Financial Instruments

9 Months Ended

Sep. 30, 2013

Financial Instruments, Owned, at Fair Value [Abstract]

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 September 30, 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)
September 30, 2013
Assets:
Marketable debt securities	$	662,164	$	662,164	$	—	$	662,164	$	—
NYMEX futures contracts	7,405		7,405		7,405		—		—
Commodity price swaps	84,762		84,762		—		58,450		26,312
HEP interest rate swaps	1,424		1,424		—		1,424		—
Total assets	$	755,755	$	755,755	$	7,405	$	722,038	$	26,312

Liabilities:
NYMEX futures contracts	$	1,934	$	1,934	$	1,934	$	—	$	—
Commodity price swaps	79,764		79,764		—		65,106		14,658
HollyFrontier senior notes	155,272		161,062		—		161,062		—
HEP senior notes	444,391		465,375		—		465,375		—
HEP interest rate swaps	1,976		1,976		—		1,976		—
Total liabilities	$	683,337	$	710,111	$	1,934	$	693,519	$	14,658



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 forecasted purchases of WCS and WTS 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 and nine months ended September 30, 2013 and 2012:



	Three Months Ended September 30,						Nine Months Ended September 30,
Level 3 Financial Instruments	2013			2012			2013			2012
	(In thousands)
Asset (liability) balance at beginning of period	$	37,126		$	119,461		$	(33,658	)	$	31,616
Change in fair value:
Recognized in other comprehensive income	(9,956		)	(192,446		)	(8,542		)	(158,893		)
Recognized in cost of products sold	(17,194		)	—			30,027			—
Settlement date fair value of contractual maturities:
Recognized in sales and other revenues	10,138			44,937			25,454			99,229
Recognized in cost of products sold	(8,460		)	—			(1,627		)	—
Asset (liability) balance at end of period	$	11,654		$	(28,048	)	$	11,654		$	(28,048	)

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 $1.2 million.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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