|
$
|
636,797
|
|
|
$
|
686,628
|
|
19,108,000
|
|
$
|
19,108
|
|
HEP Senior Notes
|
|
$
|
450,000
|
|
|
$
|
461,625
|
|
16,557,000
|
|
$
|
16,557
|
|
For the variable rate HEP Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. At
June 30, 2012
, outstanding borrowings under the HEP Credit Agreement were
$170.0 million
. By means of its cash flow hedge, HEP has effectively converted the variable rate on $155.0 million of outstanding principal to a fixed rate of
2.99%
.
At
June 30, 2012
, cash and cash equivalents included investments in investment grade, highly liquid investments with maturities of three months or less at the time of purchase and hence the interest rate market risk implicit in these cash investments is low. Due to the short-term nature of our cash and cash equivalents, a hypothetical 10% increase in interest rates would not have a
material effect on the fair market value of our portfolio. Since we have the ability to liquidate this portfolio, we do not expect our operating results or cash flows to be materially affected by the effect of a sudden change in market interest rates on our investment portfolio.
Our operations are subject to normal 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.
We have a risk management oversight committee that is made up 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.
|
|
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 June 30,
|
|
Six Months Ended June 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
(In thousands)
|
Net income attributable to HollyFrontier stockholders
|
|
$
|
493,499
|
|
|
$
|
192,235
|
|
|
$
|
735,195
|
|
|
$
|
276,929
|
|
Add income tax provision
|
|
285,718
|
|
|
111,961
|
|
|
426,124
|
|
|
160,972
|
|
Add interest expense
|
|
26,942
|
|
|
15,193
|
|
|
60,257
|
|
|
31,397
|
|
Subtract interest income
|
|
(681
|
)
|
|
(657
|
)
|
|
(1,141
|
)
|
|
(742
|
)
|
Add depreciation and amortization
|
|
56,948
|
|
|
31,832
|
|
|
113,050
|
|
|
63,140
|
|
EBITDA
|
|
$
|
862,426
|
|
|
$
|
350,564
|
|
|
$
|
1,333,485
|
|
|
$
|
531,696
|
|
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 barrel is the difference between average net sales price and average cost of products per barrel of produced refined products. Net operating margin per barrel is the difference between refinery gross margin and refinery operating expenses per barrel of produced refined products. These two margins do not include the effect of 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.
Refinery Gross and Net Operating Margins
Below are reconciliations to our consolidated statements of income for (i) net sales, cost of products and operating expenses, in each case averaged per produced barrel sold, and (ii) net operating margin and refinery gross margin. Due to rounding of reported numbers, some amounts may not calculate exactly.
Reconciliations of refined product sales from produced products sold to total sales and other revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
(Dollars in thousands, except per barrel amounts)
|
Consolidated
|
|
|
|
|
|
|
|
|
Average sales price per produced barrel sold
|
|
$
|
120.21
|
|
|
$
|
127.87
|
|
|
$
|
119.87
|
|
|
$
|
120.85
|
|
Times sales of produced refined products sold (BPD)
|
|
421,470
|
|
|
234,650
|
|
|
422,220
|
|
|
220,660
|
|
Times number of days in period
|
|
91
|
|
|
91
|
|
|
182
|
|
|
181
|
|
Refined product sales from produced products sold
|
|
$
|
4,610,507
|
|
|
$
|
2,730,427
|
|
|
$
|
9,211,295
|
|
|
$
|
4,826,684
|
|
|
|
|
|
|
|
|
|
|
Total refined product sales
|
|
$
|
4,610,507
|
|
|
$
|
2,730,427
|
|
|
$
|
9,211,295
|
|
|
$
|
4,826,684
|
|
Add refined product sales from purchased products and rounding
(1)
|
|
120,676
|
|
|
63,170
|
|
|
276,066
|
|
|
138,718
|
|
Total refined product sales
|
|
4,731,183
|
|
|
2,793,597
|
|
|
9,487,361
|
|
|
4,965,402
|
|
Add direct sales of excess crude oil
(2)
|
|
32,558
|
|
|
138,492
|
|
|
190,840
|
|
|
273,901
|
|
Add other refining segment revenue
(3)
|
|
31,728
|
|
|
21,137
|
|
|
36,999
|
|
|
29,015
|
|
Total refining segment revenue
|
|
4,795,469
|
|
|
2,953,226
|
|
|
9,715,200
|
|
|
5,268,318
|
|
Add HEP segment sales and other revenues
|
|
63,692
|
|
|
50,940
|
|
|
127,207
|
|
|
95,945
|
|
Add corporate and other revenues
|
|
4,411
|
|
|
153
|
|
|
8,635
|
|
|
801
|
|
Subtract consolidations and eliminations
|
|
(56,891
|
)
|
|
(37,186
|
)
|
|
(112,623
|
)
|
|
(71,346
|
)
|
Sales and other revenues
|
|
$
|
4,806,681
|
|
|
$
|
2,967,133
|
|
|
$
|
9,738,419
|
|
|
$
|
5,293,718
|
|
Reconciliation of average cost of products per produced barrel sold to total cost of products sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
(Dollars in thousands, except per barrel amounts)
|
Consolidated
|
|
|
|
|
|
|
|
|
Average cost of products per produced barrel sold
|
|
$
|
92.78
|
|
|
$
|
106.45
|
|
|
$
|
97.44
|
|
|
$
|
102.16
|
|
Times sales of produced refined products sold (BPD)
|
|
421,470
|
|
|
234,650
|
|
|
422,220
|
|
|
220,660
|
|
Times number of days in period
|
|
91
|
|
|
91
|
|
|
182
|
|
|
181
|
|
Cost of products for produced products sold
|
|
$
|
3,558,463
|
|
|
$
|
2,273,043
|
|
|
$
|
7,487,683
|
|
|
$
|
4,080,215
|
|
|
|
|
|
|
|
|
|
|
Total cost of products for produced products sold
|
|
$
|
3,558,463
|
|
|
$
|
2,273,043
|
|
|
$
|
7,487,683
|
|
|
$
|
4,080,215
|
|
Add refined product costs from purchased products sold and rounding
(1)
|
|
121,872
|
|
|
64,206
|
|
|
278,196
|
|
|
139,746
|
|
Total cost of refined products sold
|
|
3,680,335
|
|
|
2,337,249
|
|
|
7,765,879
|
|
|
4,219,961
|
|
Add crude oil cost of direct sales of excess crude oil
(2)
|
|
29,733
|
|
|
135,981
|
|
|
185,543
|
|
|
268,861
|
|
Add other refining segment cost of products sold
(4)
|
|
27,649
|
|
|
10,205
|
|
|
28,087
|
|
|
12,539
|
|
Total refining segment cost of products sold
|
|
3,737,717
|
|
|
2,483,435
|
|
|
7,979,509
|
|
|
4,501,361
|
|
Subtract consolidations and eliminations
|
|
(55,953
|
)
|
|
(36,340
|
)
|
|
(110,828
|
)
|
|
(69,649
|
)
|
Costs of products sold (exclusive of depreciation and amortization)
|
|
$
|
3,681,764
|
|
|
$
|
2,447,095
|
|
|
$
|
7,868,681
|
|
|
$
|
4,431,712
|
|
Reconciliation of average refinery operating expenses per produced barrel sold to total operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
(Dollars in thousands, except per barrel amounts)
|
Consolidated
|
|
|
|
|
|
|
|
|
Average refinery operating expenses per produced barrel sold
|
|
$
|
5.00
|
|
|
$
|
5.48
|
|
|
$
|
5.26
|
|
|
$
|
5.80
|
|
Times sales of produced refined products sold (BPD)
|
|
421,470
|
|
|
234,650
|
|
|
422,220
|
|
|
220,660
|
|
Times number of days in period
|
|
91
|
|
|
91
|
|
|
182
|
|
|
181
|
|
Refinery operating expenses for produced products sold
|
|
$
|
191,769
|
|
|
$
|
117,015
|
|
|
$
|
404,200
|
|
|
$
|
231,649
|
|
|
|
|
|
|
|
|
|
|
Total refinery operating expenses per produced products sold
|
|
$
|
191,769
|
|
|
$
|
117,015
|
|
|
$
|
404,200
|
|
|
$
|
231,649
|
|
Add other refining segment operating expenses and rounding
(5)
|
|
9,382
|
|
|
8,266
|
|
|
18,232
|
|
|
15,711
|
|
Total refining segment operating expenses
|
|
201,151
|
|
|
125,281
|
|
|
422,432
|
|
|
247,360
|
|
Add HEP segment operating expenses
|
|
17,923
|
|
|
14,366
|
|
|
34,911
|
|
|
27,162
|
|
Add corporate and other costs
|
|
3,786
|
|
|
(168
|
)
|
|
7,352
|
|
|
(174
|
)
|
Subtract consolidations and eliminations
|
|
(134
|
)
|
|
(134
|
)
|
|
(342
|
)
|
|
(260
|
)
|
Operating expenses (exclusive of depreciation and amortization)
|
|
$
|
222,726
|
|
|
$
|
139,345
|
|
|
$
|
464,353
|
|
|
$
|
274,088
|
|
Reconciliation of net operating margin per barrel to refinery gross margin per barrel to total sales and other revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
(Dollars in thousands, except per barrel amounts)
|
Consolidated
|
|
|
|
|
|
|
|
|
Net operating margin per barrel
|
|
$
|
22.43
|
|
|
$
|
15.94
|
|
|
$
|
17.17
|
|
|
$
|
12.89
|
|
Add average refinery operating expenses per produced barrel
|
|
5.00
|
|
|
5.48
|
|
|
5.26
|
|
|
5.80
|
|
Refinery gross margin per barrel
|
|
27.43
|
|
|
21.42
|
|
|
22.43
|
|
|
18.69
|
|
Add average cost of products per produced barrel sold
|
|
92.78
|
|
|
106.45
|
|
|
97.44
|
|
|
102.16
|
|
Average sales price per produced barrel sold
|
|
$
|
120.21
|
|
|
$
|
127.87
|
|
|
$
|
119.87
|
|
|
$
|
120.85
|
|
Times sales of produced refined products sold (BPD)
|
|
421,470
|
|
|
234,650
|
|
|
422,220
|
|
|
220,660
|
|
Times number of days in period
|
|
91
|
|
|
91
|
|
|
182
|
|
|
181
|
|
Refined product sales from produced products sold
|
|
$
|
4,610,507
|
|
|
$
|
2,730,427
|
|
|
$
|
9,211,295
|
|
|
$
|
4,826,684
|
|
|
|
|
|
|
|
|
|
|
Total refined product sales from produced products sold
|
|
$
|
4,610,507
|
|
|
$
|
2,730,427
|
|
|
$
|
9,211,295
|
|
|
$
|
4,826,684
|
|
Add refined product sales from purchased products and rounding
(1)
|
|
120,676
|
|
|
63,170
|
|
|
276,066
|
|
|
138,718
|
|
Total refined product sales
|
|
4,731,183
|
|
|
2,793,597
|
|
|
9,487,361
|
|
|
4,965,402
|
|
Add direct sales of excess crude oil
(2)
|
|
32,558
|
|
|
138,492
|
|
|
190,840
|
|
|
273,901
|
|
Add other refining segment revenue
(3)
|
|
31,728
|
|
|
21,137
|
|
|
36,999
|
|
|
29,015
|
|
Total refining segment revenue
|
|
4,795,469
|
|
|
2,953,226
|
|
|
9,715,200
|
|
|
5,268,318
|
|
Add HEP segment sales and other revenues
|
|
63,692
|
|
|
50,940
|
|
|
127,207
|
|
|
95,945
|
|
Add corporate and other revenues
|
|
4,411
|
|
|
153
|
|
|
8,635
|
|
|
801
|
|
Subtract consolidations and eliminations
|
|
(56,891
|
)
|
|
(37,186
|
)
|
|
(112,623
|
)
|
|
(71,346
|
)
|
Sales and other revenues
|
|
$
|
4,806,681
|
|
|
$
|
2,967,133
|
|
|
$
|
9,738,419
|
|
|
$
|
5,293,718
|
|
|
|
(1)
|
We purchase finished products when opportunities arise that provide a profit on the sale of such products, or to meet delivery commitments.
|
|
|
(2)
|
We purchase crude oil that at times exceeds the supply needs of our refineries. Quantities in excess of our needs are sold at market prices to purchasers of crude oil that are recorded on a gross basis with the sales price recorded as revenues and the corresponding acquisition cost as inventory and then upon sale as cost of products sold. Additionally, at times we enter into buy/sell exchanges of crude oil with certain parties to facilitate the delivery of quantities to certain locations that are netted at carryover cost.
|
|
|
(3)
|
Other refining segment revenue includes the incremental revenues associated with NK Asphalt and miscellaneous revenue.
|
|
|
(4)
|
Other refining segment cost of products sold includes the incremental cost of products for NK Asphalt and miscellaneous costs.
|
|
|
(5)
|
Other refining segment operating expenses include the marketing costs associated with our refining segment and the operating expenses of NK Asphalt.
|
|
|
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 as of
June 30, 2012
at the reasonable assurance level.
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.
PART II. OTHER INFORMATION
|
|
Item 1.
|
Legal Proceedings
|
Commitment and Contingency Reserves
We periodically establish reserves for certain legal proceedings. The establishment of a reserve involves an estimation process that includes the advice of legal counsel and subjective judgment of management. While management believes these reserves to be adequate, future changes in the facts and circumstances could result in the actual liability exceeding the estimated ranges of loss and amounts accrued.
While the outcome and impact on us cannot be predicted with certainty, management believes that the resolution of these proceedings through settlement or adverse judgment will not have a material adverse effect on our consolidated financial position or cash flow. Operating results, however, could be significantly impacted in the reporting periods in which such matters are resolved.
New Mexico OHSB Complaint – Navajo Tank Fire
On March 3, 2010, the New Mexico Occupational Health and Safety Bureau (“OHSB”), the New Mexico regulatory agency responsible for enforcing certain state occupational health and safety regulations, which are identical to Federal Occupational Safety and Health Administration (“OSHA”) regulations, commenced an inspection in relation to the tank fire that took place on March 2, 2010 at the Navajo facility in Artesia, New Mexico. On August 31, 2010, OHSB issued two citations to Navajo, alleging 10 willful violations and one serious violation of various construction safety standards. OHSB proposed penalties in the amount of $0.7 million. Navajo filed a notice of contest, challenging the citations. The parties commenced settlement negotiations but were unable to reach an agreement, thus OHSB filled an administrative complaint with New Mexico Occupational Health and Safety Review Commission (“OHSRC”) on December 20, 2010. Navajo and OHSB are presently negotiating a settlement with respect to the citations.
Propane Pit - Woods Cross
In December 2011, representatives of EPA Region 8 conducted an inspection of the Woods Cross refinery in Utah (“Woods Cross”). The purpose of the inspection was to determine compliance with the Chemical Accident Prevention and Risk Management Plan (“RMP”) requirements set forth in section 112(r)(7) of the Federal Clean Air Act and Part 68 of Title 40 of the
Code of Federal Regulations
. On January 31, 2012, EPA sent a letter to Woods Cross indicating it identified some potential violations of the RMP requirements. On February 28, 2012, representatives of Woods Cross and EPA had an initial meeting and preliminary discussion about the RMP issues EPA had identified. Prior to this meeting, in 2009 and 2010, Woods Cross voluntarily reported to EPA and the Utah Department of Environmental Quality possible regulatory issues associated with the Frozen Earth Storage propane pit (“FES”) at Woods Cross and was working to resolve them. In addition, prior to the meeting, Woods Cross had made a decision to decommission the FES. Woods Cross representatives communicated this decision to EPA at the February meeting. On April 17, 2012, EPA sent to Woods Cross a draft Administrative Order on Consent and a draft Consent Agreement under which Woods Cross would decommission the FES and pay a civil penalty of $159,200 for alleged RMP program violations-a number of which are unrelated to the FES. Woods Cross does not agree with EPA’s proposed penalty and the allegations of violations. Woods Cross believes that on a number of points there is simply a misunderstanding that, if resolved, leads directly to the conclusion that there were no violations. EPA granted Woods Cross 60 days to submit a written response to the draft enforcement documents. On June 25, 2012, Woods Cross submitted its response to the EPA allegations, explained why a penalty is inappropriate, and requested a meeting with EPA in a cooperative effort to resolve its concerns and contentions relating to the amount of the penalty and the legitimacy of a number of the alleged violations. At this early stage of the proceedings, it is impossible to accurately predict the outcome of this matter.
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.
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, 2011
. In addition to the other information set forth in this quarterly report, you should carefully consider the factors discussed in our
2011
Form 10-K, which could materially affect our business, financial condition or future results. The risks described in this quarterly report and in our
2011
Form 10-K are not the only risks we face. 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.
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
(c) Common Stock Repurchases Made in the Quarter
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
second
quarter of
2012
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number of
Shares Purchased
|
|
Average Price
Paid Per Share
|
|
Total Number of
Shares Purchased
under Approved
Stock Repurchase
Programs
|
|
Maximum Dollar
Value of Shares
Yet to be
Purchased under
Approved Stock
Repurchase
Programs
|
April 2012
|
|
1,021,543
|
|
|
$
|
29.57
|
|
|
1,021,543
|
|
|
$
|
255,625,172
|
|
May 2012
|
|
2,216,227
|
|
|
$
|
29.50
|
|
|
2,216,227
|
|
|
$
|
190,235,554
|
|
June 2012
|
|
967,381
|
|
|
$
|
31.02
|
|
|
967,381
|
|
|
$
|
510,228,860
|
|
Total for April to June 2012
|
|
4,205,151
|
|
|
|
|
4,205,151
|
|
|
|
The Exhibit Index on page 58 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.
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: August 8, 2012
|
|
|
/s/ Douglas S. Aron
|
|
|
|
Douglas S. Aron
|
|
|
|
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
|
|
|
|
/s/ J. W. Gann, Jr.
|
|
|
|
J. W. Gann, Jr.
|
|
|
|
Vice President and Controller
(Principal Accounting Officer)
|
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 Form 8-K Current Report 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 Form 8-K Current Report filed November 21, 2011, File No. 1-03876).
|
|
|
|
10.1
|
|
HollyFrontier Corporation Form of Amendment to Change in Control Agreement for Chief Executive Officer and Chief Financial Officer (incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K Current Report filed May 10, 2012, File No. 1-03876).
|
|
|
|
10.2+
|
|
LLC Interest Purchase Agreement, dated July 12, 2012, by and among HollyFrontier Corporation, Holly Energy Partners, L.P. and HEP UNEV Holdings LLC.
|
|
|
|
10.3+
|
|
Seventh Amended and Restated Omnibus Agreement, dated July 12, 2012, by and among HollyFrontier Corporation, Holly Energy Partners, L.P. and certain of their respective subsidiaries.
|
|
|
|
10.4+
|
|
Limited Partial Waiver of Incentive Distribution Rights under the First Amended and Restated Agreement of Limited Partnership of Holly Energy Partners, L.P., dated as of July 12, 2012.
|
|
|
|
10.5+
|
|
Amended and Restated Limited Liability Company Agreement of HEP UNEV Holdings LLC, dated July 12, 2012, by and among HEP UNEV Holdings LLC, HollyFrontier Holdings LLC and Holly Energy Partners, L.P.
|
|
|
|
10.6+
|
|
Termination of Option Agreement, dated July 12, 2012, by and among HollyFrontier Corporation, HEP UNEV Pipeline LLC (f/k/a Holly UNEV Pipeline Company), Navajo Pipeline Co., L.P., Holly Logistic Services, L.L.C., HEP Logistics Holdings, L.P., Holly Energy Partners, L.P., HEP Logistics GP, L.L.C. and Holly Energy Partners - Operating, L.P.
|
|
|
|
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 June 30, 2012, formatted in XBRL (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.
|
+ Filed herewith.
* Furnished electronically herewith.
Exhibit 10.2
LLC INTEREST PURCHASE AGREEMENT
by and among
HOLLYFRONTIER CORPORATION,
as Seller,
HEP UNEV HOLDINGS LLC,
as Buyer
and
HOLLY ENERGY PARTNERS, L.P.
Dated as of July 12, 2012
|
|
ARTICLE I
|
DEFINED TERMS 2
|
|
|
ARTICLE II
|
PURCHASE OF LLC INTERESTS 9
|
|
|
2.1
|
Transfer of LLC Interests 9
|
|
|
2.3
|
Purchase Price Adjustment 9
|
|
|
3.2
|
Deliveries by Seller 11
|
|
|
3.3
|
Deliveries by Buyer 12
|
|
|
3.4
|
Closing Costs; Transfer Taxes and Fees 13
|
|
|
ARTICLE IV
|
REPRESENTATIONS AND WARRANTIES OF SELLER 13
|
|
|
4.3
|
Status of Company and UNEV Pipeline 14
|
|
|
4.4
|
No Conflicts or Violations; No Consents or Approvals Required 15
|
|
|
4.5
|
Absence of Litigation 15
|
|
|
4.6
|
Title to LLC Interests; Capitalization 15
|
|
|
4.7
|
No Undisclosed Liabilities 16
|
|
|
4.10
|
Brokers and Finders 17
|
|
|
4.11
|
Condition of Pipeline 17
|
|
|
4.14
|
Banking Relationships 18
|
|
|
4.15
|
Representations Relating to the Unit Consideration 18
|
|
|
4.16
|
Compliance with Law 18
|
|
|
4.17
|
Material Contracts 18
|
|
|
4.21
|
WAIVERS AND DISCLAIMERS 19
|
|
|
ARTICLE V
|
REPRESENTATIONS AND WARRANTIES OF THE BUYER 20
|
|
|
5.3
|
No Conflicts or Violations; No Consents or Approvals Required 21
|
|
|
5.4
|
Absence of Litigation 21
|
|
|
5.5
|
Brokers and Finders 21
|
|
|
5.6
|
Validity of Profits Interest 21
|
|
|
ARTICLE VI
|
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP 21
|
|
|
6.3
|
No Conflicts or Violations; No Consents or Approvals Required 22
|
|
|
6.4
|
Absence of Litigation 22
|
|
|
6.5
|
Brokers and Finders 22
|
|
|
6.6
|
Validity of Aggregate Units 22
|
|
|
6.7
|
No Knowledge of Breach 22
|
|
|
7.2
|
Additional Agreements 23
|
|
|
7.3
|
Listing of Unit Consideration on New York Stock Exchange 23
|
|
|
ARTICLE VIII
|
ADDITIONAL AGREEMENTS 23
|
|
|
8.1
|
Further Assurances 23
|
|
|
8.3
|
Future Capacity Expansion 24
|
|
|
ARTICLE IX
|
INDEMNIFICATION 24
|
|
|
9.1
|
Indemnification of Buyer and Seller 24
|
|
|
9.2
|
Defense of Third-Party Claims 24
|
|
|
9.5
|
Tax Related Adjustments 27
|
|
|
ARTICLE X
|
MISCELLANEOUS 27
|
|
|
10.4
|
Governing Law; Jurisdiction; Waiver of Jury Trial 29
|
|
|
10.5
|
Arbitration Provision 29
|
|
|
10.6
|
Parties in Interest 30
|
|
|
10.7
|
Assignment of Agreement 30
|
|
|
10.10
|
Director and Officer Liability 30
|
|
|
10.12
|
Effect of Agreement 30
|
|
|
10.13
|
Amendment; Waiver 30
|
|
|
ARTICLE XI
|
INTERPRETATION 31
|
|
|
11.2
|
References, Gender, Number 32
|
Exhibits:
Exhibit A - Form of Assignment
Exhibit B - Form of Amended and Restated Omnibus Agreement
Exhibit C - Form of Waiver
Exhibit D - Form of LLC Agreement of HEP UNEV Holdings LLC
Exhibit E - Form of Amendment to UNEV Pipeline LLC Agreement
Schedules
:
Schedule 1.1 - Certain Specified Buyer Indemnified Costs
Schedule 4.3(a) - Company Foreign Qualifications
Schedule 4.3(b) - UNEV Pipeline Foreign Qualifications
Schedule 4.4 - Seller Consents
Schedule 4.5 - Pending Litigation and Claims
Schedule 4.6(d) - Ownership in UNEV Pipeline
Schedule 4.7 - Liabilities
Schedule 4.11 - Condition of Pipeline
Schedule 4.12 - Title to Assets
Schedule 4.13 - Permits
Schedule 4.14 - Banking Relationships
Schedule 4.17 - Material Contracts
Schedule 4.18 - Seller Security
Schedule 5.3 - Buyer Consents
Schedule 6.3 - Partnership Consents
LLC INTEREST PURCHASE AGREEMENT
THIS LLC INTEREST PURCHASE AGREEMENT
(this “
Agreement
”) dated as of July 12, 2012, is made and entered into by and among HollyFrontier Corporation, a Delaware corporation (“
Seller
”), HEP UNEV Holdings LLC, a Delaware limited liability company (“
Buyer
”), and Holly Energy Partners, L.P., a Delaware limited partnership (the “
Partnership
”). The above-named entities are sometimes referred to in this Agreement each as a “
Party
” and collectively as the “
Parties
.”
WHEREAS
, Seller is the sole member of HEP UNEV Pipeline LLC (f/k/a Holly UNEV Pipeline Company), a Delaware limited liability company (the “
Company
”);
WHEREAS
, the Company is the owner of 75% of all of the issued and outstanding membership interests (the “
UNEV Membership Interests
”) in UNEV Pipeline, LLC, a Delaware limited liability company (“
UNEV Pipeline
”);
WHEREAS
, UNEV Pipeline is the owner of an approximately 400 mile, 12-inch refined products pipeline currently running from Woods Cross, Utah to Las Vegas, Nevada, related products terminals in or near Cedar City, Utah and Las Vegas, Nevada, and other related assets (collectively, the “
Pipeline
”);
WHEREAS
, Buyer, which is wholly owned by the Partnership, wishes to purchase from Seller, and Seller wishes to sell to Buyer, all of the issued and outstanding limited liability company interests of the Company (the “
LLC Interests
”) in exchange for the consideration set forth herein;
WHEREAS
, it is the intention of the Parties that the Purchase Price (as defined below) be adjusted as set forth herein to reduce the Cash Consideration (as defined below) by the aggregate amount of the distributions by the Partnership to be received by Seller and its Affiliates and the Partnership’s general partner as a result of the issuance of the Unit Consideration (as defined below) for the second quarter of 2012 and the portion of the third quarter of 2012 during which such entities did not hold the Units (as defined below);
WHEREAS
, in connection with the acquisition of the LLC Interests, the Parties wish to (i) amend certain provisions of the Omnibus Agreement (as defined below), (ii) waive certain provisions of the Partnership Agreement (as defined below) of the Partnership, and (iii) amend and restate the LLC Agreement (as defined below) to, among other things, provide for the issuance of the Profits Interest (as defined below) to Seller (or its designee).
NOW, THEREFORE
, in consideration of the foregoing and the mutual covenants set forth herein and in the Omnibus Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows:
Article I
DEFINED TERMS
1.1
Defined Terms
. Unless the context expressly requires otherwise, the respective terms defined in this
Section 1.1
shall, when used in this Agreement, have the respective meanings herein specified, with each such definition to be equally applicable both to the singular and the plural forms of the term so defined.
“
Action
” shall mean any claim, action, suit, investigation, inquiry, proceeding, condemnation or audit by or before any court or other Governmental Entity or any arbitration proceeding.
“
Affiliate
” means, with respect to a specified person, any other person controlling, controlled by or under common control with that first person. As used in this definition, the term “control” includes (i) with respect to any person having voting securities or the equivalent and elected directors, managers or persons performing similar functions, the ownership of or power to vote, directly or indirectly, voting securities or the equivalent representing 50% or more of the power to vote in the election of directors, managers or persons performing similar functions, (ii) ownership of 50% or more of the equity or equivalent interest in any person and (iii) the ability to direct the business and affairs of any person by acting as a general partner, manager or otherwise. Notwithstanding the foregoing, no HollyFrontier Entity will be considered an Affiliate of an HEP Entity, and no HEP Entity will be considered an Affiliate of a HollyFrontier Entity.
“
Agreement
” shall have the meaning set forth in the preamble.
“
Ancillary Documents
” means, collectively, the Buyer Ancillary Documents and the Seller Ancillary Documents.
“
Applicable Law
” means any applicable statute, law, regulation, ordinance, rule, judgment, rule of law, Order, decree, permit, approval, concession, grant, franchise, license, agreement, requirement, or other governmental restriction or any similar form of decision of, or any provision or condition of any permit, license or other operating authorization issued under any of the foregoing by, or any determination by any Governmental Entity having or asserting jurisdiction over the matter or matters in question, whether now or hereafter in effect and in each case as amended (including, without limitation, all of the terms and provisions of the common law of such Governmental Entity), as interpreted and enforced at the time in question.
“
Arbitrable Dispute
” means any and all disputes, Claims, controversies and other matters in question between Seller, on the one hand, and Buyer, on the other hand, arising out of or relating to this Agreement or the alleged breach hereof, or in any way relating to the subject matter of this Agreement regardless of whether (a) allegedly extra-contractual in nature, (b) sounding in contract, tort or otherwise, (c) provided for by Applicable Law or otherwise or (d) seeking damages or any other relief, whether at law, in equity or otherwise.
“
Assignment
” shall have the meaning set forth in
Section 3.2(a)
.
“
business day
” means any day on which banks are open for business in Texas, other than Saturday or Sunday.
“
Buyer
” shall have the meaning set forth in the preamble.
“
Buyer Ancillary Documents
” means each agreement, document, instrument or certificate to be delivered by Buyer, the Partnership, or their Affiliates, at the Closing pursuant to
Section 3.3
hereof and each other document or Contract entered into by Buyer, the Partnership, or their Affiliates, in connection with this Agreement or the Closing.
“
Buyer Indemnified Costs
” means, subject to
Article IX
, any and all damages, losses, Claims, assessments, judgments, liabilities, demands, charges, suits, penalties, costs, and expenses (including court costs and reasonable attorneys’ fees and expenses incurred in investigating and preparing for any litigation or proceeding) that any of the Buyer Indemnified Parties incurs and that arise out of or relate to:
(i) any breach of a representation, warranty or covenant of Seller under this Agreement,
(ii) any obligations or duties of the Company or UNEV Pipeline under any Construction Contract (including, without limitation, the Company’s payment obligations under such Construction Contracts and the cost to complete construction of the Pipeline as set forth in such Construction Contracts), and
(iii) the matters described on
Seller Disclosure Schedule 1.1
.
Notwithstanding anything in the foregoing to the contrary, Buyer Indemnified Costs shall exclude (A) any and all indirect, consequential, punitive, or exemplary damages (other than those that are a result of (x) a third-party action for such indirect, consequential, punitive or exemplary damages or (y) the gross negligence or willful misconduct of Seller or, to the extent occurring before the Closing Date, the Company or UNEV Pipeline) and (B) any and all damages, losses, Claims, assessments, judgments, liabilities, demands, charges, suits, penalties, costs, and expenses (including court costs and reasonable attorneys’ fees and expenses incurred in investigating and preparing for any litigation or proceeding) that any of the Buyer Indemnified Parties incurs and that arise out of or relate to any defect in the construction of the Pipeline, including without limitation, any matter that is covered by a warranty under a Construction Contract, unless such matter is listed on
Seller Disclosure Schedule 1.1
or constitutes a breach of Section 4.11 (Condition of Pipeline). Notwithstanding anything herein to the contrary, Buyer Indemnified Costs shall only include amounts not taken into account in determining Effective Time Working Capital.
“
Buyer Indemnified Parties
” means Buyer and the Partnership and each officer, director, partner, manager, employee, consultant, stockholder, and Affiliate of Buyer and the Partnership, including, without limitation, the Company and UNEV Pipeline (and their respective heirs and successors, as applicable);
provided
,
however
, that for the avoidance of doubt none of Sinclair Transportation Company, its Affiliates or the managers of UNEV Pipeline appointed by Sinclair Transportation Company pursuant to the UNEV Pipeline LLC Agreement shall be Buyer Indemnified Parties.
“
Cap
” shall have the meaning set forth in
Section 9.4(b)
.
“
Cash Consideration
” shall have the meaning set forth in
Section 2.2(a)(i)
.
“
Certificates
” has the meaning set forth in
Section 2.2(c)
.
“
Claim
” means any existing or threatened future claim, demand, suit, action, investigation, proceeding, governmental action or cause of action of any kind or character (in each case, whether civil, criminal, investigative or administrative), known or unknown, under any theory, including those based on theories of contract, tort, statutory liability, strict liability, employer liability, premises liability, products liability, breach of warranty or malpractice.
“
Claimant
” shall have the meaning set forth in
Section 10.5
.
“
Closing
” shall have the meaning set forth in
Section 3.1
.
“
Closing Date
” shall have the meaning set forth in
Section 3.1
.
“
Code
” means the Internal Revenue Code of 1986, as amended.
“
Common Units
” means common units of limited partnership of the Partnership.
“
Company
” shall have the meaning set forth in the recitals.
“
Consents
” means all notices to, authorizations, consents, Orders or approvals of, or registrations, declarations or filings with, or expiration of waiting periods imposed by, any Governmental Entity, and any notices to, consents or approvals of any other third party, in each case that are required by Applicable Law or by Contract in order to consummate the transactions contemplated by this Agreement and the Ancillary Documents.
“
Construction Contract
” means any Contract relating to the original planned construction of the Pipeline, as such Contract is in effect as of the date hereof (including any change orders agreed to by the parties to such Contracts prior to the date hereof, whether or not such change order has properly been documented as of the date hereof).
“
Contract
” means any written or oral contract, agreement, indenture, instrument, note, bond, loan, lease, mortgage, franchise, license agreement, purchase order, binding bid or offer, binding term sheet or letter of intent or memorandum, commitment, letter of credit or any other legally binding arrangement, including any amendments or modifications thereof and waivers relating thereto.
“
Conversion
” shall have the meaning set forth in
Section 4.3(e)
.
“
Current Assets
” means cash and cash equivalents and accounts receivable of UNEV Pipeline determined in accordance with GAAP.
“
Current Liabilities
” means accounts payable, accrued expenses and accrued short term liabilities of UNEV Pipeline determined in accordance with GAAP.
“
Deductible
” shall have the meaning set forth in
Section 9.4(b)
.
“
DLLCA
” means the Delaware Limited Liability Company Act, as in effect from time to time.
“Effective Time”
shall have the meaning set forth in
Section 3.1
.
“
Effective Time Working Capital
” means, without duplication of any adjustment otherwise expressly provided for in this Agreement, (a) the Current Assets, less (b) the Current Liabilities determined as of the Effective Time.
“
Encumbrance
” means any mortgage, pledge, charge, hypothecation, Claim, easement, right of purchase, security interest, deed of trust, conditional sales agreement, encumbrance, interest, option, lien, right of first refusal, right of way, defect in title, encroachments or other restriction, whether or not imposed by operation of law, and any voting trust or voting agreement, stockholder agreement or proxy.
“
FERC
” means Federal Energy Regulatory Commission.
“
Fundamental Representations
” shall have the meaning set forth in
Section 9.4(a)
.
“
GAAP
” means United States generally accepted accounting principles in effect from time to time.
“
Governmental Entity
” means any Federal, state, local or foreign court or governmental agency, authority or instrumentality or regulatory body.
“
HEP Common Unit 10-Day VWAP
” shall have the meaning set forth in
Section 2.2(a)(ii)
.
“
HEP Entities
” means Holly Logistic Services, L.L.C., HEP Logistics Holdings, L.P. and the Partnership and its direct and indirect subsidiaries.
“
HollyFrontier Entities
” means Seller and its direct and indirect subsidiaries other than the HEP Entities. For the avoidance of doubt, Holly Logistics Limited LLC will be considered a HollyFrontier Entity and not an HEP Entity.
“
HSR Act
” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
“
Indemnified Costs
” means Buyer Indemnified Costs and Seller Indemnified Costs, as applicable.
“
Indemnified Party
” means any Buyer Indemnified Party or any Seller Indemnified Party, as applicable.
“
Indemnifying Party
” has the meaning set forth in
Section 9.2
.
“
Instruction Letter
” has the meaning set forth in
Section 2.2(c)
.
“
knowledge
”
and any variations thereof or words to the same effect shall mean (i) with respect to Seller, actual knowledge after reasonable inquiry of the following person: James E. Resinger; and (ii) with respect to Buyer or the Partnership, actual knowledge after reasonable inquiry of the following persons: Bruce R. Shaw and Mark T. Cunningham.
“
LLC Agreement
” shall have the meaning set forth in
Section 3.2(e)
.
“
LLC Interests
” shall have the meaning set forth in the recitals.
“
Material Adverse Effect
” means any adverse change, circumstance, effect or condition in or relating to the assets, financial condition, results of operations, or business of any person that materially affects the business of such person or that materially impedes the ability of any person to consummate the transactions contemplated hereby, other than any change, circumstance, effect or condition in the refining or pipelines industries generally (including any change in the prices of crude oil, natural gas, natural gas liquids, feedstocks or refined products or other hydrocarbon products, industry margins or any regulatory changes or changes in Applicable Law) or in United States or global economic conditions or financial markets in general. Any determination as to whether any change, circumstance, effect or condition has a Material Adverse Effect shall be made only after taking into account all effective insurance coverages and effective third-party indemnifications with respect to such change, circumstance, effect or condition.
“
Material Contracts
” shall have the meaning set forth in
Section 4.17
.
“
Omnibus Agreement
” means that certain Sixth Amended and Restated Omnibus Agreement effective as of November 1, 2011, by and among Seller, Holly Logistic Services, L.L.C., a Delaware limited liability company, the Partnership, Holly Energy Partners – Operating, L.P., HEP Logistics GP, L.L.C., a Delaware limited liability company, HEP Logistics Holdings, L.P., a Delaware limited partnership, and the other HollyFrontier Entities and HEP Entities signatory thereto, and as amended and restated as of the date hereof.
“
Operator
” means Holly Energy Partners – Operating, L.P., a Delaware limited partnership.
“
Option Agreement
” means that certain Option Agreement entered into as of January 31, 2008, by and among Seller, the Company, the Partnership and the other HollyFrontier Entities and HEP Entities signatory thereto, as amended.
“
Order
” means any order, writ, injunction, decree, compliance or consent order or decree, settlement agreement, schedule and similar binding legal agreement issued by or entered into with a Governmental Entity.
“
Partnership
” shall have the meaning set forth in the preamble.
“
Partnership Agreement
” shall have the meaning set forth in
Section 3.2(d)
.
“
Party
” and “
Parties
” shall have the meanings set forth in the preamble.
“
Permits
” means all permits, consents, authorizations, licenses, variances, exemptions, Orders, franchises and approvals of all Governmental Entities necessary for the lawful ownership and operation of the Pipeline.
“
Permitted Encumbrances
” means (i) statutory liens for current taxes or assessments not yet due or delinquent or the validity of which are being contested in good faith by appropriate proceedings; (ii) mechanics’, carriers’, workers’, repairmen’s, landlord’s and other similar liens imposed by law arising or incurred in the ordinary course of business with respect to charges not yet due and payable; and (iii) such other encumbrances, if any, which were not incurred in connection with the borrowing of money or the advance of credit and which do not materially detract from the value of or interfere with the present use, or any use presently anticipated by the Company or UNEV Pipeline, of the property subject thereto or affected thereby, and including without limitation capital leases. With respect to the UNEV Membership Interests, Permitted Encumbrances include any Encumbrances on the UNEV Membership Interests arising under the provisions of the UNEV Pipeline LLC Agreement. With respect to the Pipeline, Permitted Encumbrances include any Encumbrances on the Pipeline described on
Seller Disclosure Schedule 4.5
.
“
person
” means any individual, firm, corporation, partnership, limited liability company, trust, joint venture, Governmental Entity or other entity.
“
Pipeline
” shall have the meaning set forth in the recitals.
“
Profits Interest
” means that membership interest in Buyer issued to Seller (or its designee) in connection with the execution and delivery of the LLC Agreement as provided in
Section 3.2(e)
.
“
Purchase Price
” shall have the meaning set forth in
Section 2.2(a)
.
“
Respondent
” shall have the meaning set forth in
Section 10.5
.
“
Restated Omnibus Agreement
” shall have the meaning set forth in
Section 3.2(c)
.
“
Second Quarter Purchase Price Adjustment
” shall have the meaning set forth in
Section 2.3(b)(i)
.
“
Securities Act
” shall have the meaning set forth in
Section 4.15
.
“
Seller
” shall have the meaning set forth in the preamble.
“
Seller Ancillary Documents
” shall mean each agreement, document, instrument or certificate to be delivered by Seller, or its Affiliates, at the Closing pursuant to
Section 3.2
hereof and each other document or Contract entered into by Seller, or its Affiliates, in connection with this Agreement or the Closing.
“
Seller Indemnified Costs
” means (a) any and all damages, losses, Claims, liabilities, charges, penalties, costs, and expenses (including court costs and reasonable attorneys’ fees and expenses incurred in investigating and preparing for any litigation or proceeding) that any Seller Indemnified Party incurs and that arise out of or relate to any breach of a representation, warranty
or covenant of Buyer or the Partnership under this Agreement, and (b) any and all Claims, assessments, judgments, costs, and expenses, including reasonable legal fees and expenses, incident to any of the foregoing. Notwithstanding anything in the foregoing to the contrary, Seller Indemnified Costs shall exclude any and all indirect, consequential, punitive or exemplary damages (other than those that are a result of (x) a third-party action for such indirect, consequential, punitive or exemplary damages or (y) the gross negligence or willful misconduct of Buyer or the Partnership or, to the extent occurring from and after the Closing Date, the Company or UNEV Pipeline).
“
Seller Indemnified Parties
” means Seller and each officer, director, partner, manager, employee, consultant, stockholder, and Affiliate of Seller (and their respective heirs and successors, as applicable).
“
third-party action
” has the meaning set forth in
Section 9.2
.
“
Third Quarter Purchase Price Adjustment
” shall have the meaning set forth in
Section 2.3(b)(ii)
.
“
Transportation Agreements
” means the Amended and Restated Transportation Services Agreement, effective as of January 1, 2012, between HollyFrontier Refining & Marketing LLC and UNEV Pipeline and the Amended and Restated Transportation Services Agreement, effective as of January 1, 2012, between Sinclair Oil Corporation and UNEV Pipeline.
“
UNEV Membership Interests
” has the meaning set forth in the recitals.
“
UNEV Pipeline
” shall have the meaning set forth in the recitals.
“
UNEV Pipeline LLC Agreement
” shall mean the Amended and Restated Limited Liability Company Agreement of UNEV Pipeline dated as of December 21, 2007, as amended as of the date hereof.
“
Unit Consideration
” has the meaning set forth in
Section 2.2(a)(ii)
.
“
Units
” shall have the meaning set forth in
Section 2.2(a)(ii)
.
“
Waiver
” shall have the meaning set forth in
Section 3.2(d)
.
“
Woods Cross Expansion Completion Date
” means the first date on which both: (a) mechanical completion of the installation of new equipment at Seller’s Woods Cross facility is completed according to its design and permitted basis, as described by Seller’s management as the Woods Cross Phase I expansion, and (b) achievement by the Seller’s Woods Cross refinery of an average actual crude charge rate over a period of 15 consecutive days of at least 40,000 barrels per day, shall have occurred.
“
Working Capital Adjustment
” shall have the meaning set forth in
Section 2.3(a)(iii)
.
Article II
PURCHASE OF LLC INTERESTS
2.1
Transfer of LLC Interests
. Subject to all of the terms and conditions of this Agreement, at the Closing Seller shall sell, transfer and convey to Buyer, and Buyer shall purchase and acquire from Seller the LLC Interests, free and clear of all Encumbrances.
2.2
Consideration
.
(a)
The aggregate consideration to be paid by or on behalf of Buyer for the LLC Interests and the Waiver shall be (x) the issuance of the Profits Interest to Seller (or its designee) and (y) $315,000,000
(clause (x) and (y) collectively, the “
Purchase Price
”), subject to adjustment pursuant to Section 2.3, to be paid as follows:
(i)
$260,000,000 in immediately available funds (the “
Cash Consideration
”); and
(ii)
$55,000,000 in 1,029,900 Common Units (the “
Units
”) issued to Seller (or an Affiliate of Seller designated by Seller) (the “
Unit Consideration
”), which valuation is based upon the volume-weighted average price of the Partnership’s Common Units, as quoted on the New York Stock Exchange, for the 10 trading days immediately preceding the announcement date of the transactions contemplated by this Agreement (the “
HEP Common Unit 10-Day VWAP
”).
(b)
The Cash Consideration, subject to adjustment pursuant to Section 2.3, shall be delivered by Buyer to Seller (or its designee) at the Closing by wire transfer of immediately available funds to the account specified by Seller (or its designee);
provided
,
however
that the Cash Consideration allocated to the Waiver pursuant to Section 2.2(d) below shall be delivered to HEP Logistics Holdings, L.P. (or its designee).
(c)
The Unit Consideration shall be paid by the Partnership, on behalf of Buyer,
at the Closing by delivery of a letter to the Partnership’s transfer agent (the “
Instruction Letter
”) irrevocably instructing such transfer agent to deliver certificates representing the Unit Consideration issued in the name of Seller or its designee (the “
Certificates
”), which Instruction Letter shall be in a form and substance reasonably acceptable to both Buyer and Seller.
(d)
A portion of the Cash Consideration in the amount of $15,400,000 shall be allocated to the Waiver and treated as a cash distribution by the Partnership to HEP Logistics Holdings, L.P. Notwithstanding anything to the contrary in the Partnership Agreement, the Partnership will not allocate any income to Seller with respect to the incentive distribution rights waived in connection with the Waiver.
(e)
The portion of the Cash Consideration that qualifies for treatment as a reimbursement for capital expenditures incurred with respect to Seller’s interest in UNEV Pipeline pursuant to Treasury Regulations Section 1.707-4(d)(2)(ii) shall be determined by Seller and reported consistently by the Parties.
2.3
Purchase Price Adjustments
.
(a)
Effective Time Working Capital Adjustment
.
(i)
Within 60 days after the Closing Date, Buyer shall prepare and deliver to Seller a statement setting forth its calculation of Effective Time Working Capital.
(ii)
Within 30 days after Buyer delivers its calculation of Effective Time Working Capital, Seller and its accountants and representatives shall complete its review of the calculation of Effective Time Working Capital. If during such review period Seller objects to Buyer’s calculation of Effective Time Working Capital, Seller and Buyer shall cooperate in good faith to promptly (x) resolve any such objection, dispute or disagreement relating to the calculation of the Effective Time Working Capital and (y) finally determine the Effective Time Working Capital. If Seller does not object to Buyer’s calculation of Effective Time Working Capital by the end of such 30 day period, the Effective Time Working Capital as calculated by Buyer shall be deemed finally determined.
(iii)
If the Effective Time Working Capital as finally determined is a positive number, Buyer shall pay to Seller an amount equal to the product of the amount of the Effective Time Working Capital as finally determined multiplied by 0.75. If the Effective Time Working Capital as finally determined is a negative number, Seller shall pay to Buyer an amount equal to the product of the amount of the Effective Time Working Capital as finally determined multiplied by 0.75 (any payment pursuant to this clause (iii), the “
Working Capital Adjustment
”).
(iv)
Any Working Capital Adjustment shall be payable on or prior to five (5) business days after the calculation of the Effective Time Working Capital becomes finally determined in accordance with this
Section 2.3(a)
.
(b)
Distribution Purchase Price Adjustments
.
(i)
Second Quarter Purchase Price Adjustment. The Purchase Price shall be reduced by an amount equal to the aggregate increased distributions to Seller and its Affiliates and the Partnership’s general partner (including with respect to the incentive distribution rights) with respect to the second quarter of 2012 due to the issuance of the Units (the “
Second Quarter Purchase Price Adjustment
”).
(ii)
Third Quarter Purchase Price Adjustment. The Purchase Price shall be further reduced by an amount equal to the product of (A) the aggregate distributions made to Seller and its Affiliates and the Partnership’s general partner (including with respect to the incentive distribution rights) with respect to the third quarter of 2012 due to the issuance of the Units, multiplied by (B) the quotient of the number of calendar days between July 1, 2012 and the Closing Date, divided by 92 days (the “
Third Quarter Purchase Price Adjustment
”).
(iii)
If there is any Second Quarter Purchase Price Adjustment to be made
under
Section 2.3(b)(i)
and the amount of the distributions to the holders of the Common Units for the second quarter of 2012 has been declared on or prior to the Closing Date, then the Cash Consideration shall be reduced by the Second Quarter Purchase Price Adjustment. If the amount of the distributions to the holders of the Common Units for the second quarter of 2012 has
not
been declared on or prior to the Closing Date, then Seller shall promptly (and in any event within three (3) business days) following its receipt of such distributions pay an amount equal to the Second Quarter Purchase Price Adjustment to Buyer (or its designee) in immediately available funds.
(iv)
If there is any Third Quarter Purchase Price Adjustment to be made under
Section 2.3(b)(ii)
, then Seller shall promptly (and in any event within three (3) business days) following its receipt of such distributions pay an amount equal to the Third Quarter Purchase Price Adjustment to Buyer (or its designee) in immediately available funds.
(c)
Adjustments for Tax Purposes
. Any payments made pursuant to Section 2.3 shall be treated as an adjustment to the Purchase Price by the Parties for tax purposes, unless otherwise required by law.
Article III
CLOSING
3.1
Closing
. The closing of the transactions contemplated hereby (the “
Closing
”) shall take place simultaneously with the execution of this Agreement. The date on which the Closing takes place is referred to herein as the “
Closing Date.
” If the Closing occurs, the Closing shall be deemed to be effective as of 12:01 a.m., Dallas, Texas time, on the Closing Date (the “
Effective Time
”);
provided
,
however
, that the issuance of the Unit Consideration and the Profits Interest shall be effective at the time such Units and Profits Interest are actually issued on the Closing Date and such Units and Profits Interest shall not be considered outstanding until such issuance.
3.2
Deliveries by Seller
. At the Closing, Seller shall deliver, or cause to be delivered, to Buyer the following:
(d)
A counterpart to the assignment of limited liability company interests conveying the LLC Interests to Buyer, substantially in the form of
Exhibit A
attached hereto (the “
Assignment
”), duly executed by Seller.
(e)
The original minute books, company books and membership registers for the Company and UNEV Pipeline.
(f)
A counterpart of the Seventh Amended and Restated Omnibus Agreement substantially in the form of
Exhibit B
attached hereto (the “
Restated Omnibus Agreement
”), duly executed by Seller and each applicable subsidiary of Seller (excluding the HEP Entities).
(g)
The Limited Partial Waiver of Incentive Distribution Rights under the First
Amended and Restated Agreement of Limited Partnership (the “
Partnership Agreement
”) of the Partnership substantially in the form of
Exhibit C
attached hereto (the “
Waiver
”), duly executed by the general partner of the Partnership.
(h)
A counterpart of the First Amended and Restated Limited Liability Company Agreement of Buyer substantially in the form of
Exhibit D
attached hereto (the “
LLC Agreement
”), duly executed by Seller.
(i)
Evidence in form and substance reasonably satisfactory to Buyer of the release and termination of all Encumbrances (other than Permitted Encumbrances) on the LLC Interests, the UNEV Membership Interests and the Pipeline.
(j)
To the extent applicable, assignment documents, duly executed by Seller, assigning each of the Permits held by Seller, if any, which are assignable by Seller to Buyer or Operator (or their designees), as applicable, in accordance with Applicable Law.
(k)
A properly executed certificate, in the form prescribed by Treasury regulations under Section 1445 of the Code, stating that Seller is not a “foreign person” within the meaning of Section 1445 of the Code.
(l)
An amendment to the UNEV Pipeline LLC Agreement substantially in the form of
Exhibit E
attached hereto.
(m)
A counterpart to the termination agreement with respect to the Option Agreement in form and substance reasonably satisfactory to the Parties, duly executed by Seller and each HollyFrontier Entity party thereto.
(n)
A written resignation letter executed by each of Michael C. Jennings and Doug S. Aron in his capacity as a manager of each of UNEV Pipeline and the Company, effective as of the Closing.
(o)
A written resignation letter executed by each of Michael C. Jennings, Doug S. Aron, James Resinger, Gerald B. Faudel and David J. Jelmini, in his capacity as an officer of each of UNEV Pipeline and the Company, effective as of the Closing.
3.3
Deliveries by Buyer
. At the Closing (or such later date as may be set forth below), Buyer shall deliver, or cause to be delivered, to Seller the following:
(a)
The Cash Consideration as provided in
Section 2.2(a)
.
(b)
The irrevocable Instruction Letter as provided in
Section 2.2(c)
.
(c)
Evidence in form and substance reasonably satisfactory to Seller that the Unit Consideration has been approved for listing by the New York Stock Exchange subject to official notice of issuance.
(d)
A counterpart to the Assignment duly executed by Buyer.
(e)
A counterpart of the Restated Omnibus Agreement, duly executed by the Partnership and each applicable subsidiary of the Partnership.
(f)
A counterpart of the LLC Agreement, duly executed by Buyer and the Partnership.
(g)
A counterpart to the termination agreement with respect to the Option Agreement in form and substance reasonably satisfactory to the Parties, duly executed by the Partnership and each HEP Entity party thereto.
3.4
Closing Costs; Transfer Taxes and Fees
.
(a)
Allocation of Costs
. Buyer shall pay the cost of all sales, transfer and use taxes arising out of the transfer of the LLC Interests.
(b)
Reimbursement.
If Buyer, on the one hand, or Seller, on the other hand, pays any tax agreed to be borne by the other Party under this Agreement, such other Party shall promptly reimburse the paying Party for the amounts so paid. If any Party receives any tax refund or credit applicable to a tax paid by another Party hereunder, the receiving Party shall promptly pay such amounts to the Party entitled thereto.
(c)
Texas Franchise Tax Sharing Arrangement
. The Company and UNEV Pipeline will be included in the Texas franchise tax combined group report filed by (i) Seller or an Affiliate of Seller for the period up to the Effective Time and (ii) Buyer or an Affiliate of Buyer for the period beginning with the Effective Time. The Parties agree that the Company shall promptly reimburse the Seller and the Buyer, or an Affiliate of the Seller or the Buyer, for the franchise tax paid on behalf of the Company and UNEV Pipeline as combined group members. For purposes of the preceding sentence, the franchise tax paid on behalf of the Company and UNEV Pipeline shall be equal to the franchise tax that the Company and UNEV Pipeline would have paid if they had computed their franchise tax liability for the report period as members of a combined group that included only the Company and UNEV Pipeline rather than as members of the Seller’s, Buyer’s or an Affiliate’s combined group.
Article IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer that as of the date of this Agreement:
4.1
Organization
. Seller is an entity duly organized, validly existing and in good standing under the Applicable Laws of the State of Delaware.
4.2
Authorization
. Seller has full corporate power and authority to execute, deliver, and perform this Agreement and any Seller Ancillary Documents to which it is a party. The execution, delivery, and performance by Seller of this Agreement and the Seller Ancillary Documents to which it is a party and the consummation by Seller of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action of Seller. This Agreement has been
duly executed and delivered by Seller and constitutes, and each Seller Ancillary Document executed or to be executed by Seller has been, or when executed will be, duly executed and delivered by Seller and constitutes, or when executed and delivered will constitute, a valid and legally binding obligation of Seller, enforceable against it in accordance with their terms, except to the extent that such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar Applicable Laws affecting creditors’ rights and remedies generally and (ii) equitable principles which may limit the availability of certain equitable remedies (such as specific performance) in certain instances.
4.3
Status of Company and UNEV Pipeline
.
(d)
The Company is duly organized, validly existing and in good standing under the Applicable Laws of the State of Delaware
and (i) has all requisite limited liability company power and authority to own, operate, use or lease its properties and assets and to carry on its business as it is now being conducted, and (ii) is duly qualified to do business and is in good standing in each of the jurisdictions in which the ownership, operation or leasing of its properties and assets and the conduct of its business requires it to be so qualified, licensed or authorized, except, in the case of clause (ii), where the failure to have such power and authority or to be so qualified, licensed or authorized would not, individually or in the aggregate, be reasonably likely to cause a Material Adverse Effect.
Seller Disclosure Schedule 4.3(a)
lists all jurisdictions in which the Company is qualified to do business.
(e)
UNEV Pipeline is duly organized, validly existing and in good standing under the laws of the State of Delaware
and (i) has all requisite limited liability company power and authority to own, operate, use or lease its properties and assets and to carry on its business as it is now being conducted, and (ii) is duly qualified to do business and is in good standing in each of the jurisdictions in which the ownership, operation or leasing of its properties and assets and the conduct of its business requires it to be so qualified, licensed or authorized, except, in the case of clause (ii), where the failure to have such power and authority or to be so qualified, licensed or authorized would not, individually or in the aggregate, be reasonably likely to cause a Material Adverse Effect.
Seller Disclosure Schedule 4.3(b)
lists all jurisdictions in which UNEV Pipeline is qualified to do business.
(f)
Other than the UNEV Membership Interests and the Pipeline, the Company does not, directly or indirectly, own any assets or any interest in any corporation, partnership, limited liability company, limited partnership, joint venture or other business association or entity, foreign or domestic.
(g)
UNEV Pipeline has not engaged in any business other than the construction, ownership and operation of the Pipeline. UNEV Pipeline has no assets except the Pipeline and the associated rights and obligations under the Construction Contracts.
(h)
The Company was converted from a Delaware corporation to a Delaware limited liability company on June 27, 2012 (the “
Conversion
”), in compliance with all Applicable Laws and the articles of incorporation, by-laws and all other governing documents of Holly UNEV Pipeline Company and there are no liabilities related to the Conversion.
(i)
Seller has made available to Buyer a copy of the certificate of formation and limited liability company agreement of the Company and UNEV Pipeline, each copy being complete and correct and in full force and effect on the date hereof, and no amendment or modification of any such document has been filed, recorded or is pending or contemplated except as provided for in this Agreement. Neither the Company nor UNEV Pipeline is in violation of any provision of its certificate of formation or limited liability company agreement.
4.4
No Conflicts or Violations; No Consents or Approvals Required
.
(a)
The execution, delivery and performance by Seller of this Agreement and the other Seller Ancillary Documents to which it is a party does not, and the consummation of the transactions contemplated hereby and thereby will not, (i) violate, conflict with, or result in any breach of any provision of Seller’s organizational documents or (ii) subject to obtaining the Consents or making the registrations, declarations or filings set forth in the next sentence, violate in any material respect any Applicable Law or material Contract binding upon Seller. Except as set forth on
Seller Disclosure Schedule 4.4
, no Consent of any Governmental Entity or any other person is required for Seller in connection with the execution, delivery and performance of this Agreement and the other Seller Ancillary Documents or the consummation of the transactions contemplated hereby or thereby.
(b)
The consummation of the transactions contemplated by this Agreement and the other Seller Ancillary Documents will not, (i) violate, conflict with, or result in any breach of any provision of the Company’s or UNEV Pipeline’s organizational documents or (ii) subject to obtaining the Consents or making the registrations, declarations or filings set forth in the next sentence, violate in any material respect any Applicable Law or material Contract binding upon the Company, UNEV Pipeline or the Pipeline. Except as set forth on
Seller Disclosure Schedule 4.4
, no Consent of any Governmental Entity or any other person is required for the Company or UNEV Pipeline in connection with the performance of this Agreement and the Seller Ancillary Documents or the consummation of the transactions contemplated hereby or thereby.
4.5
Absence of Litigation
.
Except as set forth on
Seller Disclosure Schedule 4.5
, there is no Action pending or, to the knowledge of Seller, threatened against (i) the Company, the LLC Interests, the UNEV Membership Interests, UNEV Pipeline or the Pipeline or (ii) Seller or any of its Affiliates relating to the transactions contemplated by this Agreement or the Ancillary Documents or which, if adversely determined, would reasonably be expected to materially impair the ability of Seller to perform its obligations and agreements under this Agreement or the Seller Ancillary Documents and to consummate the transactions contemplated hereby and thereby.
4.6
Title to LLC Interests; Capitalization
.
(a)
Seller is the record owner of and has good and valid title to the LLC Interests, free and clear of all Encumbrances, and sole and unrestricted voting power and power of disposition with respect to all of the LLC Interests. The Company is the record owner of and has good and valid title to the UNEV Membership Interests, free and clear of all Encumbrances (other than Permitted Encumbrances), and sole and unrestricted voting power and power of disposition with respect to the UNEV Membership Interests (except as restricted under the UNEV Pipeline LLC
Agreement). Except for any claims arising under this Agreement, the Transportation Agreement to which any HollyFrontier Entity is a party and any other agreement entered into by Seller in accordance with this Agreement, Seller and its Affiliates have no claims of any kind against the Company, UNEV Pipeline or any of their respective officers, managers, directors or employees. The LLC Interests have been duly authorized and validly issued in accordance with Applicable Laws and the limited liability company agreement of the Company and are fully paid (to the extent required by the limited liability company agreement of the Company) and nonassessable (except to the extent such nonassessability may be affected by Sections 18-607 and 18-804 of DLLCA). The UNEV Membership Interests have been duly authorized and validly issued in accordance with Applicable Laws and the UNEV Pipeline LLC Agreement and are fully paid (to the extent required by the UNEV Pipeline LLC Agreement) and nonassessable (except to the extent such nonassessability may be affected by Sections 18-607 and 18-804 of DLLCA).
(b)
There are no options or rights to purchase or acquire, or agreements, arrangements, commitments or understandings relating to, any of the LLC Interests, the UNEV Membership Interests or the Pipeline except pursuant to this Agreement, the Omnibus Agreement, the UNEV Pipeline LLC Agreement and the Option Agreement (which is being terminated simultaneously herewith). There are no (i) authorized or outstanding securities of or equity interests in the Company of any kind other than the LLC Interests, (ii) except pursuant to the Option Agreement (which is being terminated simultaneously herewith), there are no outstanding options, warrants, subscriptions, puts, calls or other rights, agreements, arrangements or commitments (preemptive, contingent or otherwise) obligating Seller or the Company to offer, issue, sell, redeem, repurchase, otherwise acquire or transfer, pledge or encumber any securities of or equity interest in the Company, and (iii) there are no outstanding securities or obligations of any kind of any of the Company that are convertible into or exercisable or exchangeable for any equity interest in the Company.
(c)
At the Closing, upon payment of the Purchase Price, Buyer will have the entire record and beneficial ownership of the LLC Interests, free and clear of all Encumbrances.
(d)
The limited liability company interests of UNEV Pipeline are held between the Company and Sinclair Transportation Company as set forth on
Seller Disclosure Schedule 4.6(d)
, and the Company and Sinclair Transportation Company are the sole members of UNEV Pipeline. There are no outstanding options, warrants, subscriptions, puts, calls or other rights, agreements, arrangements or commitments (preemptive, contingent or otherwise) obligating the Company, UNEV Pipeline or, to the knowledge of Seller, Sinclair Transportation Company to offer, issue, sell, redeem, repurchase, otherwise acquire or transfer, pledge or encumber any securities of or equity interest in UNEV Pipeline other than as provided under the UNEV Pipeline LLC Agreement. There are no outstanding securities or obligations of any kind of UNEV Pipeline that are convertible into or exercisable or exchangeable for any equity interest in UNEV Pipeline.
4.7
No Undisclosed Liabilities.
Except as set forth on
Seller Disclosure Schedules 1.1
,
4.5
,
4.7
and
4.13
, neither the Company nor UNEV Pipeline now has any indebtedness or liability (whether absolute, accrued, contingent or otherwise) of any nature, other than its obligations under the Construction Contracts, Permits and the Transportation Agreements, and neither the Company
nor UNEV Pipeline, nor to Seller’s knowledge, any counterparty thereto, is currently in material breach of its obligations under the Construction Contracts and the Transportation Agreements.
4.8
No Employees.
Neither the Company nor UNEV Pipeline now has nor ever has had any employees.
4.9
Taxes.
Each of the Company and UNEV Pipeline has filed, on or before the applicable due date (including any extensions thereof), all material tax returns that it was required to file, and all such tax returns were accurate, correct, and complete in all material respects. All taxes due and owing by each of the Company and UNEV Pipeline have been paid in full or are being properly contested. The Company is, and at all times since the Conversion, has been, disregarded as an entity separate from Seller for U.S. federal income tax purposes, and no election has been filed on or before the Closing Date that would change such classification on or after the Closing Date. Prior to the Conversion, the Company was classified as a corporation for U.S. federal income tax purposes. UNEV Pipeline is, and at all times since its formation has been, classified as a partnership for U.S. federal income tax purposes, and no election has been filed on or before the Closing Date that would change such classification on or after the Closing Date.
4.10
Brokers and Finders
. No investment banker, broker, finder, financial advisor or other intermediary has been retained by or is authorized to act on behalf of Seller who is entitled to receive from Buyer any fee or commission in connection with the transactions contemplated by this Agreement.
4.11
Condition of Pipeline
. Except as set forth on
Seller Disclosure Schedule 4.11
, to Seller’s knowledge, the Pipeline is in good operating condition and repair (normal wear and tear excepted), is free from material defects (patent and latent), is suitable for the purposes for which it is currently used and is not in need of material maintenance or repairs except for ordinary routine maintenance and repairs.
4.12
Title to Assets
. Except as disclosed in
Seller Disclosure Schedule 4.12
, UNEV Pipeline owns, leases or has the legal right to use all the properties and assets used by UNEV Pipeline in the operation of its business, in each case subject to no Encumbrances, except Permitted Encumbrances. UNEV Pipeline’s assets consist of the Pipeline and the associated rights and obligations under the Construction Contracts relating to the construction of the Pipeline and the Transportation Agreements. Except as set forth in
Seller Disclosure Schedule 4.12
, UNEV Pipeline owns the Pipeline free and clear of all Encumbrances other than Permitted Encumbrances.
4.13
Permits
. Except as set forth in
Seller Disclosure Schedule 4.13
, to Seller’s knowledge, UNEV Pipeline or the Operator own or hold all Permits. Except as set forth in
Seller Disclosure Schedule 4.13,
each Permit is in full force and effect, and UNEV Pipeline is in compliance with all of its obligations with respect thereto. Except as set forth in
Seller Disclosure Schedule 4.13,
to the knowledge of Seller, no event has occurred that causes, or upon the giving of notice or the lapse of time or otherwise would cause, revocation or termination of any Permit. All Permits shall be, subject to Permitted Encumbrances, owned or held by UNEV Pipeline or the Operator at Closing.
4.14
Banking Relationships
.
Seller Disclosure Schedule 4.14
sets forth a complete and accurate list of all accounts, including checking accounts, cash contribution accounts, safe deposit boxes, borrowing arrangements and certificates of deposit that each of the Company and UNEV Pipeline has with any banks, savings and loan associations or other financial institutions, indicating in each case account numbers, if applicable, and the person or persons authorized to act or sign on behalf of the Company or UNEV Pipeline in respect of the foregoing. No person holds any power of attorney or similar authority from the Company or UNEV Pipeline with respect to such accounts.
4.15
Representations Relating to the Unit Consideration
. Seller is acquiring the Unit Consideration for its own account for investment, and not with a view to any distribution or resale thereof in violation of the Securities Act of 1933, as amended, (including the rules and regulations promulgated thereunder, the “
Securities Act
”), or any other applicable domestic or foreign securities law. Seller understands that the Units have not been registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of Seller’s representations as expressed herein. Seller understands that the Units are “restricted securities” under applicable U.S. federal and state securities laws and that, pursuant to these laws, Seller must hold such securities indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available.
4.16
Compliance with Law.
The activities currently conducted by Seller, the Company and UNEV Pipeline with respect to the Pipeline are in compliance in all material respects with all Applicable Laws.
4.17
Material Contracts
. Except as set forth on
Seller Disclosure Schedule 4.17
, and other than the Construction Contracts and Transportation Agreements, there are no material Contracts relating to the activities currently conducted by UNEV Pipeline with respect to the Pipeline, or by which the Company, UNEV Pipeline or the Pipeline are bound. “
Material Contracts
” means the Construction Contracts, Transportation Agreements and the Contracts set forth on
Seller Disclosure Schedule 4.17
. The Transportation Agreements have not been amended, modified or terminated.
4.18
Seller Security.
Seller Disclosure Schedule 4.18
contains a true and complete listing of the cash collateral, letters of credit, and guaranties in effect as of the date of this Agreement securing the performance of UNEV Pipeline under the Material Contracts
and other obligations of UNEV Pipeline with respect to the activities currently conducted by UNEV Pipeline with respect to the Pipeline.
4.19
Insurance.
All insurance policies covering UNEV Pipeline or its operations and assets provided by Seller (which, for the avoidance of doubt, excludes insurance policies covering UNEV Pipeline or its operations and assets provided by the Partnership and its Affiliates) are in full force and effect, all premiums with respect thereto covering all periods up to and including the Closing Date have been paid, and no written notice of cancellation or termination has been received with respect to any such policy. Such policies, including without limitation products liability insurance, (a) are sufficient for compliance in all material respects with all requirements of
Applicable Law and of all Material Contracts for matters covered by such policies, and (b) are, to the knowledge of Seller, valid policies, enforceable against UNEV Pipeline and the other parties thereto, in accordance with their respective terms, except to the extent that such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar Applicable Laws affecting creditors’ rights and remedies generally and (ii) equitable principles which may limit the availability of certain equitable remedies (such as specific performance) in certain instances.
4.20
Legends
. Seller understands that the certificates or other instruments representing the Unit Consideration shall bear any legend as required by the “blue sky” laws of any state and a restrictive legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “SECURITIES ACT”) AND MAY NOT BE OFFERED OR SOLD, UNLESS IT HAS BEEN REGISTERED UNDER THE SECURITIES ACT OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE (AND, IN SUCH CASE, AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE PARTNERSHIP SHALL HAVE BEEN DELIVERED TO THE PARTNERSHIP TO THE EFFECT THAT SUCH OFFER OR SALE IS NOT REQUIRED TO BE REGISTERED UNDER THE SECURITIES ACT). THIS SECURITY IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER SET FORTH IN THE FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF THE PARTNERSHIP DATED AS OF JULY 13, 2004, AS AMENDED, A COPY OF WHICH MAY BE OBTAINED FROM THE PARTNERSHIP AT ITS PRINCIPAL EXECUTIVE OFFICES.
4.21
WAIVERS AND DISCLAIMERS
. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT, EXCEPT FOR THE EXPRESS REPRESENTATIONS AND WARRANTIES AND OTHER COVENANTS AND AGREEMENTS MADE BY THE PARTIES IN THIS AGREEMENT, THE ANCILLARY DOCUMENTS AND THE OMNIBUS AGREEMENT, THE PARTIES ACKNOWLEDGE AND AGREE THAT NONE OF THE PARTIES HAS MADE, DOES NOT MAKE, AND EACH SUCH PARTY SPECIFICALLY NEGATES AND DISCLAIMS, ANY REPRESENTATIONS, WARRANTIES, PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KIND OR CHARACTER WHATSOEVER, WHETHER EXPRESS, IMPLIED OR STATUTORY, ORAL OR WRITTEN, PAST OR PRESENT, REGARDING (I) THE VALUE, NATURE, QUALITY OR CONDITION OF THE PIPELINE INCLUDING, WITHOUT LIMITATION, THE WATER, SOIL, GEOLOGY OR ENVIRONMENTAL CONDITION OF THE PIPELINE GENERALLY, INCLUDING THE PRESENCE OR LACK OF HAZARDOUS SUBSTANCES OR OTHER MATTERS ON THE PIPELINE AND RELATED RIGHTS-OF-WAY INCLUDED IN THE PIPELINE, (II) THE INCOME TO BE DERIVED FROM THE PIPELINE, (III) THE SUITABILITY OF THE PIPELINE FOR ANY AND ALL ACTIVITIES AND USES THAT MAY BE CONDUCTED THEREON, (IV) THE COMPLIANCE OF OR BY THE PIPELINE OR ITS OPERATION WITH ANY APPLICABLE LAWS (INCLUDING WITHOUT LIMITATION ANY
ZONING, ENVIRONMENTAL PROTECTION, POLLUTION OR LAND USE LAWS, RULES, REGULATIONS, ORDERS OR REQUIREMENTS), OR (V) THE HABITABILITY, MERCHANTABILITY, MARKETABILITY, PROFITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE PIPELINE. EXCEPT TO THE EXTENT PROVIDED IN THIS AGREEMENT, THE ANCILLARY DOCUMENTS OR THE OMNIBUS AGREEMENT, NONE OF THE PARTIES IS LIABLE OR BOUND IN ANY MANNER BY ANY VERBAL OR WRITTEN STATEMENTS, REPRESENTATIONS OR INFORMATION PERTAINING TO THE LLC INTERESTS, THE COMPANY, THE UNEV MEMBERSHIP INTERESTS OR THE PIPELINE FURNISHED BY ANY AGENT, EMPLOYEE, SERVANT OR THIRD PARTY. EXCEPT TO THE EXTENT PROVIDED IN THIS AGREEMENT, THE ANCILLARY DOCUMENTS OR THE OMNIBUS AGREEMENT, EACH OF THE PARTIES ACKNOWLEDGES THAT TO THE MAXIMUM EXTENT PERMITTED BY LAW, THE INDIRECT TRANSFER AND CONVEYANCE OF THE PIPELINE SHALL BE MADE IN AN “AS IS,” “WHERE IS” CONDITION WITH ALL FAULTS, AND THE PIPELINE IS INDIRECTLY TRANSFERRED AND CONVEYED SUBJECT TO ALL OF THE MATTERS CONTAINED IN THIS SECTION.
THIS SECTION SHALL SURVIVE THE TRANSFER AND CONVEYANCE OF THE LLC INTERESTS OR THE TERMINATION OF THIS AGREEMENT. THE PROVISIONS OF THIS SECTION HAVE BEEN NEGOTIATED BY THE PARTIES AFTER DUE CONSIDERATION AND ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION OF ANY REPRESENTATIONS OR WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY, WITH RESPECT TO THE LLC INTERESTS, THE COMPANY, THE UNEV MEMBERSHIP INTERESTS OR THE PIPELINE THAT MAY ARISE PURSUANT TO ANY LAW NOW OR HEREAFTER IN EFFECT, OR OTHERWISE, EXCEPT AS SET FORTH IN THIS AGREEMENT, THE ANCILLARY DOCUMENTS OR THE OMNIBUS AGREEMENT.
Article V
REPRESENTATIONS AND WARRANTIES OF THE BUYER
Buyer hereby represents and warrants to Seller that as of the date of this Agreement:
5.1
Organization
. Buyer is an entity duly organized, validly existing and in good standing under the Applicable Laws of the State of Delaware.
5.2
Authorization
. Buyer has full limited liability company power and authority to execute, deliver, and perform this Agreement and any Buyer Ancillary Documents to which it is a party. The execution, delivery, and performance by Buyer of this Agreement and the Buyer Ancillary Documents and the consummation by Buyer of the transactions contemplated hereby and thereby, have been duly authorized by all necessary limited liability company action of Buyer. This Agreement has been duly executed and delivered by Buyer and constitutes, and each such Buyer Ancillary Document executed or to be executed Buyer has been, or when executed will be, duly executed and delivered by Buyer and constitutes, or when executed and delivered will constitute, a valid and legally binding obligation of Buyer, enforceable against it in accordance with their terms, except to the extent that such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar Applicable Laws affecting creditors’ rights and remedies generally and (ii) equitable principles which may limit the availability
of certain equitable remedies (such as specific performance) in certain instances.
5.3
No Conflicts or Violations; No Consents or Approvals Required
. The execution, delivery and performance by Buyer of this Agreement and the Buyer Ancillary Documents to which it is a party does not, and consummation of the transactions contemplated hereby and thereby will not, (i) violate, conflict with, or result in any breach of any provisions of Buyer’s organizational documents or (ii) subject to obtaining the Consents or making the registrations, declarations or filings set forth in the next sentence, violate any Applicable Law or material contract binding upon Buyer. Except as set forth on
Buyer Disclosure Schedule 5.3
, no Consent of any Governmental Entity or any other person is required for Buyer in connection with the execution, delivery and performance of this Agreement and the other Buyer Ancillary Documents to which Buyer is a party or the consummation of the transactions contemplated hereby and thereby.
5.4
Absence of Litigation
. There is no Action pending or, to the knowledge of Buyer, threatened against Buyer or any of its Affiliates relating to the transactions contemplated by this Agreement or the Buyer Ancillary Documents or which, if adversely determined, would reasonably be expected to materially impair the ability of Buyer to perform its obligations and agreements under this Agreement or the Buyer Ancillary Documents and to consummate the transactions contemplated hereby and thereby.
5.5
Brokers and Finders
. No investment banker, broker, finder, financial advisor or other intermediary has been retained by or is authorized to act on behalf of Buyer who is entitled to receive from Seller any fee or commission in connection with the transactions contemplated by this Agreement.
5.6
Validity of Profits Interest
. The Profits Interest have been duly and validly authorized in accordance with Applicable Laws and Buyer’s organizational documents and, when issued and delivered in accordance with the terms of this Agreement and the LLC Agreement, will be validly issued, fully paid (to the extent required under Buyer’s organizational documents) and nonassessable (except as such nonassessability may be affected by Sections 18-607 and 18-804 of the DLLCA).
Article VI
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP
The Partnership hereby represents and warrants to Seller that as of the date of this Agreement:
6.1
Organization
. The Partnership is an entity duly organized, validly existing and in good standing under the Applicable Laws of the State of Delaware.
6.2
Authorization
. The Partnership has full limited partnership power and authority to execute, deliver, and perform this Agreement and any Ancillary Documents to which it is a party. The execution, delivery, and performance by the Partnership of this Agreement and the Ancillary Documents and the consummation by the Partnership of the transactions contemplated hereby and thereby, have been duly authorized by all necessary limited partnership action of the Partnership. This Agreement has been duly executed and delivered by the Partnership and constitutes, and each
such Ancillary Document executed or to be executed by the Partnership has been, or when executed will be, duly executed and delivered by the Partnership and constitutes, or when executed and delivered will constitute, a valid and legally binding obligation of the Partnership, enforceable against it in accordance with their terms, except to the extent that such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar Applicable Laws affecting creditors’ rights and remedies generally and (ii) equitable principles which may limit the availability of certain equitable remedies (such as specific performance) in certain instances.
6.3
No Conflicts or Violations; No Consents or Approvals Required
. The execution, delivery and performance by the Partnership of this Agreement and the Ancillary Documents to which it is a party does not, and consummation of the transactions contemplated hereby and thereby will not, (i) violate, conflict with, or result in any breach of any provisions of the Partnership’s organizational documents or (ii) subject to obtaining the Consents or making the registrations, declarations or filings set forth in the next sentence, violate any Applicable Law or material contract binding upon the Partnership. Except as set forth on
Partnership Disclosure Schedule 6.3
, no Consent of any Governmental Entity or any other person is required for the Partnership in connection with the execution, delivery and performance of this Agreement and the other Ancillary Documents to which the Partnership is a party or the consummation of the transactions contemplated hereby and thereby.
6.4
Absence of Litigation
. There is no Action pending or, to the knowledge of the Partnership, threatened against the Partnership or any of its Affiliates relating to the transactions contemplated by this Agreement or which, if adversely determined, would reasonably be expected to materially impair the ability of the Partnership to perform its obligations and agreements under this Agreement or the Ancillary Documents to which it is a party and to consummate the transactions contemplated hereby and thereby.
6.5
Brokers and Finders
. No investment banker, broker, finder, financial advisor or other intermediary has been retained by or is authorized to act on behalf of the Partnership who is entitled to receive from Seller any fee or commission in connection with the transactions contemplated by this Agreement.
6.6
Validity of Aggregate Units
. The Common Units comprising the Unit Consideration and the limited partner interests represented thereby have been duly and validly authorized by the Partnership’s organizational documents and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid (to the extent required under the Partnership’s organizational documents) and nonassessable (except as such nonassessability may be affected by Section 17 607 of the Delaware Revised Uniform Limited Partnership Act).
6.7
No Knowledge of Breach
. The Partnership has no knowledge that any of the representations and warranties of Seller in
Sections 4.4(a)(ii)
,
4.4(b)(ii)
,
4.5
,
4.7
,
4.8
,
4.11
,
4.12
,
4.13
,
4.14
,
4.16
and
4.17
as modified by the information set forth in the corresponding Seller Disclosure Schedules attached hereto are not true and correct in all material respects.
Article VII
COVENANTS
7.1
Cooperation
. Seller shall cooperate with Buyer and assist Buyer in identifying all licenses, authorizations, permissions or Permits necessary for the Company’s and UNEV Pipeline’s operations from and after the Closing Date and where permissible, transfer existing Permits, if any, to Buyer or Operator, as applicable, or, where not permissible or applicable, assist UNEV Pipeline, Buyer or Operator, as applicable, in obtaining new Permits at no cost, fee or liability to Seller.
7.2
Additional Agreements
. Subject to the terms and conditions of this Agreement, the Ancillary Documents and the Omnibus Agreement, each of the Parties shall use its commercially reasonable efforts to do, or cause to be taken all action and to do, or cause to be done, all things necessary, proper, or advisable under Applicable Laws to consummate and make effective the transactions contemplated by this Agreement. If at any time after the Closing Date any further action is necessary or desirable to carry out the purposes of this Agreement, the Parties and their duly authorized representatives shall use commercially reasonable efforts to take all such action.
7.3
Listing of Unit Consideration on New York Stock Exchange
. The Partnership shall provide notice of issuance of the Unit Consideration to the New York Stock Exchange promptly upon such issuance.
Article VIII
ADDITIONAL AGREEMENTS
8.1
Further Assurances
. After the Closing, each Party shall take such further actions, including obtaining Consents to assignment from third parties, and execute such further documents as may be necessary or reasonably requested by the other Parties in order to effectuate the intent of this Agreement and the Ancillary Documents and to provide such other Parties with the intended benefits of this Agreement and the Ancillary Documents.
8.2
Tariff Increase
. For a period of two years following the Closing, Seller shall not, and shall cause its Affiliates not to, object to any increase by UNEV Pipeline of, and Buyer may cause UNEV Pipeline to increase, the incentive tariff to ship on the Pipeline, subject to FERC rules, regulations and guidelines, in order to cover costs of defects, construction or environmental matters incurred by any of the Buyer Indemnified Parties related to the Pipeline that are discovered after the Closing but that arise out of events that occurred prior to the Closing; provided, however, that the foregoing shall not apply until the aggregate amount of such costs total $8,000,000, in which event the foregoing shall only apply to such costs in excess of $8,000,000; provided, further, that the foregoing shall not apply to such costs that arise out of or relate to any matter to the extent covered by an indemnity under
ARTICLE IX
of this Agreement, by an indemnity under the Omnibus Agreement, by effective insurance coverage or by a third party (whether by warranty, indemnity, insurance or otherwise). For the avoidance of doubt, this Section 8.2 does not prohibit tariff increases on the Pipeline in the ordinary course of business, such as for increases in the FERC index each year.
8.3
Future Capacity Expansion
. The Partnership and Buyer agree that during the term of the Transportation Agreement between HollyFrontier Refining & Marketing LLC and UNEV
Pipeline, as amended from time to time, if the Pipeline is unable to transport Seller’s (or any of its wholly-owned subsidiaries’) desired volume or is reasonably expected to be unable to transport such party’s desired volume following the Woods Cross Expansion Completion Date, the Partnership will cause UNEV Pipeline to expand the Pipeline (for example, by installing one or more additional pump stations of a size and in one or more locations), in the most expedited economically reasonable manner, that would add sufficient pipeline capacity to meet the additional transportation requirements, subject to:
(a)
execution by Seller (or any of its applicable subsidiaries) of an agreement for long-term, committed transportation services for the additional volumes on the Pipeline;
(b)
compliance with the requirements of the LLC Agreement (as amended, supplemented or modified after the date hereof) and Applicable Law; and
(c)
having an acceptable common carrier rate under the Federal Energy Regulatory Commission regulations;
provided, that, notwithstanding the foregoing, the Partnership shall not be required to pursue the expansion if such expansion would result in UNEV Pipeline receiving less than a 15% unlevered rate of return on the actual capital cost incurred by UNEV Pipeline with respect to such expansion.
Article IX
INDEMNIFICATION
9.1
Indemnification of Buyer and Seller.
From and after the Closing and subject to the provisions of this
ARTICLE IX
, (i) Seller agrees to indemnify and hold harmless the Buyer Indemnified Parties from and against any and all Buyer Indemnified Costs and (ii) Buyer and the Partnership agree, jointly and severally, to indemnify and hold harmless the Seller Indemnified Parties from and against any and all Seller Indemnified Costs. Notwithstanding any provision in this Agreement to the contrary, to the extent any Buyer Indemnified Costs are incurred by or attributable to UNEV Pipeline (a) the amount of Buyer Indemnified Costs that the Buyer Indemnified Parties are entitled to recover under this
Article IX
shall be limited to an amount that is the product of (x) the amount of the Buyer Indemnified Costs, multiplied by (y) the Company’s percentage ownership interest in UNEV Pipeline at the time such Buyer Indemnified Costs were incurred by UNEV Pipeline and (b) payment with respect to such Buyer Indemnified Costs shall be directed to, for the benefit of and recoverable solely by, the Company or its designee (and not UNEV Pipeline).
9.2
Defense of Third-Party Claims
. An Indemnified Party shall give prompt written notice to Seller or Buyer, as applicable (the “
Indemnifying Party
”), of the commencement or assertion of any action, proceeding, demand, or claim by a third party (collectively, a “
third-party action
”) in respect of which such Indemnified Party seeks indemnification hereunder. Any failure so to notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability that it, he, or she may have to such Indemnified Party under this
ARTICLE IX
unless the failure to give such notice materially and adversely prejudices the Indemnifying Party. The Indemnifying Party shall have the right to assume control of the defense of, settle, or otherwise dispose of such third-party action on such terms as it deems appropriate;
provided
,
however
, that:
(d)
The Indemnified Party shall be entitled, at its own expense, to participate in the defense of such third-party action (
provided
,
however
, that the Indemnifying Party shall pay the attorneys’ fees of the Indemnified Party if (i) the employment of separate counsel shall have been authorized in writing by the Indemnifying Party in connection with the defense of such third-party action, (ii) the Indemnifying Party shall not have employed counsel reasonably satisfactory to the Indemnified Party to have charge of such third-party action, (iii) the Indemnified Party shall have reasonably concluded that there may be defenses available to such Indemnified Party that are different from or additional to those available to the Indemnifying Party, or (iv) the Indemnified Party’s counsel shall have advised the Indemnified Party in writing, with a copy delivered to the Indemnifying Party, that there is a material conflict of interest that could violate applicable standards of professional conduct to have common counsel);
(e)
The Indemnifying Party shall obtain the prior written approval of the Indemnified Party before entering into or making any settlement, compromise, admission, or acknowledgment of the validity of such third-party action or any liability in respect thereof if, pursuant to or as a result of such settlement, compromise, admission, or acknowledgment, injunctive or other equitable relief would be imposed against the Indemnified Party or if, in the opinion of the Indemnified Party, such settlement, compromise, admission, or acknowledgment could have a material adverse effect on its business;
(f)
The Indemnifying Party shall not consent to the entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by each claimant or plaintiff to each Indemnified Party of a release from all liability in respect of such third-party action; and
(g)
The Indemnifying Party shall not be entitled to control (but shall be entitled to participate at its own expense in the defense of), and the Indemnified Party shall be entitled to have sole control over, the defense or settlement, compromise, admission, or acknowledgment of any third-party action (i) as to which the Indemnifying Party fails to assume the defense within a reasonable length of time or (ii) to the extent the third-party action seeks an order, injunction, or other equitable relief against the Indemnified Party which, if successful, would materially adversely affect the business, operations, assets, or financial condition of the Indemnified Party;
provided
,
however
, that the Indemnified Party shall make no settlement, compromise, admission, or acknowledgment that would give rise to liability on the part of any Indemnifying Party without the prior written consent of such Indemnifying Party.
The Parties shall extend reasonable cooperation in connection with the defense of any third-party action pursuant to this
ARTICLE IX
and, in connection therewith, shall furnish such records, information, and testimony and attend such conferences, discovery proceedings, hearings, trials, and appeals as may be reasonably requested.
9.3
Direct Claims
. In any case in which an Indemnified Party seeks indemnification hereunder which is not subject to
Section 9.2
because no third-party action is involved, the Indemnified Party shall notify the Indemnifying Party in writing of any Indemnified Costs which such Indemnified Party claims are subject to indemnification under the terms hereof. Subject to the limitations set forth in
Section 9.4(a)
, the failure of the Indemnified Party to exercise promptness
in such notification shall not amount to a waiver of such claim unless the resulting delay materially prejudices the position of the Indemnifying Party with respect to such claim.
9.4
Limitations
. The following provisions of this
Section 9.4
shall limit the indemnification obligations hereunder:
(a)
Limitation as to Time
. The Indemnifying Party shall not be liable for any Indemnified Costs pursuant to this
ARTICLE IX
with respect to claims for breaches of the representations and warranties under this Agreement unless a written claim for indemnification in accordance with
Section 9.2
or
Section 9.3
is given by the Indemnified Party to the Indemnifying Party with respect thereto on or before 5:00 p.m., Dallas, Texas time, on the first anniversary of the Closing Date;
provided
,
however
, that the Indemnifying Party shall be liable for Indemnified Costs with respect to claims for indemnification for breach of the representations and warranties contained in
Sections 4.1
(Organization),
4.2
(Authorization),
4.6
(Title to LLC Interests; Capitalization),
4.9
(Taxes),
4.21
(Waivers and Disclaimers),
5.1
(Organization),
5.2
(Authorization),
5.6
(Validity of Profits Interest),
6.1
(Organization),
6.2
(Authorization),
6.6
(Validity of Aggregate Units) and
6.7
(No Knowledge of Breach) (collectively, the “
Fundamental Representations
”) if a written claim for indemnification in accordance with
Section 9.2
or
Section 9.3
is given by the Indemnified Party to the Indemnifying Party at any time prior to the expiration of the applicable statute of limitations;
provided
further
,
however
, that any representation and warranty that is the subject of a claim for indemnification hereunder which claim was timely made pursuant to
Section 9.4(a)
shall survive with respect to such claim until such claim is finally paid or adjudicated. For the avoidance of doubt, the limitations set forth in this
Section 9.4(a)
shall not apply to claims for Buyer Indemnified Costs relating to matters set forth on Seller Disclosure Schedule 1.1.
(b)
Limitation as to Amount of Indemnification for Breaches of Representations and Warranties
. Solely with respect to Buyer Indemnified Costs arising out of breaches of the representations and warranties of Seller under this Agreement, (1) Seller shall not be liable to the Buyer Indemnified Parties for indemnification under
Section 9.1
, until the aggregate amount of all Buyer Indemnified Costs arising out of breaches of the representations and warranties of Seller under this Agreement exceeds $2,000,000 (the “
Deductible
”), in which event the Indemnifying Party shall only be required to pay or be liable for the Buyer Indemnified Costs arising out of breaches of such representations and warranties in excess of the Deductible; and (2) the aggregate amount of all Buyer Indemnified Costs arising out of breaches of the representations and warranties of Seller under this Agreement for which Seller shall be liable pursuant to
Section 9.1
, shall not exceed $15,000,000 (the “
Cap
”);
provided
,
however
, that the Deductible and the Cap shall not apply to claims for Buyer Indemnified Costs relating to breaches of the Fundamental Representations;
provided
,
further
, that the Deductible shall be counted towards the satisfaction of the Cap such that the aggregate amount of Buyer Indemnified Costs for which Seller may be liable under
Section 9.1
relating to claims for which the Deductible and Cap apply shall in no event exceed $13,000,000. For the avoidance of doubt, the limitations set forth in this
Section 9.4(b)
shall not apply to claims for Buyer Indemnified Costs relating to matters set forth on
Seller Disclosure Schedule 1.1
.
(c)
Amount of Damages for Breaches of Section 6.7
. The amount of Seller
Indemnified Costs with respect to any claims for breaches of the representation by Buyer set forth in
Section 6.7
(No Knowledge of Breach) shall be deemed to be equal to the amount of Buyer Indemnified Costs, if any, for which the Buyer Indemnified Parties are seeking or have sought indemnification under this
ARTICLE IX
with respect to the breach of a representation or warranty of Seller of which the Partnership had knowledge that resulted in the breach of
Section 6.7
.
(d)
Limitation as to Amount of Indemnification for Matters Set Forth on Seller Disclosure Schedule 1.1
. Solely with respect to Buyer Indemnified Costs relating to matters set forth on
Seller Disclosure Schedule 1.1
, Seller shall only be required to pay or be liable for, and Buyer Indemnified Parties shall only be entitled to recover, 75% of the Buyer Indemnified Costs for which Seller would otherwise be liable under
Section 9.1
(after giving effect to the last sentence of
Section 9.1
) with respect to such matters.
(e)
Sole and Exclusive Remedy
. Each Party acknowledges and agrees that, after the Closing Date, notwithstanding any other provision of this Agreement to the contrary, Buyer’s and the other Buyer Indemnified Parties’ and Seller’s and the other Seller Indemnified Parties’ sole and exclusive remedy with respect to the Indemnified Costs shall be in accordance with, and limited by, the provisions set forth in this
ARTICLE IX
. The Parties further acknowledge and agree that the foregoing is not the remedy for and does not limit the Parties’ remedies for matters covered by the indemnification provisions contained in the Omnibus Agreement.
9.5
Tax Related Adjustments
. Seller and Buyer agree that any payment of Indemnified Costs made hereunder will be treated by the Parties on their tax returns as an adjustment to the Cash Consideration component of the Purchase Price.
Article X
MISCELLANEOUS
10.1
Expenses
. Except as provided in
Section 3.4
of this Agreement, or as provided in the Ancillary Documents or the Omnibus Agreement, all costs and expenses incurred by the Parties in connection with the consummation of the transactions contemplated hereby shall be borne solely and entirely by the Party which has incurred such expense.
10.2
Notices
.
(a)
Any notice or other communication given under this Agreement or the Omnibus Agreement shall be in writing and shall be (i) delivered personally, (ii) sent by documented overnight delivery service, (iii) sent by email transmission, or (iv) sent by first class mail, postage prepaid (certified or registered mail, return receipt requested). Such notice shall be deemed to have been duly given (x) if received, on the date of the delivery, with a receipt for delivery, (y) if refused, on the date of the refused delivery, with a receipt for refusal, or (z) with respect to email transmissions, on the date the recipient confirms receipt. Notices or other communications shall be directed to the following addresses:
Notices to Seller:
HollyFrontier Corporation
2828 N. Harwood, Suite 1300
Dallas, Texas 75201
Attention: President
Email address: president@hollyfrontier.com with a copy, which shall not constitute notice, but is required in order to give proper notice, to:
HollyFrontier Corporation
2828 N. Harwood, Suite 1300
Dallas, Texas 75201
Attention: General Counsel
Email address: generalcounsel@hollyfrontier.com
Notices to Buyer:
HEP UNEV Holdings LLC
2828 N. Harwood, Suite 1300
Dallas, Texas 75201
Attention: President
Email address: president@hollyenergy.com
with a copy, which shall not constitute notice, but is required in order to give proper notice, to:
Holly Energy Partners, L.P.
2828 N. Harwood, Suite 1300
Dallas, Texas 75201
Attention: General Counsel
Email address: generalcounsel@hollyenergy.com
(b)
Any Party may at any time change its address for service from time to time by giving notice to the other Parties in accordance with this
Section 10.2
.
10.3
Severability
. If any term or other provision of this Agreement is invalid, illegal, or incapable of being enforced under Applicable Law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated herein are not affected in any manner adverse to any Party. Upon such determination that any term or other provision of this Agreement is invalid, illegal, or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated herein are consummated as originally contemplated to the fullest extent possible.
10.4
Governing Law; Jurisdiction; Waiver of Jury Trial
. This Agreement shall be subject to and governed by the laws of the State of Delaware, excluding any conflicts-of-law rule or principle that might refer the construction or interpretation of this Agreement to the laws of
another state. Each Party hereby submits to the jurisdiction of the state and federal courts in the State of Texas and to venue in Dallas, Texas. EACH OF THE PARTIES IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
10.5
Arbitration Provision
. Any and all Arbitrable Disputes must be resolved through the use of binding arbitration using three arbitrators, in accordance with the Commercial Arbitration Rules of the American Arbitration Association, as supplemented to the extent necessary to determine any procedural appeal questions by the Federal Arbitration Act (Title 9 of the United States Code). If there is any inconsistency between this
Section 10.5
and the Commercial Arbitration Rules or the Federal Arbitration Act, the terms of this
Section 10.5
will control the rights and obligations of the Parties. Arbitration must be initiated within the time limits set forth in this Agreement, or if no such limits apply, then within a reasonable time or the time period allowed by the applicable statute of limitations. Arbitration may be initiated by a Party (“
Claimant
”) serving written notice on the other Party (“
Respondent
”) that the Claimant elects to refer the Arbitrable Dispute to binding arbitration. Claimant’s notice initiating binding arbitration must identify the arbitrator Claimant has appointed. The Respondent shall respond to Claimant within thirty (30) days after receipt of Claimant’s notice, identifying the arbitrator Respondent has appointed. If the Respondent fails for any reason to name an arbitrator within the 30-day period, Claimant shall petition the American Arbitration Association for appointment of an arbitrator for Respondent’s account. The two arbitrators so chosen shall select a third arbitrator within thirty (30) days after the second arbitrator has been appointed. The Claimant will pay the compensation and expenses of the arbitrator named by it, and the Respondent will pay the compensation and expenses of the arbitrator named by or for it. The costs of petitioning for the appointment of an arbitrator, if any, shall be paid by Respondent. The Claimant and Respondent will each pay one-half of the compensation and expenses of the third arbitrator. All arbitrators must (i) be neutral parties who have never been officers, directors or employees of any of Seller, Buyer or any of their Affiliates and (ii) have not less than seven (7) years experience in the petroleum transportation industry. The hearing will be conducted in Dallas, Texas and commence within thirty (30) days after the selection of the third arbitrator. Seller, Buyer and the arbitrators shall proceed diligently and in good faith in order that the award may be made as promptly as possible. Except as provided in the Federal Arbitration Act, the decision of the arbitrators will be binding on and non-appealable by the Parties hereto. The arbitrators shall have no right to grant or award indirect, consequential, punitive or exemplary damages of any kind. The Arbitrable Disputes may be arbitrated in a common proceeding along with disputes under other agreements between Seller, Buyer or their Affiliates to the extent that the issues raised in such disputes are related. Without the written consent of the Parties, no unrelated disputes or third party disputes may be joined to an arbitration pursuant to this Agreement.
10.6
Parties in Interest
. This Agreement shall be binding upon and inure solely to the benefit of each Party and their successors and permitted assigns, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement.
10.7
Assignment of Agreement
. At any time, the Parties may make a collateral
assignment of their rights under this Agreement to any of their bona fide lenders or debt holders, or a trustee or a representative for any of them, and the non-assigning Parties shall execute an acknowledgment of such collateral assignment in such form as may from time to time be reasonably requested;
provided
,
however
, that unless written notice is given to the non-assigning Parties that any such collateral assignment has been foreclosed upon, such non-assigning Parties shall be entitled to deal exclusively with Seller, Buyer or the Partnership, as the case may be, as to any matters arising under this Agreement, the Ancillary Documents or the Omnibus Agreement (other than for delivery of notices required by any such collateral assignment). Except as otherwise provided in this
Section 10.7
, neither this Agreement nor any of the rights, interests, or obligations hereunder may be assigned by any Party without the prior written consent of the other Parties.
10.8
Captions
. The captions in this Agreement are for purposes of reference only and shall not limit or otherwise affect the interpretation hereof.
10.9
Counterparts
. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
10.10
Director and Officer Liability
. The directors, managers, officers, partners and stockholders of the Partnership, Seller, Buyer, and their respective Affiliates shall not have any personal liability or obligation arising under this Agreement (including any claims that another party may assert) other than, if applicable, as a direct party to or an assignee of this Agreement or pursuant to a written guarantee.
10.11
Integration
. This Agreement, the Ancillary Documents and the Omnibus Agreement
supersede any previous understandings or agreements among the Parties, whether oral or written, with respect to their subject matter. This Agreement, the Ancillary Documents and the Omnibus Agreement contain the entire understanding of the Parties with respect to the subject matter hereof and thereof. No understanding, representation, promise or agreement, whether oral or written, is intended to be or shall be included in or form part of this Agreement, the Ancillary Documents or the Omnibus Agreement unless it is contained in a written amendment hereto or thereto and executed by the Parties hereto or thereto after the date of this Agreement, the Ancillary Documents or the Omnibus Agreement.
10.12
Effect of Agreement
. The Parties ratify and confirm that except as otherwise expressly provided herein, in the event this Agreement conflicts in any way with the Omnibus Agreement, the terms and provisions of the Omnibus Agreement shall control.
10.13
Amendment; Waiver
. This Agreement may be amended only in a writing signed by all Parties. Any waiver of rights hereunder must be set forth in writing. A waiver of any breach or failure to enforce any of the terms or conditions of this Agreement shall not in any way affect, limit or waive any party’s rights at any time to enforce strict compliance thereafter with every term or condition of this Agreement.
Article XI
INTERPRETATION
11.1
Interpretation
. It is expressly agreed that this Agreement shall not be construed against any Party, and no consideration shall be given or presumption made, on the basis of who drafted this Agreement or any particular provision hereof or who supplied the form of Agreement. Each Party agrees that this Agreement has been purposefully drawn and correctly reflects its understanding of the transaction that this Agreement contemplates. In construing this Agreement:
(c)
examples shall not be construed to limit, expressly or by implication, the matter they illustrate;
(d)
the word “includes” and its derivatives means “includes, but is not limited to” and corresponding derivative expressions;
(e)
a defined term has its defined meaning throughout this Agreement and each Exhibit, Annex or Schedule to this Agreement, regardless of whether it appears before or after the place where it is defined;
(f)
each Exhibit, Annex
and Schedule to this Agreement is a part of this Agreement, but if there is any conflict or inconsistency between the main body of this Agreement and any Exhibit, Annex
or Schedule, the provisions of the main body of this Agreement shall prevail;
(g)
the term “cost” includes expense and the term “expense” includes cost;
(h)
the headings and titles herein are for convenience only and shall have no significance in the interpretation hereof;
(i)
the inclusion of a matter on a Schedule in relation to a representation or warranty shall not be deemed an indication that such matter necessarily would, or may, breach such representation or warranty absent its inclusion on such Schedule;
(j)
any reference to a statute, regulation or Applicable Law shall include any amendment thereof or any successor thereto and any rules and regulations promulgated thereunder;
(k)
currency amounts referenced herein, unless otherwise specified, are in U.S. Dollars;
(l)
unless the context otherwise requires, all references to time shall mean time in Dallas, Texas;
(m)
whenever this Agreement refers to a number of days, such number shall refer to calendar days unless business days are specified; and
(n)
if a term is defined as one part of speech (such as a noun), it shall have a corresponding meaning when used as another part of speech (such as a verb).
11.2
References, Gender, Number
. All references in this Agreement to an “Article,” “Section,” “subsection,” “Exhibit” or “Schedule” shall be to an Article, Section, subsection, Exhibit or Schedule of this Agreement, unless the context requires otherwise. Unless the context clearly
requires otherwise, the words “this Agreement,” “hereof,” “hereunder,” “herein,” “hereby,” or words of similar import shall refer to this Agreement as a whole and not to a particular Article, Section, subsection, clause or other subdivision hereof. Cross references in this Agreement to a subsection or a clause within a Section may be made by reference to the number or other subdivision reference of such subsection or clause preceded by the word “Section.” Whenever the context requires, the words used herein shall include the masculine, feminine and neuter gender, and the singular and the plural.
[The Remainder of this Page is Intentionally Left Blank]
IN WITNESS WHEREOF
, the parties have executed this Agreement to be effective as of the date first set forth above.
SELLER:
HOLLYFRONTIER CORPORATION
By:
/s/ Michael C. Jennings
Name: Michael C. Jennings
|
|
Title:
|
Chief Executive Officer and President
|
BUYER:
HEP UNEV HOLDINGS LLC
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
PARTNERSHIP:
HOLLY ENERGY PARTNERS, L.P.
By: HEP Logistics Holdings, L.P.
its General Partner
By: Holly Logistic Services, L.L.C.
its General Partner
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
Exhibit 10.3
|
|
SEVENTH AMENDED AND RESTATED OMNIBUS AGREEMENT
among
HOLLYFRONTIER CORPORATION
HOLLY ENERGY PARTNERS, L.P.
and
CERTAIN OF THEIR RESPECTIVE SUBSIDIARIES
|
TABLE OF CONTENTS
Page
|
|
Article II
|
Business Opportunities 10
|
|
|
2.1
|
Restricted Businesses 10
|
|
|
2.2
|
Permitted Exceptions 10
|
|
|
2.4
|
Scope of Prohibition 13
|
|
|
2.6
|
Limitation on Acquisitions of Subject Assets by Partnership Group Members 13
|
|
|
Article III
|
Indemnification 13
|
|
|
3.1
|
Environmental Indemnification 13
|
|
|
3.2
|
Limitations Regarding Environmental Indemnification 15
|
|
|
3.3
|
Right of Way Indemnification 15
|
|
|
3.4
|
Additional Indemnification 16
|
|
|
3.5
|
Indemnification Procedures 17
|
|
|
3.6
|
Limitation on Indemnification Obligations 18
|
|
|
3.7
|
Exclusion from Indemnification 18
|
|
|
Article IV
|
General and Administrative Expenses 19
|
|
|
Article V
|
Right of First Refusal 19
|
|
|
5.1
|
Holly Right of First Refusal: Prohibition on Transfer of Refinery Related Assets 19
|
|
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Article VI
|
Holly Purchase Option 22
|
|
|
6.1
|
Option to Purchase Tulsa Transferred Assets 22
|
|
|
Article VII
|
Miscellaneous 22
|
|
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7.2
|
Arbitration Provision 22
|
|
|
7.5
|
Termination of Article II 24
|
|
|
7.6
|
Amendment or Modification 24
|
|
|
7.8
|
Additional Partnership Entities 25
|
|
|
7.11
|
Further Assurances 25
|
|
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7.12
|
Rights of Limited Partners 25
|
|
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7.14
|
[Intentionally omitted] 26
|
|
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7.15
|
Limitation of Damages 26
|
SEVENTH AMENDED AND RESTATED
OMNIBUS AGREEMENT
THIS SEVENTH AMENDED AND RESTATED OMNIBUS AGREEMENT (the “
Agreement
”) is being entered into on July 12, 2012, by and among HollyFrontier Corporation, a Delaware corporation (“
Holly
”), the other Holly Entities (as defined herein) listed on the signature pages hereto, Holly Energy Partners, L.P., a Delaware limited partnership (the “
Partnership
”), and the other Partnership Entities (as defined herein) listed on the signature pages hereto, and amends and restates in its entirety the Sixth Amended and Restated Omnibus Agreement entered into on November 9, 2011 and effective as of November 1, 2011 (as amended, the “
Sixth Amended Omnibus Agreement
”) among Holly, Navajo Pipeline Co., L.P., a Delaware limited partnership (“
Navajo Pipeline
”), Holly Logistic Services, L.L.C., a Delaware limited liability company (“
Holly GP
”), HEP Logistics Holdings, L.P., a Delaware limited partnership (the “
General Partner
”), the Partnership, HEP Logistics GP, L.L.C., a Delaware limited liability company (the “
OLP GP
”), and Holly Energy Partners – Operating, L.P., a Delaware limited partnership (the “
Operating Partnership
”) and the other Holly Entities and Partnership Entities signatory thereto.
R E C I T A L S:
WHEREAS, the Parties entered into an Omnibus Agreement on July 13, 2004 (as amended, the “
Original Omnibus Agreement
”) to evidence their agreement, as more fully set forth in
Article II
, with respect to those business opportunities that the Holly Entities and Holly GP would not engage in, directly or indirectly, during the term of the Original Omnibus Agreement unless the Partnership declined to engage in any such business opportunity for its own account;
WHEREAS, the Parties entered into the Original Omnibus Agreement to evidence their agreement, as more fully set forth in
Article III
, with respect to certain indemnification obligations of the Parties to each other;
WHEREAS, the Parties entered into the Original Omnibus Agreement to evidence their agreement, as more fully set forth in
Article IV
, with respect to the amount to be paid by the Partnership for the general and administrative services to be performed by Holly and its Affiliates (as defined herein) for and on behalf of the Partnership Entities and their Subsidiaries;
WHEREAS, the Parties entered into the Original Omnibus Agreement to evidence their agreement, as more fully set forth in
Article V
, with respect to Holly’s right of first refusal relating to the Assets (as defined herein);
WHEREAS, in connection with that certain LLC Interest Purchase Agreement dated as of June 1, 2009, by and among Holly, Navajo Pipeline and the Operating Partnership, pursuant to which Navajo Pipeline transferred and conveyed to the Operating Partnership, and the Operating Partnership has acquired, all of the limited liability company interests of Lovington-Artesia, L.L.C., the entity that owns the 16” Lovington/Artesia Intermediate Pipeline (as defined herein), the Parties amended and restated the Original Omnibus Agreement and entered into the First Amended and Restated Omnibus Agreement (the “
First Amended Omnibus Agreement
”);
WHEREAS, in connection with that certain Asset Purchase Agreement dated as of August 1, 2009, by and between Holly Refining & Marketing – Tulsa LLC (“
Holly Tulsa
”) and HEP Tulsa LLC (“
HEP Tulsa
”), pursuant to which Holly Tulsa transferred and conveyed to HEP Tulsa, and HEP Tulsa acquired, the Tulsa Transferred Assets (as defined herein), the Parties amended and restated the First Amended Omnibus Agreement and entered into the Second Amended and Restated Omnibus Agreement (the “
Second Amended Omnibus Agreement
”);
WHEREAS, in connection with (i) that certain Asset Sale and Purchase Agreement dated as of October 19, 2009, by and among Holly Tulsa, HEP Tulsa and Sinclair Tulsa Refining Company (“
Sinclair
”), pursuant to which HEP Tulsa acquired the Sinclair Transferred Assets (as defined herein), (ii) that certain Asset Purchase Agreement dated as of December 1, 2009, by and among Holly, Navajo Pipeline and HEP Pipeline L.L.C., pursuant to which Navajo Pipeline agreed to transfer and convey to HEP Pipeline L.L.C., and HEP Pipeline L.L.C. agreed to acquire, the Beeson Pipeline (as defined herein), and (iii) that certain LLC Interest Purchase Agreement by and among Holly, Navajo Pipeline and the Operating Partnership, pursuant to which Navajo Pipeline agreed to transfer and convey to the Operating Partnership, and the Operating Partnership agreed to acquire, all of the limited liability company interests of Roadrunner Pipeline, L.L.C., the entity that owns the Roadrunner Pipeline (as defined herein), the Parties amended and restated the Second Amended Omnibus Agreement and entered into the Third Amended and Restated Omnibus Agreement (the “
Third Amended Omnibus Agreement
”);
WHEREAS, in connection with that certain LLC Interest Purchase Agreement dated as of March 31, 2010, by and among Holly, Lea Refining Company, Holly Tulsa, HEP Refining, L.L.C. (“
HEP Refining
”) and HEP Tulsa (the “
March 2010 Drop Down LLC Interest Purchase Agreement
”), pursuant to which Holly, Lea Refining Company and Holly Tulsa agreed to transfer and convey to HEP Refining and HEP Tulsa the Additional Tulsa East Assets (as defined herein) and the Additional Lovington Assets (as defined herein), the Parties amended and restated the Third Amended Omnibus Agreement and entered into the Fourth Amended and Restated Omnibus Agreement (the “
Fourth Amended Omnibus Agreement
”);
WHEREAS, in connection with the construction of the Tulsa Interconnecting Pipelines (as defined herein), Holly Tulsa, HEP Tulsa and Holly Energy Storage – Tulsa LLC entered into that certain Second Amended and Restated Pipelines, Tankage and Loading Rack Throughput Agreement (Tulsa East), dated as of August 31, 2011, pursuant to which HEP Tulsa agreed to provide transportation services to Holly Tulsa with respect to the Tulsa Interconnecting Pipelines (the “
Tulsa Throughput Agreement
”), the Parties amended and restated the Fourth Amended Omnibus Agreement and entered into the Fifth Amended and Restated Omnibus Agreement (the “
Fifth Amended Omnibus Agreement
”);
WHEREAS, in connection with that certain LLC Interest Purchase Agreement effective as of November 1, 2011, by and among Holly, Frontier Refining LLC (“
Frontier Cheyenne
”), Frontier El Dorado Refining LLC (“
Frontier El Dorado
”), the Operating Partnership and the Partnership, (the “
November 2011 Frontier Drop Down LLC Interest Purchase Agreement
”), pursuant to which Frontier Cheyenne and Frontier El Dorado agreed sell to the Operating Partnership the entities that own the Cheyenne Assets (as defined herein) and the El Dorado Assets (as defined herein), the Parties amended and restated the Fifth Amended Omnibus Agreement and entered into the Sixth Amended Omnibus Agreement; and
WHEREAS, in connection with that certain LLC Interest Purchase Agreement dated as of July 12, 2012, by and among Holly, HEP UNEV Holdings LLC (“
HEP UNEV
”) and the Partnership (the “
UNEV LLC Interest Purchase Agreement
”), pursuant to which Holly agreed to sell to HEP UNEV the entity that owns 75% of all of the issued and outstanding membership interests of UNEV Pipeline, LLC, the entity that owns the UNEV Pipeline (as defined herein), the Parties desire to amend and restate the Sixth Amended Omnibus Agreement as provided herein.
In consideration of the premises and the covenants, conditions, and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto hereby agree as follows:
Article I
Definitions
1.1
Definitions
.
As used in this Agreement, the following terms shall have the respective meanings set forth below:
“
8” and 10” Lovington/Artesia Intermediate Pipelines
” means the 8-inch pipeline running from Lovington, New Mexico to Artesia, New Mexico and the 10-inch pipeline running from Lovington, New Mexico to Artesia, New Mexico, each owned by Navajo Pipeline.
“
16” Lovington/Artesia Intermediate Pipeline
” means the 16-inch pipeline running from Lovington, New Mexico to Artesia, New Mexico, owned by Lovington-Artesia, L.L.C.
“
2004 Product Pipelines, Terminal and Related Assets
” means the assets transferred under the July 13, 2004 Contribution, Conveyance and Assumption Agreement at the time of the Partnership’s initial public offering.
“
2008 Crude Pipelines, Tanks and Related Assets
” means the Drop-Down Assets as defined in the Purchase and Sale Agreement, dated February 25, 2008, by and among Holly, Navajo Pipeline, Woods Cross Refining Company, L.L.C., a Delaware limited liability company, and Navajo Refining Company, L.L.C., as the seller parties, and the Partnership, the Operating Partnership, HEP Woods Cross, L.L.C., a Delaware limited liability company, and HEP Pipeline, L.L.C., a Delaware limited liability company, as the buyer parties.
“
Acquisition Proposal
” is defined in
Section 5.2(a)
.
“
Additional Tulsa East Assets
” means the Transferred Tulsa East Assets as defined in the March 2010 Drop Down LLC Interest Purchase Agreement.
“
Additional Lovington Assets
” means the Transferred Lovington Assets as defined in the March 2010 Drop Down LLC Interest Purchase Agreement.
“
Administrative Fee
” is defined in
Section 4.1(a)
.
“
Affiliate
” is defined in the Partnership Agreement.
“
Agreement
” is defined in the introduction to this Agreement.
“
Applicable Law
” means any applicable statute, law, regulation, ordinance, rule, judgment, rule of law, order, decree, permit, approval, concession, grant, franchise, license, agreement, requirement, or other governmental restriction or any similar form of decision of, or any provision or condition of any permit, license or other operating authorization issued under any of the foregoing by, or any determination by any Governmental Authority having or asserting jurisdiction over the matter or matters in question, whether now or hereafter in effect and in each case as amended (including, without limitation, all of the terms and provisions of the common law of such Governmental Authority), as interpreted and enforced at the time in question.
“
Arbitrable Dispute
” means any and all disputes, Claims, controversies and other matters in question between any of the Partnership Entities, on the one hand, and any of the Holly Entities, on the other hand, arising out of or relating to this Agreement or the alleged breach hereof, or in any way relating to the subject matter of this Agreement regardless of whether (a) allegedly extra-contractual in nature, (b) sounding in contract, tort or otherwise, (c) provided for by Applicable Law or otherwise or (d) seeking damages or any other relief, whether at law, in equity or otherwise.
“
Assets
” means all of the following assets conveyed, contributed, or otherwise transferred, directly or indirectly (including by transfer or sale of the entity that owns such assets or the entity that owns the interests in the entity that owns such assets), by the Holly Entities to the Partnership Entities: (i) the 2004 Product Pipelines, Terminal and Related Assets, (ii) the 8” and 10” Lovington/Artesia Intermediate Pipelines, (iii) the 2008 Crude Pipelines, Tanks and Related Assets, (iv) the 16” Lovington/Artesia Intermediate Pipeline, (v) the Tulsa Transferred Assets, (vi) the Beeson Pipeline, (vii) the Roadrunner Pipeline, (viii) the Additional Lovington Assets, (ix) the Additional Tulsa East Assets, (x) the Sinclair Assets, (xi) the Tulsa Interconnecting Pipelines, (xii) the Cheyenne Assets, (xiii) the El Dorado Assets, and (xiv) the UNEV Pipeline.
“
Beeson Pipeline
” means the 8” crude oil pipeline extending from Beeson station to Lovington, New Mexico, owned by HEP Pipeline, L.L.C.
“
Change of Control
” means, with respect to any Person (the “
Applicable Person
”), any of the following events: (a) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the Applicable Person’s assets to any other Person unless immediately following such sale, lease, exchange, or other transfer such assets are owned, directly or indirectly, by the Applicable Person; (b) the consolidation or merger of the Applicable Person with or into another Person pursuant to a transaction in which the outstanding Voting Securities of the Applicable Person are changed into or exchanged for cash, securities, or other property, other than any such transaction where (i) the outstanding Voting Securities of the Applicable Person are changed into or exchanged for Voting Securities of the surviving Person or its parent and (ii) the holders of the Voting Securities of the Applicable Person immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Securities of the surviving Person or its parent immediately after such transaction; and (c) a “person” or “group” (within the meaning of Sections 13(d) or 14(d)(2) of the Exchange Act) (in the case of Holly, other than a group consisting of some of all of the current control persons of Holly), being or becoming the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of more than 50% of all of the then outstanding Voting Securities of the Applicable Person, except in a merger or consolidation that would not constitute a Change of Control under clause (b) above.
“
Cheyenne Assets
” is defined in the November 2011 Frontier Drop Down LLC Interest Purchase Agreement.
“
Claim
” means any existing or threatened future claim, demand, suit, action, investigation, proceeding, governmental action or cause of action of any kind or character (in each case, whether civil, criminal, investigative or administrative), known or unknown, under any theory, including those based on theories of contract, tort, statutory liability, strict liability, employer liability, premises liability, products liability, breach of warranty or malpractice.
“
Claimant
” is defined in
Section 7.2
.
“
Closing Date
” means the date of the closing of the Partnership’s initial public offering of Common Units. For purposes of
Article III
, Closing Date shall mean, with respect to a group of Assets (e.g. the 8” and 10” Lovington/Artesia Intermediate Pipelines), the effective date of the purchase of such Assets or the stock, partnership interests or membership interests of the entity that directly or indirectly owned such Assets, by a Partnership Entity.
“
Common Units
” is defined in the Partnership Agreement.
“
Contribution Agreement
” means that certain Contribution, Conveyance and Assumption Agreement, dated as of July 13, 2004, among Holly, Navajo Pipeline, Holly GP, the General Partner, the Partnership, the OLP GP, the Operating Partnership and certain other parties, together with the additional conveyance documents and instruments contemplated or referenced thereunder.
“
control
” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract, or otherwise.
“
Covered Environmental Losses
” is defined in
Section 3.1
.
“
Disposition Notice
” is defined in
Section 5.2(a)
.
“
El Dorado Assets
” is defined in the November 2011 Frontier Drop Down LLC Interest Purchase Agreement.
“
Environmental Laws
” means all federal, state, and local laws, statutes, rules, regulations, orders, and ordinances, now or hereafter in effect, relating to protection of the environment including, without limitation, the federal Comprehensive Environmental Response, Compensation, and Liability Act, the Superfund Amendments Reauthorization Act, the Resource Conservation and Recovery Act, the Clean Air Act, the Federal Water Pollution Control Act, the Toxic Substances Control Act, the Oil Pollution Act, the Safe Drinking Water Act, the Hazardous Materials Transportation Act, and other environmental conservation and protection laws, each as amended from time to time.
“
Exchange Act
” means the Securities Exchange Act of 1934, as amended.
“
Fifth Amended Omnibus Agreement
” is defined in the recitals to this Agreement.
“
First Amended Omnibus Agreement
” is defined in the recitals to this Agreement.
“
First ROFR Acceptance Deadline
” is defined in
Section 5.2(a)
.
“
Fourth Amended Omnibus Agreement
” is defined in the recitals to this Agreement.
“
General Partner
” is defined in the introduction to this Agreement.
“
Governmental Authority
” means any federal, state, local or foreign government or any provincial, departmental or other political subdivision thereof, or any entity, body or authority exercising executive, legislative, judicial, regulatory, administrative or other governmental functions or any court, department, commission, board, bureau, agency, instrumentality or administrative body of any of the foregoing.
“
Hazardous Substance
” means (a) any substance that is designated, defined, or classified as a hazardous waste, hazardous material, pollutant, contaminant, or toxic or hazardous substance, or that is otherwise regulated under any Environmental Law, including, without limitation, any hazardous substance as defined under the Comprehensive Environmental Response, Compensation, and Liability Act, and (b) petroleum, crude oil, gasoline, natural gas, fuel oil, motor oil, waste oil, diesel fuel, jet fuel, and other refined petroleum hydrocarbons.
“
Holly
” is defined in the introduction to this Agreement.
“
Holly Entities
” means Holly and each other entity listed on the signature pages hereto as Holly Entity.
“
Holly Entity
” means any of the Holly Entities.
“
Holly Group
” means the Holly Entities and any Person controlled, directly or indirectly, by Holly other than the Partnership Entities.
“
Holly Group Member
” means any member of the Holly Group.
“
Indemnified Party
” means the Partnership Entities or the Holly Entities, as the case may be, in their capacity as the parties entitled to indemnification in accordance with
Article III
.
“
Indemnifying Party
” means either the Partnership Entities or the Holly Entities, as the case may be, in their capacity as the parties from whom indemnification may be required in accordance with
Article III
, including
Section 3.6
.
“
Initial Tank Inspection
” is defined in
Section 3.1(c)
.
“
Initial Tank Inspection Period
” is defined in
Section 3.1(c)
.
“
Limited Partner
” is defined in the Partnership Agreement.
“
March 2010 Drop Down LLC Interest Purchase Agreement
” is defined in the recitals to this Agreement.
“
Navajo Pipeline
” is defined in the introduction to this Agreement.
“
November 2011 Frontier Drop Down LLC Interest Purchase Agreement
” is defined in the recitals to this Agreement.
“
Offer
” is defined in
Section 2.3(b)(i)
.
“
Offer Price
” is defined in
Section 5.2(a)
.
“
OLP GP
” is defined in the introduction to this Agreement.
“
Operating Partnership
” is defined in the introduction to this Agreement.
“
Original Omnibus Agreement
” is defined in the recitals to this Agreement.
“
Partnership
” is defined in the introduction to this Agreement.
“
Partnership Agreement
” means the First Amended and Restated Agreement of Limited Partnership of Holly Energy Partners, L.P., dated July 13, 2004, as amended by Amendment No. 1 to the First Amended and Restated Agreement of Limited Partnership of Holly Energy Partners, L.P., dated February 28, 2005, as amended by Amendment No. 2 to the First Amended and Restated Agreement of Limited Partnership of Holly Energy Partners, L.P., dated July 6, 2005, as amended by Amendment No. 3 to the First Amended and Restated Agreement of Limited Partnership of Holly Energy Partners, L.P., dated April 11, 2008, and as amended pursuant to that certain Limited Partial Waiver of Incentive Distribution Rights, dated July 12, 2012, as such agreement is in effect on the date of this Agreement. No amendment or modification to the Partnership Agreement subsequent to the date of this Agreement shall be given effect for the purposes of this Agreement unless consented to by each of the Parties.
“
Partnership Entities
” means the Partnership and each other entity listed on the signature pages hereto as a Partnership Entity.
“
Partnership Entity
” means any of the Partnership Entities.
“
Partnership Group
” means the Partnership Entities and any Subsidiary of any such Person, treated as a single consolidated entity.
“
Partnership Group Member
” means any member of the Partnership Group.
“
Party
” means each of the entities listed on the signature page to this Agreement, collectively the “
Parties
”.
“
Person
” means an individual or a corporation, limited liability company, partnership, joint venture, trust, unincorporated organization association, government agency or political subdivision thereof or other entity.
“
Proposed Transferee
” is defined in
Section 5.2(a)
.
“
Prudent Industry Practice
” means such practices, methods, acts, techniques, and standards as are in effect at the time in question that are consistent with (a) the standards generally followed by the United States pipeline and terminalling industries or (b) such higher standards as may be applied or followed by the Holly Entities in the performance of similar tasks or projects, or by the Partnership Entities in the performance of similar tasks or projects.
“
Purchase Option Agreement
” has the meaning set forth in the Asset Purchase Agreement, dated August 1, 2009, between Holly Refining & Marketing – Tulsa LLC, a Delaware limited liability company, as the seller, and HEP Tulsa LLC, a Delaware limited liability company, as the buyer.
“
Respondent
” is defined in
Section 7.2
.
“
Restricted Businesses
” is defined in
Section 2.1
.
“
Retained Assets
” means the pipelines, terminals and other assets and investments owned by any of the Holly Group Members on the date of the Contribution Agreement that were not conveyed, contributed or otherwise transferred to the Partnership Entities pursuant to the Contribution Agreement or otherwise.
“
Roadrunner Pipeline
” means 16” crude oil pipeline extending from Slaughter station in Texas to Lovington, New Mexico owned by Roadrunner Pipeline, L.L.C.
“
ROFR Acceptance Deadline
” means the First ROFR Acceptance Deadline or the Second ROFR Acceptance Deadline, as applicable.
“
Sale Assets
” is defined in
Section 5.2(a)
.
“
Second Amended Omnibus Agreement
” is defined in the recitals to this Agreement.
“
Second ROFR Acceptance Deadline
” is defined in
Section 5.2(a)
.
“
Sinclair Transferred Assets
” means the HEP Tulsa Assets as defined in the Asset Sale and Purchase Agreement dated October 19, 2009 by and among Holly Tulsa, HEP Tulsa and Sinclair.
“
Sixth Amended Omnibus Agreement
” is defined in the introduction to this Agreement.
“
Subject Assets
” is defined in
Section 2.2(c)
.
“
Subsidiary
” means, with respect to any Person, (a) a corporation of which more than 50% of the voting power of shares entitled (without regard to the occurrence of any contingency) to vote in the election of directors or other governing body of such corporation is owned, directly or indirectly, at the date of determination, by such Person, by one or more Subsidiaries of such Person or a combination thereof, (b) a partnership (whether general or limited) in which such Person or a Subsidiary of such Person is, at the date of determination, a general or limited partner of such partnership, but only if more than 50% of the partnership interests of such partnership (considering all of the partnership interests of the partnership as a single class) is owned, directly or indirectly, at the date of determination, by such Person, by one or more Subsidiaries of such Person, or a combination thereof, or (c) any other Person (other than a corporation or a partnership) in which such Person, one or more Subsidiaries of such Person, or a combination thereof, directly or indirectly, at the date of determination, has (i) at least a majority ownership interest or (ii) the power to elect or direct the election of a majority of the directors or other governing body of such Person.
“
Third Amended Omnibus Agreement
” is defined in the recitals to this Agreement.
“
Toxic Tort
” means a claim or cause of action arising from personal injury or property damage incurred by the plaintiff that is alleged to have been caused by exposure to, or contamination by, Hazardous Substances that have been released into the environment by or as a result of the actions or omissions of the defendant.
“
Tulsa Interconnecting Pipelines
” means the Interconnecting Pipelines as defined in the Tulsa Throughput Agreement.
“
Tulsa Throughput Agreement
” is defined in the recitals to this Agreement.
“
Tulsa Transferred Assets
” means the Transferred Assets as defined in the Asset Purchase Agreement, dated August 1, 2009, between Holly Refining & Marketing – Tulsa LLC, a Delaware limited liability company, as the seller, and HEP Tulsa LLC, a Delaware limited liability company, as the buyer.
“
Transfer
” including the correlative terms “
Transferring
” or “
Transferred
” means any direct or indirect transfer, assignment, sale, gift, pledge, hypothecation or other encumbrance, or any other disposition (whether voluntary, involuntary or by operation of law) of the Assets.
“
Transferred Tanks
” is defined in
Section 3.1(a)(iii)
.
“
UNEV LLC Interest Purchase Agreement
” is defined in the recitals to this Agreement.
“
UNEV Pipeline
” means, collectively, an approximately 400 mile, 12-inch refined products pipeline currently running from Woods Cross, Utah to Las Vegas, Nevada, related products terminals in or near Cedar City, Utah to Las Vegas, Nevada and other related assets owned by UNEV Pipeline, LLC.
“
UNEV Profits Interest
” means the membership interest in HEP UNEV held directly or indirectly by Holly.
“
Units
” is defined in the Partnership Agreement.
“
Voting Securities
” means securities of any class of a Person entitling the holders thereof to vote on a regular basis in the election of members of the board of directors or other governing body of such Person.
Article II
Business Opportunities
2.1
Restricted Businesses
. For so long as a Holly Group Member controls the Partnership, and except as permitted by
Section 2.2
, Holly GP and each of the Holly Group Members shall be prohibited from engaging in or acquiring or investing in any business having assets engaged in the following businesses (the “
Restricted Businesses
”): the ownership and/or operation of crude oil pipelines or terminals, intermediate product pipelines or terminals, refined products pipelines or terminals, truck racks or crude oil gathering systems in the continental United States.
2.2
Permitted Exceptions
. Notwithstanding any provision of
Section 2.1
to the contrary, Holly GP and the Holly Group Members may engage in the following activities under the following circumstances:
(a)
the ownership and/or operation of any of the Retained Assets (including replacements of the Retained Assets);
(b)
any Restricted Business conducted by a Holly Group Member or Holly GP with the approval of the General Partner;
(c)
the ownership and/or operation of any asset or group of related assets used in the activities described in
Section 2.1
that are acquired or constructed by a Holly Group Member or Holly GP after the Closing Date (the “
Subject Assets
”) if, in the case of an acquisition, the fair market value of the Subject Assets (as determined in good faith by the Board of Directors of Holly), or, in the case of construction, the estimated construction cost of the Subject Assets (as determined in good faith by the Board of Directors of Holly), is less than $5 million at the time of such acquisition or completion of construction, as the case may be;
(d)
the ownership and/or operation of any Subject Assets acquired by a Holly Group Member or Holly GP after the Closing Date with a fair market value (as determined in good faith by the Board of Directors of Holly) equal to or greater than $5 million at the time of the acquisition;
provided
, the Partnership has been offered the opportunity to purchase the Subject Assets in accordance with
Section 2.3
and the Partnership has elected not to purchase the Subject Assets;
(e)
the ownership and/or operation of any Subject Assets constructed by a Holly Group Member or Holly GP after the Closing Date with a construction cost (as determined in good faith by the Board of Directors of Holly) equal to or greater than $5 million at the time of completion of construction that the Partnership has been offered the opportunity to purchase in accordance with
Section 2.3
and the Partnership has elected not to purchase; and
(f)
the ownership of the UNEV Profits Interest.
2.3
Procedures
.
(a)
In the event that Holly GP or a Holly Group Member becomes aware of an opportunity to acquire Subject Assets with a fair market value (as determined in good faith by the Board of Directors of Holly) equal to or greater than $5 million, then subject to
Section 2.3(b)
, then as soon as practicable, Holly GP or such Holly Group Member shall notify the General Partner of such opportunity and deliver to the General Partner, or provide the General Partner access to, all information prepared by or on behalf of, or material information submitted or delivered to, Holly GP or such Holly Group Member relating to such potential transaction. As soon as practicable, but in any event within 30 days after receipt of such notification and information, the General Partner, on behalf of the Partnership, shall notify Holly GP or the Holly Group Member that either (1) the General Partner, on behalf of the Partnership, has elected not to cause a Partnership Group Member to pursue the opportunity to purchase the Subject Assets, or (2) the General Partner, on behalf of the Partnership, has elected to cause a Partnership Group Member to pursue the opportunity to purchase the Subject Assets. If, at any time, the General Partner abandons such opportunity (as evidenced in writing by the General Partner following the request of Holly GP or the Holly Group Member), Holly GP or the Holly Group Member under this
Section 2.3(a)
may pursue such opportunity. Any Subject Assets which are permitted to be acquired by Holly GP or a Holly Group Member must be so acquired (i) within 12 months of the later to occur of (a) the date that Holly GP or the Holly Group Member becomes able to pursue such acquisition in accordance with the provisions of this
Section 2.3(a)
, and (b) the date upon which all required governmental approvals to consummate such acquisition have been obtained, and (ii) on terms not materially more favorable to Holly GP or the Holly Group Member than were offered to the Partnership. If either of these conditions are not satisfied, the opportunity must be reoffered to the Partnership in accordance with this
Section 2.3(a)
.
(b)
Notwithstanding
Section 2.3(a)
, in the event that (i) Holly GP or a Holly Group Member becomes aware of an opportunity to make an acquisition that includes both Subject Assets and assets that are not Subject Assets and the Subject Assets have a fair market value (as determined in good faith by the Board of Directors of Holly) equal to or greater than $5 million but comprise less than half of the fair market value (as determined in good faith by the Board of Directors of Holly) of the total assets being considered for acquisition or (ii) Holly GP or a Holly Group Member desires to construct Subject Assets with an estimated construction cost (as determined in good faith by the Board of Directors of Holly) equal to or greater than $5 million, then Holly GP or the Holly Group Member may make such acquisition without first offering the opportunity to the Partnership or may construct such Subject Assets as long as it complies with the following procedures:
(i)
Within 90 days after the consummation of the acquisition or the completion of construction by Holly GP or a Holly Group Member of the Subject Assets, as the case may be, Holly GP or the Holly Group Member shall notify the General Partner in writing of such acquisition or construction and offer the Partnership Group the opportunity to purchase such Subject Assets in accordance with this
Section 2.3(b)
(the “
Offer
”). The Offer shall set forth the terms relating to the purchase of the Subject Assets and, if Holly GP or any Holly Group Member desires to utilize the Subject Assets, the Offer will also include the commercially reasonable terms on which the Partnership Group will provide services to Holly GP or the Holly Group Member to enable Holly GP or the Holly Group Member to utilize the Subject Assets. As soon as practicable, but in any event within 30 days after receipt of such written notification, the General Partner shall notify Holly GP or the Holly Group Member in writing that either (x) the General Partner has elected not to cause a Partnership Group Member to purchase the Subject Assets, in which event Holly GP or the Holly Group Member shall be forever free to continue to own or operate such Subject Assets, or (y) the General Partner has elected to cause a Partnership Group Member to purchase the Subject Assets, in which event the following procedures shall apply.
(ii)
If Holly GP or the Holly Group Member and the General Partner within 60 days after receipt by the General Partner of the Offer are able to agree on the fair market value of the Subject Assets that are subject to the Offer and the other terms of the Offer including, without limitation, the terms, if any, on which the Partnership Group will provide services to Holly GP or the Holly Group Member to enable it to utilize the Subject Assets, a Partnership Group Member shall purchase the Subject Assets for the agreed upon fair market value as soon as commercially practicable after such agreement has been reached and, if applicable, enter into an agreement with Holly GP or the Holly Group Member to provide services in a manner consistent with the Offer.
(iii)
If Holly GP or the Holly Group Member and the General Partner are unable to agree within 60 days after receipt by the General Partner of the Offer on the fair market value of the Subject Assets that are subject to the Offer or the other terms of the Offer including, if applicable, the terms on which the Partnership Group will provide services to Holly GP or the Holly Group Member to enable it to utilize the Subject Assets, Holly GP or the Holly Entity and the General Partner will engage a mutually agreed upon investment banking firm to determine the fair market value of the Subject Assets and/or the other terms on which the Partnership Group and Holly GP or the Holly Group Member are unable to agree. Such investment banking firm will determine the fair market value of the Subject Assets and/or the other terms on which the Partnership Group and Holly GP or the Holly Group Member are unable to agree within 30 days of its engagement and furnish Holly GP or the Holly Group Member and the General Partner its determination. The fees of the investment banking firm will be split equally between Holly GP or the Holly Group Member and the Partnership Group. Once the investment banking firm has submitted its determination of the fair market value of the Subject Assets and/or the other terms on which the Partnership Group and Holly GP or the Holly Group Member are unable to agree, the General Partner will have the right, but not the obligation, to cause a Partnership Group Member to purchase the Subject Assets pursuant to the Offer as modified by the determination of the investment banking firm. The Partnership Group will provide written notice of its decision to Holly GP or the Holly Group Member within 30 days after the investment banking firm has submitted its determination. Failure to provide such notice within such 30-day period shall be deemed to constitute a decision not to purchase the Subject Assets. If the General Partner elects to cause a Partnership Group Member to purchase the Subject Assets, then the Partnership Group Member shall purchase the Subject Assets pursuant to the Offer as modified by the determination of the investment banking firm as soon as commercially practicable after such determination and, if applicable, enter into an agreement with Holly GP or the Holly Group Member to provide services in a manner consistent with the Offer, as modified by the determination of the investment banking firm, if applicable.
2.4
Scope of Prohibition
. Except as provided in this
Article II
and the Partnership Agreement, Holly GP and each Holly Group Member shall be free to engage in any business activity, including those that may be in direct competition with any Partnership Group Member.
2.5
Enforcement
. Holly GP and the Holly Group Members agree and acknowledge that the Partnership Group does not have an adequate remedy at law for the breach by Holly GP and the Holly Group of the covenants and agreements set forth in this
Article II
, and that any breach by Holly GP or the Holly Group of the covenants and agreements set forth in this
Article II
would result in irreparable injury to the Partnership Group. Holly GP and the Holly Group Members further agree and acknowledge that any Partnership Group Member may, in addition to the other remedies which may be available to the Partnership Group, file a suit in equity to enjoin Holly GP and the Holly Group from such breach, and consent to the issuance of injunctive relief under this Agreement.
2.6
Limitation on Acquisitions of Subject Assets by Partnership Group Members
. Notwithstanding anything in this Agreement to the contrary, a Partnership Group Member who is not a party to this Agreement is prohibited from acquiring Subject Assets. In the event the General Partner desires a Partnership Group Member who is not a party to this Agreement to acquire any Subject Assets, then the General Partner shall first cause such Partnership Group Member to become a party to this Agreement.
Article III
Indemnification
3.1
Environmental Indemnification
.
(g)
Subject to
Section 3.2
, the Holly Entities shall indemnify, defend and hold harmless the Partnership Entities for a period of 10 years after the Closing Date or, solely with respect to the 2008 Crude Pipelines, Tanks and Related Assets, 15 years after the Closing Date, as applicable, from and against environmental and Toxic Tort losses (including, without limitation, economic losses, diminution in value suffered by third parties, and lost profits), damages, injuries (including, without limitation, personal injury and death), liabilities, claims, demands, causes of action, judgments, settlements, fines, penalties, costs, and expenses (including, without limitation, court costs and reasonable attorney’s and expert’s fees) of any and every kind or character, known or unknown, fixed or contingent, suffered or incurred by the Partnership Entities or any third party to the extent arising out of:
(i)
any violation or correction of violation of Environmental Laws associated with the ownership or operation of the Assets,
or
(ii)
any event or condition associated with ownership or operation of the Assets (including, without limitation, the presence of Hazardous Substances on, under, about or migrating to or from the Assets or the disposal or release of Hazardous Substances generated by operation of the Assets at non-Asset locations), including, without limitation, (c) the cost and expense of any investigation, assessment, evaluation, monitoring, containment, cleanup, repair, restoration, remediation, or other corrective action required or necessary under Environmental Laws, (d) the cost or expense of the preparation and implementation of any closure, remedial, corrective action, or other plans required or necessary under Environmental Laws, and (e) the cost and expense for any environmental or Toxic Tort pre-trial, trial, or appellate legal or litigation support work;
but only to the extent that such violation complained of under
Section 3.1(a)(i)
or such events or conditions included under
Section 3.1(a)(ii)
occurred before the Closing Date (collectively, “
Covered Environmental Losses
”); or
(iii)
the operation or ownership by Holly and its Affiliates of any assets not constituting part of the Assets, including but not limited to underground pipelines retained by the Seller Parties which serve the refineries in Lovington, New Mexico, Artesia, New Mexico and Woods Cross, Utah or the tanks that are part of the 2008 Crude Pipelines, Tanks and Related Assets to the extent not transferred to the Partnership Entities (the “
Transferred Tanks
”), except to the extent arising out of the negligent acts or omissions or willful misconduct of a member of the Partnership Entities.
(h)
To the extent that a good faith claim by the Partnership Entities for indemnification under
Section 3.1(a)(i)
or
Section 3.1(a)(ii)
arises from events or conditions at the Transferred Tanks or the soil immediately underneath the Transferred Tanks or the Transferred Tanks’ secondary containment, and the Holly Entities refuse to provide such indemnification, then the burden of proof shall be on the Holly Entities to demonstrate that the events or conditions giving rise to the claim arose after the Closing Date.
(i)
The Holly Entities shall, during the period that commences on the Closing Date and ends five (5) years thereafter (the “
Initial Tank Inspection Period
”), reimburse the Partnership Entities for the actual costs associated with the first regularly scheduled API 653 inspection (the “
Initial Tank Inspections
”) and the costs associated with the replacement of the tank mixers on each of the Transferred Tanks after the Closing Date and any repairs required to be made to the Transferred Tanks as a result of any discovery made during the Initial Tank Inspections;
provided
,
however
, that (f) the Holly Entities shall not reimburse the Partnership Entities with respect to the relocated crude oil Tank 437 in the Artesia refinery complex and the new crude oil tank to replace crude oil Tank 439 in the Artesia refinery complex more particularly described in the definition of 2008 Crude Pipelines, Tanks and Related Assets, and (g) upon expiration of the Initial Tank Inspection Period, all of the obligations of the Holly Entities pursuant to this
Section 3.1(c)
shall terminate, except that the Initial Tank Inspection Period shall be extended if, and only to the extent that (h) inaccessibility of the Transferred Tanks during the Initial Tank Inspection Period caused the delay of an Initial Tank Inspection originally scheduled to be performed during the Initial Tank Inspection Period, and (i) the Holly Entities received notice from the Partnership Entities regarding such delay at the time it occurred.
(j)
The Partnership Entities shall indemnify, defend and hold harmless the Holly Entities from and against environmental and Toxic Tort losses (including, without limitation, economic losses, diminution in value and lost profits suffered by third parties), damages, injuries (including, without limitation, personal injury and death), liabilities, claims, demands, causes of action, judgments, settlements, fines, penalties, costs, and expenses (including, without limitation, court costs and reasonable attorney’s and expert’s fees) of any and every kind or character, known or unknown, fixed or contingent, suffered or incurred by the Holly Entities or any third party to the extent arising out of:
(i)
any violation or correction of violation of Environmental Laws associated with the operation of the Assets by a Person other than a Holly Entity or ownership and operation of the Assets by a Person other than a Holly Entity, or
(ii)
any event or condition associated with the operation of the Assets by a Person other than a Holly Entity or ownership and operation of the Assets by a Person other than a Holly Entity (including, but not limited to, the presence of Hazardous Substances on, under, about or migrating to or from the Assets or the disposal or release of Hazardous Substances generated by operation of the Assets at non-Asset locations) except, where a Holly Entity is operating an Asset, to the extent resulting from the negligent acts or omissions or willful misconduct of such Holly Entity including, without limitation, (j) the cost and expense of any investigation, assessment, evaluation, monitoring, containment, cleanup, repair, restoration, remediation, or other corrective action required or necessary under Environmental Laws, (k) the cost or expense of the preparation and implementation of any closure, remedial, corrective action, or other plans required or necessary under Environmental Laws, and (l) the cost and expense for any environmental or Toxic Tort pre-trial, trial, or appellate legal or litigation support work;
but only to the extent such violation complained of under
Section 3.1(d)(i)
or such events or conditions included under
Section 3.1(d)(ii)
occurred after the Closing Date;
provided
,
however
, that nothing stated above shall make the Partnership Entities responsible for any post-Closing Date negligent actions or omissions or willful misconduct by the Holly Entities.
(k)
Notwithstanding anything in this Agreement to the contrary, as used in
Section 3.1(a)
the definition of Assets shall not include the 16” Lovington/Artesia Intermediate Pipeline, the Beeson Pipeline, the Roadrunner Pipeline, the Tulsa Interconnecting Pipelines or the UNEV Pipeline.
3.2
Limitations Regarding Environmental Indemnification
. The aggregate liability of the Holly Entities
in respect of all Covered Environmental Losses under
Section 3.1(a)
shall not exceed (1) with respect to Assets other than the 2008 Crude Pipelines, Tanks and Related Assets, $15.0 million plus an additional $2.5 million in the case of Covered Environmental Losses related to the 8” and 10” Lovington/Artesia Intermediate Pipelines (for clarity, the first $15,000,000 million limit would apply to Covered Environmental Losses associated with the 8” and 10” Lovington/Artesia Intermediate Pipelines and the 2004 Product Pipelines, Terminal and Related Assets, while the limit between $15,000,000 and $17,500,000 would apply only to Covered Environmental Losses associated with the 8” and 10” Lovington/Artesia Intermediate Pipelines) and (2) $7.5 million in the case of Covered Environmental Losses related to the 2008 Crude Pipelines, Tanks and Related Assets. The Holly Entities
will not have any obligation under
Section 3.1
with respect to any Assets until the Covered Environmental Losses of the Partnership Entities exceed $200,000.
3.3
Right of Way Indemnification
. The Holly Entities
shall indemnify, defend and hold harmless the Partnership Entities from and against any losses, damages, liabilities, claims, demands, causes of action, judgments, settlements, fines, penalties, costs, and expenses (including, without limitation, court costs and reasonable attorney's and expert's fees) of any and every kind or character, known or unknown, fixed or contingent, suffered or incurred by the Partnership Entities to the extent arising out of (m) the failure of the applicable Partnership Entity to be the owner of such valid and indefeasible easement rights or fee ownership interests in and to the lands on which any pipeline or related pump station, tank farm or equipment conveyed or contributed or otherwise Transferred (including by way of a Transfer of the ownership interest of a Person or by operation of law) to the applicable Partnership Entity on the Closing Date is located as of the Closing Date; (n) the failure of the applicable Partnership Entity to have the consents, licenses and permits necessary to allow any such pipeline referred to in clause (a) of this
Section 3.3
to cross the roads, waterways, railroads and other areas upon which any such pipeline is located as of the Closing Date; and (o) the cost of curing any condition set forth in clause (a) or (b) above that does not allow any Asset to be operated in accordance with Prudent Industry Practice, to the extent that the Holly Entities are notified in writing of any of the foregoing within 10 years after the Closing Date or, solely with respect to the 2008 Crude Pipelines, Tanks and Related Assets, 15 years after the Closing Date, as applicable.
3.4
Additional Indemnification
.
(a)
In addition to and not in limitation of the indemnification provided under
Section 3.1(a)
and
Section 3.3
, the Holly Entities
shall indemnify, defend, and hold harmless the Partnership Entities from and against any losses, damages, liabilities, claims, demands, causes of action, judgments, settlements, fines, penalties, costs, and expenses (including, without limitation, court costs and reasonable attorney’s and expert’s fees) of any and every kind or character, known or unknown, fixed or contingent, suffered or incurred by the Partnership Entities to the extent arising out of (p) events and conditions associated with the operation of the Assets occurring before the Closing Date (other than Covered Environmental Losses which are provided for under
Section 3.1
and
Section 3.2
)
to the extent that the Holly Entities are notified in writing of any of the foregoing within five years after the Closing Date, (q) all legal actions pending against the Holly Entities on July 13, 2004, (r) the completion of remediation projects at the Partnership’s El Paso, Albuquerque and Mountain Home terminals that were ongoing or scheduled as of July 13, 2004, (s) events and conditions associated with the Retained Assets and whether occurring before or after the Closing Date, and (t) all federal, state and local tax liabilities attributable to the operation or ownership of the Assets prior to the Closing Date, including any such tax liabilities of the Holly Entities that may result from the consummation of the formation transactions for the Partnership Entities and the General Partner.
(b)
In addition to and not in limitation of the indemnification provided under
Section 3.1(b)
or the Partnership Agreement, the Partnership Entities shall indemnify, defend, and hold harmless the Holly Entities from and against any losses, damages, liabilities, claims, demands, causes of action, judgments, settlements, fines, penalties, costs, and expenses (including, without limitation, court costs and reasonable attorney’s and expert’s fees) of any and every kind or character, known or unknown, fixed or contingent, suffered or incurred by the Holly Entities to the extent arising out of events and conditions associated with the operation of the Assets occurring on or after the Closing Date (other than Covered Environmental Losses which are provided for under
Section 3.1
except, where a Holly Entity is operating an Asset, to the extent resulting from the negligent acts or omissions or willful misconduct of such Holly Entity), unless such indemnification would not be permitted under the Partnership Agreement by reason of one of the provisos contained in
Section 7.7(a)
of the Partnership Agreement.
3.5
Indemnification Procedures
.
(a)
The Indemnified Party agrees that promptly after it becomes aware of facts giving rise to a claim for indemnification under this
Article III
, it will provide notice thereof in writing to the Indemnifying Party, specifying the nature of and specific basis for such claim.
(b)
The Indemnifying Party shall have the right to control all aspects of the defense of (and any counterclaims with respect to) any claims brought against the Indemnified Party that are covered by the indemnification under this
Article III
, including, without limitation, the selection of counsel, determination of whether to appeal any decision of any court and the settling of any such matter or any issues relating thereto;
provided
,
however
, that no such settlement shall be entered into without the consent of the Indemnified Party unless it includes a full release of the Indemnified Party from such matter or issues, as the case may be.
(c)
The Indemnified Party agrees to cooperate fully with the Indemnifying Party, with respect to all aspects of the defense of any claims covered by the indemnification under this
Article III
, including, without limitation, the prompt furnishing to the Indemnifying Party of any correspondence or other notice relating thereto that the Indemnified Party may receive, permitting the name of the Indemnified Party to be utilized in connection with such defense, the making available to the Indemnifying Party of any files, records or other information of the Indemnified Party that the Indemnifying Party considers relevant to such defense and the making available to the Indemnifying Party of any employees of the Indemnified Party;
provided
,
however
, that in connection therewith the Indemnifying Party agrees to use reasonable efforts to minimize the impact thereof on the operations of the Indemnified Party and further agrees to maintain the confidentiality of all files, records, and other information furnished by the Indemnified Party pursuant to this
Section 3.5
. In no event shall the obligation of the Indemnified Party to cooperate with the Indemnifying Party as set forth in the immediately preceding sentence be construed as imposing upon the Indemnified Party an obligation to hire and pay for counsel in connection with the defense of any claims covered by the indemnification set forth in this
Article III
;
provided
,
however
, that the Indemnified Party may, at its own option, cost and expense, hire and pay for counsel in connection with any such defense. The Indemnifying Party agrees to keep any such counsel hired by the Indemnified Party informed as to the status of any such defense, but the Indemnifying Party shall have the right to retain sole control over such defense.
(d)
In determining the amount of any loss, cost, damage or expense for which the Indemnified Party is entitled to indemnification under this Agreement, the gross amount of the indemnification will be reduced by all amounts recovered by the Indemnified Party under contractual indemnities (other than insurance policies) from third Persons. An Indemnified Party shall be obligated to pursue all contractual indemnities that such Indemnified Party has with third Persons outside of this Agreement,
provided
,
however
, if the Indemnified Party’s right to such indemnification is assignable, the Indemnified Party may, in its sole discretion and in lieu of pursuing such claim, elect to assign such indemnification claim to the Indemnifying Party to pursue and shall reasonably cooperate with the Indemnifying Party (including, without limitation, making its relevant books, records, officers, information and testimony reasonably available to the Indemnifying Party) in the Indemnifying Party’s pursuit of such claim. In the event the Indemnified Party recovers under a contractual indemnity from a third Person outside of this Agreement, the amount recovered, less the reasonable out-of-pocket fees and expenses incurred by the Indemnified Party in recovering such amounts, shall reduce the amount such Indemnified Party may recover under this
Article III
and if the Indemnified Party receives any such amounts subsequent to an indemnification payment by the Indemnifying Party in respect of such losses, then such Indemnified Party shall promptly reimburse the Indemnifying Party for any payment made or expense incurred by such Indemnifying Party in connection with providing such indemnification payment up to the amount so received by the Indemnified Party.
(e)
The date on which notification of a claim for indemnification is received by the Indemnifying Party shall determine whether such claim is timely made.
3.6
Limitation on Indemnification Obligations
.
(a)
Notwithstanding anything in this Agreement to the contrary, when referring to the indemnification obligations of the Holly Entities in
Article III
, the definition of Holly Entities shall be deemed to mean solely (u) the Holly Entity or Holly Entities that own or operate, or owned or operated immediately prior to the transfer to the Partnership Entities, the Retained Asset, Asset or other property in question with respect to which indemnification is sought by reason of such Holly Entity’s or Holly Entities’ ownership or operation of the Retained Asset, Asset or other property in question or that is responsible for causing such loss, damage, injury, judgment, claim, cost, expense or other liability suffered or incurred by the Partnership Entities for which it is entitled to indemnification under
Article III
and (v) Holly.
(b)
Notwithstanding anything in this Agreement to the contrary, when referring to the indemnification obligations of the Partnership Entities in
Article III
, the definition of Partnership Entities shall be deemed to mean solely (w) the Partnership Entity or Partnership Entities that own or operate, or owned or operated, the Asset or other property in Partnership Entity’s or Partnership Group Entities’ ownership or operation of the Asset or other property in question or that is responsible for causing such loss, damage, injury, judgment, claim, cost, expense or other liability suffered or incurred by the Holly Entities for which they are entitled to indemnification under
Article III
, (x) the Partnership and (y) the Operating Partnership.
(c)
For the avoidance of doubt, any indemnification obligations of the Holly Entities in
Article III
with respect to any indemnifiable losses incurred by or attributable to the UNEV Pipeline shall be (i) limited to an amount that is the product of (x) the amount of such losses, multiplied by (y) HEP UNEV’s direct or indirect percentage ownership interest in the UNEV Pipeline at the time such losses were incurred and (ii) payable to, for the benefit of and recoverable solely by HEP UNEV or any Partnership Entity designated by HEP UNEV (and not by UNEV Pipeline, LLC).
3.7
Exclusion from Indemnification
. Notwithstanding anything in this Agreement to the contrary, as used in
Article III
the definition of Assets shall not include the Tulsa Transferred Assets, the Sinclair Transferred Assets or the Additional Tulsa East Assets, though the parties hereto acknowledge the environmental indemnity provided among certain of the Holly Entities and HEP Entities with respect to the Sinclair Transferred Assets and the Additional Tulsa East Assets contained in the Tulsa Throughput Agreement.
Article IV
General and Administrative Expenses
4.1
General
(c)
The Partnership will pay Holly an administrative fee (the “
Administrative Fee
”) in the amount set forth on
Schedule I
to this Agreement, payable in equal quarterly installments, for the provision by Holly and its Affiliates for the Partnership Group’s benefit of all the general and administrative services that Holly and its Affiliates have traditionally provided in connection with the Assets including, without limitation, the general and administrative services listed on
Schedule I
to this Agreement. The General Partner may agree on behalf of the Partnership to increases in the Administrative Fee in connection with expansions of the operations of the Partnership Group through the acquisition or construction of new assets or businesses.
(d)
At the end of each year, the Partnership will have the right to submit to Holly a proposal to reduce the amount of the Administrative Fee for that year if the Partnership believes, in good faith, that the general and administrative services performed by Holly and its Affiliates for the benefit of the Partnership Group for the year in question do not justify payment of the full Administrative Fee for that year. If the Partnership submits such a proposal to Holly, Holly agrees that it will negotiate in good faith with the Partnership to determine if the Administrative Fee for that year should be reduced and, if so, by how much.
(e)
The Administrative Fee shall not include and the Partnership Group shall reimburse Holly and its Affiliates for:
(i)
salaries of employees of Holly GP, to the extent, but only to the extent, such employees perform services for the Partnership Group;
(ii)
the cost of employee benefits relating to employees of Holly GP, such as 401(k), pension, and health insurance benefits, to the extent, but only to the extent, such employees perform services for the Partnership Group; and
(iii)
all sales, use, excise, value added or similar taxes, if any, that may be applicable from time to time in respect of the services provided by the Holly and its Affiliates to the Partnership pursuant to
Section 4.1(a)
.
(f)
Either Holly, on the one hand, or the Partnership, on the other hand, may terminate this
Article IV
, by providing the other with written notice of its election to do so at least six months prior to the proposed date of termination.
Article V
Right of First Refusal
5.1
Holly Right of First Refusal: Prohibition on Transfer of Refinery Related Assets
.
(a)
The Partnership Entities hereby grant to Holly a right of first refusal on any proposed Transfer (other than a grant of a security interest to a bona fide third-party lender or a Transfer to another Partnership Group Member) of the Assets that serve the Holly Entities’ refineries.
(b)
The Partnership Entities are prohibited from Transferring any of the Assets that serve the Holly Entities’ refineries to a Partnership Group Member that is not a party to this Agreement. In the event the Partnership Entities wish to Transfer any of the Assets that serve the Holly Entities’ refineries to a Partnership Group Member that is not a party to this Agreement, they shall first cause the proposed transferee Partnership Group Member to become a party to this Agreement.
(c)
The Parties acknowledge that all potential Transfers of Sale Assets pursuant to this
Article V
are subject to obtaining any and all required written consents of governmental authorities and other third parties and to the terms of all existing agreements in respect of the Sale Assets.
(d)
Notwithstanding anything in this Agreement to the contrary, as used in
Article V
the definition of Assets shall not include the Tulsa Transferred Assets or the UNEV Pipeline, but shall expressly include the equity interests of UNEV Pipeline, LLC then owned directly or indirectly by the Partnership Entities.
5.2
Procedures
.
(c)
If a Partnership Entity proposes to Transfer any of the Assets that serve the Holly Entities’ refineries to any Person pursuant to a bona fide third-party offer (an “
Acquisition Proposal
”), then the Partnership shall promptly give written notice (a “
Disposition Notice
”) thereof to Holly. The Disposition Notice shall set forth the following information in respect of the proposed Transfer: the name and address of the prospective acquiror (the “
Proposed Transferee
”), the Assets subject to the Acquisition Proposal (the “
Sale Assets
”), the purchase price offered by such Proposed Transferee (the “
Offer Price
”), reasonable detail concerning any non-cash portion of the proposed consideration, if any, to allow Holly to reasonably determine the fair market value of such non-cash consideration, the Partnership Entities’ estimate of the fair market value of any non-cash consideration and all other material terms and conditions of the Acquisition Proposal that are then known to the Partnership Entities. To the extent the Proposed Transferee’s offer consists of consideration other than cash (or in addition to cash) the Offer Price shall be deemed equal to the amount of any such cash plus the fair market value of such non-cash consideration. In the event Holly and the Partnership Entities agree as to the fair market value of any non-cash consideration, Holly will provide written notice of its decision regarding the exercise of its right of first refusal to purchase the Sale Assets within 30 days of its receipt of the Disposition Notice (the “
First ROFR Acceptance Deadline
”). Failure to provide such notice within such 30-day period shall be deemed to constitute a decision not to purchase the Sale Assets. In the event (z) Holly’s determination of the fair market value of any non-cash consideration described in the Disposition Notice (to be determined by Holly within 30 days of receipt of such Disposition Notice) is less than the fair market value of such consideration as determined by the Partnership Entities in the Disposition Notice and (aa) Holly and the Partnership Entities are unable to mutually agree upon the fair market value of such non-cash consideration within 30 days after Holly notifies the Partnership Entities of its determination thereof, the Partnership Entities and Holly shall engage a mutually-agreed-upon investment banking firm to determine the fair market value of the non-cash consideration. Such investment banking firm shall be instructed to return its decision within 30 days after all material information is submitted thereto, which decision shall be final. The fees of the investment banking firm will be split equally between Holly and the Partnership Entities. Holly will provide written notice of its decision regarding the exercise of its right of first refusal to purchase the Sale Assets to the Partnership Entities within 30 days after the investment banking firm has submitted its determination (the “
Second ROFR Acceptance Deadline
”). Failure to provide such notice within such 30-day period shall be deemed to constitute a decision by Holly not to purchase the Sale Assets. If Holly fails to exercise a right during any applicable period set forth in this
Section 5.2(a)
, Holly shall be deemed to have waived its rights with respect to such proposed disposition of the Sale Assets, but not with respect to any future offer of Assets.
(d)
If Holly chooses to exercise its right of first refusal to purchase the Sale Assets under
Section 5.2(a)
, Holly and the Partnership Entities shall enter into a purchase and sale agreement for the Sale Assets which shall include the following terms:
(iv)
Holly will agree to deliver cash for the Offer Price (or any other consideration agreed to by Holly and the Partnership Entities (each in their sole discretion));
(v)
the Partnership Entities will represent that they have good and indefeasible title to the Sale Assets, subject to all recorded and unrecorded matters and all physical conditions and other matters in existence on the closing date for the purchase of the Sale Assets, plus any other such matters as Holly may approve, which approval will not be unreasonably withheld. If Holly desires to obtain any title insurance with respect to the Sale Assets, the full cost and expense of obtaining the same (including but not limited to the cost of title examination, document duplication and policy premium) shall be borne by Holly;
(vi)
the Partnership Entities will grant to Holly the right, exercisable at Holly’s risk and expense, to make such surveys, tests and inspections of the Sale Assets as Holly may deem desirable, so long as such surveys, tests or inspections do not damage the Sale Assets or interfere with the activities of the Partnership Entities thereon and so long as Holly has furnished the Partnership Entities with evidence that adequate liability insurance is in full force and effect;
(vii)
Holly will have the right to terminate its obligation to purchase the Sale Assets under this
Article V
if the results of any searches, surveys, tests or inspections conducted pursuant to
Section 5.2(b)(ii)
or
Section 5.2(b)(iii)
above are, in the reasonable opinion of Holly, unsatisfactory;
(viii)
the closing date for the purchase of the Sale Assets shall, unless otherwise agreed to by Holly and the Partnership Entities, occur no later than 90 days following receipt by the Partnership Entities of written notice by Holly of its intention to exercise its option to purchase the Sale Assets pursuant to
Section 5.2(a)
;
(ix)
the Partnership Entities shall execute, have acknowledged and deliver to Holly a special warranty deed, assignment of easement, or comparable document, as appropriate, in the applicable jurisdiction, on the closing date for the purchase of the Sale Assets constituting real property interests conveying the Sale Assets unto Holly free and clear of all encumbrances created by the Partnership Entities other than those set forth in
Section 5.2(b)(ii)
above;
(x)
the sale of any Sale Assets shall be made on an “as is,” “where is” and “with all faults” basis, and the instruments conveying such Sale Assets shall contain appropriate disclaimers; and
(xi)
neither the Partnership Entities nor Holly shall have any obligation to sell or buy the Sale Assets if any of the material consents referred to in
Section 5.1(c)
have not been obtained or such sale or purchase is prohibited by Applicable Law.
(e)
Holly and the Partnership Entities shall cooperate in good faith in obtaining all necessary governmental and other third Person approvals, waivers and consents required for the closing. Any such closing shall be delayed, to the extent required, until the third Business Day following the expiration of any required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended;
provided
,
however
, that such delay shall not exceed 120 days and, if governmental approvals and waiting periods shall not have been obtained or expired, as the case may be, by such 120th day, then Holly shall be deemed to have waived its right of first refusal with respect to the Sale Assets described in the Disposition Notice and thereafter neither Holly nor the Partnership shall have any further obligation under this
Article V
with respect to such Sale Assets unless such Sale Assets again become subject to this
Article V
pursuant to
Section 5.2(d)
.
(f)
If the Transfer to the Proposed Transferee is not consummated in accordance with the terms of the Acquisition Proposal within the later of (bb) 180 days after the later of the applicable ROFR Acceptance Deadline, and (cc) 10 days after the satisfaction of all governmental approval or filing requirements, if any, the Acquisition Proposal shall be deemed to lapse, and the Partnership or Partnership Entity may not Transfer any of the Sale Assets described in the Disposition Notice without complying again with the provisions of this
Article V
if and to the extent then applicable.
Article VI
Holly Purchase Option
6.1
Option to Purchase Tulsa Transferred Assets
. The Parties acknowledge the purchase options and right of first refusal granted to an Affiliate of Holly with respect to the Tulsa Transferred Assets in the Purchase Option Agreement.
Article VII
Miscellaneous
7.1
Choice of Law
. This Agreement shall be subject to and governed by the laws of the State of Delaware, excluding any conflicts-of-law rule or principle that might refer the construction or interpretation of this Agreement to the laws of another state.
7.2
Arbitration Provision
. Any and all Arbitrable Disputes must be resolved through the use of binding arbitration using three arbitrators, in accordance with the Commercial Arbitration Rules of the American Arbitration Association, as supplemented to the extent necessary to determine any procedural appeal questions by the Federal Arbitration Act (Title 9 of the United States Code). If there is any inconsistency between this Section and the Commercial Arbitration Rules or the Federal Arbitration Act, the terms of this Section will control the rights and obligations of the parties. Arbitration must be initiated within the time limits set forth in this Agreement, or if no such limits apply, then within a reasonable time or the time period allowed by the applicable statute of limitations. Arbitration may be initiated by a party (“
Claimant
”) serving written notice on the other party (“
Respondent
”) that the Claimant elects to refer the Arbitrable Dispute to binding arbitration. Claimant’s notice initiating binding arbitration must identify the arbitrator Claimant has appointed. The Respondent shall respond to Claimant within 30 days after receipt of Claimant’s notice, identifying the arbitrator Respondent has appointed. If the Respondent fails for any reason to name an arbitrator within the 30 day period, Claimant shall petition the American Arbitration Association for appointment of an arbitrator for Respondent’s account. The two arbitrators so chosen shall select a third arbitrator within 30 days after the second arbitrator has been appointed. The Claimant will pay the compensation and expenses of the arbitrator named by it, and the Respondent will pay the compensation and expenses of the arbitrator named by or for it. The costs of petitioning for the appointment of an arbitrator, if any, shall be paid by Respondent. The Claimant and Respondent will each pay one-half of the compensation and expenses of the third arbitrator. All arbitrators must (3) be neutral parties who have never been officers, directors or employees of any of the Holly Entities, the Partnership Entities or any of their affiliates and (4) have not less than seven years experience in the petroleum transportation industry. The hearing will be conducted in Dallas, Texas and commence within 30 days after the selection of the third arbitrator. The Holly Entities, the Partnership Entities and the arbitrators shall proceed diligently and in good faith in order that the award may be made as promptly as possible. Except as provided in the Federal Arbitration Act, the decision of the arbitrators will be binding on and non-appealable by the parties hereto. The arbitrators shall have no right to grant or award indirect, consequential, punitive or exemplary damages of any kind. The Arbitrable Disputes may be arbitrated in a common proceeding along with disputes under other agreements between the Holly Entities, the Partnership Entities or their Affiliates to the extent that the issues raised in such disputes are related. Without the written consent of Holly, on behalf of the Holly Entities, and the Partnership, on behalf of the Partnership Entities, no unrelated disputes or third party disputes may be joined to an arbitration pursuant to this Agreement.
7.3
Notice
.
(a)
Any notice or other communication given under this Agreement shall be in writing and shall be (5) delivered personally, (6) sent by documented overnight delivery service, (7) sent by email transmission, or (8) sent by first class mail, postage prepaid (certified or registered mail, return receipt requested). Such notice shall be deemed to have been duly given (x) if received, on the date of the delivery, with a receipt for delivery, (y) if refused, on the date of the refused delivery, with a receipt for refusal, or (z) with respect to email transmissions, on the date the recipient confirms receipt. Notices or other communications shall be directed to the following addresses.
Notices to the Holly Entities:
HollyFrontier Corporation
2828 N. Harwood, Suite 1300
Dallas, Texas 75201
Attention: President
Email address: president@hollyfrontier.com
with a copy, which shall not constitute notice, but is required in order to give proper notice, to:
HollyFrontier Corporation
2828 N. Harwood, Suite 1300
Dallas, Texas 75201
Attention: General Counsel
Email address: generalcounsel@hollyfrontier.com
Notices to the Partnership Entities:
Holly Energy Partners, L.P.
c/o Holly Logistic Services, L.L.C.
2828 N. Harwood, Suite 1300
Dallas, Texas 75201
Attention: President
Email address: president@hollyenergy.com
with a copy, which shall not constitute notice, but is required in order to give proper notice, to:
Holly Energy Partners, L.P.
c/o Holly Logistic Services, L.L.C.
2828 N. Harwood, Suite 1300
Dallas, Texas 75201
Attention: General Counsel
Email address: generalcounsel@hollyenergy.com
(b)
Either Party may at any time change its address for service from time to time by giving notice to the other Party in accordance with this
Section 7.3
.
7.4
Entire Agreement
. This Agreement, together with the other agreements and instruments referred to herein, constitutes the entire agreement of the Parties relating to the matters contained herein, superseding all prior contracts or agreements, whether oral or written, relating to the matters contained herein.
7.5
Termination of Article II
. The provisions of
Article II
of this Agreement may be terminated by Holly upon a Change of Control of Holly.
7.6
Amendment or Modification
. No amendment or modification of this Agreement shall be valid unless it is in writing and signed by the parties hereto
.
No waiver of any provision of this Agreement shall be valid unless it is in writing and signed by the party against whom the waiver is sought to be enforced. Any of the exhibits or schedules to this Agreement may be amended, modified, revised or updated by the parties hereto if each of Holly (on behalf of the Holly Entities) and the Partnership (on behalf of the Partnership Entities) execute an amended, modified, revised or updated exhibit or schedule, as applicable, and attach it to this Agreement. Such amended, modified, revised or updated exhibits or schedules shall be sequentially numbered (e.g. Exhibit A‑1, Exhibit A‑2, etc.), dated and appended as an additional exhibit or schedule to this Agreement and shall replace the prior exhibit or schedule, as applicable, in its entirety, except as specified therein. No failure or delay in exercising any right hereunder, and no course of conduct, shall operate as a waiver of any provision of this Agreement. No single or partial exercise of a right hereunder shall preclude further or complete exercise of that right or any other right hereunder.
7.7
Assignment
. No Party shall have the right to assign any of its rights or obligations under this Agreement without the consent of the other Parties hereto.
7.8
Additional Partnership Entities
. In the event the General Partner desires a Partnership Group Member who is not a party to this Agreement to acquire Subject Assets or a Partnership Entity wishes to Transfer any of the Assets that serve the Holly Entities’ refineries to a Partnership Group Member who is not a party to this Agreement, then the Partnership Group Member that is the proposed acquiror of the Subject Assets or transferee of the Assets that serve the Holly Entities’ refineries may become a party to this Agreement by executing a joinder in a form reasonably satisfactory to Holly (on behalf of the Holly Entities) and the Partnership (on behalf of the Partnership Entities).
7.9
Counterparts
. This Agreement may be executed in any number of counterparts with the same effect as if all signatory parties had signed the same document. All counterparts shall be construed together and shall constitute one and the same instrument.
7.10
Severability
. If any provision of this Agreement shall be held invalid or unenforceable by a court or regulatory body of competent jurisdiction, the remainder of this Agreement shall remain in full force and effect.
7.11
Further Assurances
. In connection with this Agreement and all transactions contemplated by this Agreement, each signatory party hereto agrees to execute and deliver such additional documents and instruments and to perform such additional acts as may be necessary or appropriate to effectuate, carry out and perform all of the terms, provisions and conditions of this Agreement and all such transactions.
7.12
Rights of Limited Partners
. The provisions of this Agreement are enforceable solely by the Parties to this Agreement, and no Limited Partner of the Partnership shall have the right, separate and apart from the Partnership, to enforce any provision of this Agreement or to compel any Party to this Agreement to comply with the terms of this Agreement.
7.13
Headings
. Headings of the Sections of this Agreement are for convenience of the parties only and shall be given no substantive or interpretative effect whatsoever. All references in this Agreement to Sections are to Sections of this Agreement unless otherwise stated.
7.14
[Intentionally omitted]
7.15
Limitation of Damages
. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PROVISION OF THIS AGREEMENT AND EXCEPT FOR CLAIMS MADE BY THIRD PARTIES WHICH SHALL NOT BE LIMITED BY THIS SECTION, THE PARTIES AGREE THAT THE RECOVERY BY ANY PARTY, INCLUDING PURSUANT TO
ARTICLE III
, OF ANY LIABILITIES, DAMAGES, COSTS OR OTHER EXPENSES SUFFERED OR INCURRED BY IT (9) AS A RESULT OF ANY BREACH OR NONFULFILLMENT BY A PARTY OF ANY OF ITS COVENANTS, AGREEMENTS OR OTHER OBLIGATIONS UNDER THIS AGREEMENT OR (10) BY REASON OF OR ARISING OUT OF ANY OF THE EVENTS, CONDITIONS OR OTHER MATTERS LISTED IN
SECTIONS 3.1
,
3.3
OR
3.4
WHICH THE PARTIES HAVE AGREED TO INDEMNIFY THE OTHER PARTY AGAINST, SHALL BE LIMITED TO ACTUAL DAMAGES AND SHALL NOT INCLUDE OR APPLY TO, NOR SHALL ANY PARTY BE ENTITLED TO RECOVER, ANY INDIRECT, CONSEQUENTIAL, EXEMPLARY OR PUNITIVE DAMAGES (INCLUDING, WITHOUT LIMITATION, ANY DAMAGES ON ACCOUNT OF LOST PROFITS OR OPPORTUNITIES OR BUSINESS INTERRUPTION OR DIMINUTION IN VALUE) SUFFERED OR INCURRED BY ANY PARTY;
PROVIDED
,
HOWEVER
, THAT SUCH RESTRICTION AND LIMITATION SHALL NOT APPLY TO A PARTY’S OBLIGATION TO INDEMNIFY THE OTHER PARTY UNDER
SECTIONS 3.1
,
3.3
OR
3.4
HEREOF, AS APPLICABLE, (y) AS A RESULT OF A THIRD PARTY CLAIM FOR SUCH INDIRECT, CONSEQUENTIAL, EXEMPLARY OR PUNITIVE DAMAGES AGAINST SUCH INDEMNIFIED PARTY OR (z) INDIRECT, CONSEQUENTIAL, EXEMPLARY OR PUNITIVE DAMAGES THAT ARE A RESULT OF SUCH INDEMNIFYING PARTY’S OR ITS AFFILIATES’ GROSS NEGLIGENCE OR WILLFUL MISCONDUCT (INCLUDING, WITHOUT LIMITATION, ANY DAMAGES ON ACCOUNT OF LOST PROFITS OR OPPORTUNITIES OR BUSINESS INTERRUPTION OR DIMINUTION IN VALUE). FOR PURPOSES OF THIS SECTION 7.15, “AFFILIATES” OF THE INDEMNIFYING PARTY SHALL NOT INCLUDE THE PARTNERSHIP GROUP MEMBERS WHEN A HOLLY ENTITY IS THE INDEMNIFYING PARTY AND SHALL NOT INCLUDE THE HOLLY GROUP MEMBERS WHEN THE INDEMNIFYING PARTY IS A PARTNERSHIP ENTITY.
[Remainder of Page Intentionally Left Blank.]
IN WITNESS WHEREOF, the Parties have executed this Agreement to be effective as of July 12, 2012.
HOLLY ENTITIES:
HOLLYFRONTIER CORPORATION
By:
/s/ Michael C. Jennings
Name: Michael C. Jennings
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Title:
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Chief Executive Officer and President
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HOLLY REFINING & MARKETING COMPANY – WOODS CROSS LLC (formerly Holly Refining & Marketing Company – Woods Cross)
By:
/s/ Michael C. Jennings
Name: Michael C. Jennings
Title: Chief Executive Officer and President
NAVAJO REFINING COMPANY, L.L.C.
(formerly Navajo Refining Company, L.P.)
By:
/s/ Michael C. Jennings
Name: Michael C. Jennings
Title: Chief Executive Officer and President
NAVAJO PIPELINE CO., L.P.
By:
/s/ Michael C. Jennings
Name: Michael C. Jennings
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Title:
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Chief Executive Officer and President
|
HOLLY REFINING & MARKETING
– TULSA LLC
By:
/s/ Michael C. Jennings
Name: Michael C. Jennings
Title: Chief Executive Officer and President
FRONTIER REFINING LLC
By:
/s/ Michael C. Jennings
Name: Michael C. Jennings
Title: Chief Executive Officer and President
FRONTIER EL DORADO REFINING LLC
By:
/s/ Michael C. Jennings
Name: Michael C. Jennings
Title: Chief Executive Officer and President
PARTNERSHIP ENTITIES:
HOLLY ENERGY PARTNERS, L.P.
By: HEP Logistics Holdings, L.P.
Its General Partner
By: Holly Logistic Services, L.L.C.
Its General Partner
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HOLLY ENERGY PARTNERS – OPERATING, L.P.
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HOLLY LOGISTIC SERVICES, L.L.C.
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HEP LOGISTICS HOLDINGS, L.P.
By: Holly Logistic Services, L.L.C,
Its General Partner
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HEP LOGISTICS GP, L.L.C.
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HEP MOUNTAIN HOME, L.L.C.
HEP PIPELINE GP, L.L.C.
HEP PIPELINE, L.L.C.
HEP REFINING GP, L.L.C.
HEP REFINING, L.L.C.
HEP WOODS CROSS, L.L.C.
LOVINGTON-ARTESIA, L.L.C.
By: HOLLY ENERGY PARTNERS –
OPERATING, L.P.
Sole Member
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HEP NAVAJO SOUTHERN, L.P.
By: HEP Pipeline GP, L.L.C.
Its General Partner
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HEP REFINING ASSETS, L.P.
By: HEP Refining GP, L.L.C.
Its General Partner
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HEP PIPELINE ASSETS, LIMITED PARTNERSHIP
By: HEP Pipeline GP, L.L.C.
Its General Partner
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HEP TULSA LLC
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
ROADRUNNER PIPELINE, L.L.C.
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HOLLY ENERGY STORAGE – TULSA LLC
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HOLLY ENERGY STORAGE – LOVINGTON LLC
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
CHEYENNE LOGISTICS LLC
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
EL DORADO LOGISTICS LLC
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HEP UNEV HOLDINGS LLC
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HEP UNEV PIPELINE LLC
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
SCHEDULE I
Administrative Fee
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Amount of Annual Administrative Fee
|
Years beginning July 13, 2004 through June 30, 2007
|
$2,000,000
|
Years beginning July 1, 2007 through February 29, 2008
|
$2,100,000
|
Years beginning March 1, 2008
|
$2,300,000
|
|
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General and Administrative Services
(1)
executive services
(2)
finance, including treasury, and administration services
(3)
information technology services
(4)
legal services
(5)
health, safety and environmental services
(6)
human resources services
Exhibit 10.4
LIMITED PARTIAL WAIVER OF INCENTIVE DISTRIBUTION RIGHTS
UNDER THE FIRST AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP OF
HOLLY ENERGY PARTNERS, L.P.
This Limited Partial Waiver of Incentive Distribution Rights (this “
Waiver
”) under the First Amended and Restated Agreement of Limited Partnership of Holly Energy Partners, L.P. (the “
Partnership
”), dated as of July 13, 2004 (and as amended to the date hereof, the “
Partnership Agreement
”), is hereby adopted on July 12, 2012, by HEP Logistics Holdings, L.P., a Delaware limited partnership (the “
General Partner
”), in its capacity as general partner of the Partnership and as the holder of all of the Outstanding Incentive Distribution Rights. Capitalized terms used but not defined herein are used as defined in the Partnership Agreement.
WHEREAS, this Waiver shall become effective only upon and after the closing of the transactions contemplated by that certain LLC Interest Purchase Agreement, dated as of July 12, 2012 (the “
Purchase Agreement
”), pursuant to which HEP UNEV Holdings LLC, a subsidiary of the Partnership (the “
Buyer
”), will purchase and acquire all of the issued and outstanding membership interests in HEP UNEV Pipeline LLC (f/k/a Holly UNEV Pipeline Company) held by HollyFrontier Corporation (“
HollyFrontier
”); and
WHEREAS, in exchange for a portion of the cash consideration to be paid by or on behalf of Buyer pursuant to the Purchase Agreement, this Waiver shall be delivered by HollyFrontier at the closing of the transactions contemplated by the Purchase Agreement.
NOW, THEREFORE, the General Partner does hereby agree as follows:
1.
Defined Terms
.
“
Buyer LLC Agreement
” means the “LLC Agreement” as such term is defined in the Purchase Agreement.
“
Woods Cross Expansion Completion Date
” means the first date on which both: (a) mechanical completion of the installation of new equipment at the HollyFrontier Woods Cross facility is completed according to its design and permitted basis, as described by HollyFrontier management as the Woods Cross Phase I expansion, and (b) achievement by the HollyFrontier Woods Cross refinery of an average actual crude charge rate over a period of 15 consecutive days of at least 40,000 barrels per day, shall have occurred.
“
UNEV Acquisition Closing Date
” means the “Closing Date” as such term is defined in the Purchase Agreement.
2.
Limited Partial Waiver of Incentive Distribution Rights
.
|
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a.
|
Notwithstanding anything to the contrary in Section 6.4 of the Partnership Agreement, the General Partner hereby waives its rights to its distributions
|
as a holder of the Incentive Distribution Rights in the manner provided for in this Section 2. Any distributions to the holders of the Incentive Distribution Rights (the “
IDR Holders
”) provided for in clauses (iii), (iv) and (v) of Subsection 6.4(b) of the Partnership Agreement, as applicable, shall be adjusted commencing with the payment date of the first quarterly distribution declared and paid after the UNEV Acquisition Closing Date (such payment date, the “
First IDR Reduction Date
”) as follows: for the quarterly distribution paid on the First IDR Reduction Date and each of the eleven successive quarterly distributions declared and paid following the First IDR Reduction Date, any distributions to the IDR Holders shall be reduced by $1,250,000 (but, for the avoidance of doubt, not below zero);
provided, however,
that if the Woods Cross Expansion Completion Date has not occurred by the third anniversary of the UNEV Acquisition Closing Date, then each of such quarterly distributions declared and paid thereafter shall be reduced by $1,250,000 (but, for the avoidance of doubt, not below zero) until the earlier of (A) the calendar quarter immediately preceding the Woods Cross Expansion Completion Date (for the avoidance of doubt, this Waiver shall not apply to the quarterly distribution declared and paid with respect to the calendar quarter in which the Woods Cross Expansion Completion Date occurs) and (B) the date at which the cumulative amount of the reductions provided for in this Section 2 totals $20,000,000.
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b.
|
Notwithstanding anything to the contrary in the Partnership Agreement, the Partnership shall not allocate any income to the IDR Holders with respect to the distributions waived in this Section 2.
|
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c.
|
For the avoidance of doubt, in the event the Partnership is liquidated prior to that point in time by which there has been a completion of the waiver of distributions with respect to the Incentive Distribution Rights contemplated by this Section 2, the distributions with respect to the Incentive Distribution Rights to be received by the IDR Holders in connection with such liquidation, if any, shall not be reduced by the amount of any distributions to be waived in accordance with this Section 2 but not yet declared and paid at the time of such liquidation.
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3.
Partnership Agreement
. To the extent that this Waiver amends any provision of the Partnership Agreement, this Waiver shall constitute an amendment to the Partnership Agreement. Section 13.1(d)(i) of the Partnership Agreement provides that the General Partner, without the approval of any Limited Partner, may amend any provision of the Partnership Agreement to reflect a change that, in the discretion of the General Partner, does not adversely affect the Limited Partners (including any particular class of Partnership Interest as compared to other classes of Partnership Interests) in any material respect. The General Partner has determined, in its discretion, that this Waiver does not adversely affect the Limited Partners in any material respect, except the holder of the Incentive Distribution Rights as compared to holders of the other classes of Partnership Interests. In accordance with Section 13.3(c) of the Partnership Agreement, the General Partner, in its capacity
as the holder of all of the Outstanding Incentive Distribution Rights, hereby consents to and approves this Waiver in all respects. Except as specifically provided in this Waiver, the Partnership Agreement shall remain in full force and effect.
4.
Termination
. This Waiver shall terminate in accordance with Section 12.4 of the Buyer LLC Agreement effective on any Optional Buy-Out Date or Mandatory Buyout Date (in each case, as defined in the Buyer LLC Agreement). For the avoidance of doubt, upon such termination of this Waiver, no further distributions with respect to the Incentive Distribution Rights shall be reduced pursuant to Section 2 of this Waiver, and the IDR Holders shall be entitled to receive distributions with respect to the Incentive Distribution Rights pursuant to the terms and conditions of the Partnership Agreement unadjusted by this Waiver.
5.
Governing Law
. This Waiver shall be governed by, and interpreted in accordance with, the laws of the State of Delaware, all rights and remedies being governed by such laws without regard to principles of conflicts of laws.
6.
Binding on Successors
. This Waiver shall be binding upon all successors and assigns of the holder of the Incentive Distribution Rights and any and all transferees of the Incentive Distribution Rights, and the General Partner hereby agrees to notify any transferees of the Incentive Distribution Rights of this Waiver.
IN WITNESS WHEREOF, the General Partner has executed this Waiver as of the date first set forth above.
GENERAL PARTNER:
HEP LOGISTICS HOLDINGS, L.P.
By: Holly Logistic Services, L.L.C.,
its general partner
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
Exhibit 10.5
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
OF
HEP UNEV HOLDINGS LLC
THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (this “
Agreement
”) of HEP UNEV HOLDINGS LLC, a Delaware limited liability company (the “
Company
”), is being entered into on July 12, 2012, by and among the Company, Holly Energy Partners, L.P., a Delaware limited partnership (“
HEP
”) and HollyFrontier Holdings LLC, a Delaware limited liability company (“
HFC Holdings
” and, together with HEP, collectively, the “
Members
”).
W
I
T
N
E
S
S
E
T
H
:
WHEREAS, this Agreement amends and restates the Limited Liability Company Agreement of the Company dated as of June 27, 2012;
WHEREAS, the Members desire to enter into this Agreement to set forth the Members’ rights and obligations and other matters with respect to the Company;
WHEREAS, this Agreement shall become effective only upon the consummation of the transactions contemplated by that certain LLC Interest Purchase Agreement, dated as of July 12, 2012, pursuant to which the Company will purchase and acquire all of the issued and outstanding membership interests in HEP UNEV Pipeline LLC (f/k/a Holly UNEV Pipeline Company) (“
HEP UNEV
”) held by HollyFrontier Corporation (“
HFC
”); and
WHEREAS, HEP UNEV is the owner of 75% of all of the issued and outstanding membership interests in UNEV Pipeline (as defined below).
NOW, THEREFORE, in consideration of the promises and the covenants and provisions hereinafter contained, the Members hereby adopt the following:
ARTICLE I
DEFINITIONS
Section 1.1
Definitions
. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in this Section 1.1.
“
Affiliate
” means, with respect to any specified person, any other person controlling, controlled by or under common control with such specified person.
“
Applicable Credit Documents
” means, collectively, the Credit Agreement, the Indentures and any other indentures, credit agreements, loan agreements, promissory notes, or similar instruments or agreements (including all security agreements, pledge agreements, mortgages and other documents and instruments entered into or issued in connection with the foregoing) to which HEP or any of its subsidiaries is a party or pursuant to which any of their respective assets is pledged or encumbered, as the same may be amended or restated from time to time.
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
HEP UNEV HOLDINGS LLC
JULY 12, 2012
#PageNum#
“
Capital Contribution
” means, for any Member, the total amount of cash and cash equivalents and the fair market value of any property contributed to the Company by such Member;
provided
,
however
, that in the case of HEP Common Units distributed to the Class B Member pursuant to Section 7.3(a), such HEP Common Units shall be deemed contributed to the Company by the Class A Members, and the fair market value of such HEP Common Units shall be as determined pursuant to Section 7.3(a).
“
Class A Appraiser
” has the meaning set forth in Section 12.3(c).
“
Class A Common Units
” means the Units having the privileges, preference, duties, liabilities, obligations and rights specified with respect to “Class A Common Units” in this Agreement.
“
Class A Member
” means a holder of Class A Common Units.
“
Class B Appraiser
” has the meaning set forth in Section 12.3(c).
“
Class B Common Units
” means the Units having the privileges, preference, duties, liabilities, obligations and rights specified with respect to “Class B Common Units” in this Agreement.
“
Class B Member
” means the holder of Class B Common Units.
“
Company Minimum Gain
” means “partnership minimum gain” as defined in Section 1.704-2(b)(2) of the Treasury Regulations, substituting the term “Company” for the term “partnership” as the context requires.
“
Contract Year
” means a 12 consecutive calendar month period beginning on July 1
st
and ending on the next succeeding June 30
th
.
“
Corresponding Percentage
” means (i) in the case of a UNEV Sell-Down involving a sale by HEP UNEV of membership interests of UNEV Pipeline, a percentage equal to the portion of such seller’s total membership interest in UNEV Pipeline represented by the membership interest being sold (e.g. – For a sale of a 7.5% membership interest in UNEV Pipeline when the seller owned a 75% membership interest in UNEV Pipeline, the Corresponding Percentage would be 10% (7.5%/75% = 10%)); and (ii) in the case of a sale of membership interests in HEP UNEV by the Company or a sale of Class A Common Units by an HEP Entity, a percentage equal to the portion of such seller’s total membership interest in such entity represented by the membership interest being sold, multiplied by the ownership percentage of each entity in each other entity through which such entity indirectly holds an interest in UNEV Pipeline (e.g. – For a sale of 25% of the Class A Common Units where the Company owned 100% of HEP UNEV and HEP UNEV owned 75% of UNEV Pipeline, the Corresponding Percentage would be 18.75% (25% x 100% x 75% = 18.75%)).
“
Credit Agreement
” means that certain Second Amended and Restated Credit Agreement, dated as of February 14, 2011, by and among Holly Energy Partners – Operating, L.P., Wells Fargo Bank, N.A., as administrative agent, Union Bank, N.A., as syndication agent, BBVA Compass Bank
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
HEP UNEV HOLDINGS LLC
JULY 12, 2012
#PageNum#
and U.S. Bank N.A., as co-documentation agents, Wells Fargo Securities, LLC and Union Bank, N.A., as joint lead arrangers and joint bookrunners, and the financial institutions party thereto, providing for revolving credit borrowings and letters of credit, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time.
“
Distribution
” means a distribution made by the Company to a Member, whether in cash, property or securities of the Company and whether by liquidating distribution or otherwise;
provided
,
however
, that none of the following shall be a Distribution: (a) any recapitalization or exchange of securities of the Company; or (b) any subdivision (by a split of Units or otherwise) or any combination (by a reverse split of Units or otherwise) of any outstanding Units. “
Distribute
” when used in other grammatical variations shall have a correlative meaning.
“
DLLCA
” means the Delaware Limited Liability Company Act, Title 6, Chapter 18, §§ 18-101,
et seq
, and any successor statute, as it may be amended from time to time.
“
EBITDA Threshold Amount
” means the amount in dollars equal to (A) the HEP Ownership Percentage,
multiplied by
(B) $30 million,
divided by
(C) 75%.
“
General Partner
” means HEP Logistics Holdings, L.P., a Delaware limited partnership and general partner of HEP.
“
Giveback Amount
” means an amount equal to the
sum
of: (A) the aggregate Quarterly Reductions for the fourth fiscal quarter of the Contract Year beginning on July 1, 2015;
plus
(B) the
product
of (i) the aggregate Quarterly Reductions for the third fiscal quarter of the Contract Year beginning on July 1, 2015,
multiplied by
(ii) 1.0175;
plus
(C) the
product
of (i) the aggregate Quarterly Reductions for the second fiscal quarter of the Contract Year beginning on July 1, 2015,
multiplied by
(ii) 1.0353;
plus
(D) the
product
of (i) the aggregate Quarterly Reductions for the first fiscal quarter of the Contract Year beginning on July 1, 2015,
multiplied by
(ii) 1.0534.
“
HEP
” has the meaning set forth in the preamble.
“
HEP Common Unit
” means a “Common Unit” as such term is defined in the Partnership Agreement.
“
HEP Entities
” means HEP and its wholly-owned subsidiaries.
“
HEP Ownership Percentage
” means a percentage equal to the
product
of (at the time of calculation) (A) the
lesser
of (x) the aggregate percentage ownership interest in UNEV Pipeline directly owned by HEP UNEV and/or any other HEP Entity or (y) 75%,
multiplied by
(B) the aggregate percentage ownership interest in HEP UNEV directly owned by the Company and/or any other HEP Entity,
multiplied by
(C) the aggregate percentage of the Company’s Class A Common Units directly held by HEP and/or any other HEP Entity.
“
HEP UNEV
” shall have the meaning as set forth in the Recitals.
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“
Incentive Distribution Rights
” means the “Incentive Distribution Rights” as such term is defined in the Partnership Agreement.
“
Indentures
” means (i) that certain Indenture, dated as of March 10, 2010 among HEP and Holly Energy Finance Corp., the guarantors party thereto, and U.S. Bank National Association, as trustee and (ii) that certain Indenture, dated as of March 12, 2012 among HEP and Holly Energy Finance Corp., the guarantors party thereto, and U.S. Bank National Association, as trustee, in each case, as amended, restated, modified, or renewed, in whole or in part from time to time.
“
Independent Appraiser
” has the meaning set forth in Section 12.3(c).
“
Mandatory Buy-Out Date
” has the meaning set forth in Section 12.3.
“
Mandatory Buy-Out Price
” has the meaning set forth in Section 12.3.
“
Member Nonrecourse Debt Minimum Gain
” means “partner nonrecourse debt minimum gain” as defined in Section 1.704-2(i) of the Treasury Regulations, substituting the term “member” for the term “partner” as the context requires.
“
Membership Interest
” means an interest in the Company owned by a Member, including such Member's right (based on the type and class of Unit or Units held by such Member), as applicable, (a) to a Distributive share of net income, net losses and other items of income, gain, loss and deduction of the Company; (b) to a Distributive share of the assets of the Company; (c) to vote on, consent to or otherwise participate in any decision of the Members as provided in this Agreement; and (d) to any and all other benefits to which such Member may be entitled as provided in this Agreement or the DLLCA.
“
Optional Buy-Down Date
” has the meaning set forth in Section 12.2.
“
Optional Buy-Out Date
” has the meaning set forth in Section 12.1.
“
Optional Buy-Out Price
” has the meaning set forth in Section 12.1.
“
Partnership Agreement
” means the First Amended and Restated Agreement of Limited Partnership of HEP, dated as of July 13, 2004 and as amended from time to time.
“
Permitted Transfers
” means transfers to an Affiliate.
“
Preferred Return
” shall have the meaning set forth in Section 7.3(a).
“
Profits Interest Accrual Start Date
” means July 1, 2015.
“
Profits Interest Accrual Termination Date
” means the earlier of (i) the final day of the Contract Year with respect to which there shall have accrued a Profits Interest Amount equal to the Profits Interest Balance Amount applicable for the next Contract Year or (ii) June 30, 2032.
“
Profits Interest Amount
” means, with respect to each Profits Interest Annual Period, an
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amount equal to 50% multiplied by the excess of the incremental UNEV EBITDA for such Profits Interest Annual Period attributable to HEP’s indirect aggregate percentage ownership interest in UNEV Pipeline (not counting, as of the time of calculation, any ownership interest in UNEV Pipeline held by the HEP Entities that was previously held by Sinclair Transportation Corporation as of the date of this Agreement), over the EBITDA Threshold Amount. For the avoidance of doubt, the Profits Interest Amount with respect to a Profits Interest Annual Period shall equal the
product
of (at the time of such calculation) (A) 50%
multiplied by
(B) the
excess
(if any) of (x) the
product
of (i) the UNEV EBITDA for such Profits Interest Annual Period,
multiplied by
(ii) the HEP Ownership Percentage, over (y) the EBITDA Threshold Amount. For the further avoidance of doubt, (i) no Profits Interest Amount will accrue with respect to any Contract Year or any other period that follows the Profits Interest Accrual Termination Date, and (ii) in no event will the Profits Interest Amount with respect to any Profits Interest Annual Period include any amounts in excess of the Profits Interest Balance Amount that will be applicable for the next Contract Year.
“
Profits Interest Annual Period
” means each Contract Year beginning on the Profits Interest Accrual Start Date or an anniversary of the Profits Interest Accrual Start Date, but not including any Contract Year beginning after the Profits Interest Accrual Termination Date.
“
Profits Interest Balance Amount
” means an amount calculated in the following manner:
(a)
For the Contract Year beginning on July 1, 2016, the Profits Interest Balance Amount is $33,820,000 (as such may be adjusted from time to time pursuant to
Article XII
);
provided
,
however
, that if the Woods Cross Expansion Completion Date has not occurred by July 1, 2015, then the Profits Interest Balance Amount for the Contract year beginning on July 1, 2016 shall equal the sum of (x) $33,820,000 (as such may be adjusted from time to time pursuant to
Article XII
) plus (y) the Giveback Amount.
(b)
For each succeeding Contract Year, the Profits Interest Balance Amount applicable to such Contract Year will be equal to the product of (i) the difference between (A) the prior Contract Year’s Profits Interest Balance Amount and (B) the Profits Interest Amounts paid during such prior Contract Year, multiplied by (ii) 1.07. A table containing examples of the calculation of the Profits Interest Balance Amount is attached hereto as
Exhibit 1
.
(c)
Solely for the purposes of calculating the Profits Interest Balance Amount, amounts that were due to be paid on a Profits Interest Payment Date but which were not paid and became part of the Unpaid Profits Interest Amount (and with respect to which Preferred Return is accruing) shall be deemed “paid” under (b)(i)(B) of this definition.
(d)
Amounts paid to the Class B Member by the Company in HEP Common Units pursuant to Section 7.3, shall be valued as determined on the date of payment in accordance with such Section 7.3, rather than by reference to the value of such HEP Common Units on any subsequent date.
(e)
Preferred Return paid to the Class B Member by the Company with respect to the Unpaid Profits Interest Amount shall not be considered in determining whether or not the Profits Interest Balance Amount has been met.
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“
Profits Interest Payment Date
” means the date in each Contract Year following the end of a Profits Interest Annual Period that is the earlier of (i) the 30
th
day following the receipt by the Company of all financial statements of UNEV Pipeline with respect to such Profits Interest Annual Period, and (ii) the 60
th
day following the end of such Profits Interest Annual Period.
“
Profits Interest Payment Restriction
” has the meaning set forth in Section 7.3(a).
“
Quarterly Reductions
” means, for a given fiscal quarter, the aggregate amount of the reductions, pursuant to the Waiver, in the quarterly distributions to the General Partner in its capacity as a holder of Incentive Distribution Rights paid during such fiscal quarter.
“
Restricted Profits Interest Account
” has the meaning set forth in Section 7.3(b).
“
Treasury Regulations
” means the final or temporary regulations issued by the United States Department of Treasury pursuant to its authority under the Code, and any successor regulations.
“
UNEV EBITDA
” means earnings before interest, taxes, depreciation and amortization of UNEV Pipeline.
“
UNEV Pipeline
” means UNEV Pipeline, LLC a Delaware limited liability company of which HEP UNEV, a wholly owned subsidiary of the Company, owns 75% of all of the issued and outstanding membership interests and Sinclair Transportation Corporation owns 25% of all of the issued and outstanding membership interests. UNEV Pipeline is the owner of an approximately 400 mile, 12-inch refined products pipeline currently running from Woods Cross, Utah to Las Vegas, Nevada, related products terminals in or near Cedar City, Utah and Las Vegas, Nevada, and other related assets.
“
UNEV Sale Event
” means (A) any direct or indirect transfer, assignment, sale, gift, exchange, change of record holder, pledge, hypothecation or other encumbrance, or any other disposition (whether voluntary, involuntary or by operation of law, or by way of merger or consolidation that is not part of an internal restructuring involving, or transfer between, only HEP Entities) of: (i) all or any part of any membership interests of UNEV Pipeline by an HEP Entity; (ii) all or any part of any membership interests of HEP UNEV; or (iii) any material assets of UNEV Pipeline, or (B) any transfer, conveyance, assignment, sale or pledge of any Class A Common Units to any person other than a wholly-owned subsidiary of such Class A Member;
provided
,
however
, that no pledge, hypothecation or other encumbrance shall constitute a UNEV Sale Event to the extent made pursuant to the Credit Agreement or made to another bona fide third-party lender of borrowed money to UNEV Pipeline.
“
UNEV Sell-Down
” means a sale, transfer, assignment or conveyance (other than to an HEP Entity) of any (i) membership interests of UNEV Pipeline by HEP UNEV following which the HEP Entities collectively own more than 50% of the aggregate outstanding membership interests of UNEV Pipeline, (ii) membership interests of HEP UNEV by the Company following which the HEP Entities collectively own more than 50% of the aggregate outstanding membership interests of HEP UNEV, or (iii) Class A Common Units of the Company following which the HEP Entities collectively own more than 50% of the aggregate outstanding Class A Common Units of the
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Company.
“
Unit
” means a unit representing a fractional part of the Membership Interests of the Members and shall include all types and classes of Units, including the Class A Common Units and the Class B Common Units;
provided
,
however
, that any type or class of Unit shall have the privileges, preference, duties, liabilities, obligations and rights set forth in this Agreement and the Membership Interests represented by such type or class or series of Unit shall be determined in accordance with such privileges, preference, duties, liabilities, obligations and rights.
“
Unpaid Profits Interest Amount
” means, at any given time on or following the first Profits Interest Payment Date, an amount equal to the aggregate accrued and unpaid Profits Interest Amount at such time, including all Preferred Return accrued on any unpaid amounts in accordance with Section 7.3. For the sake of clarity, the Unpaid Profits Interest Amount shall (i) increase on each Profits Interest Payment Date by the amount of any Profits Interest Amount due on such date with respect to the most recently expired Profits Interest Annual Period, (ii) increase over time with the amount of any Preferred Return that accrues under Section 7.3, and (iii) be reduced at the time of payment by the amount of any Distributions or payments made to the Class B Member with respect to the Class B Common Units.
“
Waiver
” means the Limited Partial Waiver of Incentive Distribution Rights Under the Partnership Agreement, effective as of July 12, 2012, by HEP Logistics Holdings, L.P.
“
Woods Cross Expansion Completion Date
” means the “Woods Cross Expansion Completion Date” as such term is defined in the Waiver.
ARTICLE II
ORGANIZATIONAL AND OTHER MATTERS
Section 2.1
Organization; Admission
. The Company was formed as a limited liability company pursuant to the DLLCA by filing a Certificate of Formation (the “
Certificate
”) with the Secretary of State of the State of Delaware on June 27, 2012.
Section 2.2
Name
. The name of the Company is HEP UNEV Holdings LLC, and the business of the Company is conducted under such name. The Board may, in its sole discretion, change the name of the Company from time to time. In any such event, the Secretary shall promptly file or cause to be filed in the office of the Secretary of State of the State of Delaware an amendment to the Certificate reflecting such change of name. The Company may also conduct business under one or more fictitious names if the Board determines that such is in the best interests of the Company.
Section 2.3
Limited Liability
. Except as otherwise provided by the DLLCA, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be the debts, obligations and liabilities solely of the Company, and the Members shall not be obligated personally for any of such debts, obligations or liabilities solely by reason of being a member.
Section 2.4
Registered Office and Agent
. The address of the Company’s registered office (required by Section 18-104 of the DLLCA to be maintained in the State of Delaware) shall be
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Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801 and the name of the Company’s registered agent at such address is The Corporation Trust Company. The Company’s principal place of business shall be 2828 N. Harwood, Suite 1300, Dallas, Texas 75201. The Board may change such registered office, registered agent or principal place of business from time to time. The Company may from time to time have such other place or places of business within or without the State of Delaware as may be determined by the Board.
Section 2.5
Fiscal Year
. The fiscal year of the Company shall end on December 31 of each calendar year unless, for United States federal income tax purposes, another fiscal year is required. The Company shall have the same fiscal year for United States federal income tax purposes and for accounting purposes.
Section 2.6
No State-Law Partnership
. The Company shall not be a partnership or a joint venture for any reason other than for United States federal income and state tax purposes, and no provision of this Agreement shall be construed otherwise. The Company shall be operated in a manner consistent with its classification as a disregarded entity for United States federal and state tax purposes.
Section 2.7
Seal
. The Company may maintain a seal containing the name of the Company. Any officer of the Company shall have the authority to affix the seal of the Company in the name of the Company to any document duly authorized pursuant to this Agreement or resolutions of the Board and to attest the affixation of the seal of the Company thereto, as such affixation may be required for the conduct of the Company’s business.
ARTICLE III
PURPOSE AND POWERS
Section 3.1
Purpose of the Company
. The purpose of the Company shall be to engage or participate in any lawful business activities in which a limited liability company formed in the State of Delaware may engage or participate.
Section 3.2
Powers of the Company
. The Company shall have the power to do any and all acts reasonably necessary, appropriate, proper, advisable, incidental or convenient to or for the furtherance of the purpose and business described herein and for the protection and benefit of the Company.
ARTICLE IV
UNITS
Section 4.1
Units Generally
. The Membership Interests of the Members shall be represented by issued and outstanding Units, which may be divided into one or more types, classes or series. Each type, class or series of Units shall have the privileges, preference, duties, liabilities, obligations and rights, including voting rights, if any, set forth in this Agreement with respect to such type, class or series. Subject to the rights of the Class B Member under the final sentence in Section 4.3, the Company may, in the sole discretion of the Board, create, authorize and issue additional Membership Interests (which may or may not be denominated in Units and which may
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include additional Class A Common Units) with such rights and privileges as are determined by the Board, in its sole discretion.
Section 4.2
Class A Common Units
. Other than the Class B Member’s right to the Profits Interest Amount (and any Preferred Return), holders of Class A Common Units shall have the rights to all Distributions of the Company. Each Class A Member shall be entitled to one vote per Class A Common Unit on all matters upon which the Class A Members have the right to vote under this Agreement, or otherwise submitted to a vote of the Class A Members.
Section 4.3
Class B Common Units
. The Class B Member shall have the right to the Profits Interest Amount (and any Preferred Return) as provided in Article VII . Following the payment in full of all Profits Interest Amounts accruing (or to accrue) prior to the Profits Interest Accrual Termination Date (as well as any Preferred Return), the Class B Common Units shall automatically cease to be outstanding and the Class B Member shall no longer have any rights or privileges under this Agreement. Unless specifically set forth in this Agreement, the Class B Common Member shall have no other rights of the Members under this Agreement. Unless specifically set forth in this Agreement, the Class B Common Units shall not entitle the holder thereof to vote on any matters required or permitted to be voted on by the Members. Notwithstanding the foregoing, following the date of this Agreement and prior to the payment in full of all Profits Interest Amounts accruing (or to accrue) prior to the Profits Interest Accrual Termination Date (as well as any Preferred Return), the Company may not issue any Membership Interest that would entitle the holder thereof to receive Distributions prior to, in preference to, or
pari passu
with, the Class B Common Units.
Section 4.4
Members Schedule
. The Company shall maintain a schedule of all Members, their respective mailing addresses and the amount and series of Units held by them (the “
Members Schedule
”), and shall update the Members Schedule upon the issuance or transfer of any Units to any new or existing Member. A copy of the Members Schedule as of the execution of this Agreement is attached hereto as
Schedule A
.
ARTICLE V
CONTRIBUTIONS AND ALLOCATIONS
Section 5.1
Contributions
.
(a)
Contemporaneously with the execution of this Agreement, each Member owning Class A Common Units and Class B Common Units has made the Capital Contribution giving rise to such Member’s initial Capital Account and is deemed to own the number, type, series and class of Units, in each case, in the amounts set forth opposite such Member’s name on the Members Schedule as in effect on the date hereof.
(b)
If, at any time, the revenues and other funds available to the Company are not adequate to meet its obligations, the Members may, in their sole and absolute discretion, make additional capital contributions in such amounts as they deem necessary. The Members will not at any time have any liability to the Company for any negative balance in their capital accounts except to the extent that such negative balance arose as the result of distributions in violation of this
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Agreement or applicable law. No Member shall be required to make any additional Capital Contributions to the Company. Any future Capital Contributions made by any Member may only be made with the consent of the Board. No Member shall be required to lend any funds to the Company and no Member shall have any personal liability for the payment or repayment of any Capital Contribution by or to any other Member.
Section 5.2
Capital Accounts
. The Company shall establish and maintain for each Member a separate capital account (a “
Capital Account
”) on its books and records in accordance with this Section 5.2. Each Capital Account shall be established and maintained in accordance with the following provisions:
(a)
Each Member’s Capital Account shall be increased by the amount of:
(i)
such Member’s Capital Contributions, including such Member’s initial Capital Contribution and any HEP Common Units deemed contributed to the Company by the Class A Members pursuant to Section 7.3(a);
(ii)
any net income or other item of income or gain allocated to such Member pursuant to Sections 6.1(a) and (b); and
(iii)
any liabilities of the Company that are assumed by such Member or secured by any property Distributed to such Member.
(b)
Each Member’s Capital Account shall be decreased by:
(i)
the cash amount or fair market value of any property Distributed to such Member pursuant to Article VII, including any HEP Common Units distributed to the Class B Member pursuant to Section 7.3(a), the fair market value of which shall be determined in accordance with Section 7.3(a);
(ii)
the amount of any net loss or other item of loss or deduction allocated to such Member pursuant to Sections 6.1(a) and (b); and
(iii)
the amount of any liabilities of such Member assumed by the Company or which are secured by any property contributed by such Member to the Company.
ARTICLE VI
ALLOCATIONS
Section 6.1
Allocations
.
(c)
For each fiscal year (or portion thereof), except as otherwise provided in this Agreement, net income and net loss (and, to the extent necessary, individual items of income, gain, loss or deduction) of the Company shall be allocated among the Members in a manner such that, the Capital Account balance of each Member, immediately after making such allocations, is, as nearly as possible, equal to (i) the Distributions that would be made to such Member pursuant to Article XII if the Company were dissolved, its affairs wound up and its assets sold for cash equal
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to their fair market value, all Company liabilities were satisfied, and the net assets of the Company were Distributed, in accordance with Article XII, to the Members immediately after making such allocations, minus (ii) such Member's share of Company Minimum Gain and Member Nonrecourse Debt Minimum Gain, computed immediately prior to the hypothetical sale of assets.
(d)
Notwithstanding any other provision of this Agreement, “partner nonrecourse deductions” (as defined in Treasury Regulation Section 1.704-2(i)), if any, of the Company shall be allocated for each period to the Member that bears the economic risk of loss within the meaning of Treasury Regulation Section 1.704-2(i), and “nonrecourse deductions” (as defined in Treasury Regulation Section 1.704-2(b)) and “excess nonrecourse liabilities” (as defined in Treasury Regulations Section 1.752-3(a), if any, of the Company shall be allocated to the Members as reasonably determined by the tax matters members in accordance with applicable Treasury Regulations. This Agreement shall be deemed to include “qualified income offset,” minimum gain chargeback” and “partner nonrecourse debt minimum gain chargeback” provisions within the meaning of the Treasury Regulations under Section 704(b) of the Code.
(e)
Except as otherwise required by Section 704(c) of the Code, for federal income tax purposes, each item of income, gain, loss and deduction of the Company for each taxable period shall be allocated in the manner as such items are allocated under Sections 6.1(a) and (b).
ARTICLE VII
DISTRIBUTIONS
Section 7.1
Distributions Prior to the First Profits Interest Payment Date and After Payment of All Profits Interest Amounts and Unpaid Profits Interest Amounts
. Subject to Section 7.3, prior to the first Profits Interest Payment Date and after payment in full of all Profits Interest Amounts accrued (or to accrue) and all Unpaid Profits Interest Amounts:
(a)
the Board, in its sole discretion, shall decide whether, when and in what amounts Distributions shall be made to the Members; and
(b)
any amounts so Distributed shall be distributed to the Class A Members
pro rata
in proportion to their holdings of Class A Common Units.
Section 7.2
Distributions On and After the First Profits Interest Payment Date Until Payment of All Profits Interest Amounts and Unpaid Profits Interest Amounts
. Subject to Section 7.3, from and after the first Profits Interest Payment Date until payment in full of all Profits Interest Amounts accrued (or to accrue) and all Unpaid Profits Interest Amounts, Distributions shall be made as follows:
(a)
first, 100% to the Class B Member until the Unpaid Profits Interest Amount is reduced to zero; and
(b)
thereafter, 100% to the Class A Members
pro rata
in proportion to their holdings of Class A Common Units.
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Section 7.3
Restrictions on Dividends; Interest and Class B Member’s Election
.
(a)
Notwithstanding Section 7.1 or Section 7.2, no Distribution shall be made to any Member if, at the time of such Distribution, payment of such Distribution would (i) violate, breach or result in a default (or give any party thereto the right to declare any event of default) under any Applicable Credit Document then in effect, or (ii) violate or breach any law, regulation or court order applicable to the Class A Members, any of their direct and indirect subsidiaries, or the Company, including §18-607 of the DLLCA (a “
Profits Interest Payment Restriction
”). In the event the Company is unable to make any payment to the Class B Member of any Profits Interest Amount due on any Profits Interest Payment Date as a result of a Profits Interest Payment Restriction, then, at the election of the Class B Member, either (1) such Unpaid Profits Interest Amount will accrue a preferred return at a rate of 10% per annum (the “
Preferred Return
”), or (2) the Class B Member may receive payment of such Profits Interest Amount in the form of HEP Common Units, rather than cash, which HEP Common Units shall be valued at market prices without discount, calculated using the volume weighted average price of HEP’s Common Units, as quoted on the New York Stock Exchange for the 10 trading days immediately preceding such Profits Interest Payment Date. If the Class B Member elects to receive payment of any Profits Interest Amount in the form of HEP Common Units, such payment shall only be made if such issuance is permitted pursuant to applicable laws, regulations, court orders and the Partnership Agreement.
(b)
Notwithstanding the provisions of Section 7.3(a) or the priority of Distributions provided for in Section 7.2, in the event the Company is unable to make payment of any Profits Interest Amount as a result of a Profits Interest Payment Restriction and such payment is not made in HEP Common Units as provided in Section 7.3(a), then the Company may, nevertheless, make Distributions to the Class A Members in accordance with Section 7.2(b) so long as (i) the Company deposits the Unpaid Profits Interest Amount in a segregated account (the “
Restricted Profits Interest Account
”) (including, at least quarterly, amounts for Preferred Return accrued under Section 7.3(a)), and (ii) promptly distributes to the Class B Member the amounts in the Restricted Profits Interest Account as soon as and to the extent payment of such amounts is no longer subject to such Profits Interest Payment Restrictions.
(c)
Following the receipt of annual financial statements of UNEV Pipeline for any fiscal year that contains any portion of a completed Profits Interest Annual Period, the Company shall recalculate the UNEV EBITDA for such completed Profits Interest Annual Period based upon such annual financial statements for all purposes hereunder. If such recalculation results in an increase in the Profits Interest Amount for a completed Profits Interest Annual Period, then the Company shall Distribute such increased amount to the Class B Member. If such recalculation results in a decrease in the Profits Interest Amount for a completed Profits Interest Annual Period, then the Class B Member shall repay the amount of such Decrease to the Company.
ARTICLE VIII
MANAGEMENT OF THE COMPANY
Section 8.1
Board of Managers; Power and Authority
. The business and affairs of the Company shall be managed by or under the direction of a Board of one or more Managers (the “
Board
”; individual members of the Board shall be referred to as “
Managers
”), which shall have
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the power to do any and all acts necessary, convenient or incidental to or for the furtherance of the purposes of the Company described in this Agreement, including all powers, statutory or otherwise, possessed by managers of a limited liability company under the DLLCA and the power and authority to amend the Certificate, adopt an agreement of merger or consolidation, approve a conversion of the Company and approve any dissolution or winding up of the Company or a revocation of a dissolution of the Company. Each Manager is hereby designated a “manager” of the Company within the meaning of the DLLCA. Except as otherwise required by law, approval of any action by the Board in accordance with this Agreement shall constitute approval of such action by the Company.
(c)
Number of Managers
. The number of Managers constituting the entire Board shall be three individuals or such other number as may be fixed from time to time by the Class A Members or by the vote of a majority of the entire Board.
(d)
Appointment and Removal of Managers
. All Managers shall be appointed by the Class A Members. Any Manager so appointed by the Members shall serve in the capacity so appointed until (i) removed with or without cause by the Class A Members, (ii) such Manager’s successor shall be duly elected and appointed by the Class A Members or (iii) such Manager’s death, disability or resignation. The Class A Member hereby appoints Matthew P. Clifton, Bruce R. Shaw and Denise C. McWatters as the Managers.
(e)
Vacancies; Increases in the Number of Managers
. Vacancies and newly created Board positions resulting from any increase in the authorized number of Managers constituting the entire Board may be filled by the Class A Members.
(f)
Quorum
. A majority of the total number of Managers shall constitute a quorum for the transaction of business of the Board. Any meeting may be adjourned from time to time by a majority of the Managers present at the meeting, whether or not a quorum is present, and the meeting may be adjourned without further notice.
(g)
Action by Vote
. Except as may otherwise be provided by law or this Agreement, when a quorum is present at any meeting, the vote of a majority of the Managers present shall be the act of the Board.
(h)
Offices; Location of Books and Records; Place of Meetings; Order of Business
. The Company’s office shall be at, and the books and records of the Company will be kept at, the Company’s principal place of business. The Board may have offices and keep the books and records of the Company, except as otherwise provided by law, in such other place or places, within or without the State of Delaware, as the Board may from time to time determine by resolution. The Board may hold meetings at the Company’s principal place of business or at any place determined by a majority of the Managers. At all meetings of the Board business shall be transacted in such order as shall from time to time be determined by the Chairman of the Board (if any), or in his absence by the President, or by resolution of the Board.
(i)
Meetings
. Meetings of the Board may be called by any Manager, the President or any Vice President.
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(j)
Notice
. Meetings of the Board may be held upon at least twenty-four hours oral or written notice to the Managers or upon such shorter notice as may be approved by the Managers. All written notices and other communications to be given to Managers shall be sufficiently given for all purposes hereunder if in writing and delivered by hand, courier or overnight delivery service or three days after being mailed by certified or registered mail, return receipt requested, with appropriate postage prepaid, or when received in the form of a telegram, facsimile or other electronic transmission (including electronic mail), and shall be directed to the address, facsimile number or electronic mail address as such Manager shall designate by notice to the Company. Neither the business to be transacted at, nor the purpose of, any meeting of the Board need be specified in the notice of such meeting. Any Manager may waive the requirement of such notice as to such Manager. Attendance by a Manager at any meeting shall constitute waiver by such Manager of the requirement of notice of such meeting unless such Manager specifically objects at such meeting on the basis of improper notice.
(k)
Participation in Meetings by Conference Telephone
. Managers may participate in a meeting of the Board by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other or by any other means permitted by law. Such participation shall constitute presence in person at such meeting.
(l)
Action without a Meeting
. Any action required or permitted to be taken at any meeting of the Board may be taken without a meeting if a majority of the Managers consent thereto in writing;
provided
,
however
, that if such action is taken by less than unanimous written consent, notice of the taking of such action must be given to those Managers who have not consented in writing within two days of the taking of such action. Such consent shall be treated for all purposes as the act of the Board.
(m)
Compensation
. The Managers shall not receive any compensation except as may be fixed from time to time in writing by the Board.
(n)
Manager Standard of Care; Liability
. A Manager shall perform his duties in good faith and in a manner such Manager reasonably believes to be in the best interests of the Company. A Manager shall not have any liability by reason of being or having been a Manager.
(o)
Interested Managers
. No contract or transaction between the Company and one or more of its Managers or the Members, or between the Company and any other corporation, partnership, association, or other organization in which one or more of the Company’s Managers or the Members are managers or members or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the Manager or Member is present at or participates in the meeting of the Board which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if:
(i)
the material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to the Board, and the Board in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested Managers, even though the disinterested Managers be less than a quorum;
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
HEP UNEV HOLDINGS LLC
JULY 12, 2012
#PageNum#
(ii)
the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Members entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the Members; or
(iii)
the contract or transaction is fair as to the Company as of the time it is authorized, approved or ratified, by the Board or the Members.
Section 8.2
Officers
.
(d)
Authority to Appoint
. The Board may appoint, and remove with or without cause, such officers of the Company as the Board from time to time may determine, in its sole and absolute discretion to manage and control the business and affairs of the Company. Such officers need not be a Member or Manager, and shall have such duties, powers, responsibilities and authority as set forth below and as otherwise may be authorized by the Board from time to time.
(e)
Term
. Subject to any express term of any written agreement between the Company and any officer approved by the Board in writing, any officer so appointed by the Board shall serve in the capacity so appointed until (i) removed with or without cause by the Board, (ii) such officer’s successor shall be duly elected and appointed by the Board or (iii) such officer’s death, disability or resignation.
(f)
Titles
. To the extent appointed by the Board, the officers of the Company may be a Chairman of the Board, a Chief Executive Officer, President, a Secretary, one or more Vice Presidents (any one or more of whom may be designated Executive Vice President or Senior Vice President), a Treasurer and such other officers as the Board may from time to time elect or appoint by resolution. Any number of offices may be held by the same person.
(g)
Salaries
. The officers and agents of the Company shall not receive any salaries or other compensation except as may be fixed from time to time in writing by the Board.
(h)
Vacancies
. Any vacancy occurring in any office of the Company may be filled by the Board.
(i)
Powers and Duties of the Chairman of the Board
. The Chairman of the Board shall be an existing Manager and shall preside at all meetings of the Board.
(j)
Powers and Duties of the Chief Executive Officer
. The President shall be the Chief Executive Officer of the Company unless the Board designates the Chairman of the Board as Chief Executive Officer. The Chief Executive Officer shall have, subject to the control of the Board, general executive charge, management and control of the properties, business and operations of the Company with all such powers as may be reasonably incident to such responsibilities; he may agree upon and execute leases, contracts, evidences of indebtedness and other obligations in the name of the Company; and he may sign certificates for membership interests of the Company.
(k)
Powers and Duties of the President
. The President shall have the authority to agree upon and execute all leases, contracts, evidences of indebtedness and other obligations in
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
HEP UNEV HOLDINGS LLC
JULY 12, 2012
#PageNum#
the name of the Company; and, unless the Board otherwise determines, he shall, in the absence of the Chairman of the Board or if there be no Chairman of the Board, preside at all meetings of the Board.
(l)
Vice Presidents
. In the absence of the President, or in the event of his inability or refusal to act, a Vice President designated by the Board shall perform the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. In the absence of a designation by the Board of a Vice President to perform the duties of the President, or in the event of his absence or inability or refusal to act, the Vice President who is present and who is senior in terms of time as a Vice President of the Company shall so act.
(m)
Powers and Duties of the Chief Financial Officer
. The Chief Financial Officer, if any, shall have responsibility for the general executive charge, management and control of the financial affairs and business of the Company and, jointly with the Treasurer (if one shall be appointed), shall have custody and control of all the funds and securities of the Company. He shall perform all acts incident to the position of Chief Financial Officer, subject to the control of the Chief Executive Officer.
(n)
Treasurer
. The Treasurer, if any, jointly with the Chief Financial Officer (if one shall be appointed), shall have responsibility for the custody and control of all the funds and securities of the Company. He shall perform all acts incident to the position of Treasurer, subject to the control of the Chief Executive Officer.
(o)
Secretary
. The Secretary shall keep the minutes of all actions or consents by the Board and the Member, in books provided for that purpose; he shall attend to the giving and serving of all notices; he may sign with the other appointed officers all certificates for membership interests of the Company; he shall have charge of the certificate books, transfer books and membership interest ledgers, and such other books and records as the Board may direct, all of which shall at all reasonable times be open to inspection of any Manager or the Member upon application at the office of the Company during reasonable hours; and he shall in general perform all acts incident to the office of Secretary, subject to the control of the Chief Executive Officer.
(p)
Assistant Secretaries
. Each Assistant Secretary, if any, shall have the usual powers and duties pertaining to his office, together with such other powers and duties as from time to time may be designated in this Agreement or assigned to him by the Chief Executive Officer or the Board. The Assistant Secretaries shall exercise the powers of the Secretary under the Secretary’s direction or during that officer’s absence or inability or refusal to act.
(q)
Action with Respect to Securities and membership interests of Other Entities
. Unless otherwise directed by the Board, the Chief Executive Officer, the President and each Vice President shall have power to vote and otherwise act on behalf of the Company, in person or by proxy, at any meeting of holders of voting securities or interests held by the Company of or with respect to any action of holders of voting securities or interests of any other corporation or other entity in which the Company may hold securities and otherwise to exercise any and all rights and powers which this Company may possess by reason of its ownership of or voting securities or interest in such other corporation or other entity.
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
HEP UNEV HOLDINGS LLC
JULY 12, 2012
#PageNum#
Section 8.3
Other Activities
. Neither this Agreement nor any principle of law or equity shall preclude or limit, in any respect, the right of the Members to engage in or derive profit or compensation from any other activities or investments.
ARTICLE IX
INDEMNIFICATION
Section 9.1
Indemnification by the Company
. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (each a “
Proceeding
”), by reason of the fact that he (i) is or was a member, manager, officer, employee or agent of the Company or an officer, director, manager, stockholder, member or partner of the Members or, (ii) is or was serving at the request of the Company as a director, officer, employee or agent of another foreign or domestic limited liability company, corporation, partnership, joint venture, trust or other enterprise (a “
Subject Enterprise
”) (each person that may be indemnified under clause (i) or (ii), an “
Indemnified Person
”), in accordance with and to the fullest extent permitted under the laws of the State of Delaware as the same may be amended from time to time, including the advancement of expenses incurred by the Indemnified Person in defending any such threatened, pending or completed Proceeding. To the extent the present or former spouse(s) of any Indemnified Person is made a party or is threatened to be made a party to any Proceeding solely by virtue of his or her marital relationship to such Indemnified Person, such spouse shall be indemnified hereunder to the fullest extent permitted by the laws of the State of Delaware as the same may be amended from time to time. Except as the Board in its discretion (but subject to applicable law) may otherwise determine, such indemnification shall be afforded only if such person within 5 business days after his becoming aware of the institution of such Proceeding, shall have notified in writing by registered or certified mail, the Chief Executive Officer, President or Secretary of the Company of the institution of such Proceeding, and shall have furnished such Chief Executive Officer, President or Secretary with true copies of all papers served upon or otherwise received by such person relating to such Proceeding, and shall make available to officers or counsel of the Company all information necessary to keep the Company currently advised as to the status of such Proceeding, and permit the Company, at its option and expense, at any time during the course of such Proceeding, through counsel of the Company’s choosing, to participate in or direct the defense thereof in good faith, and in case of any proposed settlement of any Proceeding the defense of which is not directed by the Company, to submit the proposed terms and conditions thereof to the Board for its approval, failing which no indemnification hereunder shall be afforded for any such settlement. Such indemnification shall be a contract right and as such shall run to the benefit of any Indemnified Person while this
Article VI
is in effect. Any repeal or amendment of this
Article VI
shall be prospective only and shall not limit the rights of any such Indemnified Person, or the obligations of the Company with respect to any claim arising from or related to the services of such person in any of the foregoing capacities prior to any such repeal or amendment to this
Article VI
. The rights of indemnification under the foregoing provisions shall inure to the benefit of the successors, assigns, heirs, executors, administrators and personal representatives of any Indemnified Person. Such indemnification as hereinabove provided shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any statute, agreement, resolution of the Member, the Board or officers, or otherwise.
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
HEP UNEV HOLDINGS LLC
JULY 12, 2012
#PageNum#
Section 9.2
Subrogation
. In the event the Company shall be obligated to indemnify any Indemnified Person pursuant to clause (ii) of the first sentence of
Section 6.1
, the Company shall be subrogated to all rights of such Indemnified Person against, or otherwise to receive indemnification from, each Subject Enterprise with respect to or on account of the Proceeding giving rise to the Company’s obligation to indemnify such Indemnified Person pursuant to clause (ii) of the first sentence of
Section 6.1
, including without limitation any and all rights of such Indemnified Person to indemnification from such Subject Enterprise under the articles or certificate of incorporation, bylaws, regulations, limited liability company agreement, partnership agreement or other organizational documents of such Subject Enterprise or any agreement between such Indemnified Person and such Subject Enterprise.
ARTICLE X
ASSIGNMENT OF MEMBERSHIP INTERESTS
The Class A Members may transfer, convey, assign or pledge all or any portion of such Class A Member’s Membership Interest in the Company at any time, subject to Section 12.3. No portion of the Membership Interest of the Class B Member may be transferred, conveyed, assigned or pledged at any time without the prior approval of Class A Members holding at least a majority of the then outstanding Class A Common Units, except for Permitted Transfers. Upon any assignment, conveyance or transfer permitted hereunder, the assignee shall succeed to the rights and obligations of the assigning Member in respect of its interests in the Company so transferred and such assignee shall become a member in the Company;
provided
,
however
, that such assignee must agree to be bound by the terms of this Agreement, and evidence such agreement by executing a copy of this Agreement or a joinder thereto simultaneously with receiving such assignment of Membership Interests and as a condition to being admitted as a Member in the Company. Notwithstanding anything to the contrary contained herein, no such transfer of a Member’s interest in the Company shall operate to dissolve the Company.
ARTICLE XI
RESIGNATION
No Member may resign from the Company except upon an assignment by such Member of 100% of such Member’s interests in the Company in accordance with
Article X
, in which case such Member may resign at any time upon or after the effectiveness of such assignment.
ARTICLE XII
BUY-OUT AND BUY-DOWN OF THE PROFITS INTEREST
Section 12.1
Optional Buy-Out of the Profits Interest in Full
. At any time, the Class A Members or the Company may elect to purchase all of the Class B Common Units from the Class B Member by (i) providing written notice of such election to the Class B Member specifying a date for such purchase (the “
Optional Buy-Out Date
”), which date may not be more than 20 nor less than 10 days from the date of such notice, and (ii) paying to the Class B Member on the Optional Buy-Out Date an amount equal to the sum of (A) the Profits Interest Balance Amount, and (B) the Unpaid Profits Interest Amount, each as of such Optional Buy-Out Date (the “
Optional Buy-Out Price
”).
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
HEP UNEV HOLDINGS LLC
JULY 12, 2012
#PageNum#
Section 12.2
Optional Buy-Down of the Profits Interest
. At any time, and from time-to-time, the Class A Members or the Company may elect to buy-down the Profits Interest Balance Amount by providing written notice of such election to the Class B Member specifying the amount it intends to pay toward such buy-down and specifying a date for such buy-down (the “
Optional Buy-Down Date
”), which date may not be more than 20 nor less than 10 days from the date of such notice. Payment of such amount will be made on the Optional Buy-Down Date, and the Profits Interest Balance Amount will be reduced on such date by the amount of such payment.
Section 12.3
Mandatory Buy-Out of the Profits Interest upon a UNEV Sale Event
.
(a)
Upon a UNEV Sale Event, the Class A Members or the Company will (i) promptly (and in any event within 10 business days) notify the Class B Member in writing of such UNEV Sale Event, specifying in reasonable detail the nature of such UNEV Sale Event and the proceeds received by it or any of its Affiliates in connection with such UNEV Sale Event, and (ii) within 30 days of such UNEV Sale Event (or, if the fair market value of the Class B Common Units is being determined under Section 12.3(c), within 30
days after such determination becomes final as provided in such Section 12.3(c)) (the “
Mandatory Buy-Out Date
”), purchase all, but not less than all, of the Class B Member’s Class B Common Units for a price equal to the Mandatory Buy-Out Price;
provided, however
, that if the UNEV Sale Event relates to a transaction by the Class A Member within the meaning of clause (B) of the definition of UNEV Sale Event, then such transaction may not occur prior to the payment of the Mandatory Buy-Out Price;
provided further
,
however
, that if the UNEV Sale Event is a UNEV Sell-Down, then, instead of purchasing all of the Class B Common Units, the Class A Member or the Company will buy-down the Profits Interest Balance Amount by an amount equal to the Corresponding Percentage of the Profits Interest Balance Amount (a “
Mandatory Buy-Down
”). Payment for a Mandatory Buy-Down will be made within 30 days of the UNEV Sell-Down (except as provided in the first proviso above), and on such date the Profits Interest Balance Amount will be reduced by the amount of such payment.
(b)
The term “
Mandatory Buy-Out Price
” means:
(i)
if the UNEV Sale Event occurs before July 1, 2016, an amount equal to the Profits Interest Balance Amount as of such Mandatory Buy-Out Date (as indicated for such date in the table attached as Exhibit 2, using the table labeled “3-year Giveback Scenario” if the Wood Cross Expansion Completion Date has occurred by July 1, 2015, and the table labeled “4-year Giveback Scenario” if the Woods Cross Expansion Completion Date has not occurred by July 1, 2015);
(ii)
if the UNEV Sale Event occurs on or after July 1, 2016, at the option of the Class A Member or the Company (as applicable), either:
(A)
the sum of (1) the Profits Interest Balance Amount, and (2) the Unpaid Profits Interest Amount, each as of such Mandatory Buy-Out Date; or
(B)
the fair market value of the Class B Common Units as of such Mandatory Buy-Out Date, as determined in accordance with Section 12.3(c).
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
HEP UNEV HOLDINGS LLC
JULY 12, 2012
#PageNum#
(c)
The fair market value of the Class B Common Units shall initially be determined by an independent appraiser or investment banker of national prominence selected by the Class A Members or the Company (as applicable) (the “
Class A Appraiser
”). The Class A Members or Company (as applicable) shall provide the Class B Member with written notice and a copy of the determination of the Class A Appraiser promptly following its receipt thereof. If the Class B Member does not object to such valuation within 30 days following its receipt of such notice and determination, such determination shall be final and binding on the parties. If the Class B Member does object to such valuation within such 30 day period, then the Class B Member shall promptly retain a different, independent appraiser or investment banker of national prominence (the “
Class B Appraiser
”), which shall make its own determination of the fair market value of the Class B Common Units. The Class B Member shall provide the Class A Members or the Company (as applicable) with a copy of the determination of the Class B Appraiser promptly following its receipt thereof. If the Class A Members or the Company (as applicable) do not object to such valuation within 30 days following its receipt of such determination, such determination shall be final and binding on the parties. If the Class A Members or Company (as applicable) do object to such valuation within such 30 day period, then the Class A Appraiser and the Class B Appraiser shall select a third appraiser or investment banker of national prominence (the “
Independent Appraiser
”), which shall make its own determination of the fair market value of the Class B Common Units, which determination shall be final and binding on the parties. The fees and expenses of the Class A Appraiser will be borne entirely by the Class A Members or the Company (as applicable). The fees and expenses of the Class B Appraiser will be borne by entirely by the Class B Member. The fees and expenses of the Independent Appraiser will be paid proportionately by the Class A Members (or the Company, as applicable) and the Class B Member based upon the proximity of the determination made by the appraiser’s selected by them to the Independent Appraiser’s determination. For example, if the Class A Appraiser’s determination was $100, the Class B Appraiser’s determination was $200, and the Independent Appraiser’s determination was $120, then the Class A Members (or the Company, as applicable) would pay 20% of the Independent Appraiser’s fees and expenses, and the Class B Member would pay 80% of such fees and expenses.
Section 12.4
Further Assurances; Documents
. On any Optional Buy-Out Date or Mandatory Buyout Date, the Company, the Class A Members and the Class B Member shall (x) execute and deliver such documents, agreements, assignments and instruments, and take such further actions, as are necessary or reasonably requested by the Class A Members (or the Company, as applicable) to transfer and assign such Class B Common Units to the Class A Members (or the Company, as applicable), and (y) if, as of such date, the General Partner has not yet forgone all of the Incentive Distribution Rights that it is required to forego pursuant to the Waiver, take such action as is necessary to cause the General Partner to terminate the Waiver effective as of such date.
ARTICLE XIII
DISSOLUTION AND LIQUIDATION
Section 13.1
Dissolution
. The Company shall be dissolved upon the occurrence of any dissolution event specified in the DLLCA;
provided
,
however
, that notwithstanding the foregoing, the Company shall not dissolve upon the occurrence of any of the events described in Section 18‑801(a)(4) of the DLLCA (including, without limitation, the death or bankruptcy of the Members).
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
HEP UNEV HOLDINGS LLC
JULY 12, 2012
#PageNum#
Section 13.2
Effect of Dissolution
. Upon dissolution, the Company shall cease carrying on its business but shall not terminate until the winding up of the affairs of the Company is completed, the assets of the Company shall have been distributed as provided below and a Certificate of Cancellation of the Company under the DLLCA has been filed in the office of the Secretary of State of the State of Delaware.
Section 13.3
Liquidation Upon Dissolution
. Upon the dissolution of the Company, sole and plenary authority to effectuate the liquidation of the assets of the Company shall be vested in the Board, which shall have full power and authority to sell, assign and encumber any and all of the Company’s assets and to wind up and liquidate the affairs of the Company in an orderly and business-like manner. The proceeds of liquidation of the assets of the Company distributable upon a dissolution and winding up of the Company shall be applied in the following order of priority:
(a)
first, to the creditors of the Company, including creditors who are members, in the order of priority provided by law, in satisfaction of all liabilities and obligations of the Company (of any nature whatsoever, including, without limitation, fixed or contingent, matured or unmatured, legal or equitable, secured or unsecured), whether by payment or the making of reasonable provision for payment thereof; and
(b)
thereafter, to the Members in accordance with the amounts such Members would receive if the remaining proceeds of liquidation were Distributed in accordance with Section 12.3, in which case the Class B Member shall receive only the Mandatory Buy-Out Price as determined in accordance with Section 12.3, and the Class A Members shall receive all remaining amounts.
Section 13.4
Winding Up and Certificate of Cancellation
. The winding up of the Company shall be completed when all of its debts, liabilities and obligations have been paid and discharged or reasonably adequate provision therefor has been made, and all of the remaining property and assets of the Company have been distributed to the Members. Upon the completion of the winding up of the Company, a Certificate of Cancellation of the Company shall be filed in the office of the Secretary of State of the State of Delaware.
ARTICLE XIV
AMENDMENT
This Agreement may be amended or modified only by a written instrument executed by the Class A Members;
provided
,
however
, that, while any Class B Common Units remain outstanding, the Class B Member must consent to any amendment that would adversely affect the rights and privileges of the holder of Class B Common Units, increase the liability or duties of the holder of Class B Common Units or require additional contributions by the holder of Class B Common Units. In addition, the terms or conditions hereof may be waived by a written instrument executed by the party waiving compliance.
[Signatures appear on the following page.]
IN WITNESS WHEREOF, the undersigned have entered into this Agreement as of the date first written above.
COMPANY
:
HEP UNEV HOLDINGS LLC
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
MEMBERS
:
HOLLY ENERGY PARTNERS, L.P.
By: HEP Logistics Holdings, L.P.
its General Partner
By: Holly Logistic Services, L.L.C.
its General Partner
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HOLLYFRONTIER HOLDINGS LLC
By:
/s/ Michael C. Jennings
Name: Michael C. Jennings
Title: Chief Executive Officer and President
EXHIBIT 1
EXAMPLE PROFITS INTEREST BALANCE AMOUNT CALCULATION
[See Attached.]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit 1
|
|
Example Profits Interest Balance Amount Calculations
|
|
|
|
|
|
|
|
|
Example Profits Interest Balance Amount Calculations
(all amounts are in millions; assumes WX expansion completed by end of year 3; assumes 1x annual payment in subsequent year)
|
|
|
Contract Year
|
Profits Interest Balance Amount applciable for this Contract Year*
|
Hypothetical Profits Interest payment made in this Contract Year (with respect to prior Contract Year EBITDA)*
|
Total of all Profits Interest payments (after payment in this Contract Year)
|
Profits Interest Balance Amount after payment in this Contract Year (and before accrual of 7% applicable rate)
|
Profits Interest Balance Amount for next Contract Year (including accrual of 7% applicable rate)
|
|
4*
|
N/A*
|
|
$
|
—
|
|
$
|
—
|
|
N/A
|
|
$
|
33.82
|
|
|
5
|
$
|
33.82
|
|
$
|
5
|
|
$
|
5
|
|
$
|
28.82
|
|
$
|
30.84
|
|
|
6
|
$
|
30.84
|
|
$
|
5
|
|
$
|
10
|
|
$
|
25.84
|
|
$
|
27.65
|
|
|
7
|
$
|
27.65
|
|
$
|
5
|
|
$
|
15
|
|
$
|
22.65
|
|
$
|
24.23
|
|
|
8
|
$
|
24.23
|
|
$
|
5
|
|
$
|
20
|
|
$
|
19.23
|
|
$
|
20.58
|
|
|
9
|
$
|
20.58
|
|
$
|
5
|
|
$
|
25
|
|
$
|
15.58
|
|
$
|
16.67
|
|
|
10
|
$
|
16.67
|
|
$
|
5
|
|
$
|
30
|
|
$
|
11.67
|
|
$
|
12.48
|
|
|
11
|
$
|
12.48
|
|
$
|
5
|
|
$
|
35
|
|
$
|
7.48
|
|
$
|
8.01
|
|
|
12
|
$
|
8.01
|
|
$
|
5
|
|
$
|
40
|
|
$
|
3.01
|
|
$
|
3.22
|
|
|
13
|
$
|
3.22
|
|
$
|
3.22
|
|
$
|
43.22
|
|
$
|
—
|
|
$
|
—
|
|
|
14
|
$
|
—
|
|
$
|
—
|
|
$
|
43.22
|
|
$
|
—
|
|
$
|
—
|
|
|
15
|
$
|
—
|
|
$
|
—
|
|
$
|
43.22
|
|
$
|
—
|
|
$
|
—
|
|
|
16
|
$
|
—
|
|
$
|
—
|
|
$
|
43.22
|
|
$
|
—
|
|
$
|
—
|
|
|
17
|
$
|
—
|
|
$
|
—
|
|
$
|
43.22
|
|
$
|
—
|
|
$
|
—
|
|
|
18
|
$
|
—
|
|
$
|
—
|
|
$
|
43.22
|
|
$
|
—
|
|
$
|
—
|
|
|
19
|
$
|
—
|
|
$
|
—
|
|
$
|
43.22
|
|
$
|
—
|
|
$
|
—
|
|
|
20
|
$
|
—
|
|
$
|
—
|
|
$
|
43.22
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
* * *
Profits Interest Amount fully paid in Year 13.
|
|
|
|
|
|
|
|
|
|
Formula for Determining Profits Interest Balance Amount for Contract Year n+1:
|
|
|
|
|
|
|
|
|
Variables:
|
|
|
|
|
|
|
PI(n)
|
>> Profits Interest payments made in Contract Year n (with respect to
|
|
|
prior Contract Year EBITDA)
|
|
|
|
|
BA(n)
|
>> Profits Interest Balance Amount applciable for Contract Year n
|
|
|
|
|
|
|
|
|
Formula:
|
|
|
|
|
|
|
BA(n+1) =
|
[ BA(n) - PI(n) ] + ( [ BA(n) - PI(n) ] * .07 )
|
|
|
|
|
|
|
|
|
|
|
BA(n+1)
=
|
[ BA(n) - PI(n) ] * 1 .07
|
>>> Column G in above spreadsheet uses
|
|
|
|
|
this reduced formula.
|
|
|
|
|
|
|
|
|
|
Notes and Data Inputs:
|
|
|
|
|
|
* Profits Interest amounts begin to accrue during Contract Year 4; Payment of
|
|
Profits Interest amount for Contract Year 4 occurs in Contract Year 5.
|
|
|
|
|
|
|
|
|
|
Assumed hypothetical Profits Interest payment amount:
|
$5
|
|
Initial Profits Interest Balance Amount (for Contract Year 5):
|
$33.82
|
|
|
|
|
|
|
|
EXHIBIT 2
UNEV PROFITS INTEREST BALANCE AMOUNT CALCULATION (DURING WAIVER PERIOD)
$millions
3-year GP Giveback Scenario
Interest Rate 7.0%
|
|
|
|
|
|
|
|
|
|
GP giveback
|
Purchase price gap
|
Profits Interest
Balance Amount
|
|
|
6/30/2012
|
|
12.2
|
12.2
|
Year 1
|
Q1
|
9/30/2012
|
1.25
|
|
13.66
|
|
Q2
|
12/31/2012
|
1.25
|
|
15.15
|
|
Q3
|
3/31/2013
|
1.25
|
|
16.67
|
|
Q4
|
6/30/2013
|
1.25
|
|
18.21
|
Year 2
|
Q1
|
9/30/2013
|
1.25
|
|
19.78
|
|
Q2
|
12/31/2013
|
1.25
|
|
21.37
|
|
Q3
|
3/31/2014
|
1.25
|
|
23.00
|
|
Q4
|
6/30/2014
|
1.25
|
|
24.65
|
Year 3
|
Q1
|
9/30/2014
|
1.25
|
|
26.33
|
|
Q2
|
12/31/2014
|
1.25
|
|
28.04
|
|
Q3
|
3/31/2015
|
1.25
|
|
29.78
|
|
Q4
|
6/30/2015
|
1.25
|
|
31.55
|
Year 4
|
Q1
|
9/30/2015
|
-
|
|
32.11
|
|
Q2
|
12/31/2015
|
-
|
|
32.67
|
|
Q3
|
3/31/2016
|
-
|
|
33.24
|
|
Q4
|
6/30/2016
|
-
|
|
33.82
|
4-year GP Giveback Scenario
Interest Rate 7.0%
|
|
|
|
|
|
|
|
|
|
GP giveback
|
Purchase price gap
|
Profits Interest
Balance Amount
|
|
|
6/30/2012
|
|
12.2
|
12.2
|
Year 1
|
Q1
|
9/30/2012
|
1.25
|
|
13.66
|
|
Q2
|
12/31/2012
|
1.25
|
|
15.15
|
|
Q3
|
3/31/2013
|
1.25
|
|
16.67
|
|
Q4
|
6/30/2013
|
1.25
|
|
18.21
|
Year 2
|
Q1
|
9/30/2013
|
1.25
|
|
19.78
|
|
Q2
|
12/31/2013
|
1.25
|
|
21.37
|
|
Q3
|
3/31/2014
|
1.25
|
|
23.00
|
|
Q4
|
6/30/2014
|
1.25
|
|
24.65
|
Year 3
|
Q1
|
9/30/2014
|
1.25
|
|
26.33
|
|
Q2
|
12/31/2014
|
1.25
|
|
28.04
|
|
Q3
|
3/31/2015
|
1.25
|
|
29.78
|
|
Q4
|
6/30/2015
|
1.25
|
|
31.55
|
Year 4
|
Q1
|
9/30/2015
|
1.25
|
|
33.36
|
|
Q2
|
12/31/2015
|
1.25
|
|
35.19
|
|
Q3
|
3/31/2016
|
1.25
|
|
37.06
|
|
Q4
|
6/30/2016
|
1.25
|
|
38.96
|
AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
HEP UNEV HOLDINGS LLC
JULY 12, 2012
#PageNum#
Exhibit 10.6
TERMINATION OF OPTION AGREEMENT
This TERMINATION OF OPTION AGREEMENT (this “
Termination
”), dated as of July 12, 2012, is entered into by and between HollyFrontier Corporation (as successor-in-interest to Holly Corporation), a Delaware corporation (“
HFC
”), HEP UNEV Pipeline LLC (f/k/a Holly UNEV Pipeline Company), a Delaware limited liability company (“
HEP UNEV
”), Holly Energy Partners – Operating, L.P., a Delaware limited partnership (“
HEP-Operating
”), Navajo Pipeline Co., L.P., a Delaware limited partnership, Holly Logistic Services, L.L.C., a Delaware limited liability company, HEP Logistics Holdings, L.P., a Delaware limited partnership, Holly Energy Partners, L.P., a Delaware limited partnership (“
HEP
”) and HEP Logistics GP, L.L.C., a Delaware limited liability company. The above-named entities are sometimes referred to in this Termination collectively as the “
Parties
.”
R E C I T A L S
A.
The Parties previously entered into that certain Option Agreement, dated as of January 31, 2008, as amended by that certain First Amendment to Option Agreement, dated as of February 11, 2010 (collectively, the “
Option Agreement
”), pursuant to which HEP UNEV granted to HEP-Operating an irrevocable option to purchase all the equity interests owned by HEP UNEV in UNEV Pipeline, LLC, a Delaware limited liability company, upon the terms and conditions set forth in the Option Agreement.
B.
HFC and HEP desire to enter into that certain LLC Interest Purchase Agreement, by and among HFC, HEP and HEP UNEV Holdings LLC, a Delaware limited liability company and a wholly-owned subsidiary of HEP (“
Holdings
”), pursuant to which Holdings would acquire from HFC all the issued and outstanding membership interests held by HFC in HEP UNEV (the “
Purchase Agreement
”).
C.
The termination of the Option Agreement is a condition precedent to the closing of the transactions contemplated by the Purchase Agreement and the Parties desire to terminate the Option Agreement.
A G R E E M E N T
For and in consideration of the mutual understandings contained herein and other good and valuable consideration, receipt of which is hereby acknowledged, the Parties hereby covenant and agree as follows:
1.
Termination
. The Parties agree that, effective immediately as of the execution of this Termination, the Option Agreement shall terminate in its entirety and be of no further force or effect and there shall be no liability or obligations on the part of any party thereto of any nature whatsoever with respect to, in connection with or otherwise arising under the Option Agreement.
2.
Release
. The Parties hereby release and forever discharge one another for any and all past, present and future claims, demands, rights, judgments, executions, damages, liabilities, costs or expenses (including attorney’s fees and court costs), and causes of action of any and every character (whether heretofore or now known, unknown or unforeseen, or hereafter discovered) that in any way arise out of, relate to or result from the Option Agreement.
3.
Governing Law
. This Termination shall be subject to and governed by the laws of the State of Delaware, excluding any conflicts-of-law rule or principle that might refer the construction or interpretation of this Termination to the laws of another state.
4.
Severability
.
If any provision of this Termination shall be held invalid or unenforceable by a court or regulatory body of competent jurisdiction, the remainder of this Termination shall remain in full force and effect.
5.
Counterparts
. This Termination may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
[Signature Page Follows]
IN WITNESS WHEREOF, the Parties have executed this Termination on the date first written above.
HOLLYFRONTIER CORPORATION
By:
/s/ Michael C. Jennings
Name: Michael C. Jennings
Title: Chief Executive Officer and President
HEP UNEV PIPELINE LLC
By:
/s/ Michael C. Jennings
Name: Michael C. Jennings
Title: Chief Executive Officer and President
HOLLY ENERGY PARTNERS – OPERATING, L.P.
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HEP LOGISTICS HOLDINGS, L.P.
By: Holly Logistic Services, L.L.C.
its general partner
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HOLLY LOGISTIC SERVICES, L.L.C.
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
NAVAJO PIPELINE CO., L.P.
By:
/s/ Michael C. Jennings
Name: Michael C. Jennings
Title: Chief Executive Officer and President
HOLLY ENERGY PARTNERS, L.P.
By: HEP Logistics Holdings, L.P.
its general partner
By: Holly Logistic Services, L.L.C.,
its general partner
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
HEP LOGISTICS GP, L.L.C.
By:
/s/ Matthew P. Clifton
Name: Matthew P. Clifton
Title: Chief Executive Officer and President
Exhibit 31.1
CERTIFICATION
I, Michael C. Jennings, certify that:
|
|
1.
|
I have reviewed this quarterly report on Form 10-Q of HollyFrontier Corporation;
|
|
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
|
|
4.
|
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
|
|
a.
|
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
|
b.
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
|
c.
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
|
d.
|
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
|
|
5.
|
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
|
|
|
a.
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
|
|
b.
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting
|
|
|
|
|
Date: August 8, 2012
|
|
/s/ Michael C. Jennings
|
|
|
Michael C. Jennings
|
|
|
Chief Executive Officer and President
|
Exhibit 31.2
CERTIFICATION
I, Douglas S. Aron, certify that:
|
|
1.
|
I have reviewed this quarterly report on Form 10-Q of HollyFrontier Corporation;
|
|
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
|
|
4.
|
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
|
|
a.
|
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
|
b.
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
|
c.
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
|
d.
|
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's most recent fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
|
|
5.
|
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
|
|
|
a.
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
|
|
b.
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
|
|
|
|
Date: August 8, 2012
|
|
/s/ Douglas S. Aron
|
|
|
Douglas S. Aron
|
|
|
Executive Vice President and Chief Financial Officer
|
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE
OFFICER UNDER SECTION 906 OF THE
SARBANES OXLEY ACT OF 2002, 18 U.S.C. § 1350
In connection with the accompanying report on Form 10-Q for the quarterly period ended June 30, 2012 and filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael C. Jennings, Chief Executive Officer of HollyFrontier Corporation (the “Company”) hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
|
|
1.
|
The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
|
|
|
2.
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
|
|
|
|
Date: August 8, 2012
|
|
/s/ Michael C. Jennings
|
|
|
Michael C. Jennings
|
|
|
Chief Executive Officer and President
|
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL
OFFICER UNDER SECTION 906 OF THE
SARBANES OXLEY ACT OF 2002, 18 U.S.C. § 1350
In connection with the accompanying report on Form 10-Q for the quarterly period ended June 30, 2012 and filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Douglas S. Aron, Chief Financial Officer of HollyFrontier Corporation (the “Company”) hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
|
|
1.
|
The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
|
|
|
2.
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
|
|
|
|
Date: August 8, 2012
|
|
/s/ Douglas S. Aron
|
|
|
Douglas S. Aron
|
|
|
Executive Vice President and Chief Financial Officer
|