UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

OR

¨

Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from . . . . to . . . .

Commission file number 1-7627

Registrant’s telephone number, including area code: (713) 688-9600

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   þ   No ¨

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.

(Check one)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   ¨    No   þ

Registrant’s number of common shares outstanding as of August 4, 2008:  103,874,740

PART I - FINANCIAL INFORMATION

ITEM 1.        FINANCIAL STATEMENTS

FRONTIER OIL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited, in thousands, except per share data)
		Six Months Ended June 30,								Three Months Ended June 30,
		2008				2007				2008				2007
Revenues:
Refined products		$	3,089,598			$	2,481,194			$	1,882,010			$	1,431,138
Other			(137,259	)			1,389				(115,454	)			3,562
			2,952,339				2,482,583				1,766,556				1,434,700
Costs and expenses:
Raw material, freight and other costs			2,574,026				1,804,805				1,574,898				964,940
Refinery operating expenses, excluding depreciation			168,594				140,977				81,034				69,814
Selling and general expenses, excluding depreciation			22,503				24,615				12,148				13,583
Depreciation, amortization and accretion			31,437				23,193				16,497				12,070
(Gain) loss on sales of assets			(44	)			2,028				(7	)			-
			2,796,516				1,995,618				1,684,570				1,060,407
Operating income			155,823				486,965				81,986				374,293
Interest expense and other financing costs			4,563				4,948				2,924				1,992
Interest and investment income			(3,635	)			(11,647	)			(1,322	)			(6,320	)
			928				(6,699	)			1,602				(4,328	)
Income before income taxes			154,895				493,664				80,384				378,621
Provision for income taxes			49,610				175,181				21,068				134,858
Net income		$	105,285			$	318,483			$	59,316			$	243,763
Comprehensive income		$	104,223			$	318,483			$	59,204			$	243,763
Basic earnings per share of common stock		$	1.02			$	2.93			$	0.58			$	2.26
Diluted earnings per share of common stock		$	1.02			$	2.90			$	0.57			$	2.23
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

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FRONTIER OIL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands except share data)
June 30, 2008 and December 31, 2007		2008				2007
ASSETS
Current assets:
Cash, including cash equivalents of $183,582 and $278,314 at 2008 and 2007,   respectively		$	221,240			$	297,399
Trade receivables, net of allowance of $500 at both years			252,121				155,454
Income taxes receivable			487				24,056
Other receivables			6,866				5,236
Inventory of crude oil, products and other			762,102				501,927
Deferred income taxes			11,032				9,426
Commutation account			6,351				6,280
Other current assets			34,285				31,245
Total current assets			1,294,484				1,031,023
Property, plant and equipment, at cost:
Refineries and other equipment			1,189,556				1,082,275
Furniture, fixtures and other equipment			14,462				13,168
			1,204,018				1,095,443
Accumulated depreciation and amortization			(340,121	)			(317,993	)
Property, plant and equipment, net			863,897				777,450
Deferred turnaround costs			54,705				39,276
Deferred catalyst costs			12,061				6,540
Deferred financing costs, net of accumulated amortization of $1,819 and $1,619 at  2008 and 2007, respectively			2,593				2,556
Prepaid insurance, net of accumulated amortization			303				909
Intangible assets, net of accumulated amortization of $431 and $370 at 2008 and  2007, respectively			1,399				1,460
Other assets			4,595				4,634
Total assets		$	2,234,037			$	1,863,848
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	744,228			$	417,395
Derivative liabilities			19,701				15,089
Accrued liabilities and other			45,626				69,029
Total current liabilities			809,555				501,513
Long-term debt			150,000				150,000
Contingent income tax liabilities			34,031				32,257
Post-retirement employee liabilities			29,996				27,549
Long-term capital lease obligation			3,733				8
Other long-term liabilities			13,641				13,597
Deferred income taxes			114,741				100,310
Commitments and contingencies
Shareholders' equity:
Preferred stock, $100 par value, 500,000 shares authorized, no shares issued			-				-
Common stock, no par value, 180,000,000 shares authorized, 131,850,356 shares issued  at both periods			57,736				57,736
Paid-in capital			223,994				211,324
Retained earnings			1,189,306				1,095,540
Accumulated other comprehensive income			516				1,578
Treasury stock, at cost, 27,975,616 and 26,893,939 shares at 2008 and 2007, respectively			(393,212	)			(327,564	)
Total shareholders' equity			1,078,340				1,038,614
Total liabilities and shareholders' equity		$	2,234,037			$	1,863,848
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

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FRONTIER OIL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
		For the six months ended June 30,
		2008				2007
Cash flows from operating activities:
Net income		$	105,285			$	318,483
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amortization and accretion			39,786				29,532
Deferred income taxes			13,470				2,158
Stock-based compensation expense			9,802				12,090
Excess income tax benefits of stock-based compensation			(3,935	)			(4,520	)
Amortization of debt issuance costs			343				399
(Gain) loss on sales of assets			(44	)			2,028
Decrease in commutation account			-				1,000
Amortization of long-term prepaid inusrance			606				606
Increase in other long-term liabilities			1,888				28,931
Changes in deferred turnaround costs, deferred catalyst costs and other			(29,260	)			(19,207	)
Changes in working capital from operations			(18,162	)			37,275
Net cash provided by operating activities			119,779				408,775
Cash flows from investing activities:
Additions to property, plant and equipment			(115,021	)			(146,376	)
Proceeds from sales of assets			45				2,290
El Dorado Refinery contingent earn-out payment			(7,500	)			(7,500	)
Other acquisitions and leasehold improvements			-				(2,995	)
Net cash used in investing activities			(122,476	)			(154,581	)
Cash flows from financing activities:
Purchase of treasury stock			(66,403	)			(128,195	)
Proceeds from issuance of common stock			126				947
Dividends paid			(10,651	)			(6,617	)
Excess income tax benefits of stock-based compensation			3,935				4,520
Debt issuance costs and other			(469	)			(7	)
Net cash used in financing activities			(73,462	)			(129,352	)
(Decrease) increase in cash and cash equivalents			(76,159	)			124,842
Cash and cash equivalents, beginning of period			297,399				405,479
Cash and cash equivalents, end of period		$	221,240			$	530,321
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest, excluding capitalized interest		$	1,202			$	4,024
Cash paid during the period for income taxes			42,190				84,465
Cash refunds of income taxes			24,548				-
Noncash investing activities - accrued capital expenditures, end of period			18,069				48,001
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

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FRONTIER OIL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

1.      Financial Statement Presentation

The interim condensed consolidated financial statements include the accounts of Frontier Oil Corporation (“FOC”), a Wyoming corporation, and its wholly-owned subsidiaries, collectively referred to as “Frontier” or “the Company.”  The Company is an energy company engaged in crude oil refining and wholesale marketing of refined petroleum products.

The Company operates refineries (“the Refineries”) in Cheyenne, Wyoming and El Dorado, Kansas.  The Company also owns Ethanol Management Company (“EMC”), a products terminal and blending facility located near Denver, Colorado.  The Company utilizes the equity method of accounting for investments in entities in which it has the ability to exercise significant influence.  Entities in which the Company has the ability to exercise control are consolidated.  All of the operations of the Company are in the United States, with its marketing efforts focused in the Rocky Mountain and Plains States regions of the United States.  The Rocky Mountain region includes the states of Colorado, Wyoming, Montana and Utah, and the Plains States include the states of Kansas, Oklahoma, Nebraska, Iowa, Missouri, North Dakota and South Dakota.  The Company purchases crude oil to be refined and markets the refined petroleum products produced, including various grades of gasoline, diesel fuel, jet fuel, asphalt, chemicals and petroleum coke.  The operations of refining and marketing of petroleum products are considered part of one reporting segment.

These financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and include all adjustments (comprised of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  The Company believes that the disclosures contained herein are adequate to make the information presented not misleading.  The condensed consolidated financial statements included herein should be read in conjunction with the financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2007.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Earnings per share

The Company computes basic earnings per share (“EPS”) by dividing net income by the weighted average number of common shares outstanding during the period.  No adjustments to income are used in the calculation of basic EPS.  Diluted EPS includes the effects of potentially dilutive shares, principally common stock options and unvested restricted stock outstanding during the period.  The basic and diluted average shares outstanding were as follows:

 

		Six Months Ended June 30,				Three Months Ended June 30,
		2008		2007		2008		2007
Basic		103,082,444		108,627,185		102,934,252		108,007,744
Diluted		103,619,761		109,877,280		103,470,989		109,304,252

 

For the six and three months ended June 30, 2008, 449,591 outstanding stock options that could potentially dilute EPS in future years were not included in the computation of diluted EPS as they were anti-dilutive.  For the six and three months ended June 30, 2007, there were no outstanding stock options that could potentially dilute EPS in future years that were not included in the computation of diluted EPS.

The Company’s Board of Directors declared a quarterly cash dividend of $0.05 per share in November 2007, which was paid in January 2008.  In addition, a quarterly cash dividend of $0.05 per share was declared in February 2008 and paid in April 2008.  In April 2008, the Company announced an increase in the regular quarterly cash dividend, to $0.06 per share ($0.24 annualized) from the current level of $0.05 per share ($0.20 annualized) and declared a quarterly cash dividend of $0.06 per share to shareholders of record on June 27, 2008, which was paid in July 2008. The total cash required for the dividend declared in June 2008 was approximately $6.2 million and was reflected in “Accrued liabilities and other” on the Condensed Consolidated Balance Sheet as of June 30, 2008.

New accounting pronouncements

On January 1, 2008, the Company adopted The Emerging Issues Task Force (“EITF”) Issue 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”).  In a stock-based compensation arrangement, employees may be entitled to dividends during the vesting period for nonvested shares or share units and until the exercise date for stock options.  These dividend payments generally can be treated as a deductible compensation expense for income tax purposes, thereby generating an income tax benefit for the employer.  At issue was how such a realized benefit should be recognized in the financial statements.  The EITF concluded that an entity should recognize the realized tax benefit as an increase in additional paid-in capital (“APIC”) and that the amount recognized in APIC should be included in the pool of excess tax benefits available to absorb tax deficiencies on stock-based payment awards.  EITF 06-11 is effective prospectively for income tax benefits that result from dividends on equity-classified employee share-based payment awards declared in fiscal years beginning after December 15, 2007.  This EITF did not have a material effect on the Company’s financial statements.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standard (“FAS”) No. 157, “Fair Value Measurements.”  FAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements regarding fair value measurement.  Where applicable, this statement simplifies and codifies fair value related guidance previously issued within Generally Accepted Accounting Principles (“GAAP”).  FAS No. 157 was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company partially adopted FAS No. 157 as of January 1, 2008, pursuant to FASB Staff Position (“FSP”) FAS No. 157-2, “Effective Date of FASB Statement No. 157,” which delayed the effective date of FAS No. 157 for all nonrecurring fair value measurements of non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008.  FSP FAS No. 157-2 states that a measurement is recurring if it happens at least annually and defines non-financial assets and non-financial liabilities as all assets and liabilities other than those meeting the definition of a financial asset or financial liability in FAS No. 159.  The statement also notes that if FAS No. 157 is not applied in its entirety, the Company must disclose (1) that it has only partially adopted FAS No. 157 and (2) the categories of assets and liabilities recorded or disclosed at fair value to which the statement was not applied.  The Company chose to adopt FSP FAS No. 157-2 as of January 1, 2008 and delay the application of FAS No. 157 in its entirety.  Therefore, the Company did not apply FAS No. 157 to nonrecurring fair value measurements of non-financial assets and non-financial liabilities, including non-financial long-lived assets measured at fair value for an impairment assessment under FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and asset retirement obligations initially measured at fair value under FAS No. 143, “Accounting for Asset Retirement Obligations.”  The Company is still required to apply FAS No. 157 to recurring financial and non-financial instruments, which affects the fair value disclosure of our financial derivatives within the scope of FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  See Note 8 “Fair Value Measurement.”

On January 1, 2008 the Company adopted FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FAS No. 115, Accounting for Certain Investments in Debt and Equity Securities,” which expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value.  Under FAS No. 159, a company may elect to use fair value to measure many financial instruments and certain other assets and liabilities at fair value.  The Company has decided not to elect fair value accounting for any of its eligible items.  The adoption of FAS No. 159 therefore did not have any impact on the Company’s financial position, cash flows or results of operations.

FSP No. FIN 39-1, an amendment of FASB Interpretation No. 39 was adopted by the Company on January 1, 2008.  This FSP amends paragraph 3 of Interpretation 39 to replace the terms “conditional contracts” and “exchange contracts” with the term “derivative instruments” as defined in FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  It also amended paragraph 10 of Interpretation 39 to permit a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset in accordance with the paragraph.  The adoption of this FSP did not have any impact on the Company’s financial statements.

In March 2008, the FASB released FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.”  FAS No. 161 expands the disclosure requirements in FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” about an entity’s derivative instruments and hedging activities.  FAS No. 161’s disclosure provisions apply to all entities with derivative instruments subject to FAS No. 133 and its related interpretations.  The provisions also apply to related hedged items, bifurcated derivatives, and nonderivative instruments that are designated and qualify as hedging instruments.  Entities with instruments subject to FAS No. 161 must provide more robust qualitative disclosures and expanded quantitative disclosures.  The statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  The Company is currently evaluating the effect that this statement will have on the Company’s financial statements and any other factors influencing its overall business environment, but does not believe that it will have a material effect on its financial statements.

2.      Inventories

Inventories of crude oil, unfinished products and all finished products are recorded at the lower of cost on a first-in, first-out (“FIFO”) basis or market.  Crude oil includes both domestic and foreign crude oil volumes at its cost and associated freight and other cost.  Unfinished products (work in process) include any crude oil that has entered into the refining process, and other feedstocks that are not finished as far as refining operations are concerned.  These include unfinished gasoline and diesel, blend stocks and other feedstocks.  Finished product inventory includes saleable gasoline, diesel, jet fuel, chemicals, asphalt and other finished products.  Unfinished and finished products inventory values have components of raw material, the associated raw material freight and other costs, and direct refinery operating expense allocated when refining begins relative to their proportionate market values.  Refined product exchange transactions are considered asset exchanges with deliveries offset against receipts.  The net exchange balance is included in inventory.  Inventories of materials and supplies and process chemicals are recorded at the lower of average cost or market.  Crude oil inventories, unfinished product inventories and finished product inventories are used to secure financing for operations under the Company’s revolving credit facility and Utexam financing arrangement (see Note 14, “Amendment of Crude Oil Purchase and Sale Contract”).  The components of inventory as of June 30, 2008 and December 31, 2007 were as follows:

		June 30,				December 31,
		2008				2007
		(in thousands)
Crude oil		$	356,694			$	223,715
Unfinished products			223,804				152,572
Finished products			159,784				104,820
Process chemicals			1,124				1,300
Repairs and maintenance supplies and other			20,696				19,520
		$	762,102			$	501,927

3.      Accrued Liabilities and Other

		June 30,				December 31,
		2008				2007
		(in thousands)
Accrued compensation		$	7,623			$	16,119
Accrued Beverly Hills litigation settlement			10,000				10,000
Accrued income taxes			-				6,819
Accrued El Dorado Refinery contingent earn-out payment			-				7,500
Accrued dividends			6,693				5,825
Accrued environmental costs			8,662				8,750
Accrued property taxes			5,862				4,998
Accrued refinery incidents costs			276				2,800
Accrued interest			2,555				2,541
Other			3,955				3,677
		$	45,626			$	69,029

4.      Income Taxes

The Company is currently under a U.S. Federal income tax examination for 2005 and 2006.  As of June 30, 2008, no taxing authority has proposed any significant adjustments to the Company's tax positions.

The Company recognizes liabilities, interest and penalties for potential tax issues based on its estimate of whether, and the extent to which, additional taxes may be due as determined under FASB Interpretation No. 48, “Accounting for Uncertain Tax Positions – An Interpretation of FAS No. 109, Accounting for Income Taxes”.  A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding accrued interest and the federal income tax benefit of state contingencies, is as follows (in thousands):

 

Balance as of January 1, 2008		$	28,324
Additions based on tax positions related to the current year			497
Additions for tax positions of prior years			154
Reductions for tax positions of prior years			-
Settlements			-
Reductions due to lapse of applicable statutes of limitations			-
Balance as of June 30, 2008		$	28,975

 

The total contingent income tax liabilities and accrued interest of $34.0 million and $32.3 million at June 30, 2008 and December 31, 2007, respectively, are reflected in the Condensed Consolidated Balance Sheets under “Contingent income tax liabilities.”  The Company recognized approximately $1.1 million during each of the six months ended June 30, 2008 and 2007 and $521,000 and $623,000 during the three months ended June 30, 2008 and 2007, respectively, of interest expense on contingent income tax liabilities.

 

5.      Treasury Stock

The Company accounts for its treasury stock under the cost method on a FIFO basis.  Through December 31, 2007, the Company’s Board of Directors had approved a total of $300 million for share repurchases, of which $243.6 million had been utilized as of December 31, 2007.  On February 28, 2008, the Company’s Board of Directors authorized another $100 million for share repurchases.  During the six months ended June 30, 2008, the Company purchased 1,561,367 shares ($56.3 million) in open market transactions, leaving remaining authorization of $100.2 million for future repurchases of shares.

For the six months ended June 30, 2008, 824,274 treasury shares were re-issued for restricted stock awards, vesting of restricted stock units and for shares issued due to the exercise of stock options.  During the six months ended June 30, 2008, the Company received 9,224 shares ($306,000) of its common stock, now held as treasury stock, from employees in stock swaps where mature stock is surrendered by the employees to exercise their stock options, as provided by the Company’s stock-based compensation plan.  The Company also received during the six months ended June 30, 2008, 335,360 shares ($10.1 million) of its common stock, now held as treasury stock, from employees to cover minimum withholding taxes on stock-based compensation.

6.      Stock-based Compensation

Stock-based compensation costs and income tax benefits recognized in the Condensed Consolidated Statements of Income and Comprehensive Income for the six and three months ended June 30, 2008 and 2007 were as follows:

		Six Months Ended June 30,								Three Months Ended June 30,
		2008				2007				2008				2007
		(in thousands)
Restricted shares and units		$	2,294			$	3,876			$	1,239			$	1,844
Stock options			451				1,066				225				505
Performance-based stock unit awards			7,057				7,148				4,214				4,197
Total stock-based compensation expense		$	9,802			$	12,090			$	5,678			$	6,546
Income tax benefit recognized in the income statement		$	2,852			$	4,594			$	2,153			$	2,487

     Omnibus Incentive Compensation Plan.   The Company’s Omnibus Incentive Compensation Plan (the “Plan”) is a broad-based incentive plan that provides for granting stock options, stock appreciation rights (“SAR”), restricted stock awards, performance awards, stock units, bonus shares, dividend equivalent rights, other stock-based awards and substitute awards (“Awards”) to employees, consultants and non-employee directors of the Company.  As of June 30, 2008, 4,643,589 shares remain available to be awarded under the Plan assuming maximum payout is achieved on the performance awards made in 2008 (see “Performance Awards” below).  For purposes of determining compensation expense, forfeitures are estimated at the time Awards are granted based on historical average forfeiture rates and the group of individuals receiving those Awards. The Plan provides that the source of shares for Awards may be either newly issued shares or treasury shares.  For the six months ended June 30, 2008, treasury shares were re-issued for stock and restricted stock awards and for shares issued due to the exercise of stock options.  As of June 30, 2008, there was $37.8 million of total unrecognized compensation cost related to Awards issued under the Plan, including costs for stock options, restricted stock, restricted stock units and performance-based awards.  This amount is expected to be recognized as expense over a weighted-average period of 2.3 years.

 

Stock Options.   Stock option changes during the six months ended June 30, 2008 are presented below:

 

		Number of awards				Weighted-Average Exercise Price				Aggregate Intrinsic Value of Options
										(in thousands)
Outstanding at beginning of period			624,591			$	22.4021
Granted			-				-
Exercised or issued			(100,000	)			4.3125
Expired or forfeited			-				-
Outstanding at end of period			524,591			$	25.8505			$	1,444
Vested or expected to vest			513,672			$	25.7753			$	1,444
Exercisable at end of period			295,029			$	23.1002			$	1,444

The Company received $126,000 of cash for stock options exercised during the six months ended June 30, 2008.  The total intrinsic value of stock options exercised during the six months ended June 30, 2008 was $3.0 million.  The Company realized $1.1 million and $2.7 million of income tax benefit, nearly all of which was excess income tax benefit, for the six months ended June 30, 2008 and, 2007, respectively, related to exercises of stock options.  Excess income tax benefits are the benefits from deductions that are allowed for income tax purposes in excess of the expenses recorded in the Company’s financial statements.  These excess income tax benefits are recorded as an increase to paid-in capital, and the majority of these amounts are reflected as cash flows from financing activities in the Condensed Consolidated Statements of Cash Flows.

The following table summarizes information about stock options outstanding as of June 30, 2008:

 

Stock Options Outstanding at June 30, 2008
Number Outstanding				Weighted-Average Remaining Contractual Life (Years)				Exercise Price				Exercisable				Vested or Expected to Vest
	449,591				2.82			$	29.3850				220,029				438,672
	75,000				0.65			$	4.6625				75,000				75,000

Restricted Shares and Restricted Stock Units.   The following table summarizes the changes in the Company’s restricted shares and restricted stock units during the six months ended June 30, 2008:

		Shares/Units				Weighted-Average Grant-Date Market Value
Nonvested at beginning of period			1,053,083			$	24.0234
Conversion of 2007 performance stock unit awards			459,171				29.3850
Granted			191,603				29.2920
Vested			(968,195	)			23.6665
Forfeited			-				-
Nonvested at end of period			735,662				29.2119

The total fair value of restricted shares and restricted stock units which vested during the six months ended June 30, 2008 was $22.9 million, and the Company realized $10.7 million of income tax benefit related to these vestings, of which $2.8 million was excess income tax benefit.  The total fair value of restricted shares and restricted stock units which vested during the six months ended June 30, 2007 was $13.8 million, and the Company realized $5.2 million of income tax benefit related to these vestings, of which $1.9 million was excess income tax benefit.

In March 2008, following certification by the Compensation Committee of the Company’s Board of Directors that specified performance criteria had been achieved for the year ended December 31, 2007, the Company issued 459,171 shares of restricted stock in connection with the February 2007 grant of performance stock unit awards.  One-third of this restricted stock vested on June 30, 2008, one-third will vest on June 30, 2009 and the final one-third will vest on June 30, 2010. The Company issued 26,250 restricted stock units to its Board of Directors on January 24, 2008, of which 3,750 restricted stock units vested during the quarter due to retirement of a Board member and the remainder will vest on December 31, 2008.  In the six months ended June 30, 2008, an additional 162,488 shares of restricted stock were issued to employees and will vest 25% in March 2009, 25% in March 2010 and the final 50% in March 2011.  The Company also granted 2,865 shares of restricted stock to an employee, one-third of which vested on June 30, 2008, one-third will vest on June 30, 2009 and the final one-third will vest on June 30, 2010.

Performance Awards .  During the six months ended June 30, 2008, the Company granted up to 485,349 performance stock unit awards to be earned if certain performance goals are met for 2008.  Depending on achievement of the performance goals, awards earned could be between 0% and 125% of the base number of performance stock units.  If any of the performance goals are achieved for 2008 and certified by the Compensation Committee, these stock unit awards (or a portion thereof) will be converted into restricted stock during the first quarter of 2009.  One-third of these restricted shares will vest on June 30, 2009, one-third on June 30, 2010 and the final one-third on June 30, 2011.  The Company also granted up to 242,671 performance stock unit awards contingent upon performance criteria being met over a three-year period ending on December 31, 2010.  As of June 30, 2008, the Company assumed that the target (100%) level award would be earned for purposes of stock-based compensation expense for the awards granted in 2008.

As of June 30, 2008, the Company also had outstanding up to 229,607 performance stock unit awards that were issued during the quarter ended March 31, 2007, to be earned should performance criteria be met over a three-year period ending December 31, 2009.  Depending on achievement of the performance goals, awards earned could be between 0% and 125% of the base number of performance stock units.  As of June 30, 2008, the Company assumed the maximum (125%) level award would be earned for purposes of stock-based compensation expense for the awards granted in 2007.  When common stock dividends are declared by the Company’s Board of Directors, dividend equivalents (on the stock unit awards) and dividends (once the stock unit awards are converted to restricted stock) are accrued on the performance stock units and restricted stock but are not paid until the restricted stock vests.  The stock unit awards are valued at the market value on the date of grant and amortized to compensation expense on a straight-line basis over the nominal vesting period, adjusted for retirement-eligible employees, as required under FAS No. 123(R), “Share-Based Payment.”

7.      Employee Benefit Plans

Defined Benefit Plans

The Company established a defined benefit cash balance pension plan, effective January 1, 2000, for eligible El Dorado Refinery employees to supplement retirement benefits that those employees lost upon the sale of the El Dorado Refinery to Frontier.  No other current or future employees will be eligible to participate in the plan.  This plan had assets of $10.7 million at December 31, 2007, and its funding status is in compliance with ERISA.  In April 2008, the Company’s Board of Directors approved the termination of the pension plan.  Because of regulatory review, the Company estimates that it will take approximately a year to complete the termination.  Plan participants will receive 100% of their account balance, including interest, upon termination.  It is anticipated that most participants will roll over their account balance into the Company’s 401K plan.  The Company does not believe the termination will have a material effect on net income.

The Company provides post-retirement healthcare and other benefits to certain employees of the El Dorado Refinery.  Eligible employees are employees hired by the El Dorado Refinery before certain defined dates and who satisfy certain age and service requirements.  Employees hired on or before November 16, 1999 qualify for retirement healthcare insurance until eligible for Medicare.  Employees hired on or before January 1, 1995 are also eligible for Medicare supplemental insurance. These plans were unfunded as of March 31, 2008.  The post-retirement healthcare plan requires retirees to pay between 20% and 40% of total healthcare costs based on age and length of service.  The plan’s prescription drug benefits are at least equivalent to Medicare Part D benefits.  The plan was amended in the first quarter of 2008 to limit the employees’ pre-Medicare insurance premium to 125% of the active employee rate, which increased the benefit obligation by $1.4 million.

The following table sets forth the net periodic benefit costs recognized for these benefit plans in the Company’s Condensed Consolidated Statements of Income and Comprehensive Income for the six and three months ended June 30, 2008 and 2007:

		Six Months Ended  June 30,								Three Months Ended June 30,
Pension Benefits		2008				2007				2008				2007
		(in thousands)
Components of net periodic benefit cost and other amounts recognized in other comprehensive income:
Service cost		$	-			$	-			$	-			$	-
Interest cost			308				284				154				142
Expected return on plan assets			(406	)			(372	)			(203	)			(186	)
Amortization of prior service cost			-				-				-				-
Amortized net actuarial loss			-				-				-				-
Net periodic benefit cost			(98	)			(88	)			(49	)			(44	)
Changes in assets and benefit obligations recognized in other comprehensive income:
Net gain			-				-				-				-
Amortization of prior service cost			-				-				-				-
Amortization of loss			-				-				-				-
Total recognized in other comprehensive income			-				-				-				-
Total recognized in net periodic benefit cost and other comprehensive income		$	(98	)		$	(88	)		$	(49	)		$	(44	)

 

		Six Months Ended  June 30,								Three Months Ended June 30,
Post-retirement Healthcare and Other Benefits		2008				2007				2008				2007
		(in thousands)
Components of net periodic benefit cost and other amounts recognized in other comprehensive income:
Components of net periodic benefit cost:
Service cost		$	380			$	376			$	190			$	188
Interest cost			870				805				435				403
Expected return on plan assets			-				-				-				-
Amortization of prior service cost			(794	)			(938	)			(397	)			(469	)
Amortized net actuarial loss			436				568				218				284
Net periodic benefit cost			892				811				446				406
Changes in assets and benefit obligations recognized in other comprehensive income:
Increase in benefit obligation for plan amendment			1,350				-				-				-
Amortization of prior service cost			794				-				397				-
Amortization of loss			(436	)			-				(218	)			-
Total recognized in other comprehensive income			1,708				-				179				-
Total recognized in net periodic benefit cost and other comprehensive income		$	2,600			$	811			$	625			$	406

     

     During the six months ended June 30, 2008, the Company did not make any contributions to its cash balance pension plan, and is not required to make contributions during the remainder of 2008.

8.      Fair Value Measurement

FAS No. 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  The three levels are defined as follows:

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):

 

Description		Level 1				Level 2				Level 3				Total
Derivative assets		$	-			$	-			$	647			$	647
Derivative liabilities			14,247				5,454				-				19,701

As of June 30, 2008, the Company’s derivative contracts giving rise to the liabilities measured under Level 1 are NYMEX crude oil contracts and thus are valued using quoted market prices at the end of each period.  The Company’s derivative contracts giving rise to the liabilities under Level 2 are valued using pricing models based on NYMEX crude oil contracts.  The Company’s derivative asset measured under Level 3 was a crude call option that relates to lease crude in which the option was valued using internal contract pricing.   The following table provides a reconciliation of the beginning and ending balances of the Company’s Level 3 derivative assets (in thousands):

		Six Months Ended June 30,								Three Months Ended June 30,
		2008				2007				2008				2007
		(in thousands)
Beginning derivative asset balance		$	-			$	-			$	-			$	-
Net increase in derivative assets			911				-				911				-
Net settlements			(264	)			-				(264	)			-
Transfers in (out) of Level 3			-				-				-				-
Ending derivative asset balance		$	647			$	-			$	647			$	-

9.      Price Risk Management Activities

The Company, at times, enters into commodity derivative contracts to manage its price exposure to its inventory positions, purchases of foreign crude oil and consumption of natural gas in the refining process or to fix margins on certain future production.  The commodity derivative contracts used by the Company may take the form of futures contracts, collars or price swaps and are entered into with creditworthy counterparties.  The Company believes that there is minimal credit risk with respect to its counterparties.  The Company accounts for its commodity derivative contracts under the hedge (or deferral) method of accounting when the derivative contracts are designated as hedges for accounting purposes, or mark-to-market accounting through earnings if the Company elects not to designate derivative contracts as accounting hedges or if such derivative contracts do not qualify for hedge accounting under FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  As such, gains or losses on commodity derivative contracts accounted for as fair value hedges are recognized in the related inventory in “Inventory of crude oil, products and other” on the Condensed Consolidated Balance Sheets and ultimately, when the inventory is charged or sold, in “Raw material, freight and other costs” on the Condensed Consolidated Statements of Income and Comprehensive Income.  Gains and losses on transactions accounted for using mark-to-market accounting are reflected in “Other revenues” on the Condensed Consolidated Statements of Income and Comprehensive Income at each period end.  The Company has derivative contracts which it holds directly and also derivative contracts, in connection with its crude oil purchase and sale contract, held on Frontier’s behalf by Utexam Limited (“Utexam”), a wholly-owned subsidiary of BNP Paribas Ireland.  The market value of open derivative contracts is included on the Condensed Consolidated Balance Sheets in “Derivative liabilities” when the unrealized value is a loss ($19.7 million at June 30, 2008 and $15.1 million at December 31, 2007), or in “Other current assets” when the unrealized value is a gain ($647,000 at June 30, 2008, none at December 31, 2007.)

Mark-to-market activities.   During the six and three months ended June 30, 2008 and 2007, the Company (directly or indirectly) had the following derivative activities which, while economic hedges, were not accounted for as hedges under FAS No. 133. Gains or losses on these derivatives are reflected in “Other revenues” on the Condensed Consolidated Statements of Income and Comprehensive Income :

Crude purchases in-transit.   As of June 30, 2008, the Company had open derivative contracts held on Frontier’s behalf by Utexam on 781,000 barrels of crude oil to hedge in-transit Canadian crude oil costs.  As of June 30, 2008, these positions had unrealized losses of $5.5 million.  During the six months ended June 30, 2008 and 2007, the Company reported in “Other revenues” a net realized and unrealized $37.5 million loss and a net realized and unrealized $1.8 million gain, respectively, on positions to hedge in-transit crude oil, mainly Canadian crude oil for the El Dorado Refinery.  During the three months ended June 30, 2008 and 2007, the Company reported in “Other revenues” a $28.7 million loss and a $742,000 gain, respectively, on positions to hedge in-transit crude oil, mainly Canadian crude oil for the El Dorado Refinery.

Derivative contracts on crude oil to hedge excess intermediate, normal butane, finished product and excess crude oil inventory for both the Cheyenne and El Dorado Refineries.   As of June 30, 2008, the Company had open derivative contracts on 1.3 million barrels of crude oil to hedge crude oil, intermediate and finished product inventories in excess of established base levels.  At June 30, 2008, these positions had unrealized losses of $14.2 million.  During the six months ended June 30, 2008 and 2007, the Company reported in “Other revenues” $106.4 million and $5.5 million, respectively, in net realized and unrealized losses on these types of positions.  During the three months ended June 30, 2008 and 2007, the Company reported in “Other revenues” $88.1 million and $2.2 million, respectively, in net realized and unrealized losses on these types of positions.

Hedging activities.   During the six and three months ended June 30, 2008 and 2007, the Company had no derivative contracts that were designated and accounted for as hedges under FAS No. 133.

10.           Environmental

The Company’s operations and many of its manufactured products are specifically subject to certain requirements of the Clean Air Act (“CAA”) and related state and local regulations.  The 1990 amendments to the CAA contain provisions that will require capital expenditures for the production of cleaner transportation fuels and the installation of certain air pollution control devices at the Refineries during the next several years.

The Environmental Protection Agency (“EPA”) has promulgated regulations requiring the phase-in of gasoline sulfur standards, which began January 1, 2004 and continues through 2008, with special provisions for small business refiners such as Frontier.  As allowed by subsequent regulation, Frontier elected to extend its small refinery interim gasoline sulfur standard at each of the Refineries until January 1, 2011 by complying with the highway ultra low sulfur diesel standard by June 2006.  The Cheyenne Refinery has spent approximately $28.9 million (including capitalized interest) to meet the interim gasoline sulfur standard, which was required by January 1, 2004.  To meet final federal gasoline sulfur standards, the Company has identified expenditures of $9.3 million in new process unit capacity plus $10.0 million for intermediate inventory handling equipment at the Cheyenne Refinery.  In addition, new federal benzene regulations and anticipated state requirements for reduction in Reid Vapor Pressure (“RVP”) suggest that additional capital expenditures may be required for compliance projects.  The Company is presently estimating the total cost in connection with an overall compliance strategy for the Cheyenne Refinery.  Total capital expenditures estimated as of June 30, 2008 for the El Dorado Refinery to comply with the final gasoline sulfur standard are approximately $83.0 million, including capitalized interest, and are expected to be incurred by the end of 2009.  As of June 30, 2008, $18.2 million of the estimated $83.0 million had been incurred.  Substantially all of the estimated $83.0 million of expenditures relates to the El Dorado Refinery’s gasoil hydrotreater revamp project.  The gasoil hydrotreater revamp project will address most of the El Dorado Refinery’s modifications needed to achieve gasoline sulfur compliance, and the Company anticipates this project will provide a substantial economic benefit.

As of December 31, 2007, the Company had available to sell or use approximately 174 billion (parts per million (“ppm”)-gallons) gasoline sulfur credits that were generated by its Cheyenne and El Dorado Refineries and its EMC blending facility by producing gasoline with a lower sulfur content than the small refiner EPA requirement. In the six months ended June 30, 2008, Frontier sold 33.9 billion (ppm-gallons) of the 174 billion (ppm-gallons) available sulfur credits for total proceeds of $4.3 million, which was recorded in “Other revenues” on the Condensed Consolidated Statements of Income and Comprehensive Income.

The EPA has embarked on a Petroleum Refining Initiative (“Initiative”) alleging industry-wide noncompliance with certain longstanding regulatory programs.  These programs are:

•	New Source Review (“NSR”) – a program requiring permitting of certain facility modifications,

•	New Source Performance Standards – a program establishing emission standards for new emission sources as defined in the regulations,

•	Benzene Waste National Elimination System for Hazardous Air Pollutants (“NESHAPS”) – a program limiting the amount of benzene allowable in industrial wastewaters, and

•	Leak Detection and Repair (“LDAR”) – a program designed to control hydrocarbon emissions from refinery pipes, pumps and valves.

The Initiative has caused many refiners to enter into consent decrees typically requiring substantial expenditures for penalties and the installation of additional pollution control equipment.  In anticipation of such a consent decree, the Company has undertaken certain modifications at each of the Company’s Refineries.  At the Cheyenne Refinery, the Company has spent $4.6 million on the flare gas recovery system which was completed in 2006.  At the El Dorado Refinery, the flare gas recovery system was completed in 2007 for a total cost of $4.7 million.  Settlement negotiations with the EPA and state regulatory agencies regarding additional regulatory issues associated with the Initiative are underway.  The Company now estimates that, in addition to the flare gas recovery systems discussed above, capital expenditures totaling approximately $56.0 million at the Cheyenne Refinery and $70 million at the El Dorado Refinery ($11.3 million of the $70.0 million had been incurred as of June 30, 2008) will be required prior to 2015 to satisfy these issues.  Notwithstanding these anticipated regulatory settlements, many of these same expenditures would be required for the Company to implement its planned facility expansions.  In addition to the capital costs described above, the EPA has proposed a civil penalty in the amount of $1.9 million, to be discounted for a related $96,223 penalty and associated supplemental environment project (“SEP”) paid to the State of Wyoming in 2005 and further offset up to 50 percent by the completion of additional mutually agreed SEPs.  The Company has made an accrual for the balance of this estimated penalty at June 30, 2008 and December 31, 2007.

The EPA has promulgated regulations to enact the provisions of the Energy Policy Act of 2005 regarding mandated blending of renewable fuels in gasoline.  The Energy Independence and Security Act of 2007 significantly increases the amount of renewable fuels that had been required by the 2005 legislation. The Company, as a small refiner, will be exempt until 2012 from these requirements. While not yet enacted or promulgated, other pending legislation or regulation regarding the mandated use of alternative or renewable fuels and/or the reduction of greenhouse gas emissions from either transportation fuels or manufacturing processes is under consideration by the U.S. Congress and certain federal regulatory agencies.  If enacted or promulgated, these requirements may impact the operations of the Company.

On February 26, 2007, the EPA promulgated regulations limiting the amount of benzene in gasoline.  These regulations take effect for large refiners on January 1, 2011 and for small refiners, such as Frontier, on January 1, 2015.  While not yet estimated, the Company anticipates that potentially material capital expenditures may be necessary to achieve compliance with the new regulation at its Cheyenne Refinery as discussed above.  Gasoline manufactured at the El Dorado Refinery typically contains benzene concentrations near the new standard.  The Company therefore believes that necessary benzene compliance expenditures at the El Dorado Refinery will be substantially less than those at its Cheyenne Refinery.

As is the case with companies engaged in similar industries, the Company faces potential exposure from future claims and lawsuits involving environmental matters, including soil and water contamination, air pollution, personal injury and property damage allegedly caused by substances that the Company may have manufactured, handled, used, released or disposed.

Cheyenne Refinery.   The Company is party to an agreement with the State of Wyoming requiring investigation and interim remediation actions at the Cheyenne Refinery’s property that may have been impacted by past operational activities.  As a result of past and ongoing investigative efforts, capital expenditures and remediation of conditions found to exist have already taken place, including the completion of surface impoundment closures, waste stabilization activities and other site remediation projects.  In addition, the Company estimates that an ongoing groundwater remediation program will be required for approximately ten more years.  As of June 30, 2008 and December 31, 2007, the Company had a $5.0 million accrual included on the Condensed Consolidated Balance Sheets, reflecting the estimated present value of the $410,000 estimated to be spent during the remaining portion of 2008 and a $700,000 annual cost for 2009 through 2018, assuming a 3% inflation rate and discounted at a rate of 7.5%.  The Company also had accrued a total of $4.8 million, as of June 30, 2008 and December 31, 2007, for the cleanup of a waste water treatment pond located on land adjacent to the Cheyenne Refinery which the Company had historically leased from the landowner.  The lease expired, and the Company ceased use of the pond on June 30, 2006.  The waste water pond will be cleaned up pursuant to the aforementioned agreement with the State of Wyoming.  Depending upon the results of the ongoing investigation, or by a subsequent administrative order or permit, additional remedial action and costs could be required.  Pursuant to this agreement, the Company has also committed to the installation of a groundwater boundary control system to be constructed in the near future.  The costs associated with this system are under development.

The Company has completed the negotiation of a settlement of a Notice of Violation (“NOV”) from the Wyoming Department of Environmental Quality alleging non-compliance with certain refinery waste management requirements.  A negotiated penalty in the amount of $631,000 was paid in 2007 as part of the settlement of this NOV.  The Company has estimated that the capital cost for required corrective measures will be approximately $2.7 million.  In addition, the Company had an accrual at both June 30, 2008 and December 31, 2007 of $1.2 million for additional work related to the corrective measures.

Pursuant to an agreement with the City of Cheyenne, the Company will contribute $1.5 million toward a project (estimated to be completed in 2009) to relocate a city storm water conveyance pipe, which is presently located on Refinery property and therefore is potentially subject to contaminants from Refinery operations.

El Dorado Refinery.   The El Dorado Refinery is subject to a 1988 consent order with the Kansas Department of Health and Environment (“KDHE”).  Subject to the terms of the purchase and sale agreement for the El Dorado Refinery entered into between the Company and Shell Oil Products US (“Shell”), Shell is responsible for the costs of continued compliance with this order.  This order, including various subsequent modifications, requires the El Dorado Refinery to continue the implementation of a groundwater management program with oversight provided by the KDHE Bureau of Environmental Remediation.  More specifically, the El Dorado Refinery must continue to operate the hydrocarbon recovery well systems and containment barriers at the site and conduct sampling from monitoring wells and surface water stations.  Quarterly and annual reports must also be submitted to the KDHE.  The order requires that remediation activities continue until KDHE-established groundwater criteria or other criteria agreed to by the KDHE and the Refinery are met.

11.                  Litigation

Beverly Hills Lawsuits.   On October 12, 2007, following the court rulings discussed below, the Company announced that it had reached agreement in principle on the terms of a settlement with the attorneys for the plaintiffs in the Beverly Hills lawsuits.  Under the terms of the settlement, the plaintiffs will receive $10.0 million from the Company, its subsidiary and its insurance provider.  Frontier’s share of the cost is approximately $6.3 million, which will be funded from the Company’s commutation account that had previously been established with an insurance provider. Once a settlement agreement is finalized between the plaintiffs and the Company and its subsidiary, including releases by the plaintiffs, the settlement will be subject to approval by the Los Angeles Superior Court.  Following court approval, the settlement should resolve all of the litigation against the Company and its subsidiary currently pending in both the Los Angeles Superior Court and the California Court of Appeal.  The following provides more information about the Beverly Hills litigation and associated insurance coverage.

A Frontier subsidiary, Wainoco Oil & Gas Company, owned and operated an interest in an oil field in the Los Angeles, California metropolitan area from 1985 to 1995.  The production facilities for that oil field are located at the campus of the Beverly Hills High School.  In April 2003, a law firm began filing claims against the Beverly Hills Unified School District and the City of Beverly Hills on behalf of former students, school employees, area residents and others alleging that emissions from the oil field or the production facilities caused cancers or various other health problems in those individuals.  Wainoco Oil & Gas Company and Frontier have been named in seven such suits: Moss et al. v. Venoco, Inc. et al., filed in June 2003; Ibraham et al. v. City of Beverly Hills et al., filed in July 2003; Yeshoua et al. v. Venoco, Inc. et al., filed in August 2003; Jacobs v. Wainoco Oil & Gas Company et al., filed in December 2003; Bussel et al. v. Venoco, Inc. et al., filed in January 2004; Steiner et al. v. Venoco, Inc. et al., filed in May 2004; and Kalcic et al. v. Venoco, Inc. et al., filed in April 2005.  Of the approximately 1,025 plaintiffs in the seven lawsuits, Wainoco Oil & Gas Company and Frontier are named as defendants by approximately 450 of those plaintiffs.  Other defendants in these lawsuits include the Beverly Hills Unified School District, the City of Beverly Hills, three other oil and gas companies (and their related companies), and one company (and its related companies) involved in owning or operating a power plant adjacent to the Beverly Hills High School.  The lawsuits include claims for personal injury, wrongful death, loss of consortium and/or fear of contracting diseases, and also ask for punitive damages.  No dollar amounts of damages have been specified in any of the lawsuits.  The seven lawsuits and two lawsuits that do not name Wainoco Oil & Gas Company or Frontier as defendants have been consolidated and are pending before a judge on the complex civil litigation panel in the Superior Court of the State of California for the County of Los Angeles.  A case management order was entered pursuant to which 12 plaintiffs were selected as the initial group of plaintiffs to proceed to trial.

The oil production site operated by Frontier’s subsidiary was a modern facility and was operated with a high level of safety and responsibility.  Frontier believes that its subsidiary’s activities did not cause any health problems for anyone, including former Beverly Hills High School students, school employees or area residents.  Nevertheless, as a matter of prudent risk management, Frontier purchased insurance in 2003 from a highly-rated insurance company covering the existing claims described above and any similar claims for bodily injury or property damage asserted during the five-year period following the policy’s September 30, 2003 commencement date.  The claims are covered, whether asserted directly against the insured parties or as a result of contractual indemnity.  In October 2003, the Company paid $6.25 million to the insurance company for loss mitigation insurance and also funded with the insurance company a commutation account of approximately $19.5 million, which is funding the first costs incurred under the policy including, but not limited to, the costs of defense of the claims.  The policy covers defense costs and any payments made to claimants, up to an aggregate limit of $120 million, including coinsurance by Frontier of up to $3.9 million of the coverage between $40 million and $120 million.  As of June 30, 2008, the commutation account balance was approximately $6.4 million and was included in current assets on the Condensed Consolidated Balance Sheet.  The Company also has been seeking coverage with respect to the Beverly Hills, California claims from the insurance companies that provided policies to Frontier during the 1985 to 1995 period. The Company has reached a settlement on some of the policies and is continuing to pursue coverage efforts on other policies.

On October 27, 2006, the Los Angeles Superior Court granted summary judgment in favor of the parent, Frontier Oil Corporation.  As a result of this order, the plaintiffs in all of the lawsuits in which Frontier is a defendant can no longer prosecute claims against Frontier Oil Corporation, either for Frontier Oil Corporation’s alleged direct liability or for any of the plaintiffs’ claims against its subsidiary.  The order does not affect unresolved indemnity claims asserted by or against Frontier Oil Corporation.  In addition, on November 22, 2006, the Court entered a ruling granting summary judgment in favor of all of the defendants, including Wainoco Oil & Gas Company and Frontier Oil Corporation, against the initial 12 trial plaintiffs.  A final judgment was entered by the Los Angeles Superior Court on January 31, 2007 that included the ruling in favor of Frontier Oil Corporation in October and the ruling in favor of all of the defendants in November.  The plaintiffs’ notice of appeal from this final judgment was filed March 29, 2007 and is currently pending before the California Court of Appeal.

Additional rulings by the Los Angeles Superior Court include a January 9, 2007 ruling granting summary judgment in favor of the City of Beverly Hills, concluding that the City has no liability to the plaintiffs in any of the lawsuits in which the City is a defendant under the California governmental tort liability statutes, and a March 23, 2007 ruling granting summary judgment in favor of the Beverly Hills Unified School District, concluding that the School District has no liability under the California governmental tort liability statutes. The entry of a final judgment by the Court in favor of the City and the School District on these recent rulings remains subject to appeal.

In accordance with FAS No. 5, “Accounting for Contingencies,” Frontier accrued as of June 30, 2008 and December 31, 2007 the $10.0 million settlement (“Accrued Beverly Hills litigation settlement” on the Condensed Consolidated Balance Sheets) because it is probable and reasonably estimable and a receivable from insurance providers of $3.6 million (included in “Other receivables” on the Condensed Consolidated Balance Sheet).  Frontier does not believe that any potential future claims or litigation, by which similar or related claims may be asserted against the Company or its subsidiary, will result in any material liability or have any material adverse effect upon the Company.

Other.   The Company is also involved in various other lawsuits which are incidental to its business.  In management’s opinion, the adverse determination of such lawsuits would not have a material adverse effect on the Company’s liquidity, financial position or results of operations.

12.                  Other Contingencies

El Dorado Earn-out Payments.   On November 16, 1999, Frontier acquired the crude oil refinery located in El Dorado, Kansas from Equilon Enterprises LLC, now known as Shell.  Under the provisions of the purchase and sale agreement, the Company was required to make contingent earn-out payments for each of the years 2000 through 2007 equal to one-half of the excess over $60.0 million per year of the El Dorado Refinery’s revenues less its material costs and operating costs, other than depreciation.  The total amount of these contingent earn-out payments was capped at $40.0 million, with an annual cap of $7.5 million.  Any contingent earn-out payment was recorded as an additional acquisition cost when determinable.  A contingent earn-out payment of $7.5 million was required based on 2007 results, and was accrued at December 31, 2007 and paid in January 2008.  Including the final payment under the agreement, made in January 2008, the Company paid a total of $37.5 million for contingent earn-out payments.

13.                  Amendment of Revolving Credit Facility Agreement

On June 23, 2008, the Company entered into a second amendment to the Third Amended and Restated Revolving Credit Agreement which increased the maximum amount available under this agreement from $250 million to $350 million.

14.                  Amendment of Crude Oil Purchase and Sale Contract

Effective March 10, 2006, the Company’s subsidiary, Frontier Oil and Refining Company (“FORC”), entered into a Master Crude Oil Purchase and Sale Contract (“Contract”) with Utexam.  Under this $200.0 million Contract, Utexam purchases, transports and subsequently sells crude oil to FORC at a location near Cushing, Oklahoma or other locations as agreed.  Under this agreement, Utexam is the owner of record of the crude oil as it is transported from the point of injection, typically Hardisty, Alberta, Canada, to the point of ultimate sale to FORC.  The Company has provided a guarantee of FORC’s obligations under this Contract, primarily to receive crude oil and make payment for crude oil purchases arranged under this Contract.  The Company accounts for the transactions under this Contract as a financing arrangement, whereby the inventory and the associated liability are recorded in the Company’s financial statements when the crude oil is injected into the pipeline in Canada.

On March 12, 2008, FORC entered into an amendment of this Contract which increased the maximum amount available under this contract from $200.0 million to $250.0 million and also allows for Utexam to sell crude oil to FORC at a location near Guernsey, Wyoming as well as at a location near Cushing, Oklahoma.

15.                  Consolidating Financial Statements

Frontier Holdings Inc. and its subsidiaries (“FHI”) are full and unconditional guarantors of Frontier Oil Corporation’s 6⅝% Senior Notes.  Presented on the following pages are the Company’s condensed consolidating balance sheets, statements of income, and statements of cash flows as required by Rule 3-10 of Regulation S-X of the Securities Exchange Act of 1934, as amended.  As specified in Rule 3-10, the condensed consolidating balance sheets, statements of income, and statements of cash flows presented on the following pages meet the requirements for financial statements of the issuer and each guarantor of the notes because the guarantors are all direct or indirect wholly-owned subsidiaries of Frontier Oil Corporation, and all of the guarantees are full and unconditional on a joint and several basis.  The Company files a consolidated U.S. federal income tax return and consolidated state income tax returns in the majority of states in which it does business.  Each subsidiary calculates its income tax provisions on a separate company basis, which are eliminated in the consolidation process.

 

FRONTIER OIL CORPORATION
Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2008
(Unaudited, in thousands)
		FOC (Parent)				FHI (Guarantor Subsidiaries)				Other Non-Guarantor Subsidiaries				Eliminations				Consolidated
Revenues:
Refined products		$	-			$	3,089,598			$	-			$	-			$	3,089,598
Other			-				(137,350	)			91				-				(137,259	)
			-				2,952,248				91				-				2,952,339
Costs and expenses:
Raw material, freight and other costs			-				2,574,026				-				-				2,574,026
Refinery operating expenses, excluding  depreciation			-				168,594				-				-				168,594
Selling and general expenses, excluding depreciation			9,646				12,857				-				-				22,503
Depreciation, amortization and accretion			27				31,359				-				51				31,437
Gains on sales of assets			(37	)			(7	)			-				-				(44	)
			9,636				2,786,829				-				51				2,796,516
Operating income (loss)			(9,636	)			165,419				91				(51	)			155,823
Interest expense and other financing costs			6,286				2,136				-				(3,859	)			4,563
Interest and investment income			(2,264	)			(1,371	)			-				-				(3,635	)
Equity in earnings of subsidiaries			(168,313	)			-				-				168,313				-
			(164,291	)			765				-				164,454				928
Income before income taxes			154,655				164,654				91				(164,505	)			154,895
Provision for income taxes			49,370				52,481				32				(52,273	)			49,610
Net income		$	105,285			$	112,173			$	59			$	(112,232	)		$	105,285

FRONTIER OIL CORPORATION
Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2007
(Unaudited, in thousands)
		FOC (Parent)				FHI (Guarantor Subsidiaries)				Other Non-Guarantor Subsidiaries				Eliminations				Consolidated
Revenues:
Refined products		$	-			$	2,481,194			$	-			$	-			$	2,481,194
Other			2				1,366				21				-				1,389
			2				2,482,560				21				-				2,482,583
Costs and expenses:
Raw material, freight and other costs			-				1,804,805				-				-				1,804,805
Refinery operating expenses, excluding depreciation			-				140,977				-				-				140,977
Selling and general expenses, excluding  depreciation			13,916				10,699				-				-				24,615
Depreciation, amortization and accretion			33				23,393				-				(233	)			23,193
Losses on sales of assets			2,028				-				-				-				2,028
			15,977				1,979,874				-				(233	)			1,995,618
Operating income (loss)			(15,975	)			502,686				21				233				486,965
Interest expense and other financing costs			6,271				2,202				-				(3,525	)			4,948
Interest and investment income			(5,342	)			(6,305	)			-				-				(11,647	)
Equity in earnings of subsidiaries			(510,498	)			-				-				510,498				-
			(509,569	)			(4,103	)			-				506,973				(6,699	)
Income before income taxes			493,594				506,789				21				(506,740	)			493,664
Provision for income taxes			175,111				180,057				7				(179,994	)			175,181
Net income		$	318,483			$	326,732			$	14			$	(326,746	)		$	318,483

FRONTIER OIL CORPORATION
Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2008
(Unaudited, in thousands)
		FOC (Parent)				FHI (Guarantor Subsidiaries)				Other Non-Guarantor Subsidiaries				Eliminations				Consolidated
Revenues:
Refined products		$	-			$	1,882,010			$	-			$	-			$	1,882,010
Other			-				(115,520	)			66				-				(115,454	)
			-				1,766,490				66				-				1,766,556
Costs and expenses:
Raw material, freight and other costs			-				1,574,898				-				-				1,574,898
Refinery operating expenses, excluding  depreciation			-				81,034				-				-				81,034
Selling and general expenses, excluding  depreciation			5,411				6,737				-				-				12,148
Depreciation, amortization and accretion			13				16,401				-				83				16,497
Gain on sales of assets			-				(7	)			-				-				(7	)
			5,424				1,679,063				-				83				1,684,570
Operating income (loss)			(5,424	)			87,427				66				(83	)			81,986
Interest expense and other financing  costs			3,102				1,197				-				(1,375	)			2,924
Interest and investment income			(704	)			(618	)			-				-				(1,322	)
Equity in earnings of subsidiaries before  income taxes			(88,016	)			-				-				88,016				-
			(85,618	)			579				-				86,641				1,602
Income before income taxes			80,194				86,848				66				(86,724	)			80,384
Provision for income taxes			20,878				23,648				23				(23,481	)			21,068
Net income		$	59,316			$	63,200			$	43			$	(63,243	)		$	59,316

 

FRONTIER OIL CORPORATION
Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2007
(Unaudited, in thousands)
		FOC (Parent)				FHI (Guarantor Subsidiaries)				Other Non-Guarantor Subsidiaries				Eliminations				Consolidated
Revenues:
Refined products		$	-			$	1,431,138			$	-			$	-			$	1,431,138
Other			2				3,551				9				-				3,562
			2				1,434,689				9				-				1,434,700
Costs and expenses:
Raw material, freight and other costs			-				964,940				-				-				964,940
Refinery operating expenses, excluding  depreciation			-				69,814				-				-				69,814
Selling and general expenses, excluding  depreciation			7,693				5,890				-				-				13,583
Depreciation, amortization and accretion			14				12,216				-				(160	)			12,070
Loss on sales of assets			-				-				-				-				-
			7,707				1,052,860				-				(160	)			1,060,407
Operating income (loss)			(7,705	)			381,829				9				160				374,293
Interest expense and other financing  costs			3,184				1,015				-				(2,207	)			1,992
Interest and investment income			(2,782	)			(3,538	)			-				-				(6,320	)
Equity in earnings of subsidiaries before  income taxes			(386,658	)			-				-				386,658				-
			(386,256	)			(2,523	)			-				384,451				(4,328	)
Income before income taxes			378,551				384,352				9				(384,291	)			378,621
Provision for income taxes			134,788				137,042				3				(136,975	)			134,858
Net income		$	243,763			$	247,310			$	6			$	(247,316	)		$	243,763

FRONTIER OIL CORPORATION
Condensed Consolidating Balance Sheet
As of June 30, 2008
(Unaudited, in thousands)
		FOC (Parent)				FHI (Guarantor Subsidiaries)				Other Non-Guarantor Subsidiaries				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	90,224			$	131,016			$	-			$	-			$	221,240
Trade, income tax and other receivables			4,239				255,213				22				-				259,474
Receivable from affiliated companies			-				1,428				365				(1,793	)			-
Inventory of crude oil, products and  other			-				762,102				-				-				762,102
Deferred tax assets			11,032				13,228				-				(13,228	)			11,032
Commutation account			6,351				-				-				-				6,351
Other current assets			11,937				22,348				-				-				34,285
Total current assets			123,783				1,185,335				387				(15,021	)			1,294,484
Property, plant and equipment, at cost			1,188				1,195,330				-				7,500				1,204,018
Accumulated depreciation and  amortization			(970	)			(347,112	)			-				7,961				(340,121	)
Property, plant and equipment, net			218				848,218				-				15,461				863,897
Deferred turnaround costs			-				54,705				-				-				54,705
Deferred catalyst costs			-				12,061				-				-				12,061
Deferred financing costs, net			1,569				1,024				-				-				2,593
Prepaid insurance, net			303				-				-				-				303
Intangible assets, net			-				1,399				-				-				1,399
Other assets			3,246				1,349				-				-				4,595
Investment in subsidiaries			1,272,848				-				-				(1,272,848	)			-
Total assets		$	1,401,967			$	2,104,091			$	387			$	(1,272,408	)		$	2,234,037
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	434			$	743,794			$	-			$	-			$	744,228
Accrued liabilities and other			20,609				44,529				189				-				65,327
Total current liabilities			21,043				788,323				189				-				809,555
Long-term debt			150,000				-				-				-				150,000
Contingent income tax liabilities			32,909				1,122				-				-				34,031
Long-term capital lease obligations			-				3,733				-				-				3,733
Other long-term liabilities			3,141				40,496				-				-				43,637
Deferred income taxes			114,741				111,390				-				(111,390	)			114,741
Payable to affiliated companies			1,793				50,943				102				(52,838	)			-
Shareholders' equity			1,078,340				1,108,084				96				(1,108,180	)			1,078,340
Total liabilities and shareholders'  equity		$	1,401,967			$	2,104,091			$	387			$	(1,272,408	)		$	2,234,037

FRONTIER OIL CORPORATION
Condensed Consolidating Balance Sheet
As of December 31, 2007
(Unaudited, in thousands)
		FOC (Parent)				FHI (Guarantor Subsidiaries)				Other Non-Guarantor Subsidiaries				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	186,368			$	111,031			$	-			$	-			$	297,399
Trade, income tax and other receivables			27,948				156,798				-				-				184,746
Receivable from affiliated companies			-				2,319				296				(2,615	)			-
Inventory of crude oil, products and  other			-				501,927				-				-				501,927
Deferred tax assets			9,426				13,507				-				(13,507	)			9,426
Commutation account			6,280				-				-				-				6,280
Other current assets			9,646				21,599				-				-				31,245
Total current assets			239,668				807,181				296				(16,122	)			1,031,023
Property, plant and equipment, at cost			1,121				1,090,695				-				3,627				1,095,443
Accumulated depreciation and  amortization			(943	)			(325,076	)			-				8,026				(317,993	)
Property, plant and equipment, net			178				765,619				-				11,653				777,450
Deferred turnaround costs			-				39,276				-				-				39,276
Deferred catalyst costs			-				6,540				-				-				6,540
Deferred financing costs, net			1,810				746				-				-				2,556
Prepaid insurance, net			909				-				-				-				909
Intangible assets, net			-				1,460				-				-				1,460
Other assets			3,313				1,321				-				-				4,634
Investment in subsidiaries			1,106,243				-				-				(1,106,243	)			-
Total assets		$	1,352,121			$	1,622,143			$	296			$	(1,110,712	)		$	1,863,848
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	242			$	417,153			$	-			$	-			$	417,395
Accrued liabilities and other			25,947				57,982				189				-				84,118
Total current liabilities			26,189				475,135				189				-				501,513
Long-term debt			150,000				-				-				-				150,000
Contingent income tax liabilities			31,185				1,072				-				-				32,257
Long-term capital lease obligations			-				8				-				-				8
Other long-term liabilities			3,208				37,938				-				-				41,146
Deferred income taxes			100,310				107,652				-				(107,652	)			100,310
Payable to affiliated companies			2,615				3,365				70				(6,050	)			-
Shareholders' equity			1,038,614				996,973				37				(997,010	)			1,038,614
Total liabilities and shareholders'  equity		$	1,352,121			$	1,622,143			$	296			$	(1,110,712	)		$	1,863,848

FRONTIER OIL CORPORATION
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2008
(Unaudited, in thousands)
		FOC (Parent)				FHI (Guarantor Subsidiaries)				Other Non-Guarantor Subsidiaries				Eliminations				Consolidated
Cash flows from operating activities:
Net income		$	105,285			$	112,173			$	59			$	(112,232	)		$	105,285
Adjustments to reconcile net income to  net cash from operating activities:
Equity in earnings of subsidiaries before  income taxes			(168,313	)			-				-				168,313				-
Depreciation, amortization and  accretion			27				39,708				-				51				39,786
Deferred income taxes			13,470				-				-				-				13,470
Stock-based compensation expense			9,802				-				-				-				9,802
Excess income tax benefits of  stock-based compensation			(3,935	)			-				-				-				(3,935	)
Income taxes eliminated in  consolidation			-				52,241				32				(52,273	)			-
Amortization of debt issuance costs			241				102				-				-				343
Gain on sales of assets			(37	)			(7	)			-				-				(44	)
Amortization of long-term prepaid  insurance			606				-				-				-				606
Increase  in other long-term liabilities			1,160				728				-				-				1,888
Changes in deferred turnaround costs,  deferred catalyst costs and other			67				(29,327	)			-				-				(29,260	)
Changes in components of working capital from operations			19,328				(38,559	)			(22	)			1,091				(18,162	)
Net cash (used in) provided by operating  activities			(22,299	)			137,059				69				4,950				119,779
Cash flows from investing activities:
Additions to property, plant and  equipment			(67	)			(110,004	)			-				(4,950	)			(115,021	)
Proceeds from sales of assets			37				8				-				-				45
El Dorado Refinery contingent earn-out  payment			-				(7,500	)			-				-				(7,500	)
Net cash used in investing activities			(30	)			(117,496	)			-				(4,950	)			(122,476	)
Cash flows from financing activities:
Purchase of treasury stock			(66,403	)			-				-				-				(66,403	)
Proceeds from issuance of common stock			126				-				-				-				126
Dividends paid			(10,651	)			-				-				-				(10,651	)
Excess income tax benefits of  stock-based compensation			3,935				-				-				-				3,935
Debt issuance costs and other			-				(469	)			-				-				(469	)
Intercompany transactions			(822	)			891				(69	)			-				-
Net cash (used in) provided by  financing activities			(73,815	)			422				(69	)			-				(73,462	)
(Decrease) increase in cash and cash  equivalents			(96,144	)			19,985				-				-				(76,159	)
Cash and cash equivalents, beginning of  period			186,368				111,031				-				-				297,399
Cash and cash equivalents, end of  period		$	90,224			$	131,016			$	-			$	-			$	221,240

 

FRONTIER OIL CORPORATION
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2007
(Unaudited, in thousands)
		FOC (Parent)				FHI (Guarantor Subsidiaries)				Other Non-Guarantor Subsidiaries				Eliminations				Consolidated
Cash flows from operating activities:
Net income		$	318,483			$	326,732			$	14			$	(326,746	)		$	318,483
Adjustments to reconcile net income to  net cash from operating activities:
Equity in earnings of subsidiaries before  income taxes			(510,498	)			-				-				510,498				-
Depreciation, amortization and  accretion			33				29,732				-				(233	)			29,532
Deferred income taxes			2,158				-				-				-				2,158
Stock-based compensation expense			12,090				-				-				-				12,090
Excess income tax benefits of  stock-based compensation			(4,520	)			-				-				-				(4,520	)
Income taxes eliminated in  consolidation			-				179,987				7				(179,994	)			-
Amortization of debt issuance costs			242				157				-				-				399
Loss on sales of assets			2,028				-				-				-				2,028
Decrease in commutation account			1,000				-				-				-				1,000
Amortization of long-term prepaid  insurance			606				-				-				-				606
Increase in other long-term liabilities			29,408				(477	)			-				-				28,931
Changes in deferred turnaround costs,  deferred catalyst costs and other			(76	)			(19,131	)			-				-				(19,207	)
Changes in components of working  capital from operations			59,504				(20,874	)			-				(1,355	)			37,275
Net cash (used in) provided by operating  activities			(89,542	)			496,126				21				2,170				408,775
Cash flows from investing activities:
Additions to property, plant and  equipment			(4,308	)			(139,898	)			-				(2,170	)			(146,376	)
Proceeds from sale of assets			2,290				-				-				-				2,290
El Dorado Refinery contingent earn-out  payment			-				(7,500	)			-				-				(7,500	)
Other acquisitions			-				(2,995	)			-				-				(2,995	)
Net cash used in investing activities			(2,018	)			(150,393	)			-				(2,170	)			(154,581	)
Cash flows from financing activities:
Purchase of treasury stock			(128,195	)			-				-				-				(128,195	)
Proceeds from issuance of common stock			947				-				-				-				947
Dividends paid			(6,617	)			-				-				-				(6,617	)
Excess income tax benefits of  stock-based compensation			4,520				-				-				-				4,520
Debt issuance costs and other			-				(7	)			-				-				(7	)
Intercompany transactions			170,300				(170,279	)			(21	)			-				-
Net cash used in financing activities			40,955				(170,286	)			(21	)			-				(129,352	)
(Decrease) increase in cash and cash  equivalents			(50,605	)			175,447				-				-				124,842
Cash and cash equivalents, beginning of  period			215,049				190,430				-				-				405,479
Cash and cash equivalents, end of  period		$	164,444			$	365,877			$	-			$	-			$	530,321

 

---

ITEM 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

We are an independent energy company engaged in crude oil refining and the wholesale marketing of refined petroleum products.  We operate refineries (the “Refineries”) in Cheyenne, Wyoming and El Dorado, Kansas with a total annual average crude oil capacity of approximately 172,000 barrels per day (“bpd”).  The crude oil capacity increased from 162,000 bpd in April 2008, because of the completion of the crude unit and vacuum tower expansion at our El Dorado Refinery.  To assist in understanding our operating results, please refer to the operating data at the end of this analysis, which provides key operating information for our Refineries.  Refinery operating data is also included in our annual report on Form 10-K, our quarterly reports on Form 10-Q and on our web site at http://www.frontieroil.com .  We make our web site content available for informational purposes only.  The web site should not be relied upon for investment purposes.  We make available on this web site under “Investor Relations,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file those materials with, or furnish those materials to, the SEC.

Overview

The terms “Frontier,” “we” and “our” refer to Frontier Oil Corporation and its subsidiaries.  The four significant indicators of our profitability, which are reflected and defined in the operating data at the end of this analysis, are the gasoline crack spread, the diesel crack spread, the light/heavy crude oil differential and the WTI/WTS crude oil differential.  Other significant factors that influence our results are refinery utilization, crude oil price trends, asphalt and by-product margins and refinery operating expenses (including natural gas prices and maintenance).  Under our first-in, first-out (“FIFO”) inventory accounting method, crude oil price trends can cause significant fluctuations in the inventory valuation of our crude oil, unfinished products and finished products, thereby resulting in inventory gains (lower cost of sales) when crude oil prices increase and inventory losses (higher cost of sales) when crude oil prices decrease during the reporting period.  We typically do not use derivative instruments to offset price risk on our base level of operating inventories.  See “Price Risk Management Activities” under Item 3 for a discussion of our utilization of futures trading.

Six months ended June 30, 2008 compared with the same period in 2007

Overview of Results

We had net income for the six months ended June 30, 2008 of $105.3 million, or $1.02 per diluted share, compared to net income of $318.5 million, or $2.90 per diluted share, earned in the same period in 2007.  Our operating income of $155.8 million for the six months ended June 30, 2008 decreased $331.1 million from the $487.0 million for the comparable period in 2007.  Our results for the six months ended June 30, 2008 were negatively impacted by several factors, the primary ones being the rapid increase in crude oil prices since the beginning of the period and the weakening U.S. economy.  These factors reduced the demand for gasoline, causing a substantial drop in gasoline margins.  In addition, our margins on asphalt and other products declined substantially as sales prices for these products increased only modestly in comparison to the increase in crude prices.  The average gasoline crack spread of $4.60 per barrel during the first half of 2008 was substantially lower than the $24.84 per barrel in the first half of 2007.  In addition, the average diesel crack spread decreased to $24.31 per barrel during the first half of 2008 from $25.39 per barrel in the comparable period in 2007.  Product yields and product revenues were significantly lower during the first half of 2008 because of the major turnaround work conducted at the El Dorado Refinery during all of March 2008.

Specific Variances

Refined product revenues.   Refined product revenues increased $608.4 million, or 25%, from $2.48 billion to $3.09 billion for the six months ended June 30, 2008 compared to the same period in 2007.  This increase resulted primarily from higher crude oil prices, which supported higher refined product prices ($35.19 higher average per sales barrel), despite a decline in sales volumes.

Manufactured product yields.   Yields decreased 23,559 bpd at the El Dorado Refinery and increased 1,995 bpd at the Cheyenne Refinery for the six months ended June 30, 2008 compared to same period in 2007.  The decrease in yields at the El Dorado Refinery was due to the planned major turnaround work on the crude unit, the coker and the reformer during all of March 2008.

Other revenues.   Other revenues decreased $138.6 million to a loss of $137.3 million for the six months ended June 30, 2008, compared to income of $1.4 million for the same period in 2007, the primary source of which was $143.1 million in net realized and unrealized losses from derivative contracts in the six months ended June 30, 2008 compared to $3.7 million in net realized and unrealized losses from derivative contracts in the six months ended June 30, 2007.  See “Price Risk Management Activities” under Item 3 for a discussion of our utilization of commodity derivative contracts.  We had gasoline sulfur credit sales of $4.3 million in the six months ended June 30, 2008 compared to $4.8 million in the comparable 2007 period and $950,000 of ethanol Renewable Identification Number (“RIN”) sales in 2008 (none in the comparable period of 2007).  Ethanol RINs were created as a tracking tool in order to ensure that nationwide a certain EPA regulated volume of renewable fuels are blended into gasoline on a percentage basis.

Raw material, freight and other costs.   Raw material, freight and other costs increased by $769.2 million, from $1.80 billion in the six months ended June 30, 2007 to $2.57 billion in the same period for 2008.  The increase in raw material, freight and other costs was due to higher average crude oil prices and increased purchased products partially offset by decreased overall crude oil charges and higher light/heavy crude oil differentials during the six months ended June 30, 2008 when compared to the same period in 2007.  For the six months ended June 30, 2008, we realized a reduction in raw material, freight and other costs as a result of inventory gains of approximately $165.3 million after tax ($265.9 million pretax, consisting of a $69.2 million gain at the Cheyenne Refinery and a $196.7 million gain at the El Dorado Refinery).  For the six months ended June 30, 2007, we realized a reduction in raw material, freight and other costs as a result of inventory gains of approximately $22.0 million after tax ($35.5 million pretax, comprised of a $23.5 million gain at the Cheyenne Refinery and a $12.0 million gain at the El Dorado Refinery).

The Cheyenne Refinery raw material, freight and other costs of $89.10 per sales barrel for the six months ended June 30, 2008 increased from $56.17 per sales barrel in the same period in 2007 due to higher average crude oil prices and increased purchased products partially offset by increased light/heavy crude oil differentials.  The light/heavy crude oil differential for the Cheyenne Refinery averaged $19.96 per barrel in the six months ended June 30, 2008 compared to $13.71 per barrel in the same period in 2007.

The El Dorado Refinery raw material, freight and other costs of $98.81 per sales barrel for the six months ended June 30, 2008 increased from $58.50 per sales barrel in the same period in 2007 due to a lower volume of product sales and higher average crude oil prices partially offset by decreased overall crude charges and higher light/heavy crude oil differentials.  The WTI/WTS crude oil differential increased from an average of $4.47 per barrel in the six-month period ended June 30, 2007 to $4.81 per barrel in the same period in 2008.  The light/heavy crude oil differential increased from an average of $15.59 per barrel in the six-month period ended June 30, 2007 to $22.63 per barrel in the same period in 2008.

Refinery operating expenses.   Refinery operating expenses, excluding depreciation, were $168.6 million in the six months ended June 30, 2008 compared to $141.0 million in the comparable period of 2007.

The Cheyenne Refinery operating expenses, excluding depreciation, were $59.3 million for the six months ended June 30, 2008 compared to $47.8 million in the comparable period of 2007.  Primary areas of increased costs were: maintenance costs ($3.1 million, $720,000 of which related to the remaining costs of the December 2007 coker fire, natural gas costs ($2.9 million due to increased volumes and prices), turnaround amortization ($2.1 million due to amortization costs of 2007 turnarounds), additives and chemicals ($1.1 million), salaries and benefits expenses ($679,000), and electricity ($618,000).

The El Dorado Refinery operating expenses, excluding depreciation, were $109.3 million for the six months ended June 30, 2008, increasing from $93.2 million in the same six-month period of 2007.  Primary areas of increased costs and the variance amounts for the 2008 period compared to the 2007 period were: maintenance costs ($10.1 million, primarily related to demolition, catalyst and repair costs incurred during the March 2008 turnaround), natural gas costs ($2.5 million due to increased volumes and prices), salaries and benefits expenses ($1.6 million, mostly due to increased overtime in relation to the March 2008 turnaround), consulting and legal expenses ($1.1 million), property and other taxes ($1.1 million), and operating supplies ($803,000).

Selling and general expenses.   Selling and general expenses, excluding depreciation, decreased $2.1 million, or 9%, from $24.6 million for the six months ended June 30, 2007 to $22.5 million for the six months ended June 30, 2008, due to $2.0 million of lower salaries and benefit expenses (including stock-based compensation expense) in 2008.

Depreciation, amortization and accretion.   Depreciation, amortization and accretion increased $8.2 million, or 36%, for the six months ended June 30, 2008 compared to the same period in 2007 because of increased capital investments in our Refineries, including our El Dorado Refinery crude unit and vacuum tower expansion project placed into service in the second quarter of 2008.  We also had higher depreciation expense during the six months ended June 30, 2008 due to changes made during the third quarter of 2007 in the estimated useful lives of assets that have been or are expected to be retired in connection with certain capital projects in 2008 and 2009.

Gain on sale of assets.   The $44,000 gain on the sale of assets during the six months ended June 30, 2008 compares to a $2.0 million loss during the six months ended June 30, 2007.

Interest expense and other financing costs.   Interest expense and other financing costs of $4.6 million for the six months ended June 30, 2008 decreased $385,000, or 8%, from $4.9 million in the comparable period in 2007.  The primary cause of this decrease was higher capitalized interest in the first half of 2008 of $4.1 million compared to $3.5 million in 2007. Average debt outstanding was $155.3 million and $150.0 during the six months ended June 30, 2008 and 2007, respectively  (excluding amounts payable to Utexam under the Utexam Arrangement).

Interest and investment income.   Interest and investment income decreased $8.0 million from $11.6 million in the six months ended June 30, 2007, to $3.6 million in the six months ended June 30, 2008, because of lower average cash balances and lower interest rates.

Provision for income taxes.   The provision for income taxes for the six months ended June 30, 2008 was $49.6 million on pretax income of $154.9 million (or 32.0%).  Our provision for income taxes for the six months ended June 30, 2007 was $175.2 million on pretax income of $493.7 million (or 35.5%).  The effective tax rate for the six months ended June 30, 2008 was lower than the effective tax rate in the comparable period in 2007 primarily because of a lower Kansas state income tax provision for the 2008 period resulting from recognizing the benefit of $12.5 million approved Kansas income tax credits for expansion projects at our El Dorado Refinery.  Other benefits which reduced our Kansas income tax provision included a benefit of $492,000 for Kansas state income taxes due to a recent favorable ruling by the Kansas Board of Tax Appeals and a reduction of Kansas corporate income tax rates from 7.35% to 7.1%.  The income tax provision for the six months ended June 30, 2007 included a $4.2 million ultra-low sulfur diesel credit benefit to the provision, and the 2008 provision was higher due to certain executive compensation that exceeded the limits allowed as a tax deduction.  The benefit of the Section 199 production activities deduction for manufacturers (based on taxable income) was also less in the six months ended June 30, 2008, than in the comparable period of 2007 because taxable income was substantially less during the first half of 2008.

Three months ended June 30, 2008 compared with the same period in 2007

Overview of Results

We had net income for the three months ended June 30, 2008 of $59.3 million, or $0.57 per diluted share compared to net income of $243.8 million, or $2.23 per diluted share, earned in the same period in 2007.  Our operating income of $82.0 million for the three months ended June 30, 2008 decreased $292.3 million from the $374.3 million for the comparable period in 2007.  Our results for the three months ended June 30, 2008 were negatively impacted by several factors, the primary ones being the rapid increase in crude oil prices since the beginning of the period and the weakening U.S. economy.  These factors reduced the demand for gasoline, causing a substantial drop in gasoline margins.  In addition, our margins on asphalt and other products declined substantially as sales prices for these products increased only modestly compared to the increase in crude prices.  The average gasoline crack spread of $5.03 per barrel during the second quarter of 2008 was substantially lower than the $36.73 per barrel in the second quarter of 2007.  In addition, the average diesel crack spread decreased to $27.88 per barrel during the second quarter of 2008 from $29.08 per barrel in the comparable period in 2007.

Specific Variances

Refined product revenues.   Refined product revenues increased $450.9 million, or 32%, from $1.43 billion to $1.88 billion for the three months ended June 30, 2008 compared to the same period in 2007.  This increase resulted primarily from higher crude oil prices, which supported higher refined product prices ($39.83 higher average per sales barrel), despite a decline in sales volumes.

Manufactured product yields.   Yields decreased 9,573 bpd at the El Dorado Refinery and increased 6,231 bpd at the Cheyenne Refinery for the three months ended June 30, 2008 compared to same period in 2007.  The decrease in yields at the El Dorado Refinery was due to the planned major turnaround work on the crude unit, which was completed on April 10, 2008.

Other revenues.   Other revenues decreased $119.1 million to a loss of $115.5 million for the three months ended June 30, 2008, compared to a gain of $3.6 million for the same period in 2007, the primary source of which was $115.9 million in net realized and unrealized losses from derivative contracts in the three months ended June 30, 2008 compared to $1.4 million in net realized and unrealized losses from derivative contracts in the three months ended June 30, 2007.  See “Price Risk Management Activities” under Item 3 for a discussion of our utilization of commodity derivative contracts.  We had $4.8 million in gasoline sulfur credit sales in the three months ended June 30, 2007 (none in the comparable period of 2008) and $213,000 of ethanol RIN sales in the three months ended June 30, 2008 (none in the comparable period of 2007).

Raw material, freight and other costs.   Raw material, freight and other costs increased by $610.0 million, from $964.9 million in the three months ended June 30, 2007, to $1.57 billion in the same period for 2008.  The increase in raw material, freight and other costs was due to higher average crude oil prices and increased purchased products partially offset by decreased overall crude oil charges and higher light/heavy crude oil differentials during the three months ended June 30, 2008 when compared to the same period in 2007.  For the three months ended June 30, 2008, we realized a reduction in raw material, freight and other costs as a result of inventory gains of approximately $102.8 million after tax ($165.2 million pretax, consisting of a $48.3 million gain at the Cheyenne Refinery and a $116.9 million gain at the El Dorado Refinery).  For the three months ended June 30, 2007, we realized a reduction in raw material, freight and other costs as a result of inventory gains of approximately $20.0 million after tax ($32.3 million pretax, comprised of a $22.0 million gain at the Cheyenne Refinery and a $10.3 million gain at the El Dorado Refinery).

The Cheyenne Refinery raw material, freight and other costs of $99.51 per sales barrel for the three months ended June 30, 2008 increased from $61.15 per sales barrel in the same period in 2007 due to higher average crude oil prices, more crude oil charges and increased purchased products partially offset by increased light/heavy crude oil differentials.  The light/heavy crude oil differential for the Cheyenne Refinery averaged $21.36 per barrel in the three months ended June 30, 2008 compared to $14.17 per barrel in the same period in 2007.

The El Dorado Refinery raw material, freight and other costs of $112.98 per sales barrel for the three months ended June 30, 2008 increased from $60.92 per sales barrel in the same period in 2007 due to a lower volume of sales barrels and higher average crude oil prices partially offset by decreased overall crude charges and higher light/heavy crude oil differentials.  The WTI/WTS crude oil differential increased from an average of $4.59 per barrel in the three-month period ended June 30, 2007, to $4.98 per barrel in the same period in 2008.  The light/heavy crude oil differential increased from an average of $18.78 per barrel in the three-month period ended June 30, 2007 to $22.59 per barrel in the same period in 2008.

Refinery operating expenses.   Refinery operating expenses, excluding depreciation, were $81.0 million in the three months ended June 30, 2008 compared to $69.8 million in the comparable period of 2007.

The Cheyenne Refinery operating expenses, excluding depreciation, were $30.1 million in the three months ended June 30, 2008 compared to $22.8 million in the comparable period of 2007.  Primary areas of increased costs were: maintenance costs ($1.9 million primarily due to various unplanned tank and coker repairs and outages), turnaround amortization ($1.3 million due to amortization costs of 2007 turnarounds), natural gas costs ($1.2 million due to increased price offset partially by decreased volumes), additives and chemicals costs ($1.1 million), electricity costs ($505,000 due to increased volumes), and salaries and benefits expenses ($486,000).

The El Dorado Refinery operating expenses, excluding depreciation, were $51.0 million in the three months ended June 30, 2008, increasing from $47.0 million in the same three-month period of 2007.  Primary areas of increased costs and the variance amounts for the 2008 period compared to the 2007 period were: maintenance costs ($3.4 million, which includes demolition costs, crude unit start up expenses and tank repair costs), natural gas costs ($1.3 million due to increased prices), and consulting and legal expenses ($462,000), partially offset by lower 2008 environmental costs ($1.3 million).

Selling and general expenses.   Selling and general expenses, excluding depreciation, decreased $1.4 million, or 11%, from $13.6 million for the three months ended June 30, 2007 to $12.1 million for the three months ended June 30, 2008, due to lower salaries and benefits expenses ($1.8 million), including stock-based compensation expense, in the second quarter of 2008 compared to the comparable period in 2007.

Depreciation, amortization and accretion.   Depreciation, amortization and accretion increased $4.4 million, or 37%, for the three months ended June 30, 2008 compared to the same period in 2007 because of increased capital investments in our Refineries, including our El Dorado Refinery crude unit and vacuum tower expansion project placed into service in the second quarter of 2008.  We also had higher depreciation expense during the three months ended June 30, 2008, due to changes made during the third quarter of 2007, in the estimated useful lives of certain assets that have been or are expected to be retired in connection with capital projects in 2008 and 2009.

Interest expense and other financing costs.   Interest expense and other financing costs of $2.9 million for the three months ended June 30, 2008 increased $932,000, or 47%, from $2.0 million in the comparable period in 2007.  The primary cause of the increase was lower capitalized interest in the second quarter of 2008 of $1.5 million compared to $2.2 million in 2007.  Average debt outstanding was $158.8 million and $150.0 during the three months ended June 30, 2008 and 2007, respectively (excluding amounts payable to Utexam under the Utexam Arrangement).

Interest and investment income.   Interest and investment income decreased $5.0 million from $6.3 million in the three months ended June 30, 2007, to $1.3 million in the three months ended June 30, 2008, because of lower average cash balances and lower interest rates.

Provision for income taxes.   The provision for income taxes for the three months ended June 30, 2008 was $21.1 million on pretax income of $80.4 million (or 26.2%).  Our provision for income taxes for the three months ended June 30, 2007 was $134.9 million on pretax income of $378.6 million (or 35.6%).  The effective tax rate for the three months ended June 30, 2008 was lower than the effective tax rate in the comparable period in 2007 primarily because of a lower Kansas state income tax provision for the 2008 period resulting from recognizing the benefit of $12.5 million approved Kansas income tax credits for expansion projects at our El Dorado Refinery.  Another benefit which reduced our Kansas income tax provision included a reduction of Kansas corporate income tax rates from 7.35% to 7.1%.  The income tax provision for the three months ended June 30, 2007 included a $2.1 million ultra-low sulfur diesel credit benefit to the provision.  The benefit of the Section 199 production activities deduction for manufacturers (based on taxable income) was also less in the second quarter of 2008, than in the comparable period of 2007 because taxable income was substantially less during the second quarter of 2008.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows from operating activities.   Net cash provided by operating activities was $119.8 million for the six months ended June 30, 2008 compared to net cash provided by operating activities of $408.8 million during the six months ended June 30, 2007.  In addition, lower operating income decreased cash flow, cash flows from working capital changes used cash during the 2008 period compared to providing cash for the same period in 2007.  Operating cash flows are affected by crude oil and refined product prices and other risks as discussed in “Item 3. Quantitative and Qualitative Disclosures About Market Risks.”

Working capital changes used a total of $18.2 million of cash during the first six months of 2008 compared to providing $37.3 million of cash for the same period in 2007.  The most significant components of the working capital change were an increase in inventories of $260.2 million in the 2008 period compared to an increase in inventories of $6.6 million in the 2007 comparable period, and an increase in receivables of $74.7 million in the first six months of 2008 compared to an increase in receivables of $43.8 million in the 2007 comparable period, and an increase in current accrued liabilities of $3.6 million in the six months ended June 30, 2008 compared to an increase of $60.0 million during the comparable period in 2007, offset by an increase in trade and crude payables of $327.3 million in 2008 compared to an increase in 2007 of $19.5 million.  The increase in inventories during the six months ended June 30, 2008 was principally due to higher prices.  During the six months ended June 30, 2008, we received income tax refunds of $24.5 million, consisting mostly of our estimated federal income tax overpayment from 2007.  At June 30, 2008, we had $221.2 million of cash and cash equivalents, $484.9 million of working capital and $262.4 million of borrowing base availability for cash borrowings under our $350.0 million revolving credit facility.

Cash flows used in investing activities.   Capital expenditures during the first six months of 2008 were $115.0 million, which included approximately $87.9 million for the El Dorado Refinery and $26.9 million for the Cheyenne Refinery. The $87.9 million of capital expenditures for our El Dorado Refinery included $31.9 million to complete the crude unit and vacuum tower expansion ($154 million total cost), $18.9 million on the coke drum replacement and $7.9 million on the gasoil hydrotreater revamp, as well as operational, payout, safety, administrative, environmental and optimization projects.  The $26.9 million of capital expenditures for our Cheyenne Refinery included approximately $3.9 million for the boiler replacement, $5.3 million for the amine plant, and $2.4 million for the coker expansion, as well as environmental, operational, safety, administrative and payout projects.

Under the provisions of the purchase agreement with Shell for our El Dorado Refinery, we were required to make contingent earn-out payments for each of the years 2000 through 2007 equal to one-half of the excess over $60.0 million per year of the El Dorado Refinery’s annual revenues less material costs and operating costs, other than depreciation.  The total amount of these contingent payments was capped at $40.0 million, with an annual cap of $7.5 million. Such contingency payments were recorded as an additional acquisition cost when the payment was considered probable and estimable.  A payment of $7.5 million was paid in early 2008, based on 2007 results, and was accrued as of December 31, 2007.  Including the payment made in early 2008, we paid a total of $37.5 million for contingent earn-out payments and are no longer subject to this provision of the Shell agreement.

Cash flows used in financing activities.   During the six months ended June 30, 2008, we spent $66.4 million to repurchase stock under the stock repurchase program discussed below.  Treasury stock increased by 335,360 shares ($10.1 million) from stock surrendered by employees and members of the Board of Directors to pay withholding taxes on stock-based compensation which vested during the first six months of 2008.  We also paid $10.7 million in dividends during the six months ended June 30, 2008.

Through December 31, 2007, our Board of Directors had approved a total of $300 million for share repurchases, of which $243.6 million had been spent.  In February 2008, our Board of Directors approved an additional $100 million to be utilized for share repurchases.  As indicated above, we used $56.3 million to repurchase stock under this program during the six months ended June 30, 2008, leaving a remaining authorization of $100.2 million.

During the six months ended June 30, 2008, we issued 100,000 shares of common stock from our treasury stock in connection with stock option exercises by employees and members of our Board of Directors, for which we received $126,000 in cash and 9,224 shares ($306,000) of our common stock in stock swaps where mature stock was surrendered to facilitate the exercise of the option. As of June 30, 2008, we had $150.0 million of long-term debt outstanding and no borrowings under our revolving credit facility.  We also had $87.6 million of letters of credit outstanding under our revolving credit facility.  We were in compliance with the financial covenants of our revolving credit facility as of June 30, 2008.  Shareholders’ equity as of June 30, 2008 was $1.08 billion.

Our Board of Directors declared regular quarterly cash dividends of $0.05 per share in December 2007 and February 2008, which were paid in January and April 2008, respectively.  In April 2008, our Board of Directors announced an increase in the regular quarterly cash dividend to $0.06 per share ($0.24 annualized) for shareholders of record on June 27, 2008, which was paid in July 2008.  The total cash required for the dividend declared in April 2008 was approximately $6.2 million and was included in “Accrued dividends” on the June 30, 2008 Condensed Consolidated Balance Sheet.

FUTURE CAPITAL EXPENDITURES

  Significant future capital projects.   Both the Cheyenne and El Dorado Refineries will continue working on significant, multi-year projects in 2008 and 2009.  The new amine unit at the Cheyenne Refinery has an estimated total cost of $20.5 million (including capitalized interest) and is intended to result in improved alkylation unit reliability and provide a partial backup unit if the main amine unit is not operating. Spending on this project is nearly completed and start-up is expected to occur in the third quarter of 2008.

The coke drum replacement project estimated at $60 million for our El Dorado Refinery will improve safety and reliability as well as increase overall throughput for the Refinery and is expected to be completed in the second half of 2008.  At June 30, 2008, there were $5.8 million of outstanding commitments for this project.  The gasoil hydrotreater revamp at the El Dorado Refinery is the key project to achieve gasoline sulfur compliance for our El Dorado Refinery and has a total estimated cost of $82 million (see “Environmental” in Note 10 in the “Notes to Condensed Consolidated Financial Statements”).  The project will also result in a significant yield improvement for the catalytic cracking unit and is anticipated to be completed in the fall of 2009.  As of June 30, 2008, outstanding purchase commitments for the gasoil hydrotreater revamp were $10.0 million.  The El Dorado Refinery’s planned $84 million catalytic cracker expansion project is currently under evaluation because of the current low gasoline margin environment.  This evaluation may result in a reduced scope of work and reduced project costs.  The project is anticipated to be completed in the fall of 2009, and has outstanding purchase commitments at June 30, 2008 of $4.5 million.  The El Dorado Refinery catalytic cracker regenerator emission control project, with a fall 2009 estimated completion date and total estimated cost of $36 million, will add a scrubber to improve the environmental performance of the unit, specifically as it relates to flue-gas emissions.  This project is necessary to support the catalytic cracking expansion project and to meet a portion of the expected requirements of the EPA Petroleum Refining Initiative (see “Environmental” in Note 10 in the “Notes to Condensed Consolidated Financial Statements”).  At June 30, 2008, the catalytic cracker regenerator emission control project had outstanding purchase commitments of $3.4 million.  The above amounts include estimated capitalized interest.

2008 capital expenditures.   Including the projects discussed above, 2008 capital expenditures aggregating approximately $267.0 million are currently planned, of which $115.0 million had been incurred through June 30, 2008, and include $170.0 million at our El Dorado Refinery, $96.0 million at our Cheyenne Refinery, $465,000 at our products terminal and blending facility and $600,000 at our Denver and Houston offices.  We have reduced our 2008 capital expenditures by deferring $35.0 million to future years because of the decline in our operating profits.  The $170.0 million of planned capital expenditures for our El Dorado Refinery includes $26.0 million for the gasoil hydrotreater revamp project, $29.0 million for  the coke drum replacement project, $32.0 million for the crude unit and vacuum expansion project, $20.0 million for the catalytic cracker expansion project and $13.0 million for the catalytic cracker regenerator emission control project, as mentioned above, as well as environmental, operational, safety, payout and administrative projects.  The $96.0 million of planned capital expenditures for our Cheyenne Refinery includes $15.4 million for the Refinery main office building replacement, $13.0 million for a new boiler project ($14.0 million total cost) and $8.0 million for the new amine plant ($20.5 million total cost), as well as environmental, operational, safety, payout and administrative projects.  We expect that our remaining 2008 capital expenditures will be funded with cash generated by our operations and by using a portion of our existing cash balance, if necessary.  We will continue to review our capital expenditures in light of market conditions.  We may experience cost overruns and/or schedule delays on any of these projects because of the strong industry demand for material, labor and engineering resources.

CONTRACTUAL CASH OBLIGATIONS

 

Contractual cash obligations for crude supply, feedstocks and natural gas have increased because of increased prices.  The obligations as of June 30, 2008 with payments within one year are $1.19 billion, of which approximately $818 million relates to July and August 2008 crude supply, feedstock and natural gas requirements for the Refineries.

 

 

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Operating Data

The following tables set forth the refining operating statistical information on a consolidated   basis and for each Refinery for the six and three months ended June 30, 2008 and 2007.  The statistical information includes the following terms:

·

WTI Cushing crude oil price - the benchmark West Texas Intermediate crude oil priced at Cushing, Oklahoma (ConocoPhillips WTI crude oil posting plus).

·

Charges - the quantity of crude oil and other feedstock processed through Refinery units on a bpd basis.

·

Manufactured product yields - the volumes of specific materials that are obtained through the distilling of crude oil and the operations of other refinery process units on a bpd basis.

·

Gasoline and diesel crack spreads - the average non-oxygenated gasoline and diesel net sales prices that we receive for each product less the average WTI Cushing crude oil price.

·

Cheyenne light/heavy crude oil differential - the average differential between the WTI Cushing crude oil price and the heavy crude oil delivered to the Cheyenne Refinery.

·

WTI/WTS crude oil differential - the average differential between the WTI Cushing crude oil price and the West Texas sour crude oil priced at Midland, Texas.

·

El Dorado Refinery light/heavy crude oil differential - the average differential between the WTI Cushing crude oil price and Canadian heavy crude oil delivered to the El Dorado Refinery.

 

Consolidated:
		Six Months Ended June 30,								Three Months Ended June 30,
		2008				2007				2008				2007
Charges (bpd)
Light crude			21,499				38,785				31,939				35,663
Heavy and intermediate crude			101,568				109,506				110,323				110,906
Other feed and blendstocks			20,632				16,962				19,118				17,422
Total			143,699				165,253				161,380				163,991
Manufactured product yields (bpd)
Gasoline			69,351				78,740				73,203				79,921
Diesel and jet fuel			46,522				58,386				54,220				55,437
Asphalt			4,520				4,999				3,472				5,744
Other			19,247				19,079				25,520				18,656
Total			139,640				161,204				156,415				159,758
Total product sales (bpd)
Gasoline			78,742				88,954				82,155				92,434
Diesel and jet fuel			46,587				60,191				54,587				58,821
Asphalt			4,813				4,901				4,345				5,106
Other			17,806				18,278				17,679				17,527
Total			147,948				172,324				158,766				173,888
Refinery operating margin information  (per sales barrel)
Refined products revenue		$	114.74			$	79.55			$	130.27			$	90.44
Raw material, freight and other costs  (FIFO inventory accounting)			95.60				57.86				109.01				60.98
Refinery operating expenses, excluding  depreciation			6.26				4.52				5.61				4.41
Depreciation, amortization and accretion			1.16				0.74				1.14				0.76
Average WTI Cushing crude oil price  (per barrel)		$	111.49			$	60.24			$	125.10			$	63.22
Average gasoline crack spread  (per barrel)			4.60				24.84				5.03				36.73
Average diesel crack spread (per barrel)			24.31				25.39				27.88				29.08
Average sales price (per sales barrel)
Gasoline		$	118.89			$	86.98			$	133.03			$	102.00
Diesel and jet fuel			141.22				86.09				156.44				92.84
Asphalt			45.60				42.91				59.64				49.58
Other			45.81				31.67				53.93				33.35

 

 

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		Six Months Ended June 30,								Three Months Ended June 30,
		2008				2007				2008				2007
Cheyenne Refinery:
Charges (bpd)
Light crude			7,615				14,245				7,089				11,680
Heavy and intermediate crude			34,119				25,535				33,229				21,995
Other feed and blendstocks			1,039				1,257				434				625
Total			42,773				41,037				40,752				34,300
Manufactured product yields (bpd)
Gasoline			18,726				17,215				16,981				13,733
Diesel			11,752				12,670				10,111				10,676
Asphalt			4,520				4,999				3,472				5,744
Other			6,428				4,547				8,561				2,741
Total			41,426				39,431				39,125				32,894
Total product sales (bpd)
Gasoline			27,277				26,132				25,519				25,591
Diesel			11,535				12,607				10,671				12,044
Asphalt			4,813				4,901				4,345				5,106
Other			5,309				3,288				6,216				2,521
Total			48,934				46,928				46,751				45,262
Refinery operating margin information  (per sales barrel)
Refined products revenue		$	106.06			$	79.19			$	119.64			$	92.10
Raw material, freight and other costs  (FIFO inventory accounting)			89.10				56.17				99.51				61.15
Refinery operating expenses, excluding  depreciation			6.66				5.63				7.07				5.54
Depreciation, amortization and accretion			1.47				1.25				1.52				1.38
Average light/heavy crude oil  differential (per barrel)		$	19.96			$	13.71			$	21.36			$	14.17
Average gasoline crack spread  (per barrel)			3.85				25.19				5.35				37.75
Average diesel crack spread (per barrel)			25.93				30.11				30.12				37.20
Average sales price (per sales barrel)
Gasoline		$	115.13			$	87.83			$	129.78			$	103.56
Diesel			140.29				91.91				159.94				100.94
Asphalt			45.60				42.91				59.64				49.58
Other			39.84				15.75				50.61				19.54

 

 

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		Six Months Ended June 30,								Three Months Ended June 30,
		2008				2007				2008				2007
El Dorado Refinery:
Charges (bpd)
Light crude			13,884				24,540				24,850				23,983
Heavy and intermediate crude			67,449				83,971				77,094				88,911
Other feed and blendstocks			19,593				15,705				18,684				16,797
Total			100,926				124,216				120,628				129,691
Manufactured product yields (bpd)
Gasoline			50,624				61,524				56,222				66,188
Diesel and jet fuel			34,770				45,716				44,110				44,761
Other			12,819				14,532				16,959				15,915
Total			98,213				121,772				117,291				126,864
Total product sales (bpd)
Gasoline			51,464				62,822				56,636				66,844
Diesel and jet fuel			35,053				47,583				43,916				46,777
Other			12,497				14,990				11,463				15,007
Total			99,014				125,395				112,015				128,628
Refinery operating margin information  (per sales barrel)
Refined products revenue		$	119.04			$	79.68			$	134.71			$	89.86
Raw material, freight and other costs  (FIFO inventory accounting)			98.81				58.50				112.98				60.92
Refinery operating expenses, excluding  depreciation			6.07				4.10				5.00				4.02
Depreciation, amortization and accretion			1.01				0.55				0.98				0.54
Average WTI/WTS crude oil  differential (per barrel)		$	4.81			$	4.47			$	4.98			$	4.59
Average light/heavy crude oil  differential (per barrel)			22.63				15.59				23.26				18.78
Average gasoline crack spread  (per barrel)			4.99				24.70				4.88				36.34
Average diesel crack spread (per barrel)			23.78				24.14				27.34				26.99
Average sales price (per sales barrel)
Gasoline		$	120.88			$	86.62			$	134.50			$	101.40
Diesel and jet fuel			141.53				84.55				155.59				90.75
Other			48.34				35.16				55.73				35.67

 

 

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ITEM 3.                       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Impact of Changing Prices.   Our earnings and cash flows and estimates of future cash flows are sensitive to changes in energy prices.  The prices of crude oil and refined products have fluctuated substantially in recent years.  These prices depend on many factors, including the overall demand for crude oil and refined products, which in turn depend on, among other factors, general economic conditions, the level of foreign and domestic production of crude oil and refined products, the availability of imports of crude oil and refined products, the marketing of alternative and competing fuels, the extent of government regulations and global market dynamics.  The prices we receive for refined products are also affected by factors such as local market conditions and the level of operations of other refineries in our markets.  The prices at which we can sell gasoline and other refined products are strongly influenced by the price of crude oil.  Generally, an increase or decrease in the price of crude oil results in a corresponding increase or decrease in the price of gasoline and other refined products.  The timing of the relative movement of the prices, however, can impact profit margins, which could significantly affect our earnings and cash flows .

Under our FIFO inventory accounting method, crude oil price movements can cause significant fluctuations in the valuation of our crude oil, unfinished products and finished products inventories, resulting in inventory gains when crude oil prices increase and inventory losses when crude oil prices decrease during the reporting period.

Price Risk Management Activities.   At times, we enter into commodity derivative contracts to manage our price exposure to our inventory positions, purchases of foreign crude oil and consumption of natural gas in the refining process or to fix margins on future production.  Gains or losses on commodity derivative contracts accounted for as hedges are recognized in the Condensed Consolidated Statements of Income and Comprehensive Income as “Raw material, freight and other costs” or “Refinery operating expenses, excluding depreciation” when the associated transactions are consummated, while gains and losses on transactions accounted for using mark-to-market accounting are reflected in “Other revenues” in the Condensed Consolidated Statements of Income and Comprehensive Income at each period end.  See Note 9 “Price Risk Management Activities” in the “Notes to Condensed Consolidated Financial Statements.”

Interest Rate Risk.   Borrowings under our revolving credit facility bear a current market rate of interest.  A one percent increase or decrease in the interest rates on our revolving credit facility would not significantly affect our earnings or cash flows.  Our $150.0 million principal of 6⅝% Senior Notes that were outstanding at June 30, 2008, and due 2011, have a fixed interest rate.  Thus, our long-term debt is not exposed to cash flow risk from interest rate changes.  Our long-term debt, however, is exposed to fair value risk.  The estimated fair value of our 6⅝% Senior Notes at June 30, 2008 was $147.8 million.

ITEM 4.                       CONTROLS AND PROCEDURES

We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  As of the end of the period covered by this report, we evaluated, under the supervision and with the participation of our management, including our Chairman of the Board, President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act.  Based on that evaluation, our Chairman of the Board, President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

During the most recent fiscal quarter, there have been no changes in our internal control over financial reporting 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 –   See Note 11 in the Notes to Condensed Consolidated Financial Statements .
ITEM 1A.	Risk Factors –   Our risk management activities may generate substantial losses and limit potential gains   In order to hedge and limit potential financial losses on certain of our inventories, we from time to time enter into derivative contracts to make forward sales or purchases of crude oil, refined products, natural gas and other commodities.  We may also use options or swaps to accomplish similar objectives.  Our inventory hedging strategies generally produce losses when hedged crude oil or refined products increase in value.  In the six months ended June 30, 2008, we incurred a pre-tax hedging loss of $143.1 million recorded in “Other revenues” in the Condensed Consolidated Statements of Income and Comprehensive Income.  Offsetting the cost of our hedges is the economic value realized when we liquidate inventory which had been hedged.  The value of the hedged inventory generally moves in an opposite direction to the value of the hedge contract.  However, due to mark to market accounting requirements and cash margin requirements of commodities exchanges and various counterparties, there may be timing differences between when hedging losses are incurred and when the related physical inventories are sold.  In certain instances, these derivative contracts are accounted for as hedges, but there is potential risk that these hedges may not be considered effective from an accounting perspective and would be marked to market in our financial statements.  As we use progressively more Canadian crude oil at our refineries, both our total crude oil inventories and the amount hedged inventories are likely to increase in future periods.  See “Quantitative and Qualitative Disclosures about Market Risk” in Part I, Item 3.
ITEM 4.	Submission of Matters to a Vote of Security Holders – The annual shareholders meeting of the Company was held on April 22, 2008, with 97,098,257 of the Company’s shares present or represented by proxy at the meeting.  This represented nearly 94% of the Company’s shares outstanding as of the record date of the meeting.  The shareholders of the Company took the following actions: 1.    Election of Directors:      Elected the following seven directors for terms of office expiring at the annual meeting of shareholders in 2009:

 

Name	For	Withheld
James R. Gibbs	96,264,618	833,639
Douglas Y. Bech	95,668,009	1,430,248
G. Clyde Buck	96,605,485	492,772
T. Michael Dossey	96,616,095	482,162
James H. Lee	96,152,350	945,907
Paul B. Loyd, Jr.	96,142,084	956,173
Michael E. Rose	96,512,519	585,738

2.    Ratified the appointment of Deloitte & Touche LLP as the Company’s auditors for the year ending December 31, 2008.  The vote was 96,711,115 for, 232,417 against, 154,725 abstentions and no broker non-votes.

ITEM 6 .

Exhibits –   10.1 – Frontier Products Offtake Agreement El Dorado Refinery, dated as of October 19, 1999 by and between Frontier Oil and Refining Company and Equiva Trading Company (now Shell Oil Products US, assignee of Equiva Trading Company) (“the Agreement), and First Amendment to the Agreement dated September 18, 2000, Second Amendment to the Agreement dated September 21, 2000, Third Amendment to the Agreement dated December 19, 2000, Fourth Amendment to the Agreement dated February 22, 2001, Fifth Amendment to the Agreement dated August 14, 2001, Sixth Amendment to the Agreement dated November 5, 2001, Seventh Amendment to the Agreement dated April 22, 2002, Eighth Amendment to the Agreement dated May 30, 2003, Ninth Amendment to the Agreement dated May 25, 2004, Tenth Amendment to the Agreement dated May 3, 2005, Eleventh Amendment to the Agreement dated March 31, 2006, Twelfth Amendment to the Agreement dated May 11, 2006, Thirteenth Amendment to the Agreement dated September 30, 2007, Fourteenth Amendment to the Agreement dated May 1, 2008 and Fifteenth Amendment to the Agreement dated May 28, 2008.   31.1 – Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   31.2 – Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   32.1 – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   32.2 – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

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SIGNATURES

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

 

 

	FRONTIER OIL CORPORATION
	By:	/s/  Nancy J. Zupan
		Nancy J. Zupan
		Vice President - Controller (principal accounting officer)

 

Date: August 7, 2008