Welcome to HollyFrontier Corporation's First Quarter (sic) [Second Quarter] 2017 Conference Call and Webcast. Hosting the call today from HollyFrontier is George Damiris, President and Chief Executive Officer. He is joined by Rich Voliva, 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 Craig Biery, Director of Investor Relations. Craig, you may begin.

Thank you, Melissa. Good morning, everyone, and welcome to HollyFrontier Corporation's second quarter 2017 earnings call. I'm Craig Biery, Director of Investor Relations for HollyFrontier. This morning, we issued a press release announcing results for the quarter ending June 30, 2017. If you would like a copy of the press release, you may find one on our website, at hollyfrontier.com. Before we proceed with 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 security 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. The call also may include discussion of non-GAAP measures, and please see the press release for reconciliations to GAAP financial measures. Also, please note that information presented on today's call speaks only as of today, August 2, 2017. Any time-sensitive information provided may no longer be accurate at the time of any webcast replay or re-reading of the transcript. And with that, I'll turn the call over to George Damiris.

Thanks, Craig. Good morning, everyone. Today, we reported second quarter net income attributable to HFC shareholders of $57.8 million or $0.33 per diluted share. Certain items detailed in our earnings release that Rich will discuss in his prepared remarks, decreased net income by $58.2 million on an after-tax basis. Excluding these items, net income for the quarter was $116.1 million or $0.66 per diluted share versus $49 million or $0.28 per diluted share for the same period in 2016. Adjusted EBITDA for the period was $306 million, an increase of 78% compared with second quarter last year. This increase was principally driven by higher product sales volumes and margins, combined with earnings from our recently acquired Petro-Canada Lubricants business, PCLI. Due to strong refining operations and reliability during the period, we set a new quarterly crude charge record averaging 467,000 barrels per day, which generated strong financial results and positive free cash flow. We're pleased to report the first full quarter of financial performance from PCLI in our consolidated earnings. Adjusted EBITDA for the quarter was $30 million with product sales averaging 23,720 barrels per day and operating costs at $53 million for the period. Our first five months of earnings equate to $140 million of annualized EBITDA, well within our guidance range. Production levels were lower in the quarter due to down time taken to upgrade and maintain certain underinvested refining assets. Our plant is now back to normal operations and our go-forward plan is to run the plant at natural capacity. As we progress with the integration of PCLI, we remain confident in our ability to achieve operational and financial synergies between our two lubricants businesses. This morning, we also announced our board of directors declared a dividend of $0.33 per share payable on September 20 to holders of record on August 23. Today's dividend declaration reflects our continued commitment returning cash to shareholders. Looking forward, we remain focused on operating our plants safely and reliably, and executing on our business improvement plan and growth strategies. With no major planned downtime until October, we are well-positioned to continue on the path of strong operational and financial performance for the remainder of the year. Now, I'll turn the call over to Jim for an update on our operations.

Thank you, George. As George mentioned, for the second quarter, our crude throughput was 467,000 barrels per day versus our guidance of 440,000 to 450,000 barrels per day, driven by strong refinery reliability. This represents our highest quarterly crude charge achieved by HollyFrontier. We also set a number of individual refinery throughput records across the fleet. Most notably, El Dorado and Woods Cross achieved record crude charges for the quarter and Tulsa and Navajo ran record monthly crude charges in June. Our consolidated operating cost of $5.18 per throughput barrel was an improvement of 23% versus the first quarter. We remain focused on improving operations and reliability at our Cheyenne plant and are seeing positive trends in the Rockies region. The Rockies operating costs improved to $8.31 per throughput barrel adjusted for the ATP tariffs embedded in the Woods Cross Refinery OpEx. During the quarter, we ran nearly 75,000 barrels per day of crude charge and are encouraged about increasing our Rockies throughput going forward. We are very pleased with the overall performance of our refinery system during the period and remain confident in our ability to continue improving upon our operational reliability. I will now turn the call over to Tom for an update on our commercial operations.

Thanks, Jim, and good morning. For the second quarter, we ran 26% sours and 19% WCS and black wax crude oils. Our average laid-in crude cost under WTI was $0.39 in the Mid-Con, $2.97 in the Rockies and $0.87 in the Southwest. We experienced tightening differentials, primarily among our heavy and sour crude slates during the second quarter, and was coupled with apportionment on various lines coming from Canada. Currently, we continue to see compressed differentials in both synthetics and Western Canadian heavy crudes due to the Canadian synthetic production interruptions. However, apportionment has decreased as a result of the closing of the transportation arm. While the crude differentials were challenging in the quarter, we were able to optimize our system accordingly and served the barrels necessary to achieve a record product output. In future, we expect differential throughput to pricing based on both transportation and quality. On the product side, gasoline inventories in the Magellan system have dropped by over 2 million barrels since March 31 of this year. This has helped to keep crack spreads in the second quarter higher when compared to the same period last year. Excluding the Cheyenne RIN benefit, second quarter consolidated refinery gross margin was $10.76 per produced barrel, a 21% increase over the $8.88 which was recorded in the second quarter of 2016. Realized gross margin improved at all our refineries, despite the less than favorable crude differentials during the period. We continued to see improvements in our Rocky Mountain region with an adjusted realized gross margin of $15.05 per produced barrel, which, excluding the RIN benefit, represents a 50% increase from the second quarter of last year. RINs expense in this quarter was $83 million before the RIN benefit, driven by higher production and sales volumes and higher RIN prices. For the third quarter of 2017, we expect to run between 450,000 and 460,000 barrels per day. And with that, I'll turn it over to Rich. Thank you.

Thank you, Tom. Second quarter included several unusual items. Pre-tax earnings were negatively impacted by an $84 million lower of cost or market charge, $23 million of asset impairments, a $5.1 million inventory charge related to the purchase accounting at PCLI and a $3.7 million in acquisition-related charges. These charges were partially offset by a $30.5 million gain as a result of the waiver of Cheyenne's 2016 RFS obligation. A table detailing these items can be found in our press release. PCLI's adjusted EBITDA for the second quarter was $30 million. We remain confident in our annual EBITDA range of $100 million to $200 million for 2017. For the second quarter of 2017, cash flow provided by operations was $513 million inclusive of $38 million of turnaround spending. HollyFrontier's standalone capital expenditures totaled $56 million for the quarter. For the full year of 2017, we still expect to spend between $375 million and $425 million of standalone capital including turnarounds. Additionally, we expect to spend $40 million of capital at HEP and $30 million for PCLI. As of June 30, our total cash and marketable securities balance stood at $460 million. During the second quarter, we announced and paid a $0.33 regular dividend, putting our yield at 4.5% as of last night's close. As of June 30, we have $1 billion of standalone debt outstanding and no drawings under our $1.35 billion credit facility. This puts our liquidity over $1.8 billion and debt-to-cap at a modest 18%. HollyFrontier owns 36% of Holly Energy Partners including a 2% general partner interest. HEP units continue to perform well, and the current market value of HFC's LP units is over $800 million. Second quarter general partner distributions were $18.7 million, a 43% increase over the same quarter last year. As a reminder, we have published benchmark margins for Group I, II and III base oils. Going forward, we will continue to publish these lubricant indicators monthly along with the WTI based 3-2-1 margins for each of our operating regions. These regional product and base oil indicators do not reflect the actual sales data, and are meant to show monthly trends. Realized gross margin per barrel may differ from indicators for a variety of reasons. You can find all of this data on the Investor page of www.hollyfrontier.com. And with that, Melissa, we're ready to take questions.

Thank you. The floor is now open for questions. Our first question comes from Doug Leggate from Bank of America. Your line is open.

Thanks. Good morning, everybody. Congratulations on a strong quarter. I got a couple of things, if I may. First of all, the throughput was obviously pretty strong, and it really looks like you've turned the corner operationally now. So, as we go forward, how would you characterize any additional steps you think you need to take to sustain that? Is there anything unusual about the options of maintenance or reliability or something that is driving that change? Can you just characterize why you think we've really turned the corner now on reliability? And I've got a follow-up please.

No. Like I said, Doug, we're very pleased with our results in the second quarter, and it's basic blocking and tackling. So, our focus here is on continuing to sustain the levels that we've seen in the second quarter. I don't think there's any plans or programs that we haven't previously discussed that we haven't been working on. It's just a matter of, again, continuing to focus and setting that high expectation for our operations teams and having them maintain the second quarter-type performance.

I guess I was just looking at the delta between actual throughput on guidance is obviously well ahead. That's really what I was getting at in Q2. Okay. I'll leave that one. My follow up is just hopefully a housekeeping question for Rich, is on the cash flow. Rich, can you walk us through this extraordinary cash flow in the quarter? Just walk us through what – if there was anything unusual in there and I'll leave it at that. Thank you.

Hey, Doug, yeah, there was nothing really unusual in there. Typically, we catch a little bit of a working capital benefit in the second quarter, and we get the flip of that in the first quarter. So, we saw that this year. We did catch a tax carryback in the second quarter of about $80 million or so, so that helped a little bit. That was for 2016. Those are the only items I'd call out.

Okay. I'll wait for the queue. Thanks, guys.

Thanks.

Our next question comes from Blake Fernandez from Scotia Howard Weil. Your line is open.

Guys, good morning. Congrats on the strong results.

Thanks, Blake.

Question for you on the lubes business, the full quarter of reporting was broadly in line with what we saw last quarter, which was kind of a partial quarter, despite the fact that some of these benchmark indicators that you published here were up pretty strong. Can you give us some, I guess, some help or guidance on how to think about using these indicators and kind of modeling or kind of how these are directionally going to move the earnings going forward?

Yeah. I'll start with a couple of general comments and maybe Craig or Rich can help you on the modeling-related questions. But again, like I said in the prepared remarks, we had some down-time in the second quarter that impacted production. As we learn more about the plant, we're finding where some of the soft spots are in the plant where they've been underinvested in recent time, especially as the previous owners prepared this asset for sale. So, we've taken the time to fix and improve. We're seeing as we learn about the plant. And then the second comment, Blake, is of all the base oil indicators that we publish were stronger quarter-on-quarter. I think it's important to remember that this is an integrated business that takes the base oil and sells it to finished product. And those finished product pricing is lagged versus the base oil, which itself is lagged versus crude oil price movement. So, there are lags in the system that don't necessarily catch up to the base oil pricing that we change in our indicators from quarter to quarter. So, Rich, I don't know if you want to say anything?

Blake, the only thing I'd say is, the benefit of having an integrated business is that we're closer to the customer. The downside to that, right, this is not like selling gasoline. You don't change the price every single day, so.

Without getting too far ahead of our skis here, but would that suggest 3Q, maybe you have some upward momentum given the move from 1Q to 2Q?

I think we'd hope so, but we'll see what base oil markers do and everything else, so...

Got it, okay. The second piece is on CapEx, I don't think it looks like you're falling too far out of line with guidance, but based on my numbers, you've done about $223 million first half of the year when you include turnarounds? And if you extrapolate that just kind of forward, it seems like maybe there's a chance you go below, especially given that you don't really have any down-time until November, so is there any downward pressure on CapEx that you can see or any color there?

Blake, we feel comfortable with the range. There's obviously, timing and turnarounds was a big part of it, so.

We also completed some big capital projects early this year, which inflated our first half capital spend.

Right. Right.

So, yeah, we feel good with the range at the end of the day.

Okay. Well, thank you, guys.

Yeah.

Thanks Blake.

Our next question comes from Justin Jenkins from Raymond James. Your line is open.

Yeah. Thanks. Good morning, everybody. I guess, maybe if I could start on crude differentials and maybe your crude slate in the quarter. It seems like the overall feedstock mix was pretty similar to what we've seen recently. And, I guess, that's a bit different than what your peers have been saying. Is that just a function of running more volumes through the Rockies or any color maybe on mix of crude utilization going forward?

Yes, that's probably right. We did have a little bit of a change in the – I think we ran more black wax at Woods Cross but, by and large, we do have crudes in long haul pipelines that we have to run off in the inventory, we try and regrade it at Cushing, but.

Okay. Perfect. That's helpful. And then, maybe moving over to Navajo here, I know we talked last quarter about some operational uplift to get more Delaware crude in. But maybe just curious on what you're seeing today in terms of opportunity set there and how the barrel quality is trending in your system?

Yeah. I think, directionally, the incremental barrel is lighter due to the shale source of the crude oil. And, again, we did make the modifications to the plant and our second quarter turnaround allowed us to run more of those lighter barrels.

Perfect. Thanks, guys.

Thanks, Justin.

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

Hey, guys, good morning.

Good morning, Paul.

I actually have one request and maybe a couple of questions. The request is that, Rich, in the future, if you can include a table on the special item by segment and by line because when we're looking at in this quarter impairment, your goodwill and asset impairment in your income statement, so $19.2 million, but you say it's $23.2 million. So, we have about $4 million we don't even know where we should target. So, it will be extremely helpful that if you can help us out to have maybe break it down in a table, so that we know where to tick those as special items up?

Yeah. Fair enough, Paul, just so to clarify that, the missing $4 million, if you will, is in the Mid-Con segment. So...

But I mean, we don't even know that in Mid-Con, is it in the cost of goods sold? Is it in the G&A? So, that's why I'm saying that it will be extremely helpful.

Okay. Fair enough.

It will be extremely helpful that if you help us that, so that we don't have to just keep guessing. And, George, just wondering, I understand what you say about in this quarter that that didn't change, but more importantly is that if the differential remain narrow in terms of your configuration, your capability, how much you can shift from heavy into light, if the differentials stay at where we are for an extended period of time?

Well, I think, we have flexibility, but we still have economics even at these narrow differentials to run heavy crude to fill our cokers. So, that's...

So, even at today's differential that you're still better off to run heavy in your...?

Exactly. Up to the point in which we fill our cokers. And then from there, it becomes an economic tradeoff between heavy and light, and directionally, we are switching from heavy to light at this type of differential, once we could fill the cokers.

But not at today's level, today you're still better off. Because most of your peers seem to suggest that at today's level that they're better off there to switch into light already.

Again, there's a certain incremental volume at both Cheyenne and El Dorado that we will switch from heavy to light. But again, we'll fill the cokers first. And even at today's differentials, like we've said, Paul, we are still going to run that heavy crude to fill the coker. After the coker is full, the next increment, we'll switch from heavy to light.

Okay. And the second question is that at the time of your acquisition that one of the maybe big prize you're looking at is how you will be able to integrate and move the feedstock from maybe Tulsa up in Canada so that you can upgrade into a Group III or that you move the feedstock maybe from – or not feedstock, but the crude slate into Tulsa to help you into maybe moving into Group II or the other. So, just curious then after the last five months, is there any update you can provide on that?

Okay. So, it's still very early there, but we have run some initial trials. They've been short in duration. The initial results are encouraging, but we have still a lot of analytical work that we need to do to test the product that's been made to see what exactly it looks like and what exactly we can do with it in our downstream businesses and (23:33) the base oil market. So, we don't have enough results that we feel comfortable in sharing them at this point in time, Paul. But, again, everything is encouraging from what we've seen to-date.

All right. Thank you.

Thanks, Paul.

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

Yeah. Yes. Hi. Good morning. Couple of clarification questions. First, just in terms of the lubes EBITDA of $150 million. Did you say you're still expecting to achieve that for this full year, or is that more of a run rate basis?

So, run rate. So, obviously, we're going to end up owning the asset for 11 months of the year. So...

Okay. And then how much would you say – in the second quarter, you called out the maintenance. I mean, was that a meaningful impact on the result? I'm just trying to think about how we should be generally thinking about the second half this year.

Yeah. I think, our LPO, or lost opportunity in the lubes business is probably around $20 million for the five months that we've owned it due to the operational issues we've had.

Okay. That's helpful. And then, just another clarification just on the RINs expense. What did you say, the second quarter was $83 million excluding the benefit, is that what the number was?

Correct.

Okay. And then, I know in the last call, you didn't want to get into too many specific numbers, but is that kind of the right way to think about the second half of the year? Or just how should we be kind of thinking about that with where RINs are today and more broadly...

Well, Phil – yeah, I mean, Phil, if you run rate the current set of prices, yeah, it's probably pretty reasonable. Tell me what RIN prices are going to be, right? So, that's the...

Yeah. Okay.

But I think that's a reasonable ballpark, yeah, today's market.

Okay. And there's a broader question on the RINs, obviously. The D.C. Court of Appeals had a ruling late last week, and I didn't know if you had any comments on that or how we should think about any impacts that might happen to these 2016 standards, is it meaningful for you guys if something changes there.

Yeah. I think – yeah, there's still a lot to be learned about what exactly this ruling means and what the EPA is going to do as a result. I think, maybe taking a little step back here around this RFS. I think, this is something we still continue to work hard. We're impressed with how eager this administration is to learn about the RFS and their desire to discover the truth and to do what's right, which is obviously a refreshing change from the administration. I think, it's important to remember, these people are new, new roles. They're still trying to get up the learning curve on this complicated topic we've all had the benefit of studying for over 10 years. We take for granted that the $15 billion RVO is above the blend wall. A lot of people in Washington are still learning about that fact. They're still learning about the fact that the bio deal of RVO is above domestic production. They're still learning about this unicorn biofuel called cellulosic. It doesn't even exist. And I think although the changes in the recently announced RVO are relatively modest, you did see some modest movement down in the advanced cellulosics. I think, there's no coincidence there. And, I think, they also mentioned that they were interested in a possible reset of the RVO going forward. So, I think, that's a longwinded way of saying that there's a refreshing change with this new administration and they're going to try to do what they can within the confines of the RFS to fix this problem.

Got it. Okay. Thanks, George.

Our next question comes from Neil Mehta from Goldman Sachs. Your line is open.

Good morning team.

Good morning, Neil.

Good morning, Neil.

Good morning. So, I just wanted to start on the refining gross margins in the Rockies. Obviously, very strong results there, but want to confirm, the $19.47 that's in the release, that includes the one-time gain? And then, the bigger picture question around the Rockies is just the sustainability of the captures that you saw there, anything that you can provide that would help us think about that going forward.

So, yeah. Neil, you're correct. The gross margin reported includes the benefit of the Cheyenne waiver. And broadly speaking, as far as capture is concerned, things should normalize there, if you will, so we're very comfortable with where we're at and the sustainability of that going forward. The team has done a great job so far. There's a long way to go though and they're going to continue to work hard I'm sure.

And is that improvement in capture more of a reflection of the ability to source more favorable crude barrels? Or is it a reflection of your ability to run the assets more optimally driving better performance? Just trying to understand the DNA of that capture.

I mean, mostly it's reliability at the end of the day, Neil.

Okay. Cool. Follow-up question is just, George, you've talked in the past about growing scale across each of your three business lines. And just latest thoughts in terms of being an asset or, for that matter, corporate acquirer, how is HollyFrontier thinking about the opportunity set that's in the market?

Well, again, I want to reiterate, our primary focus is on optimizing what we have integrating PCLI and improving our reliability of our existing fleet. But we are seeing assets available across all three of our business lines that are attractive to us. So, within the priority of, again, optimizing what we currently have, we're continuing to look at and work opportunities to acquire something.

Is there any business line in particular that seems to be a focus? And should we look at what you did with PCLI as an example of the type of things that are potentially on the board going forward?

Yes. Again I think we're looking at opportunities across all three businesses, refining, downstream or midstream, and lubes. And I think PCLI would be a good example of the type of things we're looking at where it's again accretive and it positions us well for the long term.

All right. Thanks, guys. Congrats on the good quarter.

Thank you, Neil.

Thank you, Neil.

Our next question comes from Paul Sankey from Wolfe Reseach. Your line is open.

Hi. Good morning. Just a couple from me please. Firstly, can you talk a bit about the market as it regards the (31:45) Petro-Canada business? Rich, when you're in here the other week, you were talking about pro-GTL. (31:50) I wondered if there was some dynamics there that you might just highlight if there was anything worth highlighting. Secondly, a bigger question. Do you have a target, a specific target, or something that we can think about for improved operational performance? I just wondered if there's something – some aspiration that you have after this quarter that we can look forward to?

So, Paul, let me grab the first one, just on – I mean, obviously we saw strength in base oil in the second quarter, particularly frankly in Group I which is the Tulsa and the benchmark indicators. (32:31) had some issues. I don't think that hurt that market, but I wouldn't call anything else besides that.

Okay.

And then as far as the second question, as far as the target, Paul, I don't think we have a specific number we want to share. But I think we've shared this example at El Dorado where we're running about 150,000 barrels a day in a refinery that had historically run about 138,000 barrels a day. And I only use that as an example of the type of things we're focused on doing at El Dorado is not only improving the reliability at our base levels, but finding those areas that are the next bottleneck if we can overcome it, we'll just be running more crude and more intermediate through the downstream unit. So, again, classic process engineering of finding the constraints, relieving that constraint till we find what the next constraint is downstream of that.

Okay. Thank you.

Okay.

Our next question comes from Brad Heffern from RBC. Your line is open.

Hi, everyone. I'll start by trying to ask Doug's question again, Rich, on the cash flow number, the $513 million, it just seems like even if you take out the $80 million that you called out, it still just seems out of line with sort of how the business has been performing at these earning levels of late. I think you have to go back to, like, 2012 when WTI was – the spread was $20 to get a number like that. So, with the addition of PCLI, has the cash generation just changed? Like, can we think about it $0.66 of earnings, the business generating $500 million of cash reported going forward? Just any more color you can give me to help there.

Once again, Brad, what I'd say is what the working capital benefit we caught in the second quarter was over $200 million. Now, we had a pretty significant drag in the first quarter, so this is fairly predictable from us seasonally. So, what I'll tell you is effectively the first quarter cash from operations is understated, if you will, on a run rate basis and you get the flip of it in the second.

Okay. Sorry. I missed that working capital comment. I guess, secondly on the Cheyenne exemption, has that facility received an exemption in the past? I don't remember hearing about it.

No. This is the first time.

So, what was the change there? Has it just been performing at a low enough level that it's now eligible when it wasn't in the past?

I think that's a good characterization. That's why the focus on the reliability there.

Okay. Got it. And then, just finally, any update on the process looking at the ATP IDRs?

No update, Brad. We're continuing to work that, but nothing to announce or report at this time.

Okay. Thank you.

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

Thanks. Maybe just a quick follow-up, I'm not sure if I missed it earlier. Did you say what the throughput was at Cheyenne in the quarter?

No. We're not going to go to that level, Ryan.

Okay. But, I guess, generally, from an operational point of view, I mean, it seems you got a couple of consecutive quarters of improved performance out of the Rockies there. I know it's been touched on to varying degrees over the course of the call. I mean, how close are you, I guess, at Cheyenne specifically at being where you would like it to be and how sustainable do you view the improved performance there?

Yeah. I think we've made good progress, but we still have a lot of runway to go there. As with every improvement initiative, you're going to have fits and starts. We have periods where we run really where we'd like to be, and then we backslide a little bit and figure out what it's going to take to get. Again, it's getting to where it can be sustainable performance rather than just periodic performance. That's really where our focus is. So, again, we hit where we want to be, but it's a matter of sustaining that type of level for a protracted period of time.

Okay. Thanks. And maybe back over to PCLI, maybe as a follow-up there, you talked about some of the test batches that you ran on the feedstock optimization. I think, previously, you had talked about the possibility that that would be something that we might see signs of the numbers showing up towards the end of the year. Is that still a reasonable timeline to see potential impact of some feedstock optimization? And then maybe just at a broader sense of PCLI, you've had a few more months with it now under your belt, any thoughts evolving on the growth opportunities that you see there in the business over the next few years?

Yeah. I think what we've said in the past, Ryan, or at least what we meant to say in the past, is we'd start working on it towards the end of this year, and I think you've seen that in the test trials that we just talked about. We'll have some more test trials between now and the end of the year. But I think as far as really starting to see it in the numbers from both the synergy and the feedstock optimization perspective, I think you should think more towards 2018 than second half of 2017.

Okay.

To your second question, the more we get into this business, the more we confirm our going in assumptions and feel comfortable that the value that we think we can add to this business, and the value this business can add to our Tulsa business can be realized. So, there's nothing that concerns us from what we've learned. And, if anything, we are more confident, and think more upside than what we've talked about in the past.

Okay. Thanks.

Our next question comes from Roger Read from Wells Fargo. Your line is open.

Yeah. Good morning. I just would like to come back a little on the operational performance, obviously, solid in the quarter, but then your guidance for Q3 is a little bit lighter. Is there anything you've seen quarter-to-date that makes that or are we just trying to be careful, maybe Q2 was a little bit on the high side for total throughputs?

Right. I'd just say if you're talking about trying to get this down to a percentage point of accuracy, you're cutting it pretty fine. So, we obviously have higher guidance in the third quarter than we had in the second. So, we view this performance as sustainable, and we're very excited about it.

Okay. And then, George, you've talked before about, as a bigger organization and consolidating operations across the units, putting a core group in charge of reliability. You've talked, obviously, about that on the call so far, but where do you think you are in terms of that performance? Are we, the old baseball analogy, halfway through here in the fourth or fifth inning? Are you in the third? Are we pretty well through that process? What's sort of your take on that?

I think we're probably in the middle third of the game, and we're seeing some positives. We have plenty of runway left to go.

And for the remaining part, presumably the low hanging fruit first, are the things that you need to do going forward capital consuming or are they more, as you said earlier, process-oriented?

I think it's more process-oriented. Again, we're hitting rates that we'd like to hit. But sustaining those levels for a protracted period of time, that's where our focus is. And so, we don't need the capital because we are hitting those rates for periods of time, but it's sustaining those levels which is, again, gets back to more of the operational processes.

Okay. Thank you.

Thanks, Roger.

Our next question comes from Chi Chow from Tudor, Pickering, Holt. Your line is open.

Great. Thank you. Just back on the Cheyenne RIN situation. Rich, what exactly does the $30 million represent? Is that an elimination of an accrual or was there an actual cash impact flowing through?

So, it represents the refund of our 2016 RIN obligation at Cheyenne at cost. The cash impact will be effectively not needing to purchase those RINs then this year. So, we'll have an avoided cash cost at the end of the day.

Okay. Got it. So, I may have missed it earlier, but do you have an estimate on your RIN expense for this year?

Well, let's put it this way, Chi. It was $83 million for the quarter, excluding that benefit. If prices were to hold exactly where they are today, I think that's a pretty reasonable run rate. But, again, we got to make the price call more than anything.

Okay. Have you applied for an exemption for 2017, again, at Cheyenne or any of your other refineries?

Yeah, I think, Chi, we're going to stay away from that question for any applications for the future.

Okay. Then back on PCLI. Can we circle back to how this whole pricing dynamic works? Would the increase in the base oil cracks that you show in your website, was that a function of crude prices coming down or was it actual increases in pricing for the base oils?

Increases on base oil pricing.

Okay. Going forward, I guess, how impactful is the quarter-to-quarter change in crude prices on your margins versus – should we be looking at base oil pricing as the most impactful factor rather than changes in crude prices?

So, Chi, again, it's like crack spread-related base oil on the product side, and there's vacuum gas oil on the input side. VGO is effectively 70% gasoline and 30% diesel, but it's got its own market and dynamics. So, maybe if traded on the Gulf Coast, you can find quotes for it.

Okay. Maybe one final question.

It closely correlates with crude, but not exactly.

Yeah.

So, typically trades at a differential to crude oil. We're talking about VGO now, and that differential does change from day-to-day.

Right. Okay. One final question. George, you mentioned a $20 million opportunity cost in your comments earlier. Just to clarify, was that just for PCLI or was that a figure related to refining?

No, that's just the PCLI.

Really? Okay. Okay. Thanks a lot.

Thanks.

Thanks, Chi.

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

Hey guys. Rich, I just want to make sure I get it right. The 450,000 to 460,000 barrel per day third quarter guidance, is that crude or is that total throughput?

Crude.

That's crude.

Yes, sir.

Okay. So, that's actually is really not that much lower than 2017 second quarter. And do you have the effective tax rate you're willing to share that guidance for the second half?

I think it's the same as the first half. We're talking 36%, 38% ballpark. From a book perspective, no, we see no change.

Okay. A final one for George. On the Rocky Mountain, that's the only region you are still running at less than 80% utilization rate. But given the size of the market over there, over the next couple of years, should we assume that this is probably as good as you can get? In other words, the utilization rate is constrained by the market or are you still constrained by the processes over there?

Yeah. It's not constrained by the market. I think there's more potential for us to run more crude rates, it gets back into our reliability. And, I think, the last comment I have on here is, I think our capacity is overstated slightly. I think take Cheyenne, for example., I think, our stated capacity in Cheyenne is like 52,000 barrels a day and I think that might be overstated by a couple of thousand barrels a day.

Okay. So, if you have the processes, get everything right, what is a more realistic target you have in mind over the next couple of years, you can get the utilization rate up to for this region?

Let me take this question a little bit differently. I think we can get crude throughput in the Rockies into the 80,000s barrels a day.

Into the 80,000s barrels a day?

80,000 barrels a day.

Okay. Good job. Thank you.

Thanks, Paul.

There are no further questions at this time. Craig, I turn the call back over to you.

Thanks, everyone. We appreciate you taking the time to join us on today's call. If you have any follow-up questions, as always, reach out to Investor Relations. Otherwise, we look forward to sharing our third quarter results with you in November.

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