Financial Instruments

3 Months Ended

Mar. 31, 2013

Financial Instruments, Owned, at Fair Value [Abstract]

Financial Instruments

Financial Instruments

Our financial instruments consist of cash and cash equivalents, investments in marketable securities, accounts receivable, accounts payable, debt and derivative instruments. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value. HEP's outstanding credit agreement borrowings also approximate fair value as interest rates are reset frequently at current interest rates.

Fair value measurements are derived using inputs (assumptions that market participants would use in pricing an asset or liability, including assumptions about risk). GAAP categorizes inputs used in fair value measurements into three broad levels as follows:

• (Level 1) Quoted prices in active markets for identical assets or liabilities.

• (Level 2) Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, similar assets and liabilities in markets that are not active or can be corroborated by observable market data.

• (Level 3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes valuation techniques that involve significant unobservable inputs.

The carrying amounts and related estimated fair values of our investments in marketable securities, derivative instruments and senior notes at March 31, 2013 and December 31, 2012 were as follows:

					Fair Value by Input Level
Financial Instrument	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
			(In thousands)
March 31, 2013
Assets:
Marketable debt securities	$	670,694	$	670,694	$	—	$	670,694	$	—
Commodity price swaps	43,808		43,808		—		27,598		16,210
Forward sales	1,468		1,468		—		—		1,468
Total assets	$	715,970	$	715,970	$	—	$	698,292	$	17,678
Liabilities:
NYMEX futures contracts	$	5,837	$	5,837	$	5,837	$	—	$	—
Commodity price swaps	38,650		38,650		—		14,723		23,927
HollyFrontier senior notes	435,373		469,573		—		469,573		—
HEP senior notes	443,913		480,563		—		480,563		—
HEP interest rate swaps	2,868		2,868		—		2,868		—
Total liabilities	$	926,641	$	997,491	$	5,837	$	967,727	$	23,927

December 31, 2012
Assets:
Marketable debt securities	$	635,702	$	635,702	$	—	$	635,702	$	—
Commodity price swaps	17,383		17,383		—		6,151		11,232
Total assets	$	653,085	$	653,085	$	—	$	641,853	$	11,232
Liabilities:
NYMEX futures contracts	$	5,563	$	5,563	$	5,563	$	—	$	—
Commodity price swaps	83,982		83,982		—		39,092		44,890
HollyFrontier senior notes	435,254		470,990		—		470,990		—
HEP senior notes	443,673		484,125		—		484,125		—
HEP interest rate swaps	3,430		3,430		—		3,430		—
Total liabilities	$	971,902	$	1,048,090	$	5,563	$	997,637	$	44,890

Level 1 Financial Instruments

Our NYMEX futures contracts are exchange traded and are measured and recorded at fair value using quoted market prices, a Level 1 input.

Level 2 Financial Instruments

Investments in marketable debt securities and derivative instruments consisting of commodity price swaps and HEP's interest rate swaps are measured and recorded at fair value using Level 2 inputs. The fair values of the commodity price and interest rate swap contracts are based on the net present value of expected future cash flows related to both variable and fixed rate legs of the respective swap agreements. The measurements are computed using market-based observable inputs, quoted forward commodity prices with respect to our commodity price swaps and the forward London Interbank Offered Rate (“LIBOR”) yield curve with respect to HEP's interest rate swaps. The fair value of the marketable debt securities and senior notes is based on values provided by a third-party, which were derived using market quotes for similar type instruments, a Level 2 input.

Level 3 Financial Instruments

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

The following table presents the changes in fair value of the Level 3 assets and liabilities (all related to derivative instruments) for the three months ended March 31, 2013 and 2012:

Level 3 Financial Instruments	Three Months Ended March 31,
	2013			2012
	(In thousands)
Asset (liability) balance at beginning of period	$	(33,658	)	$	31,616
Change in fair value:
Recognized in other comprehensive income	(49,202		)	(146,769		)
Recognized in cost of products sold	43,559			—
Settlement date fair value of contractual maturities:
Recognized in sales and other revenues	19,185			(34,125		)
Recognized in cost of products sold	13,867			—
Asset (liability) balance at end of period	$	(6,249	)	$	(149,278	)

A hypothetical change of 10% to the estimated future cash flows attributable to our Level 3 derivative instruments would result in an estimated fair value change of approximately $4.1 million.