Julia Heidenreich - Vice President-Investor Relations George J. Damiris - President, Chief Executive Officer & Director Douglas S. Aron - Chief Financial Officer & Executive Vice President John W. Gann - Chief Accounting Officer, VP & Controller Thomas G. Creery - Vice President-Crude Supply, HollyFrontier Corp..

Roger D. Read - Wells Fargo Securities LLC Phil M.

Gresh - JPMorgan Securities LLC Doug Leggate - Bank of America Merrill Lynch Edward George Westlake - Credit Suisse Securities (USA) LLC (Broker) Brad Heffern - RBC Capital Markets LLC Paul Sankey - Wolfe Research LLC Jeff Dietert - Simmons & Company Blake Fernandez - Howard Weil Ryan Todd - Deutsche Bank Securities, Inc.

Neil Mehta - Goldman Sachs & Co. Chi Chow - Tudor, Pickering, Holt & Co. Securities, Inc. Paul Cheng - Barclays Capital, Inc. Faisel H. Khan - Citigroup Global Markets, Inc. (Broker).

Welcome to the HollyFrontier Corporation Second Quarter 2016 Conference Call and Webcast. Hosting the call today from HollyFrontier is George Damiris, President and Chief Executive Officer. He is joined by Doug Aron, Executive Vice President and Chief Financial Officer.

At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. Please note that this conference is being recorded. It is now my pleasure to turn the floor over to Julia Heidenreich, Vice President, Investor Relations. Julia, you may begin..

Good morning, everyone, and welcome to HollyFrontier Corporation's second quarter 2016 earnings call. This morning, we issued a press release announcing results for the quarter ending June 30, 2016. If you would like a copy of today's release, you may find one on our website, hollyfrontier.com.

Before George and Doug proceed with their prepared remarks, please note the Safe Harbor disclosure statement in today's press release. In summary, it says statements made regarding management expectations, judgments or predictions are forward-looking statements.

These statements are intended to be covered under the Safe Harbor provisions of federal securities laws. There are many factors that could cause results to differ from expectations, including those noted in our SEC filings. Today's statements are not guarantees of future outcomes. Today's call may also include discussion of non-GAAP measures.

Please see the press release for reconciliations to GAAP financials. Also please note that information presented on today's call speaks only as of today, August 3, 2016. Any time-sensitive information provided may no longer be accurate at the time of the webcast replay or rereading of the transcript.

And with that, I'll turn the call over to George Damiris..

Thanks, Julia. Good morning. Thank you for joining us on HollyFrontier's second quarter earnings call. Today, we reported a second quarter net loss attributable to HFC shareholders of $409 million or $2.33 per diluted share.

Reported results were impacted by non-cash goodwill and asset impairment charges, partially offset by a positive inventory valuation adjustment. The combined after-tax effect of these charges was $459 million or $2.61 per share. Excluding these non-cash items, net income attributable to HFC shareholders was $49 million or $0.28 per share.

Second quarter adjusted EBITDA was $172 million, 68% below the comparable quarter last year. Consolidated refinery margin was $8.88 per produced barrel, roughly half the $17.42 reported in second quarter 2015.

Our results were impacted by materially-weaker benchmark margin environment, tighter crude differentials and the impact of rising crude price and secondary product margins.

Also impacting earnings this quarter were increasing costs associated with purchasing RINs to comply with the RFS mandate, which in this margin environment continue to have significant impact as a proportion of earnings. Before I discuss operational results and expectations, I'd like to spend a moment on the RFS program.

Obviously, this mandate has been receiving increased attention in recent months, given the price of RINs and negative blending economics. We believe the constructs of the RFS do not align the ability to influence biofuel blending with the burden of compliance.

Along with others in our industry and our trade association, AFPM, we're advocating for the EPA to address this mismatch in the point of obligation and to do so expeditiously.

The simple fact is that RINs were intended to be a certificate of compliance under the RFS, not a method of extracting value or creating winners and losers based on asset configuration in the value chain.

A far more equitable structure would be to expand the point of obligation to include those parties that have the ability and desire to increase volumes of biofuel blending as of the intent of the RFS. Further, we agree with those advocating for oversight of the RIN market.

We believe oversight is needed to regulate speculatory participation, which has caused RIN prices to trade well in excess of the cost of blend in a market that is thinly traded and where demand for RINs has already pegged against supply.

The current point of obligation carries severe unintended consequences for merchant refiners like HollyFrontier, and does not advance goals set forth by the EPA.

We believe the mismatch between the burden of compliance and the ability to influence biofuel blending is becoming more understood in Washington, by other affected parties and by EPA officials.

We ask that EPA move quickly in their analysis of the point of obligation and, ideally, initiate a rulemaking process that will provide the quickest path to implementing an equitable solution.

Moving on to our operations, second quarter crude throughput was 429,000 barrels per day, toward the top end of our 420,000 barrel to 430,000 barrel per day guidance. We ran 27% sour and 17% WCS and black wax crude. Our average laid-in crude cost under WTI was $1.54 in the Mid-Con, $4.09 in the Rockies, and $2.03 in the Southwest.

For the third quarter, we expect to run between 440,000 barrels and 450,000 barrels per day of crude, with a potential upside in the 460,000 barrels range if crack spreads dictate doing so. We only have minor maintenance scheduled for the quarter and no large turnarounds.

Despite strong demand fundamentals, gasoline margins have disappointed this summer due to supply outstripping growing demand. Year-to-date, we've seen an unexpected 60 million barrel increase in U.S. gasoline supply due to an increase in U.S. refining throughput, a 2% yield shift from diesel to gasoline, and a rising imports.

We've also seen a similar 60 million barrel decrease in diesel supply. As this data illustrates, fundamentals in our industry can abruptly change. We are planning for challenging market conditions and continued volatility in the months ahead, but remain prepared to respond to take advantage of any opportunities that arise.

In this environment, it is more important than ever for us to stay focused on the things we can control. We continue to make progress executing our business improvement plan. Our refineries are operating safely and reliably.

The Woods Cross expansion started up successfully in June and in the current crude price and margin environment is on track to generate annual EBITDA within the expected range of $80 million to $100 million. The new cat cracker is operating at full capacity of 8,000 barrels per day.

With the completion of our large capital investment program, our growth capital will be allocated towards our smaller quick-hit opportunity investments. During the second quarter, we completed our third and final FCC modernization, this one at our Cheyenne refinery.

Much like the work done at El Dorado and Tulsa, the Cheyenne modernization will add an incremental capacity and improved liquid yields. Our El Dorado refinery achieved a total crude record of 150,000 barrels per day in June, as well as a record heavy Canadian crude rate of approximately 58,000 barrels per day.

As of the expectation for the Opportunity project initiative, this achievement was accomplished using the combined intellectual capital of our engineering and refining teams.

A key benefit in the strategic shift towards our quick-hit Opportunity Capital projects is the flexibility it affords us over the pace and timing of execution of our investments. Based on our current outlook, we have elected to defer some planned 2016 capital spend and, if necessary, have identified further opportunities for deferral in 2017.

Although the current environment for refiners is challenging, I believe HollyFrontier is well positioned to withstand the pressure and exploit potential opportunities given our complex refineries and advantage markets, our strong balance sheet and our excellent liquidity position.

With that, let me turn it over to Doug Aron, our Chief Financial Officer..

Thank you, George, and good morning. Thanks to all of you for joining us. For the second quarter of 2016, our cash flow provided by operations totaled $304 million. Turnaround spending in the second quarter totaled $35 million, and HollyFrontier stand-alone CapEx totaled $126 million.

As George mentioned, we completed the Woods Cross refinery expansion project and successfully started up the new assets in the second quarter, increasing our nameplate capacity by 14,000 barrels a day to a total of 45,000 barrels a day.

Looking ahead, our discretionary spend will be focused on quick-hit capital projects, which, as George mentioned, gives us greater flexibility in managing the timing and pace of our growth CapEx.

We plan to defer about $40 million in capital spending this year, which will take our 2016 expected capital and turnaround spend to approximately $560 million, down from the previously-communicated $600 million.

With the completion of our Woods Cross refinery expansion and the majority of our Tier 3 compliance spending requirement, we expect 2007 – I'm sorry, 2017 capital and turnaround spending to be approximately $400 million, which would be about $160 million reduction versus 2016.

However, please keep in mind this is not yet a board-approved number, and as we get closer to next year, we'll obviously communicate what we expect that final number to be. As of June 30, 2016, our total cash and marketable securities balance stood at $533 million, a $422 million increase from March 31 levels.

We have $595 million of stand-alone debt and no drawings under our $1 billion revolving credit facility. This puts our current liquidity at $1.6 billion and debt to capital excluding HEP at 11%.

This morning, in conjunction with our results, we announced a $0.33 regular dividend to be paid in the third quarter, putting our yield at 5.2% as of last night's close. We have $170 million remaining under our existing share repurchase authorization.

We remain committed to returning excess cash to shareholders; however, the pace and volume will be dependent on free cash flow generation and cash proceeds received from HEP for dropdowns. Holly Energy continues to make progress executing third-party acquisition opportunities, with the purchase of a 50% interest in the Cheyenne pipeline.

The Cheyenne pipeline is an 87,000 barrel per day crude oil pipeline that transports Canadian crude from Guernsey to our Cheyenne refinery. In July, HEP successfully issued a $400 million senior note due 2024 at a 6% coupon in order to repay borrowings on its revolving credit facility.

The favorable capital market environment for MLPs should help facilitate a dropdown of the Woods Cross assets later this year. Our HEP units continue to perform strongly, up 11% year-to-date versus the AMZ at 6%. As a reminder, HollyFrontier owns 39% of HEP, including 22.4 million common units, plus the 2% general partner interest.

The current market value of our LP units is approximately $772 million as of last night's close. HEP recently announced its 47th consecutive quarterly distribution increase and is gaining momentum in achieving their stated 8% distribution growth target.

Second quarter general partner incentive distributions were $13 million, a 22% increase over the same quarter last year.

Overall, HollyFrontier is well positioned to manage through this current refining environment and take advantage of any opportunities that may arise given our strong liquidity position, best-in-class investment-grade balance sheet, and our partnership with HEP.

Lastly, a reminder that you can find monthly WTI-based 321 indicators for our Mid-Con, Rockies and Southwest regions on our Investor page. These regional indicators do not reflect actual sales data and are meant to show monthly trends. Realized gross margins per barrel may differ from indicators for a variety of reasons.

You can find that data on our Investor page at www.hollyfrontier.com. And now, Christy, I believe we're ready to open the line for questions..

The floor is now open for questions. Thank you. Your first question comes from the line of Roger Read from Wells Fargo. Your line is open..

Yeah. Hello. Good morning..

Good morning, Roger..

Thanks for the update on the RINs thing. I mean, it definitely sounds like everybody is in the same boat.

I was wondering, though, what do you think the potential is for something happening, let's say, before year-end, just with the idea that during an election year, all this becomes somewhat challenging?.

Yeah, realistically, Roger, by year-end, there is probably zero chance, given the election that you just mentioned. And really, I don't think we'll get any action until after the new administration gets in there..

All right. Well, how's that for killing optimism..

I'm trying to be realistic, man..

I know I know. I'm just kidding (15:36)....

Roger, I'd just throw in that, I would have told you the same thing about this time last year as it related to crude exports, and that ended up getting through. So, while I agree with George, I think the chances are low. I would also tell you that I do think we're getting some momentum.

We've got an audience now in EPA that's at least willing to consider the point of obligation. And we've seen some quotes that sort of indicate that that is something they're looking after. And look, as an industry, this is a full-court press. I'm sure you saw some of our peers with similar commentary.

And so, I wouldn't put it at zero, but maybe something in the low-single digits. But I do think we're much further along today than we were six months ago, even..

No question..

Okay. Great. Thanks. And then the follow-up. So, given the guidance, 440,000 barrels, 450,000 barrels, upside to 460,000 barrels, a year ago the crude input was right around 460,000 barrels. So, it sounds like you're looking for kind of the similar potential third quarter guiding maybe slightly below, but potential to match up.

We've heard a lot of talk about run cuts, can you give us an idea of how you're operating and whether or not you think you'd be at risk for run cuts, or whether that's more of an issue for some of your peers, in the regions in which you operate?.

Yeah. I don't expect us to have economic run cuts. I think we have good competitive position from both the crude supply and product distribution perspective. So, I think that's going to be more of an East Coast phenomenon, where the Bakken barrel doesn't fit anymore. So (17:25)..

Okay. Thank you..

Yeah..

Your next question comes from the line of Phil Gresh from JPMorgan. Your line is open..

Hi. Good morning. First question is just on the Mid-Con performance. You ran well at 104%, but it looks like your margin performance, especially if I compare it to direct peers in that region, lagged by a decent amount.

Could you talk a little bit about what happened in the quarter?.

Yeah. Hey, Phil, this is Julia. So I think it continues to be a RIN burden, which significantly has an impact in the Mid-Con, because we do sell a lot clear barrels there. Additionally, the co-product crack with the rising crude price went against us, asphalt actually flipped from positive to negative. Those were the biggest impacts in the quarter..

Okay. Second question is just you talked about the Woods Cross project being $80 million to $100 million potential contribution.

Could you talk about the timing over which you'd expect to achieve that as well as the other self-help related EBITDA that you're thinking about over the next six months to 12 months?.

Yeah. As it relates to the Woods Cross expansion, I think you can start expecting that to click in starting in June or basically with this full quarter. And then, everything else that we've discussed on our – this improvement plan is proceeding on schedule.

So, as we said before, Opportunity Capital, we plan on investing the $100 million per year there, maybe slightly less in light of what we just discussed in our prepared remarks. And expect our two-year payback metric to hold, so roughly annual EBITDA contribution of half of what we invest annually..

Okay. And then, final question is just on the CapEx budget for 2017, does that – remind me what the maintenance capital number is in that $400 million and how much growth capital you're planning on..

About $100 million for turnarounds, $100 million for maintenance, $100 million for environmental and sustaining and $100 million for growth..

Got it. Okay. Thanks..

Your next question comes from the line of Doug Leggate from Bank of America Merrill Lynch. Your line is open..

Thanks. Good morning, everybody. George, the comment about we continue to look for opportunities, it's something Holly's said for quite a while now.

Just wondering if you could give us a refresh on given the challenges the whole industry is facing right now, what do you see those opportunities are? And what's really behind my question is, given the continued RIN issue and your lack of retail exposure, is that ever something strategically that Holly would consider changing and as a consideration maybe moving more to more vertical-integrated model?.

Yeah. We've covered this in the past, Doug. I mean, it's tough on the retail front. We don't particularly care to get into retail. As you say, the major attraction to consider getting into retail is RIN.

I personally think that's a poor way to get RIN because of the mindset that when you buy the retail, you're going to be paying for the RIN, whatever the prevailing outlook is for RIN at that time.

I tend to think the RIN price is at the high end of the range now, so buying retail to take care of your RIN position, you'd basically be buying RINs at today's prices for the 15- to 20-year life of the acquisition project you're looking at.

Having said that, I have come off of my position of never say never on retail, and it is something we're looking at, and as well as other strategies for better controlling our ability to blend and generate RINs. And that's more on the wholesale side of the business, if you will..

George, I wonder if could just take a quick follow-up there. So, obviously, you and everyone else are talking to the EPA about the situation.

Just so I understand it correctly, when you talk about the point of obligation, are you talking about the wholesale blend or are you talking about point of sale?.

It's right at the rack, Doug..

Okay. Thanks.

Final one for me is, your dividend obviously, we think, has been a pretty interesting source of support for your stock, and just for all the folks who are looking at your name out there, I'm wondering if you could just reiterate your commitment to that dividend and any outlook you might have for shifting distribution to shareholders back towards that as opposed to buyback?.

Yeah. Doug, I think our regular dividend is one that if our research is correct and with Holly being sort of the accounting acquirer of Frontier Oil, we show having paid a consistent and never sort of stopped 28 years of dividends at Holly Corporation and now HollyFrontier. We feel strongly about continuing to support that dividend.

Obviously, in this margin environment, we're distributing slightly more than what we earned in the quarter. And so, I don't think that if we saw this margin environment persist for 36 months or 48 months that we could be committed to it for that period of time. And it's a decision that our Board makes every quarter.

But certainly, as you look at our liquidity position being in excess of $1.5 billion and our expectations for Woods Cross to be contributing additional EBITDA, as George mentioned, sort of starting at the end of June, we feel very good about the near to medium term at certainly the current rate..

Appreciate that, guys. Thank you..

Thanks, Doug..

Your next question comes from the line of Ed Westlake from Credit Suisse. Your line is open..

Yeah. Good morning. I guess coming back to the self-help, obviously, Woods Cross we should see in 2Q. You do have the other assets that you've built up, the El Dorado, Naphtha Fractionator, the Cheyenne hydrogen plants, you've got obviously these FCCs.

I mean, in terms of the total EBITDA there, I just added up from your presentation, it's $180 million, $200 million, when do you expect that these will be fully reflected in the earnings in this sort of in this sort of type of program?.

Well, the first two, the El Dorado and Naphtha Frac should have been seen from the first quarter. It started up late last year. Recall, well, we dropped that down at HEP last year as well. The Cheyenne hydrogen plant really started kicking in, in the first quarter. So, this last quarter was the first quarter you should have seen results there.

Although, that was mitigated by the turnaround we took at Cheyenne with the cat cracker. So, we didn't have the opportunity to see the full benefits in the second quarter. So, that will occur in the third quarter. And as I said on the earlier question, the Woods Cross expansion really should start kicking in this fall third quarter..

That's helpful. And then, just on the drops, you obviously have the opportunity to drop in HEP, it's been a good stock.

Maybe just update us in the terms of the next steps?.

So, we're in the process of working on a term sheet, both HEP and HFC's conflicts committees and boards going through that process, as we speak. Ed, I think what we've communicated previously was something in the $200 million range.

We think that actually given the EBITDA profile of that project and, as George kind of alluded to, that $80 million to $100 million of expected annual EBITDA generation, dropping somewhere in the third or a little higher in terms of that EBITDA to HEP at a market multiple, 8 times to 10 times is sort of what's out there, really more like 8 times to 9 times, 9.5 times.

So something in the middle of that range is probably an expectation. Again, not yet circled out, but that would indicate something in the $250 million or so plus total value for Woods Cross drop-downs. Still something very much that's being worked between two companies and nothing yet finalized.

But for modeling purposes, that's probably a good walking around number. And essentially, we'd expect to close before the end of the year..

Thanks very much. Very clear..

Your next question comes from the line of Brad Heffern from RBC Capital Markets. Your line is open..

Good morning, everyone.

Doug, just as a follow-on to that last comment that you made, what's the expected cash versus units proceeds?.

Yeah. Brad, given that that's a newly-constructed unit with a high tax basis, we would see it largely, if not all, cash because there would be no tax leakage associated with that..

Okay. Got it.

And then following-on on the comments in the prepared remarks about the repurchase, can you talk a little bit about why the number was so low in the second quarter? I certainly understand it was a low cash generation quarter, but at the same time the cash balance was up $400 million, and you did the debt deal during the second quarter as well.

So, why weren't there more repurchases? And then, the outlook going forward on the repurchase front and thoughts around the strategy of adding more debt in order to do repurchases?.

Brad, it's really one of – as we first – going back to being very committed to our dividend and making sure we have adequate liquidity for what we see as a very uncertain time in U.S. refining and really no way to sugarcoat that particularly with the rising RIN price in the quarter.

I'd also tell you, of the cash that was generated in the quarter, we generated about $160 million from working capital, and that's really purely driven by the rising crude oil price during the second quarter, which we've now seen reverse itself a little bit in the third quarter.

So, I think certainly until we get this dropdown completed and funded and we've seen a significant improvement in the MLP market and their ability to raise equity, which gives us a lot more confidence about getting that deal done in 2016, I think it's going to be slow in terms of share repurchases.

But we'll see as we get that dropdown done, we'll take a hard look and compare that to the other opportunities that exist out there. And we'd obviously love particularly at this price to be buying more stock back. But also think it's prudent to maintain an investment-grade balance sheet and so we're committed to doing that..

Okay. Understood. And then, finally, on the yield front, I think you're probably one of the only companies that reported a substantially higher distillate yield during the second quarter.

Where are you on the spectrum of max gasoline to max distillate and how are you think about yield through the end of the year, say?.

That's a tough one to call, because you don't know what the gasoline to diesel spread is, and that's changed quite a bit over the course of the year. I think we started out seeing incentive to make diesel, then it switched to gasoline, it's probably gone back and forth a couple of times in between.

So, we have the potential to make industry-leading percentages of gasoline, and then shift to diesel as the margins dictate. I think right now, we've seen recent strength in gasoline that's causing us to shift back again..

Okay. I'll leave it there. Thanks..

Your next question comes from the line of Paul Sankey from Wolfe Research. Your line is open..

Hi. Morning, everyone. Doug, going back to your comment on the changes that we saw in exports, and the fact that there has been progress over the past six months on RINs, can you just highlight for me what that progress has been, because obviously the dynamic here is important for you guys? Thanks..

Sure. Paul, I think first was hearing from the EPA willingness to consider the point of obligation.

Second is getting AFPM, the association for petroleum manufacturers, is a diverse group, and there was questions as to whether or not the group wanted to support moving the point of obligation or full-out repeal and was going down the path of point of obligation, admitting defeat on full-on repeal.

I think instead it was more of a view that, let's take an all-of-the-above approach, that the current system is just not workable and can't go on forever. And so, getting support of that trade organization was another big change, in my opinion. There are still challenges. And again, we see the likelihood low in this year.

But again, as George talked about, the intent of the rule was not to trade value out of the refining system and into retailers or blenders. And so, I think there is an acknowledgment the system's broken.

The last thing I'd say, Paul, is if you go back to – my memory is a little fuzzy as to whether it was 2013 or 2014 when we saw RINs in that sort of RIN sanity period, I think, you called it, or certainly someone did, and we were north of $1 (32:11) price in RINs.

You saw Congress wake up and realize that this was creating a burden, not just on the refiners, but also on consumers, and called on the EPA to act. So it's – I don't have – I wish I had more concrete – gosh, they've given us a hearing and that hearing date is three weeks from now. It's not that good. But I do think momentum is moving positively..

That's the EPA hearing?.

Yeah. Yes. So, if I could chime in a little bit, Paul. I think, as Doug said, the industry is doing a better job of getting itself organized. You can see that through AFPM, as Doug said.

I think especially the merchant refiners, led by Valero and their petition to the EPA, Coffeyville, PBF, all of us that are not integrated into retail especially, rally behind the point of obligation, versus a myriad of other RFS reforms that have been proposed in the past.

So, by better organizing and better concentrating our message around the point of obligation, I think that's really what's led to the attention we're getting from the EPA, as well as Congressional leadership in Washington..

Understood. Yeah.

And if I remember rightly, if you can get somehow Washington to believe that the whole thing is being led by Wall Street banks and speculators – hedge fund speculators – if you can somehow blame those people, you've got a much better shot of getting rid of it altogether?.

We'd appreciate your help in that effort. I know you've got some friends in Washington, Paul..

That was a deadpan joke by me.

And another more general one, because you obviously answered a lot of questions over the call, but how far do you think 2Q was from mid-cycle – if you like, the new mid-cycle? Are there elements to it that you think are unusual for the second quarter, or do you now think that this may be the sort of environment of the future? Thanks, guys..

Yeah, I think the second quarter was below what we would consider mid-cycle. I think I would view it more towards the bottom of the cycle. But having said that, I think we could be here for three quarters or four quarters. So we're planning for that, as we said.

We've got a lot of inventory to work off, both nationally and in the Group 3 market, which is our biggest market. But again, you never know. I think as quickly as things turned down unexpectedly this year, I think everybody came in with the expectation that 2016 was going to be a repeat of last year. It could turn back and prove..

Yeah. I mean, I guess, I would say that the inventory was above where you'd expect it to be, probably because of the warm winter..

Exactly..

The Canadian heavy averages (35:30) are not good for you, right? I mean you obviously suffer from Canadian heavy, and then we're clearly also debating RINs, but if you've got any other thoughts..

No, I think you hit it right on the head. What started the ball rolling here was higher – was the warm winter, which led to high diesel inventories, which led to weak diesel margins, which led to the shift to gasoline production, which again has overwhelmed continued strong demand growth in gasoline..

Yeah. Okay. Thanks very much..

Your next question comes from the line of Jeff Dietert from Simmons. Your line is open..

Good morning..

Good morning..

Just on the RIN side, Bloomberg is not tracking RIN's prices, so it's a little bit harder for us to see.

Where are you seeing current RIN's prices, and what does that imply for RIN's cost for the third quarter?.

I think RINs are in the low $0.90s (36:30), and I think it's to put our RIN tab in the third quarter in the $60 million to $70 million range.

$60 million range?.

Yeah, Jeff. I would – the RIN tab this quarter was $57 million. I would say, probably going to tick up a little bit from there. $70 million probably at the very high end, if it really were to stay in the dollar range..

Okay.

And secondly, with the Woods Cross expansion, are there any expectations for feedstock changes as to what you're putting in the unit? Could you talk about how that might evolve with the new capacity?.

Sure. Obviously, that unit was designed, intended to run the Utah West crude and what's going on the crude price front and in the Uinta Basin specifically, we're modifying the plant to allow us to run more Canadian Syncrude..

So, the primary addition will be Canadian Syncrude or are there local crudes, not waxy crudes, but local crudes that will provide some of that feedstock as well?.

I think the local crudes will kick in as well, but I would expect the majority of it to be coming down from Canada incrementally..

Okay. Thanks for your comments..

Thanks, Jeff..

Your next question comes from the line of Blake Fernandez from Howard Weil. Your line is open..

Folks, good morning. George, I wanted to go back to the M&A question. I know you addressed retail and wholesale as a potential way to mitigate some of the RINs exposure, but I didn't hear you really comment on refining.

Is there still appetite there? And if so, could you kind of reiterate the regions you're most interested in?.

Sure. We are definitely interested in growing. We would love to grow, first, in the Mid-Continent or, in general, U.S. I think secondary to that would be the Gulf Coast, and really would prefer not to go to either the East Coast or the West Coast. But we would look and if the proposition was compelling, we'd potentially do it.

But again, far and away, our preference is to stay inland..

Okay. Got it. Got it. And the second one is really kind of more modeling oriented, so apologize for the detail. But Doug, I noticed DD&A in refining was a little bit above our estimate, it ticked up to about $72 million. I know that you took some impairments and write-downs in the quarter. I'm just trying to get a general trajectory going forward.

Should we see that kind of start to come down a bit with those impairments or any guidance would be helpful?.

Sure. So, I thought our total D&A was more like $90 million for the quarter – refining D&A, okay. So, I think the impairment should be about $8 million, and I'm assuming that's an annual number – or quarterly number, going forward. Okay. So Jay Gann, our Chief Accounting Officer is here.

He's telling me that the impacts of the write-down should be about $8 million..

It's an annual, not quarterly (40:01)..

Yeah. Okay. $8 million annually, so $2 million a quarter..

And that's going to be net offset, obviously, by the incremental $4 million-ish from Woods Cross..

Got it. Got it. Okay. All right. Thanks. Appreciate it..

Your next question comes from the line of Ryan Todd from Deutsche Bank. Your line is open..

Great. Thanks. Good morning, gentlemen. Maybe if I could ask one on OpEx. OpEx was certainly a bright spot in the quarter in our view. Can you help us – in the past, you've quantified the impact of the low nat gas environment.

Could you potentially do that as you did in the prior quarter? And then, any other meaningful drivers from the quarter and can you talk about sustainability and opportunities potentially for the lower cost going forward?.

Ryan, we're kind of scrambling here on the natural gas sensitivity. I don't have that on my fingertips..

Like 120,000 BTU a day, so about every dollar change, just call it $25 million..

Yeah. What was the – I guess kind of what we're trying to – the question is what are you trying to compare to, previous quarter-over-quarter, Ryan, I mean, I'd say that nat gas was pretty flat, maybe even up just slightly. So, the improvements you'd be seeing likely were going to be true improvements in our efforts to reduce operating costs..

And keep in mind, Ryan, we do have some nat gas hedges. So basically, it's not a one-for-one basis when you're looking at the spot price on your screen with regards to our OpEx impact..

Yes, I didn't mean to make you scramble.

I guess, just any other thoughts on drivers of your low OpEx and how sustainable that is going forward and other opportunities, potentially, to get it lower?.

I mean, I think this quarter the OpEx, obviously, there was a fair amount of our lower OpEx was from lower nat gas. The rest of it was really split between lower maintenance, materials and just other types of projects where we really cut spend..

Yeah. And a bigger picture there, Ryan, the best thing we can do to get our operating cost down, and we've been making progress here, is to get our reliability up. That decreases our maintenance expense, obviously. It gets our per barrel numbers lower, which is always a good thing.

And then, as we've laid out in our business improvement plan, we've identified $100 million of OpEx improvements. And lately, we've identified another $30 million of improvements in addition to that, primarily through better management of contractors and other head count..

Great. Thanks. And maybe one more just in terms of overall use of cash, I mean, you mentioned pulling back a little bit on discretionary capital spend and potentially into 2017.

Can you talk about a little bit how you think about allocating your use of cash between CapEx, return to shareholders? Is there a rough overriding target in terms of how much you like to return to shareholders versus spend on CapEx? And how we should think about the potential for the discretionary capital spend to ramp up and down given the current cash flow?.

Yeah. I mean, I think the way we think about it is that our CapEx is basically defending the fortress. So, it's our first priority. We have to maintain our plants. We have to invest in the compliance projects that are required to stay in business. So, in our mind, a lot of that is not discretionary and things we have to do.

We can cut back on the margin on some of the Opportunity Capital and growth capital, but we tend to think that those are better returns to the shareholders than even getting the dividend. Second is the dividend, but again that's like a 1A and 1B between our CapEx and the dividend.

And as Doug mentioned earlier, our swing is really on returning cash to the shareholders through the repurchase option..

Okay. Thanks. I will leave it there..

Okay. Thanks, Ryan..

Your next question comes from line of Neil Mehta from Holly Fuel Corp (sic) [Goldman Sachs] (45:06). Your line is open..

Good morning. Yeah. Neil Mehta from Goldman Sachs here. So, just want to reach out on a couple questions here.

So, the first is on capture rates, as oil prices have pullback here, do you think that capture rates can start to become a tailwind again, similar to 2015 where you had the benefit of contango, but also less losses on resids and secondary products?.

I think the biggest benefit of lower crude prices is less of an impact on our liquid volume yields. So, as you know, refiners don't produce 100% liquid volume yield. It's somewhere in the 93% to 98%, maybe sometimes a 100%, depending on how much hydrogen you add to your products.

So, when you take, say, 5% times the crude price, that's really the impact of the liquid volume yield on your margins. Typically, like you're saying, when the crude price is lower, other secondary product margins are better.

But having said that, we're still seeing weakness this year in asphalt in fuel oil at least relative to the prior quarters and prior years. So we're not getting the bump there that you would normally see in those secondary product WTI cracks than we had in the past..

Appreciate that, George. And then second question here is on tax rate. The adjusted tax rate in the release was 23%.

Was there anything unusual in the quarter to call out?.

Well, there was just a couple things, Neil. First, obviously, the biggest was the impairment and goodwill, which goodwill you don't get a tax benefit from. It's not a rate driver. So, what you saw happen was even though we announced a large loss, and you might have expected even tax rate to be lower, you don't get to count that goodwill portion.

That said, our first quarter tax estimate was sort of expecting better earnings through the first half of the year, which then reversed. So, all of those sort of drove us towards a lower number.

The only other thing I'd point out is that with HEP being a larger percent of our earnings and HEP being the tax-advantaged structure, you saw that rate as you pointed out being sort of below what you would have maybe expected, something closer to 35%..

Perfect. And last question is just on turnaround season as we get into it. As you think about the Mid-Con, where do you think we're going to be from a turnaround perspective based on what you're hearing? And just remind us again where you are in terms of your maintenance? I think you're front-half-loaded, but just wanted to double check..

Yeah, definitely. Our turnarounds were in the first quarter and second quarter. We are going to have a turnaround at the existing or older Woods Cross FCC unit in the fourth quarter. But other than that, we're pretty much done for the year. We think that the fall turnaround schedule in Mid-Con is going to be pretty heavy, as it typically is.

There's some turnarounds as well in the Rockies, in the third quarter, early fourth quarter. But I don't think it's anything outside the normal preparation for winter type of turnarounds..

Do you think Brent WTI can widen out during that period as it does seasonally sometimes, or just because of the roll in U.S.

oil production, that's going to be tough to happen?.

Yeah.

Well, Jon (49:19), you've got anything on that?.

I would – this is Tom Creery, Neil. Brent TWI, I still think we're going to probably see the $2 mark for the balance of this year, somewhere in there. If something happens internationally, it could do something. But we don't see anything on the forecast that's going to substantially change that..

Great. Guys, thanks for the comments..

Your next question comes from the line of Chi Chow from Tudor, Pickering and Holt. Your line is open..

Thank you. A couple of questions in the Rockies region. First, can you give us the details on the asset write-down at Cheyenne? And second, following-up on Ryan's question, actually operating expenses in that region on a per barrel basis look to be still on the high end.

What actions can you take to lower the cost structure there?.

Why don't you hit that first and then I'll get (50:12) the detail..

Okay. On the OpEx side, Chi, remember, we had our FCC turnaround at Cheyenne in the quarter. So, that on a per barrel of crude basis makes those costs look lower, because we ran pure barrel. And then even when we came out of turnaround, we had some gas oil inventory to run off. So, that led to lower crude rate even after the turnaround was completed.

So again, makes the per barrel numbers look higher than it ordinarily would. But having said that, we have a lot of our opportunities that we've identified to improve our operating cost structure in the company, are in the Rockies, especially at Cheyenne.

We've got the contractor head count that we talked about earlier, and we benchmarks ourselves to our peer group and we have opportunities across the board to improve at Cheyenne..

And Chi, by many my math, just looking here, I mean, the OpEx calculated from Q2 of 2015 and also Q1 of 2016 was pretty much closer to $60 million versus closer to $50 million for Q2. So, directionally, moving in the right direction, we just need to add the barrels now..

So, Chi, following up on the goodwill impairment as well as the PP&E write-down, you'll likely remember – no, and I'm not sure we broke it out by plant, but we had about $309 million worth of goodwill associated with the Cheyenne refinery as a result of the Holly-Frontier merger in 2011.

We're required to actually test that for impairment every quarter. We do a major review every July. And what we found in that review, as you do a discounted cash flow analysis, look at the forward outlook, the operating history, RINs prices as an example, another overhang.

We found that the Cheyenne refinery, based on past results and future expectations, certainly was impaired for goodwill. There's then a second step that's required after you've done that, is to test on an undiscounted basis, a look at your existing property, plant and equipment.

And again, looking at those discounted cash flows, as we went forward, found that there was an additional $300 million or so write-down that needed to occur on book value sort of versus enterprise value, also sort of taking into account our market capitalization.

So, all of that resulted in what was a little more than $600 million of non-cash impairment to the Cheyenne refinery in the quarter..

Okay..

Chi, one other thought on the OpEx question. Tying in Woods Cross to that Rockies region number you're probably looking at. We've been carrying the full load of the additional operators and other expenses for the Woods Cross expansion for the whole year, let alone the second quarter.

And again, with us basically starting that unit up in the last month of the second quarter, that's going to contribute to per-barrel numbers looking high as well..

Do you have any guidance on the per barrel OpEx there going forward? What that might look like with Woods Cross up now?.

I think $7 would be a good walking around number..

And Chi, that's a combination, again, of getting the Woods Cross barrels on, because we've had the OpEx associated with that layering in over the past couple of years and reducing OpEx, in general, at Cheyenne..

Okay.

Is Cheyenne still a core asset for you?.

All our assets are core assets. How's that for a standard reply? It's a good refinery. With the hydrogen plant that we've added there, we have the capability to run up to 80% heavy Canadian crude. The Denver market's a good market. We've invested in a heavy oil rack that allows us to sell more bottom-of-the-barrel asphalt and gas oil type of products.

So, we like the asset. We just need to get the reliability up at that facility. Work on our operating costs, as you've highlighted for us here. And I think it could be a major contributor to HollyFrontier. And no question the key driver for that facility, though, is the heavy crude desk. (55:05).

Okay. Thanks, George. One final question here. It looks like a lot of your projects are leaning towards improving gasoline yields, with all the FCC improvements and whatnot.

Are you suggesting that you expect gasoline to be a better market than distillates longer term?.

We don't really mean to suggest that with the projects that we're doing. Really looking at projects that can increase our yield and not necessarily preferentially gasoline versus diesel. And those are the projects, like FCC modernizations, are basically upgrading coke and gas and LPGs into gasoline and diesel.

I don't think we're smart enough to pick the gasoline and the diesel spread. So, we design for flexibility. I think, in the short to intermediate term, with all the diesel capacity that's been added worldwide, it suggests gasoline is going to be better than diesel.

But again, like I said earlier, we've seen the gasoline to diesel spread flipped about four times in the first six months of the year. And when it does, we react accordingly, by changing our cut points and things of that nature, to make the right product at the right time..

Okay. Great. Thanks, George. Appreciate it..

See you, Chi..

Our next question comes from the line of Paul Cheng from Barclays. Your line is open..

Hey, guys. Good morning..

Good morning, Paul..

George, for Cheyenne, for the reliability issue, is it a hardware or is it a culture issue? And what is the solution or the initiative, I should say, that you're taking?.

I would say, historically, it's probably been more of a hardware issue, especially in our utilities area, where we've had less-than-reliable steam and instrument air and systems of that nature. I think a lot of that is behind us. We may have some incremental improvements from here, but the vast majority of those utility-related issues are behind us.

I think, going forward, more of our issues there are management and culture related. But we've just installed a new plant manager and – as well as a new operations manager earlier this year. And we're just beginning to see the aircraft carrier turn at Cheyenne.

So, we're pleasantly pleased at what the plant's been able to do since it's come out of its FCC turnaround. The FCC project is performing as we expected, and we're excited by the blooms we're seeing on the roads at Cheyenne..

And when you did the write-down, did you base on the historical comps (58:25) reliability, or you base on what you think the reliability may be able to achieve in the future?.

Both, Paul. You have to – one has to drive the other. I mean, if you had specific reasons as to why past operations were going to be different that you can point to, that's one answer. But the answer is, there is a combination of both that goes into that..

But which is more of a primary job (58:56), I'm trying to understand....

I think you've got (58:57)..

Sort (58:57) write-down, is it really because of historical data, we saw it's just bad (58:59), or that even after you think the kind of improvement that you have you still cannot justify whatever is the offset?.

No. It's not a matter of justification, Paul, and it's not just crude throughput as an example. You also have Brent TI that as you look backwards three years to four years, you saw something that probably averaged $6 or $7. As you look forward, we use something in the $2 to $4 range.

And so, that causes impairment because Brent TI was a driver of profitability historically..

Paul. I think the major reason for the write-down is just, frankly, the carrying value on our books for Cheyenne has been too high ever since the merger. We've been skirting on the question of whether we should take the write-down even through great margin periods like last year. So, I think we've just decided to bite the bullet and do this.

And obviously, the weaker margins this year are the catalysts for doing it..

And Woods Cross, George, since that you have the expansion and just wondering since June, and so far and what you can see? Do you have any problem pacing (1:00:20) the additional product and whether that you have caused the local market margin or the pricing to move?.

No, we've been very pleased by the market's ability to absorb the additional production out of Woods Cross. Granted it is the summertime when Salt Lake demand is stronger than it is obviously in the winter. We've got strong cracks and prices in the Salt Lake and Idaho markets right now.

Up until recently, we've seen strong cracks in the Vegas market as well. I think it's been, say, in the last week or so that Vegas has gotten weak along with the West Coast. But overall, we've been very pleased that our ability to place the product at nice margins for Woods Cross and for us..

And for winter, does it mean that you need to cut back the run to tailor to the local market or you think you can actually ship it out with your UNEV Pipeline and other (1:01:30)?.

We fully expect to place that product using the UNEV Pipeline. That was why that pipeline was built, to be a relief valve, if you will, especially in the wintertime..

And final one for me. Yesterday, one of your competitors was actually talking about how strong the asphalt market in the Southwest and in the Minneapolis market.

And I may have been surprised that since you guys see a totally different market, maybe that you can enlighten me a little bit, is it really such a big difference?.

Well, I think it's the difference between wholesale and retail, Paul. I think much of our discussion today has been wholesale related. What we basically sell out of our refineries to our asphalt customers.

We are seeing what you're talking about beneficially within our Holly Asphalt division, where we have great margins at more than retail level through Holly Asphalt. But again, we're talking – most of our discussion today has been at the – regarding the netback of asphalt to the refinery producer..

And Paul, just remember, our retail business profitability does not layer into our refining results. You can find the details in the reconciliation..

Okay. All right. Very good. Thank you..

Yeah. And one last thing I'd offer, Paul, the write-down question, that had an impact, timing-wise was our market capitalization. So, down 50% or so from the end of last year also plays into that equation sort of when measuring your market valuation and book valuation..

Thank you..

Our last question comes from the line of Faisel Khan from Citigroup. Your line is open..

Hi. Thanks for taking my question.

Just going back to the RINs for a second, what percentage of your gasoline do you guys blend?.

Roughly half..

Okay.

And then is that at all that half sort of through the HEP-owned terminals that you guys have?.

No. I would say, most of it is in the Magellan system, where we sell the majority of our products..

Obviously, you blend it into – you blend it into the – after it gets on the Magellan system, because – but you can't blend it before it goes into the system, right?.

That's right. It goes in unblended and then when it comes out at the rack level, that's where we blend..

Thanks.

So then, at the terminals where you have rack capacity, I take it that you do have rack capacity there., if those contracts are there with other marketers and as those contracts roll off, can't you take back the capacity and sort of market your own gasoline and blend it through there?.

Well, that's getting into very core of what the issue is regarding RINs..

Sure..

Obviously, refiners would love to blend as much of their product as possible. But unfortunately, our customers are pretty smart guys.

And when they see the opportunity to get into the blending business or to grow their existing blending business so that they can generate RINs and turnaround and sell them back to us, that's getting at the core of this point of obligation we're talking about..

No, I understand that.

I was just thinking that in order to mitigate sort of your current costs, are there opportunities to take back some of that capacity as it comes up for re-contracting?.

Again, that's the negotiation and friction between the refiner and his customer..

Okay. Okay. All right. Fair enough. Thanks for the time..

Okay, Faisel..

And that was our last question in queue. I'd now like to turn the call over to Mrs. Heidenreich for any closing remarks..

Thanks everyone for joining us this morning. If you have any follow-up questions, Craig and I will be available all day. We look forward to speaking with you in November to share our third quarter results. Thank you..

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day..