UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
| | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020March 31, 2021
OR
|
| | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to ____________
Commission File Number 1-3876
_________________________________________________________________
HOLLYFRONTIER CORPORATIONCORPORATION
(Exact name of registrant as specified in its charter)
|
| | | | | | | |
| Delaware | | 75-1056913 |
(State or other jurisdiction of
incorporation or organization)
| | (I.R.S. Employer Identification No.) |
| 2828 N. Harwood, Suite 1300 | | |
| Dallas, Texas | | 75201 |
Texas | | 75201 |
| (Address of principal executive offices) | | (Zip Code) |
(214) (214) 871-3555
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
|
| | | | | | | |
| Securities registered pursuant to 12(b) of the Securities Exchange Act of 1934: |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock $0.01 par value | HFC | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| Emerging growth company | ☐ | | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
162,015,416162,442,987 shares of Common Stock, par value $.01 per share, were outstanding on July 31, 2020.
April 30, 2021.
HOLLYFRONTIER CORPORATION
INDEX
| | | | | |
| Page |
| |
| |
| |
| |
| |
| PART I. FINANCIAL INFORMATION | |
| |
| Page |
| |
| |
| |
| |
| |
PART I. FINANCIAL INFORMATION | |
| |
| |
| |
| |
June 30, 2020March 31, 2021 (Unaudited) and December 31, 20192020 | |
| |
| |
Three and Six Months Ended June 30,March 31, 2021 and 2020 and 2019 | |
| |
| |
Three and Six Months Ended June 30,March 31, 2021 and 2020 and 2019 | |
| |
| |
SixThree Months Ended June 30,March 31, 2021 and 2020 and 2019 | |
| |
| |
Three and Six Months Ended June 30,March 31, 2021 and 2020 and 2019 | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Index to Exhibits | |
| |
| Signatures | |
FORWARD-LOOKING STATEMENTS
References herein to HollyFrontier Corporation (“HollyFrontier”) include HollyFrontier and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s (“SEC”) “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words “we,” “our,” “ours” and “us” refer only to HollyFrontier and its consolidated subsidiaries or to HollyFrontier or an individual subsidiary and not to any other person with certain exceptions. Generally, the words “we,” “our,” “ours” and “us” include Holly Energy Partners, L.P. (“HEP”) and its subsidiaries as consolidated subsidiaries of HollyFrontier, unless when used in disclosures of transactions or obligations between HEP and HollyFrontier or its other subsidiaries. This document contains certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of HollyFrontier. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact included in this Form 10-Q, including, but not limited to, those under “Results of Operations,” “Liquidity and Capital Resources” and “Risk Management” in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and those in Part II, Item 1 “Legal Proceedings” are forward-looking statements. Forward-looking statements use words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “intend,” “should,” “would,” “could,” “believe,” “may,” and similar expressions and statements regarding our plans and objectives for future operations. These statements are based on management’s beliefs and assumptions using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks and uncertainties. AllUnless specifically noted, all statements concerning our expectations for future results of operations are based on forecasts for our existing operations and do not include the potential impact of any future acquisitions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that our expectations will prove to be correct. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in these statements. Any differences could be caused by a number of factors including, but not limited to:
•our ability to successfully close the pending Puget Sound refinery transaction, or, once closed, integrate the operation of the Puget Sound refinery with our existing operations;
•the extraordinary market environment and effects of the COVID-19 pandemic, including the continuation of a materialsignificant decline in demand for refined petroleum products in markets that we serve;
•risks and uncertainties with respect to the actions of actual or potential competitive suppliers and transporters of refined petroleum products or lubricant and specialty products in our markets;
•the spread between market prices for refined products and market prices for crude oil;
•the possibility of constraints on the transportation of refined products or lubricant and specialty products;
•the possibility of inefficiencies, curtailments or shutdowns in refinery operations or pipelines, whether due to infection in the workforce or in response to reductions in demand;
•the effects of current and/or future governmental and environmental regulations and policies, including the effects of current and/or future restrictions on various commercial and economic activities in response to the COVID-19 pandemic;
•the availability and cost of our financing;
•the effectiveness of our capital investments and marketing strategies;
•our efficiency in carrying out and consummating construction projects, including our ability to complete announced capital projects, such as the conversion of the Cheyenne Refinery to a renewable diesel facility and the construction of the Artesia renewable diesel unit and pretreatment unit, on time and within budget;
•our ability to timely obtain or maintain permits, including those necessary for operations or capital projects,
•our ability to acquire refined or lubricant product operations or pipeline and terminal operations on acceptable terms and to integrate any existing or future acquired operations;
•the possibility of terrorist or cyberattacks and the consequences of any such attacks;
•general economic conditions, including uncertainty regarding the timing, pace and extent of an economic recovery in the United States;
further•continued deterioration in gross margins or a prolonged economic slowdown due to the COVID-19 pandemic which could result in an impairment of goodwill and / and/or additional long-lived asset impairments; and
•other financial, operational and legal risks and uncertainties detailed from time to time in our SEC filings.
Cautionary statements identifying important factors that could cause actual results to differ materially from our expectations are set forth in this Form 10-Q, including without limitation the forward-looking statements that are referred to above. You should not put any undue reliance on any forward-looking statements. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth under the heading “Risk Factors” included in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 20192020 and Part II, Item 1A of this Form 10-Q and in conjunction
with the discussion in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headingheadings “Outlook” and “Liquidity and Capital Resources” and Part II, Item 1A, “Risk Factors.Resources.” All forward-looking statements included in this Form 10-Q and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
DEFINITIONS
Within this report, the following terms have these specific meanings:
“BPD” means the number of barrels per calendar day of crude oil or petroleum products.
“BPSD” means the number of barrels per stream day (barrels of capacity in a 24 hour period) of crude oil or petroleum products.
“Base oil” is a lubricant grade oil initially produced from refining crude oil or through chemical synthesis that is used in producing lubricant products such as lubricating greases, motor oil and metal processing fluids.
“Black wax crude oil” is a low sulfur, low gravity crude oil produced in the Uintah Basin in Eastern Utah that has certain characteristics that require specific facilities to transport, store and refine into transportation fuels.
“Cracking” means the process of breaking down larger, heavier and more complex hydrocarbon molecules into simpler and lighter molecules.
“Crude oil distillation” means the process of distilling vapor from liquid crudes, usually by heating, and condensing the vapor slightly above atmospheric pressure turning it back to liquid in order to purify, fractionate or form the desired products.
“FCC,” or fluid catalytic cracking, means a refinery process that breaks down large complex hydrocarbon molecules into smaller more useful ones using a circulating bed of catalyst at relatively high temperatures.
“LPG” means liquid petroleum gases.
“Lubricant” or “lube” means a solvent neutral paraffinic product used in commercial heavy duty engine oils, passenger car oils and specialty products for industrial applications such as heat transfer, metalworking, rubber and other general process oil.
“MMBTU” means one million British thermal units.
“Rack back” represents the portion of our Lubricants and Specialty Products business operations that entails the processing of feedstocks into base oils.
“Rack forward” represents the portion of our Lubricants and Specialty Products business operations that entails the processing of base oils into finished lubricants and the packaging, distribution and sale to customers.
“Refinery gross margin” means the difference between average net sales price and average cost per barrel sold. This does not include the associated depreciation and amortization costs.
“Renewable diesel” means a diesel fuel derived from vegetable oils or animal fats that is produced through various processes, most commonly through hydrotreating, reacting the feedstock with hydrogen under temperatures and pressure in the presence of a catalyst.
“RINs” means renewable identification numbers and refers to serial numbers assigned to credits generated from renewable fuel production under the Environmental Protection Agency’s Renewable Fuel Standard (“RFS”) regulations, which require blending renewable fuels into the nation’s fuel supply. In lieu of blending, refiners may purchase these transferable credits in order to comply with the regulations.
“Sour crude oil” means crude oil containing quantities of sulfur greater than 0.4 percent by weight, while “sweet crude oil” means crude oil containing quantities of sulfur equal to or less than 0.4 percent by weight.
“Vacuum distillation” means the process of distilling vapor from liquid crudes, usually by heating, and condensing the vapor below atmospheric pressure turning it back to a liquid in order to purify, fractionate or form the desired products.
“White oil” is an extremely pure, highly-refined petroleum product that has a wide variety of applications ranging from pharmaceutical to cosmetic products.
“WTI” means West Texas Intermediate and is a grade of crude oil used as a common benchmark in oil pricing. WTI is a sweet crude oil and has a relatively low density.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLYFRONTIER CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
| | | | | | | | |
| | | June 30,
2020 | | December 31, 2019 |
| | | (Unaudited) | | |
| ASSETS | | | | |
| Current assets: | | | | |
Cash and cash equivalents (HEP: $18,913 and $13,287, respectively) | | $ | 902,509 |
| | $ | 885,162 |
|
| | | | | |
Accounts receivable: Product and transportation (HEP: $14,929 and $18,732, respectively) | | 540,818 |
| | 834,771 |
|
| Crude oil resales | | 52,567 |
| | 44,914 |
|
| | | 593,385 |
| | 879,685 |
|
| Inventories: Crude oil and refined products | | 977,851 |
| | 1,282,789 |
|
Materials, supplies and other (HEP: $935 and $833, respectively) | | 195,850 |
| | 191,413 |
|
| | | 1,173,701 |
| | 1,474,202 |
|
| Income taxes receivable | | 77,729 |
| | 5,478 |
|
Prepayments and other (HEP: $6,970 and $6,795, respectively) | | 56,210 |
| | 61,662 |
|
| Total current assets | | 2,803,534 |
| | 3,306,189 |
|
| | | | | |
Properties, plants and equipment, at cost (HEP: $2,053,174 and $2,047,674, respectively) | | 7,052,866 |
| | 7,237,297 |
|
Less accumulated depreciation (HEP: $(584,651) and $(552,786), respectively) | | (2,567,686 | ) | | (2,414,585 | ) |
| | | 4,485,180 |
| | 4,822,712 |
|
Operating lease right-of-use assets (HEP: $3,377 and $2,652, respectively) | | 390,497 |
| | 467,109 |
|
| | | | | |
| Other assets: Turnaround costs | | 359,203 |
| | 521,278 |
|
Goodwill (HEP: $312,873 and $312,873, respectively) | | 2,373,912 |
| | 2,373,907 |
|
Intangibles and other (HEP: $350,056 and $319,569, respectively) | | 651,494 |
| | 673,646 |
|
| | | 3,384,609 |
| | 3,568,831 |
|
| Total assets | | $ | 11,063,820 |
| | $ | 12,164,841 |
|
| | | | | |
| LIABILITIES AND EQUITY | | | | |
| Current liabilities: | | | | |
Accounts payable (HEP: $14,888 and $18,050, respectively) | | $ | 870,695 |
| | $ | 1,215,555 |
|
| Income taxes payable | | 18,759 |
| | 27,965 |
|
Operating lease liabilities (HEP: $3,766 and $3,608, respectively) | | 102,336 |
| | 104,415 |
|
Accrued liabilities (HEP: $30,886 and $30,418, respectively) | | 341,252 |
| | 337,993 |
|
| Total current liabilities | | 1,333,042 |
| | 1,685,928 |
|
| | | | | |
Long-term debt (HEP: $1,486,648 and $1,462,031, respectively) | | 2,480,746 |
| | 2,455,640 |
|
Noncurrent operating lease liabilities (HEP: $70,167 and $72,000, respectively) | | 318,955 |
| | 364,420 |
|
Deferred income taxes (HEP: $432 and $424, respectively) | | 765,572 |
| | 889,270 |
|
Other long-term liabilities (HEP: $58,351 and $59,021, respectively) | | 250,994 |
| | 260,157 |
|
| | | | | |
| Equity: | | | | |
| HollyFrontier stockholders’ equity: | | | | |
| Preferred stock, $1.00 par value – 5,000,000 shares authorized; none issued | | — |
| | — |
|
| Common stock $.01 par value – 320,000,000 shares authorized; 256,042,554 shares issued as of June 30, 2020 and December 31, 2019 | | 2,560 |
| | 2,560 |
|
| Additional capital | | 4,215,894 |
| | 4,204,547 |
|
| Retained earnings | | 4,148,390 |
| | 4,744,120 |
|
| Accumulated other comprehensive income | | 2,225 |
| | 14,774 |
|
| Common stock held in treasury, at cost – 94,144,334 and 94,196,029 shares as of June 30, 2020 and December 31, 2019, respectively | | (2,986,487 | ) | | (2,987,808 | ) |
| Total HollyFrontier stockholders’ equity | | 5,382,582 |
| | 5,978,193 |
|
| Noncontrolling interest | | 531,929 |
| | 531,233 |
|
| Total equity | | 5,914,511 |
| | 6,509,426 |
|
| Total liabilities and equity | | $ | 11,063,820 |
| | $ | 12,164,841 |
|
| | | | | | | | | | | | | | |
| | March 31,
2021 | | December 31, 2020 |
| | | (Unaudited) | | |
| ASSETS | | | | |
| Current assets: | | | | |
Cash and cash equivalents (HEP:$19,753 and $21,990, respectively) | | $ | 1,193,428 | | | $ | 1,368,318 | |
| | | | |
Accounts receivable: Product and transportation (HEP: $17,451 and $14,543, respectively) | | 687,154 | | | 590,526 | |
| Crude oil resales | | 91,613 | | | 39,510 | |
| | 778,767 | | | 630,036 | |
| Inventories: Crude oil and refined products | | 1,436,602 | | | 989,296 | |
Materials, supplies and other (HEP: $976 and $895, respectively) | | 180,246 | | | 184,180 | |
| | 1,616,848 | | | 1,173,476 | |
| Income taxes receivable | | 65,274 | | | 91,348 | |
Prepayments and other (HEP: $4,718 and $8,591, respectively) | | 45,959 | | | 47,583 | |
| Total current assets | | 3,700,276 | | | 3,310,761 | |
| | | | |
Properties, plants and equipment, at cost (HEP: $2,141,710 and $2,119,295, respectively) | | 7,441,262 | | | 7,299,517 | |
Less accumulated depreciation (HEP: $(660,692) and $(644,149), respectively) | | (2,799,243) | | | (2,726,378) | |
| | 4,642,019 | | | 4,573,139 | |
Operating lease right-of-use assets (HEP: $71,766 and $72,480, respectively) | | 340,514 | | | 350,548 | |
| | | | |
Other assets: Turnaround costs | | 308,726 | | | 314,816 | |
Goodwill (HEP: $312,873 and $312,873, respectively) | | 2,293,422 | | | 2,293,935 | |
Intangibles and other (HEP: $218,893 and $224,430, respectively) | | 649,860 | | | 663,665 | |
| | 3,252,008 | | | 3,272,416 | |
| Total assets | | $ | 11,934,817 | | | $ | 11,506,864 | |
| | | | |
| LIABILITIES AND EQUITY | | | | |
| Current liabilities: | | | | |
Accounts payable (HEP: $30,320 and $28,565, respectively) | | $ | 1,266,690 | | | $ | 1,000,959 | |
| Income taxes payable | | 12,424 | | | 1,801 | |
Operating lease liabilities (HEP: $3,867 and $3,827, respectively) | | 95,898 | | | 97,937 | |
Accrued liabilities (HEP: $13,660 and $29,518, respectively) | | 382,296 | | | 274,459 | |
| Total current liabilities | | 1,757,308 | | | 1,375,156 | |
| | | | |
Long-term debt (HEP: $1,388,335 and $1,405,603, respectively) | | 3,126,091 | | | 3,142,718 | |
Noncurrent operating lease liabilities (HEP: $68,273 and $68,454, respectively) | | 275,382 | | | 285,785 | |
Deferred income taxes (HEP: $451 and $449, respectively) | | 671,241 | | | 713,703 | |
Other long-term liabilities (HEP: $48,504 and $55,105, respectively) | | 266,749 | | | 267,299 | |
| | | | |
| Equity: | | | | |
| HollyFrontier stockholders’ equity: | | | | |
| Preferred stock, $1.00 par value – 5,000,000 shares authorized; NaN issued | | 0 | | | 0 | |
| Common stock $.01 par value – 320,000,000 shares authorized; 256,046,051 shares issued as of March 31, 2021 and December 31, 2020 | | 2,560 | | | 2,560 | |
| Additional capital | | 4,216,816 | | | 4,207,672 | |
| Retained earnings | | 4,003,733 | | | 3,913,179 | |
| Accumulated other comprehensive income | | 4,658 | | | 13,462 | |
| Common stock held in treasury, at cost – 93,603,064 and 93,632,391 shares as of March 31, 2021 and December 31, 2020, respectively | | (2,968,580) | | | (2,968,512) | |
| Total HollyFrontier stockholders’ equity | | 5,259,187 | | | 5,168,361 | |
| Noncontrolling interest | | 578,859 | | | 553,842 | |
| Total equity | | 5,838,046 | | | 5,722,203 | |
| Total liabilities and equity | | $ | 11,934,817 | | | $ | 11,506,864 | |
Parenthetical amounts represent asset and liability balances attributable to Holly Energy Partners, L.P. (“HEP”) as of June 30, 2020March 31, 2021 and December 31, 2019.2020. HEP is a variable interest entity.
See accompanying notes.
HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(Unaudited)
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, | | |
| | | 2021 | | 2020 | | | | |
| | | | | | | | |
| Sales and other revenues | | $ | 3,504,293 | | | $ | 3,400,545 | | | | | |
| Operating costs and expenses: | | | | | | | | |
| Cost of products sold (exclusive of depreciation and amortization): | | | | | | | | |
| Cost of products sold (exclusive of lower of cost or market inventory valuation adjustment) | | 2,960,305 | | | 2,693,726 | | | | | |
| Lower of cost or market inventory valuation adjustment | | (200,037) | | | 560,464 | | | | | |
| | 2,760,268 | | | 3,254,190 | | | | | |
| Operating expenses (exclusive of depreciation and amortization) | | 399,909 | | | 328,345 | | | | | |
| Selling, general and administrative expenses (exclusive of depreciation and amortization) | | 81,975 | | | 87,737 | | | | | |
| Depreciation and amortization | | 124,079 | | | 140,575 | | | | | |
| | | | | | | | |
| Total operating costs and expenses | | 3,366,231 | | | 3,810,847 | | | | | |
| Income (loss) from operations | | 138,062 | | | (410,302) | | | | | |
| Other income (expense): | | | | | | | | |
| Earnings of equity method investments | | 1,763 | | | 1,714 | | | | | |
| Interest income | | 1,031 | | | 4,073 | | | | | |
| Interest expense | | (38,386) | | | (22,639) | | | | | |
| | | | | | | | |
| | | | | | | | |
| Gain on tariff settlement | | 51,500 | | | 0 | | | | | |
| Loss on early extinguishment of debt | | 0 | | | (25,915) | | | | | |
| Loss on foreign currency transactions | | (1,317) | | | (4,233) | | | | | |
| Other, net | | 1,890 | | | 1,850 | | | | | |
| | 16,481 | | | (45,150) | | | | | |
| Income (loss) before income taxes | | 154,543 | | | (455,452) | | | | | |
| Income tax expense (benefit): | | | | | | | | |
| Current | | 11,165 | | | (11,440) | | | | | |
| Deferred | | (39,472) | | | (150,726) | | | | | |
| | (28,307) | | | (162,166) | | | | | |
| Net income (loss) | | 182,850 | | | (293,286) | | | | | |
| Less net income attributable to noncontrolling interest | | 34,633 | | | 11,337 | | | | | |
| Net income (loss) attributable to HollyFrontier stockholders | | $ | 148,217 | | | $ | (304,623) | | | | | |
| Earnings (loss) per share: | | | | | | | | |
| Basic | | $ | 0.90 | | | $ | (1.88) | | | | | |
| Diluted | | $ | 0.90 | | | $ | (1.88) | | | | | |
| Average number of common shares outstanding: | | | | | | | | |
| Basic | | 162,479 | | | 161,873 | | | | | |
| Diluted | | 162,479 | | | 161,873 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | | | |
| Sales and other revenues | | $ | 2,062,930 |
| | $ | 4,782,615 |
| | $ | 5,463,475 |
| | $ | 8,679,862 |
|
| Operating costs and expenses: | | | | | | | | |
| Cost of products sold (exclusive of depreciation and amortization): | | | | | | | | |
| Cost of products sold (exclusive of lower of cost or market inventory valuation adjustment) | | 1,576,996 |
| | 3,704,884 |
| | 4,270,722 |
| | 6,904,089 |
|
| Lower of cost or market inventory valuation adjustment | | (269,904 | ) | | 47,801 |
| | 290,560 |
| | (184,545 | ) |
| | | 1,307,092 |
| | 3,752,685 |
| | 4,561,282 |
| | 6,719,544 |
|
| Operating expenses (exclusive of depreciation and amortization) | | 303,359 |
| | 333,252 |
| | 631,704 |
| | 664,844 |
|
| Selling, general and administrative expenses (exclusive of depreciation and amortization) | | 75,369 |
| | 85,317 |
| | 163,106 |
| | 173,351 |
|
| Depreciation and amortization | | 130,178 |
| | 126,908 |
| | 270,753 |
| | 248,329 |
|
| Long-lived asset and goodwill impairments | | 436,908 |
| | 152,712 |
| | 436,908 |
| | 152,712 |
|
| Total operating costs and expenses | | 2,252,906 |
| | 4,450,874 |
| | 6,063,753 |
| | 7,958,780 |
|
| Income (loss) from operations | | (189,976 | ) | | 331,741 |
| | (600,278 | ) | | 721,082 |
|
| Other income (expense): | | | | | | | | |
| Earnings of equity method investments | | 2,156 |
| | 1,783 |
| | 3,870 |
| | 3,883 |
|
| Interest income | | 1,506 |
| | 4,588 |
| | 5,579 |
| | 10,963 |
|
| Interest expense | | (32,695 | ) | | (34,264 | ) | | (55,334 | ) | | (70,911 | ) |
| Gain on sales-type leases | | 33,834 |
| | — |
| | 33,834 |
| | — |
|
| Loss on early extinguishment of debt | | — |
| | — |
| | (25,915 | ) | | — |
|
| Gain (loss) on foreign currency transactions | | 2,285 |
| | 2,213 |
| | (1,948 | ) | | 4,478 |
|
| Other, net | | 1,572 |
| | 92 |
| | 3,422 |
| | 649 |
|
| | | 8,658 |
| | (25,588 | ) | | (36,492 | ) | | (50,938 | ) |
| Income (loss) before income taxes | | (181,318 | ) | | 306,153 |
| | (636,770 | ) | | 670,144 |
|
| Income tax expense (benefit): | | | | | | | | |
| Current | | (65,607 | ) | | 63,364 |
| | (77,047 | ) | | 118,648 |
|
| Deferred | | 34,696 |
| | 25,972 |
| | (116,030 | ) | | 58,193 |
|
| | | (30,911 | ) | | 89,336 |
| | (193,077 | ) | | 176,841 |
|
| Net income (loss) | | (150,407 | ) | | 216,817 |
| | (443,693 | ) | | 493,303 |
|
| Less net income attributable to noncontrolling interest | | 26,270 |
| | 19,902 |
| | 37,607 |
| | 43,333 |
|
| Net income (loss) attributable to HollyFrontier stockholders | | $ | (176,677 | ) | | $ | 196,915 |
| | $ | (481,300 | ) | | $ | 449,970 |
|
| Earnings (loss) per share attributable to HollyFrontier stockholders: | | | | | | | | |
| Basic | | $ | (1.09 | ) | | $ | 1.16 |
| | $ | (2.97 | ) | | $ | 2.64 |
|
| Diluted | | $ | (1.09 | ) | | $ | 1.15 |
| | $ | (2.97 | ) | | $ | 2.62 |
|
| Average number of common shares outstanding: | | | | | | | | |
| Basic | | 161,889 |
| | 169,356 |
| | 161,882 |
| | 170,100 |
|
| Diluted | | 161,889 |
| | 170,547 |
| | 161,882 |
| | 171,264 |
|
See accompanying notes.
HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, | | |
| | | 2021 | | 2020 | | | | |
| | | | | | | | |
| Net income (loss) | | $ | 182,850 | | | $ | (293,286) | | | | | |
| Other comprehensive income (loss): | | | | | | | | |
| Foreign currency translation adjustment | | (5,863) | | | (21,586) | | | | | |
| Hedging instruments: | | | | | | | | |
| Change in fair value of cash flow hedging instruments | | (18,517) | | | (6,748) | | | | | |
| Reclassification adjustments to net income (loss) on settlement of cash flow hedging instruments | | 13,875 | | | (6,576) | | | | | |
| Net unrealized loss on hedging instruments | | (4,642) | | | (13,324) | | | | | |
| Pension and other post-retirement benefit obligations: | | | | | | | | |
| Actuarial loss on pension plans | | 0 | | | (45) | | | | | |
| Pension plans gain reclassified to net income | | (101) | | | 0 | | | | | |
| Actuarial gain on post-retirement healthcare plans | | 0 | | | 3 | | | | | |
| Post-retirement healthcare plans gain reclassified to net income | | (838) | | | 0 | | | | | |
| Retirement restoration plan loss reclassified to net income | | 9 | | | 0 | | | | | |
| Net change in pension and other post-retirement benefit obligations | | (930) | | | (42) | | | | | |
| Other comprehensive loss before income taxes | | (11,435) | | | (34,952) | | | | | |
| Income tax benefit | | (2,631) | | | (8,029) | | | | | |
| Other comprehensive loss | | (8,804) | | | (26,923) | | | | | |
| Total comprehensive income (loss) | | 174,046 | | | (320,209) | | | | | |
| Less noncontrolling interest in comprehensive income | | 34,633 | | | 11,337 | | | | | |
| Comprehensive income (loss) attributable to HollyFrontier stockholders | | $ | 139,413 | | | $ | (331,546) | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | | | |
| Net income (loss) | | $ | (150,407 | ) | | $ | 216,817 |
| | $ | (443,693 | ) | | $ | 493,303 |
|
| Other comprehensive income (loss): | | | | | | | | |
| Foreign currency translation adjustment | | 11,710 |
| | 9,160 |
| | (9,876 | ) | | 13,523 |
|
| Hedging instruments: | | | | | | | | |
| Change in fair value of cash flow hedging instruments | | 1,513 |
| | (693 | ) | | (5,235 | ) | | 14,897 |
|
| Reclassification adjustments to net income (loss) on settlement of cash flow hedging instruments | | 5,401 |
| | (5,321 | ) | | (1,175 | ) | | (6,963 | ) |
| Net unrealized gain (loss) on hedging instruments | | 6,914 |
| | (6,014 | ) | | (6,410 | ) | | 7,934 |
|
| Pension and other post-retirement benefit obligations: | | | | | | | | |
| Actuarial gain (loss) on pension plans | | — |
| | 72 |
| | (45 | ) | | — |
|
| Actuarial gain on post-retirement healthcare plans | | — |
| | 2 |
| | 3 |
| | — |
|
| Net change in pension and other post-retirement benefit obligations | | — |
| | 74 |
| | (42 | ) | | — |
|
| Other comprehensive income (loss) before income taxes | | 18,624 |
| | 3,220 |
| | (16,328 | ) | | 21,457 |
|
| Income tax expense (benefit) | | 4,250 |
| | 416 |
| | (3,779 | ) | | 4,878 |
|
| Other comprehensive income (loss) | | 14,374 |
| | 2,804 |
| | (12,549 | ) | | 16,579 |
|
| Total comprehensive income (loss) | | (136,033 | ) | | 219,621 |
| | (456,242 | ) | | 509,882 |
|
| Less noncontrolling interest in comprehensive income | | 26,270 |
| | 19,902 |
| | 37,607 |
| | 43,333 |
|
| Comprehensive income (loss) attributable to HollyFrontier stockholders | | $ | (162,303 | ) | | $ | 199,719 |
| | $ | (493,849 | ) | | $ | 466,549 |
|
See accompanying notes.
HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | |
| Net income (loss) | | $ | 182,850 | | | $ | (293,286) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
| Depreciation and amortization | | 124,079 | | | 140,575 | |
| | | | |
| Lower of cost or market inventory valuation adjustment | | (200,037) | | | 560,464 | |
| Earnings of equity method investments, inclusive of distributions | | (617) | | | (1,164) | |
| Loss on early extinguishment of debt | | 0 | | | 25,915 | |
| | | | |
| Gain on sale of assets | | (425) | | | (312) | |
| Deferred income taxes | | (39,472) | | | (150,726) | |
| Equity-based compensation expense | | 9,770 | | | 6,330 | |
| Change in fair value – derivative instruments | | 3,783 | | | (41,641) | |
| (Increase) decrease in current assets: | | | | |
| Accounts receivable | | (145,891) | | | 301,535 | |
| Inventories | | (241,238) | | | (50,468) | |
| Income taxes receivable | | 25,844 | | | (816) | |
| Prepayments and other | | 3,830 | | | 6,741 | |
| Increase (decrease) in current liabilities: | | | | |
| Accounts payable | | 266,163 | | | (328,222) | |
| Income taxes payable | | 10,335 | | | (11,056) | |
| Accrued liabilities | | 95,041 | | | 16,892 | |
| Turnaround expenditures | | (24,817) | | | (38,653) | |
| Other, net | | (6,872) | | | 47,990 | |
| Net cash provided by operating activities | | 62,326 | | | 190,098 | |
| | | | |
| Cash flows from investing activities: | | | | |
| Additions to properties, plants and equipment | | (116,743) | | | (64,807) | |
| Additions to properties, plants and equipment – HEP | | (33,218) | | | (18,942) | |
| Investment in equity company - HEP | | 0 | | | (2,345) | |
| Distributions in excess of equity earnings | | 2,897 | | | 0 | |
| Net cash used for investing activities | | (147,064) | | | (86,094) | |
| | | | |
| Cash flows from financing activities: | | | | |
| Borrowings under credit agreements | | 73,000 | | | 112,000 | |
| Repayments under credit agreements | | (90,500) | | | (67,000) | |
| | | | |
| Proceeds from issuance of senior notes - HEP | | 0 | | | 500,000 | |
| Redemption of senior notes - HEP | | 0 | | | (522,500) | |
| Purchase of treasury stock | | (12) | | | (1,062) | |
| Dividends | | (57,663) | | | (57,248) | |
| Distributions to noncontrolling interests | | (19,977) | | | (33,918) | |
| Contributions from noncontrolling interests | | 6,332 | | | 7,304 | |
| | | | |
| Payments on finance leases | | (673) | | | (410) | |
| Deferred financing costs | | 0 | | | (8,478) | |
| Other, net | | (68) | | | (145) | |
| Net cash used for financing activities | | (89,561) | | | (71,457) | |
| | | | |
| Effect of exchange rate on cash flow | | (591) | | | (8,583) | |
| | | | |
| Cash and cash equivalents: | | | | |
| Increase (decrease) for the period | | (174,890) | | | 23,964 | |
| Beginning of period | | 1,368,318 | | | 885,162 | |
| End of period | | $ | 1,193,428 | | | $ | 909,126 | |
| | | | |
| Supplemental disclosure of cash flow information: | | | | |
| Cash (paid) received during the period for: | | | | |
| Interest | | $ | (18,532) | | | $ | (26,707) | |
| Income taxes, net | | $ | 24,649 | | | $ | (1,201) | |
| Decrease in accrued and unpaid capital expenditures | | $ | (2,816) | | | $ | (9,914) | |
|
| | | | | | | | |
| | | Six Months Ended June 30, |
| | | 2020 | | 2019 |
| Cash flows from operating activities: | | | | |
| Net income (loss) | | $ | (443,693 | ) | | $ | 493,303 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Depreciation and amortization | | 270,753 |
| | 248,329 |
|
| Long-lived asset and goodwill impairments | | 436,908 |
| | 152,712 |
|
| Lower of cost or market inventory valuation adjustment | | 290,560 |
| | (184,545 | ) |
| Earnings of equity method investments, inclusive of distributions | | (1,298 | ) | | — |
|
| Loss on early extinguishment of debt | | 25,915 |
| | — |
|
| Gain on sales-type leases | | (33,834 | ) | | — |
|
| (Gain) loss on sale of assets | | (357 | ) | | 73 |
|
| Deferred income taxes | | (116,030 | ) | | 58,193 |
|
| Equity-based compensation expense | | 14,289 |
| | 21,562 |
|
| Change in fair value – derivative instruments | | (9,377 | ) | | 31,454 |
|
| (Increase) decrease in current assets: | | | | |
| Accounts receivable | | 281,011 |
| | (72,300 | ) |
| Inventories | | (764 | ) | | (6,708 | ) |
| Income taxes receivable | | (72,382 | ) | | (26,835 | ) |
| Prepayments and other | | 9,704 |
| | 14,020 |
|
| Increase (decrease) in current liabilities: | | | | |
| Accounts payable | | (314,892 | ) | | 292,893 |
|
| Income taxes payable | | (9,268 | ) | | 7,826 |
|
| Accrued liabilities | | 3,340 |
| | 38,003 |
|
| Turnaround expenditures | | (49,248 | ) | | (110,273 | ) |
| Other, net | | 27,965 |
| | 11,843 |
|
| Net cash provided by operating activities | | 309,302 |
| | 969,550 |
|
| | | | | |
| Cash flows from investing activities: | | | | |
| Additions to properties, plants and equipment | | (98,996 | ) | | (102,717 | ) |
| Additions to properties, plants and equipment – HEP | | (30,740 | ) | | (17,752 | ) |
| Purchase of Sonneborn, net of cash acquired | | — |
| | (662,665 | ) |
| Investment in equity company - HEP | | (2,400 | ) | | — |
|
| Other, net | | 470 |
| | 825 |
|
| Net cash used for investing activities | | (131,666 | ) | | (782,309 | ) |
| | | | | |
| Cash flows from financing activities: | | | | |
| Borrowings under credit agreements | | 168,000 |
| | 175,000 |
|
| Repayments under credit agreements | | (138,500 | ) | | (156,500 | ) |
| Proceeds from issuance of senior notes - HEP | | 500,000 |
| | — |
|
| Redemption of senior notes - HEP | | (522,500 | ) | | — |
|
| Purchase of treasury stock | | (1,243 | ) | | (266,996 | ) |
| Dividends | | (114,430 | ) | | (113,508 | ) |
| Distributions to noncontrolling interests | | (51,008 | ) | | (66,703 | ) |
| Contributions from noncontrolling interests | | 13,263 |
| | — |
|
| Payments on finance leases | | (843 | ) | | (783 | ) |
| Deferred financing costs | | (8,714 | ) | | — |
|
| Other, net | | 456 |
| | (374 | ) |
| Net cash used for financing activities | | (155,519 | ) | | (429,864 | ) |
| | | | | |
| Effect of exchange rate on cash flow | | (4,770 | ) | | 2,515 |
|
| | | | | |
| Cash and cash equivalents: | | | | |
| Increase (decrease) for the period | | 17,347 |
| | (240,108 | ) |
| Beginning of period | | 885,162 |
| | 1,154,752 |
|
| End of period | | $ | 902,509 |
| | $ | 914,644 |
|
| | | | | |
| Supplemental disclosure of cash flow information: | | | | |
| Cash paid during the period for: | | | | |
| Interest | | $ | (64,003 | ) | | $ | (67,620 | ) |
| Income taxes, net | | $ | (4,738 | ) | | $ | (138,587 | ) |
See accompanying notes.
HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands except per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | HollyFrontier Stockholders' Equity | | | | |
| | Common Stock | | Additional Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Non-controlling Interest | | Total
Equity |
| | |
| Balance at December 31, 2019 | $ | 2,560 |
| | $ | 4,204,547 |
| | $ | 4,744,120 |
| | $ | 14,774 |
| | $ | (2,987,808 | ) | | $ | 531,233 |
| | $ | 6,509,426 |
|
| Net income (loss) | — |
| | — |
| | (304,623 | ) | | — |
| | — |
| | 11,337 |
| | (293,286 | ) |
| Dividends ($0.35 declared per common share) | — |
| | — |
| | (57,248 | ) | | — |
| | — |
| | — |
| | (57,248 | ) |
| Distributions to noncontrolling interest holders | — |
| | — |
| | — |
| | — |
| | — |
| | (33,918 | ) | | (33,918 | ) |
| Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | (26,923 | ) | | — |
| | — |
| | (26,923 | ) |
| Issuance of common stock under incentive compensation plans, net of forfeitures | — |
| | (2,037 | ) | | — |
| | — |
| | 2,037 |
| | — |
| | — |
|
| Equity-based compensation | — |
| | 5,824 |
| | — |
| | — |
| | — |
| | 506 |
| | 6,330 |
|
| Purchase of treasury stock | — |
| | — |
| | — |
| | — |
| | (1,062 | ) | | — |
| | (1,062 | ) |
| Purchase of HEP units for restricted grants | — |
| | — |
| | — |
| | — |
| | — |
| | (145 | ) | | (145 | ) |
| Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 7,304 |
| | 7,304 |
|
| Balance at March 31, 2020 | $ | 2,560 |
| | $ | 4,208,334 |
| | $ | 4,382,249 |
| | $ | (12,149 | ) | | $ | (2,986,833 | ) | | $ | 516,317 |
| | $ | 6,110,478 |
|
| Net income (loss) | — |
| | — |
| | (176,677 | ) | | — |
| | — |
| | 26,270 |
| | (150,407 | ) |
| Dividends ($0.35 declared per common share) | — |
| | — |
| | (57,182 | ) | | — |
| | — |
| | — |
| | (57,182 | ) |
| Distributions to noncontrolling interest holders | — |
| | — |
| | — |
| | — |
| | — |
| | (17,090 | ) | | (17,090 | ) |
| Other comprehensive income, net of tax | — |
| | — |
| | — |
| | 14,374 |
| | — |
| | — |
| | 14,374 |
|
| Issuance of common stock under incentive compensation plans, net of forfeitures | — |
| | (527 | ) | | — |
| | — |
| | 527 |
| | — |
| | — |
|
| Equity-based compensation | — |
| | 7,484 |
| | — |
| | — |
| | — |
| | 475 |
| | 7,959 |
|
| Purchase of treasury stock | — |
| | — |
| | — |
| | — |
| | (181 | ) | | — |
| | (181 | ) |
| Purchase of HEP units for restricted grants | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
| Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 5,959 |
| | 5,959 |
|
| Reclamation of stockholder short-swing profit | — |
| | 603 |
| | — |
| | — |
| | — |
| | — |
| | 603 |
|
| Balance at June 30, 2020 | $ | 2,560 |
| | $ | 4,215,894 |
| | $ | 4,148,390 |
| | $ | 2,225 |
| | $ | (2,986,487 | ) | | $ | 531,929 |
| | $ | 5,914,511 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| HollyFrontier Stockholders' Equity | | | | |
| Common Stock | | Additional Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Treasury Stock | | Non-controlling Interest | | Total
Equity |
| | |
| Balance at December 31, 2020 | $ | 2,560 | | | $ | 4,207,672 | | | $ | 3,913,179 | | | $ | 13,462 | | | $ | (2,968,512) | | | $ | 553,842 | | | $ | 5,722,203 | |
| Net income | — | | | — | | | 148,217 | | | — | | | — | | | 34,633 | | | 182,850 | |
| Dividends ($0.35 declared per common share) | — | | | — | | | (57,663) | | | — | | | — | | | — | | | (57,663) | |
| Distributions to noncontrolling interest holders | — | | | — | | | — | | | — | | | — | | | (19,977) | | | (19,977) | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | (8,804) | | | — | | | — | | | (8,804) | |
| | | | | | | | | | | | | |
| Issuance of common stock under incentive compensation plans | — | | | 56 | | | — | | | — | | | (56) | | | — | | | — | |
| Equity-based compensation | — | | | 9,088 | | | — | | | — | | | — | | | 682 | | | 9,770 | |
| Purchase of treasury stock | — | | | — | | | — | | | — | | | (12) | | | — | | | (12) | |
| Purchase of HEP units for restricted grants | — | | | — | | | — | | | — | | | — | | | (68) | | | (68) | |
| Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | 9,747 | | | 9,747 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Balance at March 31, 2021 | $ | 2,560 | | | $ | 4,216,816 | | | $ | 4,003,733 | | | $ | 4,658 | | | $ | (2,968,580) | | | $ | 578,859 | | | $ | 5,838,046 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| HollyFrontier Stockholders' Equity | | | | |
| Common Stock | | Additional Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Treasury Stock | | Non-controlling Interest | | Total
Equity |
| | |
| Balance at December 31, 2019 | $ | 2,560 | | | $ | 4,204,547 | | | $ | 4,744,120 | | | $ | 14,774 | | | $ | (2,987,808) | | | $ | 531,233 | | | $ | 6,509,426 | |
| Net income (loss) | — | | | — | | | (304,623) | | | — | | | — | | | 11,337 | | | (293,286) | |
| Dividends ($0.35 declared per common share) | — | | | — | | | (57,248) | | | — | | | — | | | — | | | (57,248) | |
| Distributions to noncontrolling interest holders | — | | | — | | | — | | | — | | | — | | | (33,918) | | | (33,918) | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | (26,923) | | | — | | | — | | | (26,923) | |
| Issuance of common stock under incentive compensation plans | — | | | (2,037) | | | — | | | — | | | 2,037 | | | — | | | — | |
| Equity-based compensation | — | | | 5,824 | | | — | | | — | | | — | | | 506 | | | 6,330 | |
| Purchase of treasury stock | — | | | — | | | — | | | — | | | (1,062) | | | — | | | (1,062) | |
| Purchase of HEP units for restricted grants | — | | | — | | | — | | | — | | | — | | | (145) | | | (145) | |
| Contributions from noncontrolling interests | — | | | — | | | — | | | — | | | — | | | 7,304 | | | 7,304 | |
| Balance at March 31, 2020 | $ | 2,560 | | | $ | 4,208,334 | | | $ | 4,382,249 | | | $ | (12,149) | | | $ | (2,986,833) | | | $ | 516,317 | | | $ | 6,110,478 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | HollyFrontier Stockholders' Equity | | | | |
| | Common Stock | | Additional Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Treasury Stock | | Non-controlling Interest | | Total
Equity |
| | |
| Balance at December 31, 2018 | $ | 2,560 |
| | $ | 4,196,125 |
| | $ | 4,196,902 |
| | $ | 13,623 |
| | $ | (2,490,639 | ) | | $ | 540,488 |
| | $ | 6,459,059 |
|
| Net income | — |
| | — |
| | 253,055 |
| | — |
| | — |
| | 23,431 |
| | 276,486 |
|
| Dividends ($0.33 declared per common share) | — |
| | — |
| | (56,849 | ) | | — |
| | — |
| | — |
| | (56,849 | ) |
| Distributions to noncontrolling interest holders | — |
| | — |
| | — |
| | — |
| | — |
| | (33,673 | ) | | (33,673 | ) |
| Other comprehensive income, net of tax | — |
| | — |
| | — |
| | 13,775 |
| | — |
| | — |
| | 13,775 |
|
| Issuance of common stock under incentive compensation plans, net of forfeitures | — |
| | 3 |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
|
| Equity-based compensation | — |
| | 8,713 |
| | — |
| | — |
| | — |
| | 661 |
| | 9,374 |
|
| Purchase of treasury stock | — |
| | — |
| | — |
| | — |
| | (73,225 | ) | | — |
| | (73,225 | ) |
| Purchase of HEP units for restricted grants | — |
| | — |
| | — |
| | — |
| | — |
| | (373 | ) | | (373 | ) |
| Balance at March 31, 2019 | $ | 2,560 |
| | $ | 4,204,841 |
| | $ | 4,393,108 |
| | $ | 27,398 |
| | $ | (2,563,867 | ) | | $ | 530,534 |
| | $ | 6,594,574 |
|
| Net income | — |
| | — |
| | 196,915 |
| | — |
| | — |
| | 19,902 |
| | 216,817 |
|
| Dividends ($0.33 declared per common share) | — |
| | — |
| | (56,659 | ) | | — |
| | — |
| | — |
| | (56,659 | ) |
| Distributions to noncontrolling interest holders | — |
| | — |
| | — |
| | — |
| | — |
| | (33,030 | ) | | (33,030 | ) |
| Other comprehensive income, net of tax | — |
| | — |
| | — |
| | 2,804 |
| | — |
| | — |
| | 2,804 |
|
| Equity attributable to HEP common unit issuances, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | (140 | ) | | (140 | ) |
| Issuance of common stock under incentive compensation plans, net of forfeitures | — |
| | (138 | ) | | — |
| | — |
| | 138 |
| | — |
| | — |
|
| Equity-based compensation | — |
| | 11,602 |
| | — |
| | — |
| | — |
| | 586 |
| | 12,188 |
|
| Purchase of treasury stock | — |
| | — |
| | — |
| | — |
| | (205,555 | ) | | — |
| | (205,555 | ) |
| Balance at June 30, 2019 | $ | 2,560 |
| | $ | 4,216,305 |
| | $ | 4,533,364 |
| | $ | 30,202 |
| | $ | (2,769,284 | ) | | $ | 517,852 |
| | $ | 6,530,999 |
|
See accompanying notes.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| |
NOTE 1: | Description of Business and Presentation of Financial Statements |
NOTE 1:Description of Business and Presentation of Financial Statements
References herein to HollyFrontier Corporation (“HollyFrontier”) include HollyFrontier and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s (“SEC”) “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In these financial statements, the words “we,” “our,” “ours” and “us” refer only to HollyFrontier and its consolidated subsidiaries or to HollyFrontier or an individual subsidiary and not to any other person, with certain exceptions. Generally, the words “we,” “our,” “ours” and “us” include Holly Energy Partners, L.P. (“HEP”) and its subsidiaries as consolidated subsidiaries of HollyFrontier, unless when used in disclosures of transactions or obligations between HEP and HollyFrontier or its other subsidiaries. These financial statements contain certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of HollyFrontier. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.
We are an independent petroleum refiner and marketer that produces high-value light products such as gasoline, diesel fuel, jet fuel, specialty lubricant products and other specialty products.and modified asphalt. We own and operate petroleum refineries that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain geographic regions of the United States. In addition, we produce base oils and other specialized lubricants in the United States, Canada and the Netherlands, with retail and wholesale marketing of our products through a global sales network with locations in Canada, the United States, Europe, China and Latin America.
As of March 31, 2021, we:
•June 30,owned and operated a petroleum refinery in El Dorado, Kansas (the “El Dorado Refinery”), 2 refinery facilities located in Tulsa, Oklahoma (collectively, the “Tulsa Refineries”), a refinery in Artesia, New Mexico that is operated in conjunction with crude oil distillation and vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the “Navajo Refinery”) and a refinery in Woods Cross, Utah (the “Woods Cross Refinery”);
•owned a facility in Cheyenne, Wyoming, which operated as a petroleum refinery until early August 2020, at which time its assets began to be converted to renewable diesel production (the “Cheyenne Refinery”);
•, we:
| |
• | owned and operated a petroleum refinery in El Dorado, Kansas (the “El Dorado Refinery”), 2 refinery facilities located in Tulsa, Oklahoma (collectively, the “Tulsa Refineries”), a refinery in Artesia, New Mexico that is operated in conjunction with crude oil distillation and vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the “Navajo Refinery”), a refinery located in Cheyenne, Wyoming (the “Cheyenne Refinery”) and a refinery in Woods Cross, Utah (the “Woods Cross Refinery”);
|
owned and operated Petro-Canada Lubricants Inc. (“PCLI”) located in Mississauga, Ontario, which produces base oils and other specialized lubricant products;
•owned and operated Sonneborn (as defined below) with manufacturing facilities in Petrolia, Pennsylvania and the Netherlands, which produce specialty lubricant products for our Sonneborn business, such as white oils, petrolatums and waxes;
•owned and operated Red Giant Oil Company LLC (“Red Giant Oil”), which supplies locomotive engine oil and has storage and distribution facilities in Iowa Kansas, Utah and Wyoming, along with a blending and packaging facility in Texas;
•owned and operated HollyFrontier Asphalt Company LLC (“HFC Asphalt”), which operates various asphalt terminals in Arizona, New Mexico and Oklahoma; and
•owned a 57% limited partner interest and a non-economic general partner interest in HEP, a variable interest entity (“VIE”). HEP owns and operates logistic assets consisting of petroleum product and crude oil pipelines, terminals, tankage, loading rack facilities and refinery processing units that principally support our refining and marketing operations in the Mid-Continent, Southwest and Rocky Mountain geographic regions of the United States.
On June 1,May 4, 2021, HollyFrontier Puget Sound Refining LLC (the “Purchaser”), a wholly-owned subsidiary of HollyFrontier Corporation, entered into a sale and purchase agreement with Equilon Enterprises LLC d/b/a Shell Oil Products US (the “Seller”) to acquire Seller’s refinery and related assets, including the on-site cogeneration facility and related logistics assets (the “Puget Sound Refinery”), for a base cash purchase price of $350 million plus hydrocarbon inventory to be valued at closing with an estimated current value in the range of $150 million to $180 million (the “Acquisition”). The Puget Sound Refinery is strategically located on approximately 850 acres in Anacortes, Washington, approximately 80 miles north of Seattle and 90 miles south of Vancouver. The 149,000 barrel per day facility is a large, high quality and complex refinery with catalytic cracking and delayed coking units and is well positioned geographically and logistically to source advantaged Canadian and Alaskan North Slope crudes. In addition to refining assets and an on-site cogeneration facility, the transaction includes a deep-water marine dock, a light product loading rack, a rail terminal, and storage tanks with approximately 5.8 million barrels of crude, product and other hydrocarbon storage capacity. The Acquisition is expected to close in the fourth quarter of 2021, subject to regulatory clearance and other customary closing conditions. We expect to fund the Acquisition with a one-year suspension of our regular quarterly dividend and cash on hand.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
In the third quarter of 2020, we announced plans to permanently ceaseceased petroleum refining operations at our Cheyenne Refinery and to convertsubsequently began converting certain assets at our Cheyenne Refinery to renewable diesel production. We subsequently began winding downIn connection with the cessation of petroleum refining operations at our Cheyenne Refinery, on August 3, 2020. This decision was primarily based on a positive outlook on the market for renewable dieselwe recognized $8.3 million in decommissioning expense and the expectation that future free cash flow generation at our Cheyenne Refinery would be challenged due to lower gross margins resulting from the economic impact of the COVID-19 pandemic and compressed crude differentials due to dislocations in the crude oil market. Additional factors included uncompetitive operating and maintenance costs forecasted for our Cheyenne Refinery and the anticipated loss of the Environmental Protection Agency’s (“EPA”) small refinery exemption. Approximately 200 employees at our Cheyenne Refinery are expected to be impacted by this decision.
During the second quarter of 2020, we recorded a long-lived asset impairment of $232.2 million and accelerated depreciation of $2.2 million related to our Cheyenne Refinery asset groups. We expect to record additional non-cash charges of $3.7 million for accelerated depreciation in the third quarter of 2020. Additionally, during the second quarter of 2020, we recorded $1.1$0.5 million in employee severance costs related tofor the conversion of our Cheyenne Refinery. Also, during the second quarter of 2020, we recorded a reserve of $6.2 million against our repair and maintenance supplies inventory. These severance costs and the inventory reserve chargethree months ended March 31, 2021, which were recognized in operating expenses and were reported in our RefiningCorporate and Other segment.
During the secondfirst quarter of 2020,2021, we initiated a restructuring within our Lubricants and completed a corporate restructuring.Specialty Products segment. As a result of this restructuring, we recorded $3.7$7.8 million in employee severance costs for the three months ended March 31, 2021, which were recognized primarily as operating expenses in our Refining segment and selling, general and administrative expenses in our Corporate and Other segment.
On November 12, 2018, we entered into an equity purchase agreement to acquire 100% of the issued and outstanding capital stock of Sonneborn US Holdings Inc. and 100% of the membership rights in Sonneborn Coöperatief U.A. (collectively, “Sonneborn”). The acquisition closed on February 1, 2019. Aggregate consideration totaled $701.6 million and consisted of $662.7 million in cash paid at acquisition, net of cash acquired. Sonneborn is a producer of specialty hydrocarbon chemicals such as white oils, petrolatums and waxes with manufacturing facilities in the United States and Europe.
This transaction was accounted for as a business combination using the acquisition method of accounting, with the purchase price allocated to the fair value of the acquired Sonneborn assets and liabilities as of the February 1, 2019 acquisition date, with the excess purchase price recorded as goodwill assigned to our Lubricants and Specialty Products segment. This goodwill is not deductible for income tax purposes. Fair values are as follows: cash and cash equivalents $38.9 million, current assets $139.4 million, properties, plants and equipment $168.2 million, goodwill $282.3 million, intangibles and other noncurrent assets $231.5 million, current liabilities $47.9 million and deferred income tax and other long-term liabilities $110.8 million.
We incurred $0.6 million and $3.6 million for the three months ended June 30, 2020 and 2019, respectively, and $1.9 million and $16.2 million for the six months ended June 30, 2020 and 2019, respectively, in incremental direct integration and regulatory costs that principally relate to legal, advisory and other professional fees and are presented as selling, general and administrative expenses.
We have prepared these consolidated financial statements without audit. In management’s opinion, these consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of our consolidated financial position as of June 30, 2020,March 31, 2021, the consolidated results of operations, comprehensive income, and statements of equity for the three and six months ended June 30, 2020 and 2019 and consolidated cash flows for the sixthree months ended June 30,March 31, 2021 and 2020 and 2019 in accordance with the rules and regulations of the SEC. Although certain notes and other information required by generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 20192020 that has been filed with the SEC.
Our results of operations for the sixthree months ended June 30, 2020March 31, 2021 are not necessarily indicative of the results of operations to be realized for the year ending December 31, 2020.2021.
Accounts Receivable: Our accounts receivable consist of amounts due from customers that are primarily companies in the petroleum industry. Credit is extended based on our evaluation of the customer’s financial condition, and in certain circumstances collateral, such as letters of credit or guarantees, is required. We reserve for doubtful accountsexpected credit losses based on our historical loss experience as well as expected credit losses from current economic conditions and management’s expectations of future economic conditions. Credit losses are charged to the allowance for doubtful accountsexpected credit losses when an account is deemed uncollectible. Our allowance for doubtful accountsexpected credit losses was $3.9 million at March 31, 2021 and $3.4 million at June 30, 2020 and $4.5 million at December 31, 2019.2020.
Inventories: Inventories related to our refining operations are stated at the lower of cost, using the last-in, first-out (“LIFO”) method for crude oil and unfinished and finished refined products, or market. In periods of rapidly declining prices, LIFO inventories may have to be written down to market value due to the higher costs assigned to LIFO layers in prior periods. In addition, the use of the LIFO inventory method may result in increases or decreases to cost of sales in years that inventory volumes decline as the result of charging cost of sales with LIFO inventory costs generated in prior periods. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final year-end LIFO inventory valuation.
Inventories of our Petro-Canada Lubricants and Sonneborn businesses are stated at the lower of cost, using the first-in, first-out (“FIFO”) method, or net realizable value.
Inventories consisting of process chemicals, materials and maintenance supplies and renewable identification numbers (“RINs”) are stated at the lower of weighted-average cost or net realizable value.
Leases: At inception, we determine if an arrangement is or contains a lease. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our payment obligation under the leasing arrangement. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We use our estimated incremental borrowing rate (“IBR”) to determine the present value of lease payments as most of our leases do not contain an implicit rate. Our IBR represents the interest rate which we would pay to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term in a similar economic environment. We use the implicit rate when readily determinable.
Operating leases are recorded in operating lease right-of-use assets and current and noncurrent operating lease liabilities on our consolidated balance sheet. Finance leases are included in properties, plants and equipment and accrued liabilities and other long-term liabilities on our consolidated balance sheet.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Our lease term includes an option to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less are not recorded on our balance sheet. For certain equipment leases, we apply a portfolio approach for the operating lease ROU assets and liabilities. Also, as a lessee, we separate non-lease components that are identifiable and exclude them from the determination of net present value of lease payment obligations. In addition, HEP, as a lessor, does not separate the non-lease (service) component in contracts in which the lease component is the dominant component. HEP treats these combined components as an operatinga lease.
Goodwill and Long-lived Assets: As of June 30, 2020,March 31, 2021, our goodwill balance was $2.4$2.3 billion, with goodwill assigned to our Refining, Lubricants and Specialty Products and HEP segments of $1,733.5 million, $327.6$247.1 million and $312.9 million, respectively. See Note 1514 for additional information on our segments. The carrying amount of our goodwill may fluctuate from period to period due to the effects of foreign currency translation adjustments on goodwill assigned to our Lubricants and Specialty Products segment. Goodwill represents the excess of the cost of an acquired entity over the fair value of the assets acquired and liabilities assumed. Goodwill is not subject to amortization and is tested annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our goodwill impairment testing first entails either a quantitative assessment or an optional qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that based on the qualitative factors that it is more likely than not that the fair valuecarrying amount of the reporting unit is greater than its carrying amount,fair value, a quantitative test is performed in which we estimate the fair value of the related reporting unit. If the carrying amount of a reporting unit exceeds its fair value, the goodwill of that reporting unit is impaired, and we measure goodwill impairment as the excess of the carrying amount of the reporting unit over the related fair value.
For purposes of long-lived asset impairment evaluation, we have grouped our long-lived assets as follows: (i) our refinery asset groups, which include certain HEP logistics assets, (ii) our Lubricants and Specialty Products asset groups and (iii) our HEP asset groups, which comprises HEP assets not included in our refinery asset groups. These asset groups represent the lowest level for which independent cash flows can be identified. Our long-lived assets are evaluated for impairment by identifying whether indicators of impairment exist and if so, assessing whether the long-lived assets are recoverable from estimated future undiscounted cash flows. The actual amount of impairment loss measured, if any, is equal to the amount by which the asset group’s carrying value exceeds its fair value.
Indicators of goodwill and long-lived asset impairment
Due to the recent economic slowdown caused by the COVID-19 pandemic, we determined that indicators of potential goodwill impairment for our Refining and Lubricants and Specialty Products reporting units were present. In addition, we determined that these indicators were also evidence of potential long-lived asset impairments. These indicators included reductions in the prices of our finished goods and raw materials and the related decrease in our gross margins, as well as the recent decline in our common share price which has resulted in a decrease in our market capitalization. Additionally, our recent announcement of the conversion of our Cheyenne Refinery to renewable diesel production was also considered a triggering event requiring assessment of potential impairments to the carrying value of our Cheyenne Refinery asset group. During the second quarter of 2020, we performed interim goodwill and long-lived asset impairment testing as of May 31, 2020.
Long-lived asset impairment testing
As a result of our long-lived asset impairment testing, we determined that the carrying value of the long-lived assets of our Cheyenne Refinery and PCLI asset groups were not recoverable, and thus recorded long-lived asset impairment charges of $232.2 million and $204.7 million, respectively, in the second quarter of 2020. Our testing did not result in any other impairment of long-lived assets.
The estimated fair values of the Cheyenne Refinery and PCLI asset groups were determined using a combination of the income and cost approaches. The income approach was based on management’s best estimates of the expected future cash flows over the remaining useful life of the asset group. The cost approach utilized assumptions for the current replacement costs of similar assets adjusted for estimated depreciation and economic obsolescence. These fair value measurements involve significant unobservable inputs (Level 3 inputs). See Note 4 for further discussion of Level 3 inputs.
Goodwill impairment testing
The estimated fair values of our Refining and Lubricants and Specialty Products reporting units were derived using a combination of income and market approaches. The income approach reflects expected future cash flows based on estimated forecasted production levels, selling prices, gross margins, operating costs and capital expenditures. Our market approaches include both the guideline public company and guideline transaction methods. Both methods utilize pricing multiples derived from historical market transactions of other like-kind assets. These fair value measurements involve significant unobservable inputs (Level 3 inputs). See Note 4 for further discussion of Level 3 inputs.
Our interim goodwill impairment testing indicated that the fair values of our Refining and Lubricants and Specialty Products reporting units were in excess of their respective carrying amounts ranging from 9% to 283%; therefore, there was no impairment of goodwill at our Refining and Lubricants and Specialty Products reporting units.
A reasonable expectation exists that further deterioration in our operating results or overall economic conditions could result in an impairment of goodwill and / or additional long-lived assets impairments at some point in the future. Future impairment charges could be material to our results of operations and financial condition. Our annual goodwill impairment testing is performed on July 1.
During the second quarter of 2019, we recorded a goodwill impairment charge of $152.7 million to fully impair the goodwill of the PCLI reporting unit included in our Lubricants and Specialty Products segment.
Revenue Recognition: Revenue on refined product and excess crude oil sales are recognized when delivered (via pipeline, in-tank or rack) and the customer obtains control of such inventory, which is typically when title passes and the customer is billed. All revenues are reported inclusive of shipping and handling costs billed and exclusive of any taxes billed to customers. Shipping and handling costs incurred are reported as cost of products sold.
Our lubricants and specialty products business has sales agreements with marketers and distributors that provide certain rights of return or provisions for the repurchase of products previously sold to them. Under these agreements, revenues and cost of revenues are deferred until the products have been sold to end customers. Our lubricants and specialty products business also has agreements that create an obligation to deliver products at a future date for which consideration has already been received and recorded as deferred revenue. This revenue is recognized when the products are delivered to the customer.
HEP recognizes revenues as products are shipped through its pipelines and terminals and as other services are rendered. Additionally, HEP has certain throughput agreements that specify minimum volume requirements, whereby HEP bills a customer for a minimum level of shipments in the event a customer ships below their contractual requirements. If there are no future performance obligations, HEP recognizes these deficiency payments as revenue. In certain of these throughput agreements, a customer may later utilize such shortfall billings as credit towards future volume shipments in excess of its minimum levels within its respective contractual shortfall make-up period. Such amounts represent an obligation to perform future services, which may be initially deferred and later recognized as revenue based on estimated future shipping levels, including the likelihood of a customer’s ability to utilize such amounts prior to the end of the contractual shortfall make-up period. HEP recognizes the service portion of these deficiency payments as revenue when HEP does not expect it will be required to satisfy these performance obligations in the future based on the pattern of rights exercised by the customer. Payment terms under our contracts with customers are consistent with industry norms and are typically payable within 30 days of the date of invoice.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Foreign Currency Translation: Assets and liabilities recorded in foreign currencies are translated into U.S. dollars using exchange rates in effect as of the balance sheet date. Revenue and expense accounts are translated using the weighted-average exchange rates during the period presented. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income.
In connection with our PCLI acquisition, we issued intercompany notes to initially fund certain of our foreign businesses. Remeasurement adjustments resulting from the conversion of such intercompany financing amounts to functional currencies are recorded as gains and losses as a component of other income (expense) in the income statement.consolidated statements of operations. Such adjustments are not recorded to the Lubricants and Specialty Products segment operations, but to Corporate and Other. See Note 1514 for additional information on our segments.
Income Taxes: Provisions for income taxes include deferred taxes resulting from temporary differences in income for financial and tax purposes, using the liability method of accounting for income taxes. The liability method requires the effect of tax rate changes on deferred income taxes to be reflected in the period in which the rate change was enacted. The liability method also requires that deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized.
Potential interest and penalties related to income tax matters are recognized in income tax expense. We believe we have appropriate support for the income tax positions taken and to be taken on our income tax returns and that our accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.
For the sixthree months ended June 30,March 31, 2021 and 2020, we recorded anincome tax benefits of $28.3 million and $162.2 million, respectively. This decrease in income tax benefit of $193.1 million compared to income tax expense of $176.8 million for the six months ended June 30, 2019. This decrease was due principally to a pre-tax losspre-tax income during the sixthree months ended June 30, 2020March 31, 2021 compared to pre-tax earningsloss in the same period of 2019.2020. Our effective tax rates were 30.3%(18.3)% and 26.4%35.6% for the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively. The year-over-year increasedecrease in the effectiveeffective tax rate is due principally to the relationship between the pre-tax results and the earnings attributable to the noncontrolling interest that is not included in income for tax purposes.
Inventory Repurchase Obligations: We periodically enter into same-party sell / buy transactions, whereby we sell certain refined product inventory and subsequently repurchase the inventory in order to facilitate delivery to certain locations. Such sell / buy transactions are accounted for as inventory repurchase obligations under which proceeds received under the initial sell is recognized as an inventory repurchase obligation that is subsequently reversed when the inventory is repurchased. For the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, we received proceeds of $20.4$11.0 million and $12.6$14.4 million, respectively, and subsequently repaid $21.7$12.0 million and $12.9$11.8 million, respectively, under these sell / buy transactions.
Accounting Pronouncements - Recently Adopted
Income Tax Accounting
In December 2019, Accounting Standards Update (“ASU”) 2019-12, “Simplifying the Accounting for Income Taxes,” was issued which eliminates some exceptions to the general approach in ASC Topic 740 “Income Taxes” and also provides clarification of other aspects of ASC 740. We adopted this standard effective January 1, 2020 on a prospective basis, and recognized an income tax benefit for the six months ended June 30, 2020 based upon the application of our estimated annual effective tax rate to our pre-tax loss.
Credit Losses Measurement
In June 2016, ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” was issued requiring measurement of all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. We adopted this standard effective January 1, 2020, at which time our review of historic and expected credit losses resulted in a decrease of $3.2 million in our reserve for doubtful accounts. Based upon our assessment of the potential impact of current and forecasted conditions, we increased our reserve for doubtful accounts by $2.1 million during the six months ended June 30, 2020. Assumptions about the potential effects of the COVID-19 pandemic on our estimate of expected credit losses are inherently subjective and difficult to forecast. However, we believe that our current estimate of allowance for doubtful accounts to be reasonable based upon current information and forecasts.
| |
NOTE 2: | Holly Energy Partners |
NOTE 2:Holly Energy Partners
HEP is a publicly held master limited partnership that owns and operates logistic assets consisting of petroleum product and crude oil pipelines, terminals, tankage, loading rack facilities and refinery processing units that principally support our refining and marketing operations, as well as other third-party refineries, in the Mid-Continent, Southwest and Rocky Mountain geographic regions of the United States. Additionally, as of June 30, 2020,March 31, 2021, HEP owned a 75% interest in UNEV Pipeline, LLC (“UNEV”), the owner of a pipeline running from Woods Cross, Utah to Las Vegas, Nevada (the “UNEV Pipeline”) and associated product terminals, and a 50% ownership interest in each of Osage Pipe Line Company, LLC, the owner of a pipeline running from Cushing, Oklahoma to El Dorado, Kansas (the “Osage Pipeline”); Cheyenne Pipeline, LLC, the owner of a pipeline running from Fort Laramie, Wyoming to Cheyenne, Wyoming (the “Cheyenne Pipeline”) and Cushing Connect Pipeline & Terminal LLC (“Cushing Connect”), the owner of a crude oil storage terminal in Cushing, Oklahoma and a to-be-constructed pipeline under construction that will run from Cushing, Oklahoma to our Tulsa Refineries.
At June 30, 2020,March 31, 2021, we owned a 57% limited partner interest and a non-economic general partner interest in HEP. As the general partner of HEP, we have the sole ability to direct the activities that most significantly impact HEP’s financial performance, and therefore as HEP's primary beneficiary, we consolidate HEP.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
HEP has 2 primary customers (including us) and generates revenues by charging tariffs for transporting petroleum products and crude oil through its pipelines, by charging fees for terminalling refined products and other hydrocarbons, and by storing and providing other services at its storage tanks and terminals. Under our long-term transportation agreements with HEP (discussed further below), we accounted for 81%80% of HEP’s total revenues for the sixthree months ended June 30, 2020.March 31, 2021. We do not provide financial or equity support through any liquidity arrangements and / or debt guarantees to HEP.
HEP has outstanding debt under a senior secured revolving credit agreement and its senior notes. HEP’s creditors have no recourse to our assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries. See Note 9 for a description of HEP’s debt obligations.
HEP has risk associated with its operations. If a major customer of HEP were to terminate its contracts or fail to meet desired shipping or throughput levels for an extended period of time, revenue would be reduced and HEP could suffer substantial losses to the extent that a new customer is not found. In the event that HEP incurs a loss, our operating results will reflect HEP’s loss, net of intercompany eliminations, to the extent of our ownership interest in HEP at that point in time.
Cushing Connect Joint Venture
In October 2019, HEP Cushing LLC (“HEP Cushing”), a wholly-owned subsidiary of HEP, and Plains Marketing, L.P. (“PMLP”), a wholly-owned subsidiary of Plains All American Pipeline, L.P. (“Plains”), formed a 50/50 joint venture, Cushing Connect, for (i) the development, construction, ownership and constructionoperation of a new 160,000 barrel per day common carrier crude oil pipeline (the “Cushing Connect Pipeline”) that will connect the Cushing, Oklahoma crude oil hub to our Tulsa Refineries and (ii) the ownership and operation of 1.5 million barrels of crude oil storage in Cushing, Oklahoma (the “Cushing Connect Terminal”). The Cushing Connect Terminal was fully in service beginning in April 2020, and the Cushing Connect Pipeline is expected to be placed in service during the firstthird quarter of 2021. Long-term commercial agreements have been entered into to support the Cushing Connect assets.
Cushing Connect will contract with an affiliate of HEP to manage the construction and operation of the Cushing Connect Pipeline and with an affiliate of Plains to manage the operation of the Cushing Connect Terminal. The total investment in Cushing Connect will be shared proportionately among the partners, and HEP estimates its share of the cost of the Cushing Connect Terminal contributed by Plains and Cushing Connect Pipeline construction costs are approximately $65.0$65 million to $70 million. However, any Cushing Connect Pipeline construction costs exceeding 10% of the budget are borne solely by HEP.
Cushing Connect and its two subsidiaries, Cushing Connect Pipeline and Cushing Connect Terminal, are each VIE’s because they do not have sufficient equity at risk to finance their activities without additional financial support. HEP is the primary beneficiary of two of these entities as HEP is constructing and will operate the Cushing Connect Pipeline, and HEP has more ability to direct the activities that most significantly impact the financial performance of Cushing Connect and Cushing Connect Pipeline. Therefore, HEP consolidates these two entities. HEP is not the primary beneficiary of Cushing Connect Terminal, which HEP accounts for using the equity method of accounting.
Transportation Agreements
HEP serves our refineries under long-term pipeline, terminal and tankage throughput agreements and refinery processing tolling agreements expiring fromfrom 2021 through 2036. UnderUnder these agreements, we pay HEP fees to transport, store and process throughput volumes of refined products, crude oil and feedstocks on HEP’s pipeline, terminals, tankage, loading rack facilities and refinery processing units that result in minimum annual payments to HEP including UNEV (a consolidated subsidiary of HEP). Under these agreements, the agreed upon tariff rates are subject to annual tariff rate adjustments on July 1 at a rate based upon the percentage change in Producer Price Index or Federal Energy Regulatory Commission index. As of July 1, 2020,March 31, 2021, these agreements result inrequire minimum annualized payments to HEPHEP of $351.1$338.3 million.
Our transactions with HEP and fees paid under our transportation agreements with HEP and UNEV are eliminated and have no impact on our consolidated financial statements.
Lessor Accounting
Our consolidated statements of incomeoperations reflect lease revenue recognized by HEP for contracts with third parties in which HEP is the lessor.
One of HEP’s throughput agreements with Delek US Holdings, Inc. (“Delek”) was renewed during the three months ended June 30, 2020. Certain components of this agreement met the criteria of sales-type leases since the underlying assets are not expected to have an alternative use at the end of the lease term to anyone other than Delek. Under sales-type lease accounting, at the commencement date, the lessor recognizes a net investment in the lease, based on the estimated fair value of the underlying leased assets at contract inception, and derecognizes the underlying assets with the difference recorded as selling profit or loss arising from the lease. Therefore, HEP recognized a gain on sales-type leases totaling $33.8 million, during the three months ended June 30, 2020. This sales-type lease transaction, including the related gain, was a non-cash transaction.
HOLLYFRONTIER CORPORATION
(Unaudited) Continued
Lease income recognized was as follows:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| | 2021 | | 2020 | | | | |
| | (In thousands) | | | | |
| Operating lease revenues | | $ | 4,447 | | | $ | 8,290 | | | | | |
| | | | | | | | |
| | | | | | | | |
| Sales-type lease interest income | | $ | 639 | | | $ | 0 | | | | | |
| Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable | | $ | 337 | | | $ | 0 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | (In thousands) |
| Operating lease revenues | | $ | 5,442 |
| | $ | 8,267 |
| | $ | 13,732 |
| | $ | 16,466 |
|
| Gain on sales-type leases | | $ | 33,834 |
| | $ | — |
| | $ | 33,834 |
| | $ | — |
|
| Sales-type lease interest income | | $ | 642 |
| | $ | — |
| | $ | 642 |
| | $ | — |
|
| Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable | | $ | 286 |
| | $ | — |
| | $ | 286 |
| | $ | — |
|
HEP Common Unit Continuous Offering Program
In May 2016, HEP establishedhas a continuous offering program under which HEP may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million. During the sixthree months ended June 30, 2020,March 31, 2021, HEP did not issue any common units under this program. As of June 30, 2020,March 31, 2021, HEP has issued 2,413,153 common units undersince the inception of this program, providing $82.3 million in gross proceeds.
NOTE 3:Revenues
Substantially all revenue-generating activities relate to sales of refined product and excess crude oil inventories sold at market prices (variable consideration) under contracts with customers. Additionally, we have revenues attributable to HEP logistics services provided under petroleum product and crude oil pipeline transportation, processing, storage and terminalling agreements with third parties.
Disaggregated revenues were as follows:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| | 2021 | | 2020 | | | | |
| | (In thousands) | | | | |
| Revenues by type | | | | | | | | |
| Refined product revenues | | | | | | | | |
Transportation fuels (1) | | $ | 2,471,771 | | | $ | 2,478,347 | | | | | |
Specialty lubricant products (2) | | 480,681 | | | 470,953 | | | | | |
Asphalt, fuel oil and other products (3) | | 158,586 | | | 201,343 | | | | | |
| Total refined product revenues | | 3,111,038 | | | 3,150,643 | | | | | |
Excess crude oil revenues (4) | | 356,300 | | | 199,779 | | | | | |
| Transportation and logistic services | | 25,258 | | | 26,426 | | | | | |
Other revenues (5) | | 11,697 | | | 23,697 | | | | | |
| Total sales and other revenues | | $ | 3,504,293 | | | $ | 3,400,545 | | | | | |
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | (In thousands) |
| Revenues by type | | | | | | | | |
| Refined product revenues | | | | | | | | |
Transportation fuels (1) | | $ | 1,385,246 |
| | $ | 3,633,966 |
| | $ | 3,863,593 |
| | $ | 6,441,407 |
|
Specialty lubricant products (2) | | 340,284 |
| | 507,183 |
| | 811,237 |
| | 951,525 |
|
Asphalt, fuel oil and other products (3) | | 145,298 |
| | 248,861 |
| | 346,641 |
| | 467,718 |
|
| Total refined product revenues | | 1,870,828 |
| | 4,390,010 |
| | 5,021,471 |
| | 7,860,650 |
|
Excess crude oil revenues (4) | | 163,394 |
| | 350,683 |
| | 363,173 |
| | 733,313 |
|
| Transportation and logistic services | | 19,244 |
| | 28,382 |
| | 45,670 |
| | 59,520 |
|
Other revenues (5) | | 9,464 |
| | 13,540 |
| | 33,161 |
| | 26,379 |
|
| Total sales and other revenues | | $ | 2,062,930 |
| | $ | 4,782,615 |
| | $ | 5,463,475 |
| | $ | 8,679,862 |
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| | 2021 | | 2020 | | | | |
| | (In thousands) |
| Refined product revenues by market | | | | | | | | |
| United States | | | | | | | | |
| Mid-Continent | | $ | 1,668,213 | | | $ | 1,532,924 | | | | | |
| Southwest | | 768,063 | | | 734,175 | | | | | |
| Rocky Mountains | | 237,803 | | | 468,779 | | | | | |
| Northeast | | 172,298 | | | 159,824 | | | | | |
| Canada | | 181,946 | | | 182,653 | | | | | |
| Europe, Asia and Latin America | | 82,715 | | | 72,288 | | | | | |
| | | | | | | | |
| Total refined product revenues | | $ | 3,111,038 | | | $ | 3,150,643 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | (In thousands) |
| Refined product revenues by market | | | | | | | | |
| United States | | | | | | | | |
| Mid-Continent | | $ | 867,660 |
| | $ | 2,361,969 |
| | $ | 2,400,584 |
| | $ | 4,092,474 |
|
| Southwest | | 436,073 |
| | 1,008,806 |
| | 1,170,248 |
| | 1,858,955 |
|
| Rocky Mountains | | 274,973 |
| | 613,063 |
| | 743,752 |
| | 1,128,398 |
|
| Northeast | | 110,909 |
| | 148,116 |
| | 270,733 |
| | 276,007 |
|
| Canada | | 120,870 |
| | 174,772 |
| | 303,523 |
| | 352,127 |
|
| Europe, Asia and Latin America | | 60,343 |
| | 83,284 |
| | 132,631 |
| | 152,689 |
|
| Total refined product revenues | | $ | 1,870,828 |
| | $ | 4,390,010 |
| | $ | 5,021,471 |
| | $ | 7,860,650 |
|
| |
(1) | Transportation fuels consist of gasoline, diesel and jet fuel. |
| |
(2) | Specialty lubricant products consist of base oil, waxes, finished lubricants and other specialty fluids. |
| |
(3) | Asphalt, fuel oil and other products revenue include revenues attributable to our Refining and Lubricants and Specialty Products segments of $131.9 million and $13.4 million, respectively, for the three months ended June 30, 2020, $280.7 million and $65.9 million, respectively for the six months ended June 30, 2020, $210.7 million and $38.2 million, respectively, for the three months ended June 30, 2019, and $380.6 million and $87.2 million, respectively, for the six months ended June 30, 2019. |
| |
(4) | Excess crude oil revenues represent sales of purchased crude oil inventory that at times exceeds the supply needs of our refineries. |
| |
(5) | Other revenues are principally attributable to our Refining segment. |
(3)Asphalt, fuel oil and other products revenue include revenues attributable to our Refining and Lubricants and Specialty Products segments of $117.3 million and $41.3 million, respectively, for the three months ended March 31, 2021, and $148.8 million and $52.5 million, respectively, for the three months ended March 31, 2020.
(4)Excess crude oil revenues represent sales of purchased crude oil inventory that at times exceeds the supply needs of our refineries.
(5)Other revenues are principally attributable to our Refining segment.
Our consolidated balance sheet reflects contract liabilities related to unearned revenues attributable to future service obligations under HEP’s third-party transportation agreements and production agreements from the acquisition ofour Sonneborn on February 1, 2019.operations. The following table presents changes to our contract liabilities during the sixthree months ended June 30, 2020March 31, 2021 and 2019.2020.
|
| | | | | | | | |
| | | Six Months Ended June 30, |
| | | 2020 | | 2019 |
| | | (In thousands) |
| Balance at January 1 | | $ | 4,652 |
| | $ | 132 |
|
| Sonneborn acquisition | | — |
| | 6,463 |
|
| Increase | | 16,115 |
| | 10,813 |
|
| Recognized as revenue | | (14,980 | ) | | (12,906 | ) |
| Balance at June 30 | | $ | 5,787 |
| | $ | 4,502 |
|
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2021 | | 2020 |
| | | | | | (In thousands) |
| Balance at January 1 | | | | | | $ | 6,738 | | | $ | 4,652 | |
| Increase | | | | | | 7,730 | | | 10,419 | |
| Recognized as revenue | | | | | | (8,583) | | | (9,712) | |
| Balance at March 31 | | | | | | $ | 5,885 | | | $ | 5,359 | |
As of June 30, 2020,March 31, 2021, we have long-term contracts with customers that specify minimum volumes of gasoline, diesel, lubricants and specialty products to be sold ratably at market prices through 2024.through 2025. Such volumes are typically nominated in the month preceding delivery and delivered ratably throughout the following month. Future prices are subject to market fluctuations and therefore, we have elected the exemption to exclude variable consideration under these contracts under Accounting Standards Codification 606-10-50-14A. Aggregate minimum volumes expected to be sold (future performance obligations) under our long-term product sales contracts with customers are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Remainder of 2021 | | 2022 | | 2023 | | Thereafter | | Total |
| | (In thousands) |
| Refined product sales volumes (barrels) | | 14,450 | | | 14,176 | | | 12,795 | | | 11,698 | | | 53,119 | |
|
| | | | | | | | | | | | | | | |
| | | Remainder of 2020 | | 2021 | | 2022 | | Thereafter | | Total |
| | | (In thousands) |
| Refined product sales volumes (barrels) | | 10,398 |
| | 15,958 |
| | 12,799 |
| | 24,465 |
| | 63,620 |
|
17
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Additionally, HEP has long-term contracts with third-party customers that specify minimum volumes of product to be transported through its pipelines and terminals that result in fixed-minimum annual revenues throughthrough 2025. Annual minimum revenues attributable to HEP’s third-party contracts as of June 30, 2020March 31, 2021 are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Remainder of 2021 | | 2022 | | 2023 | | Thereafter | | Total |
| | (In thousands) |
| HEP contractual minimum revenues | | $ | 16,360 | | | $ | 11,053 | | | $ | 9,000 | | | $ | 11,512 | | | $ | 47,925 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Remainder of 2020 | | 2021 | | 2022 | | Thereafter | | Total |
| | | (In thousands) |
| HEP contractual minimum revenues | | $ | 13,164 |
| | $ | 21,942 |
| | $ | 10,954 |
| | $ | 20,293 |
| | $ | 66,353 |
|
| |
NOTE 4: | Fair Value Measurements |
NOTE 4:Fair Value Measurements
Our financial instruments measured at fair value on a recurring basis consist of derivative instruments and RINs credit obligations.
Fair value measurements are derived using inputs (assumptions that market participants would use in pricing an asset or liability, including assumptions about risk). GAAP categorizes inputs used in fair value measurements into three broad levels as follows:
•(Level 1) Quoted prices in active markets for identical assets or liabilities.
•(Level 2) Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, similar assets and liabilities in markets that are not active or can be corroborated by observable market data.
•(Level 3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes valuation techniques that involve significant unobservable inputs.
The carrying amounts of derivative instruments and RINs credit obligations at June 30, 2020March 31, 2021 and December 31, 20192020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value by Input Level |
| | Carrying Amount | | Level 1 | | Level 2 | | Level 3 |
| | (In thousands) |
| March 31, 2021 | | | | | | | | |
| Assets: | | | | | | | | |
| NYMEX futures contracts | | $ | 1,927 | | | $ | 1,927 | | | $ | 0 | | | $ | 0 | |
| Commodity price swaps | | 36 | | | 0 | | | 36 | | | 0 | |
| Commodity forward contracts | | 482 | | | 0 | | | 482 | | | 0 | |
| | | | | | | | |
| Total assets | | $ | 2,445 | | | $ | 1,927 | | | $ | 518 | | | $ | 0 | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Commodity forward contracts | | $ | 7,198 | | | $ | 0 | | | $ | 7,198 | | | $ | 0 | |
| Foreign currency forward contracts | | 26,136 | | | 0 | | | 26,136 | | | 0 | |
RINs credit obligations (1) | | 43,299 | | | 0 | | | 43,299 | | | 0 | |
| Total liabilities | | $ | 76,633 | | | $ | 0 | | | $ | 76,633 | | | $ | 0 | |
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
| | | | | | | Fair Value by Input Level | |
| | | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | |
| | | (In thousands) | | Fair Value by Input Level |
| June 30, 2020 | | | | | | | | | |
| | | Carrying Amount | | Level 1 | | Level 2 | | Level 3 |
| | | (In thousands) |
| December 31, 2020 | | December 31, 2020 | |
| Assets: | | | | | | | | | Assets: | |
| Commodity price swaps | | $ | 3,561 |
| | $ | — |
| | $ | 3,561 |
| | $ | — |
| |
| | Commodity forward contracts | | 4,219 |
| | — |
| | 4,219 |
| | — |
| Commodity forward contracts | | $ | 275 | | | $ | 0 | | | $ | 275 | | | $ | 0 | |
| Foreign currency forward contracts | | 7,361 |
| | — |
| | 7,361 |
| | — |
| |
| Total assets | | $ | 15,141 |
| | $ | — |
| | $ | 15,141 |
| | $ | — |
| Total assets | | $ | 275 | | | $ | 0 | | | $ | 275 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | Liabilities: | |
| NYMEX futures contracts | | $ | 6,987 |
| | $ | 6,987 |
| | $ | — |
| | $ | — |
| NYMEX futures contracts | | $ | 418 | | | $ | 418 | | | $ | 0 | | | $ | 0 | |
| Commodity price swaps | | 395 |
| | — |
| | 395 |
| | — |
| Commodity price swaps | | 359 | | | 0 | | | 359 | | | 0 | |
| Commodity forward contracts | | 6,156 |
| | — |
| | 6,156 |
| | — |
| Commodity forward contracts | | 196 | | | 0 | | | 196 | | | 0 | |
RINs credit obligations (1) | | 5,349 |
| | — |
| | 5,349 |
| | — |
| |
| Foreign currency forward contracts | | Foreign currency forward contracts | | 23,005 | | | 0 | | | 23,005 | | | 0 | |
| Total liabilities | | $ | 18,887 |
| | $ | 6,987 |
| | $ | 11,900 |
| | $ | — |
| Total liabilities | | $ | 23,978 | | | $ | 418 | | | $ | 23,560 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | |
| | | | | Fair Value by Input Level |
| | | Carrying Amount | | Level 1 | | Level 2 | | Level 3 |
| | (In thousands) |
| December 31, 2019 | | | | | | | | |
| Assets: | | | | | | | | |
| Commodity price swaps | | $ | 13,455 |
| | $ | — |
| | $ | 13,455 |
| | $ | — |
|
| Commodity forward contracts | | 4,133 |
| | — |
| | 4,133 |
| | $ | — |
|
| Total assets | | $ | 17,588 |
| | $ | — |
| | $ | 17,588 |
| | $ | — |
|
| | | | | | | | | |
| Liabilities: | | | | | | | | |
| NYMEX futures contracts | | $ | 2,578 |
| | $ | 2,578 |
| | $ | — |
| | $ | — |
|
| Commodity price swaps | | 1,230 |
| | — |
| | 1,230 |
| | — |
|
| Commodity forward contracts | | 3,685 |
| | — |
| | 3,685 |
| | — |
|
| Foreign currency forward contracts | | 6,722 |
| | — |
| | 6,722 |
| | — |
|
| Total liabilities | | $ | 14,215 |
| | $ | 2,578 |
| | $ | 11,637 |
| | $ | — |
|
(1) Represent obligations for RINs credits for which we did not have sufficient quantities at June 30, 2020March 31, 2021 to satisfy our EPAEnvironmental Protection Agency (“EPA”) regulatory blending requirements.
Level 1 Instruments
Our NYMEX futures contracts are exchange traded and are measured and recorded at fair value using quoted market prices, a Level 1 input.
Level 2 Instruments
Derivative instruments consisting of foreign currency forward contracts, commodity price swaps and forward sales and purchase contracts are measured and recorded at fair value using Level 2 inputs. The fair value of the commodity price swap contracts is based on the net present value of expected future cash flows related to both variable and fixed rate legs of the respective swap agreements. The measurements are computed using market-based observable input and quoted forward commodity prices with respect to our commodity price swaps. The fair value of the forward sales and purchase contracts are computed using quoted forward commodity prices. RINs credit obligations are valued based on current market RINs prices. The fair value of foreign currency forward contracts are based on values provided by a third party, which were derived using market quotes for similar type instruments, a Level 2 input.
Nonrecurring Fair Value Measurements
During the three months ended June 30, 2020, we recognized long-lived asset impairment charges based on fair value measurements utilized during our goodwill and long-lived asset impairment testing (see Note 1). The fair value measurements were based on a combination of valuation methods including discounted cash flows, the guideline public company and guideline transaction methods and obsolescence adjusted replacement costs, all of which are Level 3 inputs.
During the three months ended June 30, 2020, HEP recognized a gain on sales-type leases (see Note 2). The estimated fair value of the underlying leased assets at contract inception and the present value of the estimated unguaranteed residual asset at the end of the lease term were used in determining the net investment in leases and related recognized gain on sales-type leases. The asset valuation estimates included Level 3 inputs based on a replacement cost valuation method.
| |
NOTE 5: | Earnings Per Share |
NOTE 5:Earnings Per Share
Basic earnings per share is calculated as net income (loss) attributable to HollyFrontier stockholders, adjusted for participating securities’ share in earnings divided by the average number of shares of common stock outstanding. Diluted earnings per share assumes, when dilutive,includes the issuance of the net incremental shares resulting from restricted stock units and performance share units.certain share-based awards. The following is a reconciliation of the denominators of the basic and diluted per share computations for net income (loss) attributable to HollyFrontier stockholders:
| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, | | |
| | | 2021 | | 2020 | | | | |
| | | (In thousands, except per share data) |
| Net income (loss) attributable to HollyFrontier stockholders | | $ | 148,217 | | | $ | (304,623) | | | | | |
Participating securities’ share in earnings (1) | | 2,042 | | | 0 | | | | | |
| Net income (loss) attributable to common shares | | $ | 146,175 | | | $ | (304,623) | | | | | |
| Average number of shares of common stock outstanding | | 162,479 | | | 161,873 | | | | | |
| | | | | | | | |
| Average number of shares of common stock outstanding assuming dilution | | 162,479 | | | 161,873 | | | | | |
| Basic earnings (loss) per share | | $ | 0.90 | | | $ | (1.88) | | | | | |
| Diluted earnings (loss) per share | | $ | 0.90 | | | $ | (1.88) | | | | | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | (In thousands, except per share data) |
| Net income (loss) attributable to HollyFrontier stockholders | | $ | (176,677 | ) | | $ | 196,915 |
| | $ | (481,300 | ) | | $ | 449,970 |
|
| Participating securities’ (restricted stock) share in earnings | | — |
| | 283 |
| | — |
| | 647 |
|
| Net income (loss) attributable to common shares | | $ | (176,677 | ) | | $ | 196,632 |
| | $ | (481,300 | ) | | $ | 449,323 |
|
| Average number of shares of common stock outstanding | | 161,889 |
| | 169,356 |
| | 161,882 |
| | 170,100 |
|
Effect of dilutive variable restricted stock units and performance share units (1) | | — |
| | 1,191 |
| | — |
| | 1,164 |
|
| Average number of shares of common stock outstanding assuming dilution | | 161,889 |
| | 170,547 |
| | 161,882 |
| | 171,264 |
|
| Basic earnings (loss) per share | | $ | (1.09 | ) | | $ | 1.16 |
| | $ | (2.97 | ) | | $ | 2.64 |
|
| Diluted earnings (loss) per share | | $ | (1.09 | ) | | $ | 1.15 |
| | $ | (2.97 | ) | | $ | 2.62 |
|
(1) Excludes anti-dilutive restricted and performance share units of: | | 590 |
| | 160 |
| | 585 |
| | 131 |
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
| |
NOTE 6: | Stock-Based Compensation |
NOTE 6:Stock-Based Compensation
We have a principal share-based compensation plan (the “2020 Long-Term Incentive Plan”), which allows us to grant new equity awards until February 12, 2030. We alsoto certain officers, non-employee directors and other key employees of HollyFrontier. The restricted stock unit awards generally vest over a period of one to three years. Upon vesting, restrictions on the restricted stock units lapse at which time they convert to common shares or cash. The performance share units generally vest over a period of three years and are payable in stock or cash upon meeting certain financial and performance criteria. The number of shares ultimately issued or cash paid for the performance share units can range from 0 to 200% of target award amounts. The holders of unvested restricted stock units and performance share units have a long-term incentive compensation plan which expires pursuantthe right to its terms on December 31, 2020 and will continue to govern outstanding equity awards granted thereunder; however, as of February 12, 2020, no new awards are being granted under this plan. receive dividends.
The compensation cost charged against income for these plans was $8.1$10.9 million and $11.9$4.8 million for the three months ended June 30, 2020March 31, 2021 and 2019, respectively, and $12.9 million and $20.8 million for the six months ended June 30, 2020, and 2019, respectively. Our accounting policy for the recognition of compensation expense for awards with pro-rata vesting is to expense the costs ratably over the vesting periods.
Additionally, HEP maintains a share-based compensation plan for Holly Logistic Services, L.L.C.’s non-employee directors and certain executives and employees. Compensation cost attributable to HEP’s share-based compensation plan was $0.5$0.7 million and $0.6$0.5 million for the three months ended June 30, 2020March 31, 2021 and 2019, respectively, and $1.0 million and $1.2 million for the six months ended June 30, 2020, and 2019, respectively.
Restricted Stock Units
Under our long-term incentive plan, we grant certain officers and other key employees restricted stock unit awards, which are payable in stock or cash and generally vest over a period of three years. Certain restricted stock unit award recipients have the right to receive dividends, however, restricted stock units do not have any other rights of absolute ownership. Upon vesting, restrictions on the restricted stock units lapse at which time they convert to common shares or cash. In addition, we grant non-employee directors restricted stock unit awards, which typically vest over a period of one year and are payable in stock. The fair value of each restricted stock unit award is measured based on the grant date market price of our common shares and is amortized over the respective vesting period. We account for forfeitures on an estimated basis.
A summary of restricted stock unit activity during the six months ended June 30, 2020 is presented below:
|
| | | | | | | | | | | |
| Restricted Stock Units | | Grants | | Weighted Average Grant Date Fair Value | | Aggregate Intrinsic Value ($000) |
| | | | | | | |
| Outstanding at January 1, 2020 | | 1,101,781 |
| | $ | 53.30 |
| | |
| Granted | | 62,776 |
| | 35.58 |
| | |
| Vested | | (79,956 | ) | | 44.30 |
| | |
| Forfeited | | (59,494 | ) | | 53.41 |
| | |
| Converted from performance share units | | 19,450 |
| | 38.13 |
| | |
| Outstanding at June 30, 2020 | | 1,044,557 |
| | 52.48 |
| | $ | 30,501 |
|
For the six months ended June 30, 2020, restricted stock units vested having a grant date fair value of $3.5 million. As of June 30, 2020, there was $23.2 million of total unrecognized compensation cost related to non-vested restricted stock unit grants. That cost is expected to be recognized over a weighted-average period of 1.2 years.
Performance Share Units
Under our long-term incentive plan, we grant certain officers and other key employees performance share units, which are payable in stock or cash upon meeting certain criteria over the service period, and generally vest over a period of three years. Under the terms of our performance share unit grants, awards are subject to “financial performance” and “market performance” criteria. Financial performance is based on our financial performance compared to a peer group of independent refining companies, while market performance is based on the relative standing of total shareholder return achieved by HollyFrontier compared to peer group companies. The number of shares ultimately issued or cash paid under these awards can range from 0 to 200% of target award amounts. Holders of performance share units have the right to receive dividend equivalents and other distributions with respect to such performance share units based on the target level of payout.
A summary of performance share unit activity and changes during the sixthree months ended June 30, 2020March 31, 2021 is presented below:
| | | | | | | | | | | | | | | | | |
| | Restricted Stock Units | | Performance Share Units | | | |
| | | | | | | |
| Outstanding at January 1, 2021 | | 2,057,045 | | | 635,204 | | | | |
Granted (1) | | 8,453 | | | 0 | | | | |
| Vested | | (34,624) | | | (3,565) | | | | |
| Forfeited | | (86,459) | | | (18,268) | | | | |
| | | | | | | |
| Outstanding at March 31, 2021 | | 1,944,415 | | | 613,371 | | | | |
| | | | | | | |
| (1) Weighted average grant date fair value per unit | | $ | 34.91 | | | $ | 0 | | | | |
|
| | | |
Performance Share Units | | Grants |
| | |
Outstanding at January 1, 2020 | | 375,588 |
|
Vested | | (12,129 | ) |
Forfeited | | (18,766 | ) |
Converted to restricted stock units | | (19,450 | ) |
Outstanding at June 30, 2020 | | 325,243 |
|
For the six months June 30, 2020, we issued 7,889 shares of common stock, representing a 100% payout on vested performance share units having a grant date fair value of $0.5 million. As of June 30, 2020, there was $8.3 million of total unrecognized compensation cost related to non-vested performance share units having a grant date fair value of $58.07 per unit. That cost is expected to be recognized over a weighted-average period of 1.6 years.
HOLLYFRONTIER CORPORATION
NOTE 7:Inventories
Inventories consist of the following components:
| | | | | June 30,
2020 | | December 31, 2019 | | March 31,
2021 | | December 31, 2020 |
| | | (In thousands) | | (In thousands) |
| Crude oil | | $ | 537,863 |
| | $ | 489,169 |
| Crude oil | | $ | 541,022 | | | $ | 451,967 | |
Other raw materials and unfinished products(1) | | 301,956 |
| | 394,045 |
| Other raw materials and unfinished products(1) | | 401,247 | | | 260,495 | |
Finished products(2) | | 668,955 |
| | 639,938 |
| Finished products(2) | | 613,158 | | | 595,696 | |
| Lower of cost or market reserve | | (530,923 | ) | | (240,363 | ) | Lower of cost or market reserve | | (118,825) | | | (318,862) | |
Process chemicals(3) | | 33,677 |
| | 36,786 |
| Process chemicals(3) | | 36,684 | | | 35,006 | |
Repair and maintenance supplies and other (4) | | 162,173 |
| | 154,627 |
| Repair and maintenance supplies and other (4) | | 143,562 | | | 149,174 | |
| Total inventory | | $ | 1,173,701 |
| | $ | 1,474,202 |
| Total inventory | | $ | 1,616,848 | | | $ | 1,173,476 | |
| |
(1) | Other raw materials and unfinished products include feedstocks and blendstocks, other than crude. |
| |
(2) | Finished products include gasolines, jet fuels, diesels, lubricants, asphalts, LPG’s and residual fuels. |
| |
(3) | Process chemicals include additives and other chemicals. |
(1)Other raw materials and unfinished products include feedstocks and blendstocks, other than crude.
(2)Finished products include gasolines, jet fuels, diesels, lubricants, asphalts, LPG’s and residual fuels.
(3)Process chemicals include additives and other chemicals.
(4)Includes RINs.
Our inventories that are valued at the lower of LIFO cost or market reflect a valuation reserve of $530.9$118.8 million and $240.4$318.9 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. The December 31, 20192020 market reserve of $240.4$318.9 million was reversed due to the sale of inventory quantities that gave rise to the 20192020 reserve. A new market reserve of $530.9$118.8 million was established as of June 30, 2020March 31, 2021 based on market conditions and prices at that time. The effect of the change in lower of cost or market reserve was a decrease toto cost of products sold totaling $269.9$200.0 million for the three months ended June 30, 2020March 31, 2021 and an increase to cost of products sold totaling $47.8$560.5 million for the three months ended June 30, 2019, respectively, and an increase to cost of products sold totaling $290.6 million for the six months ended June 30,March 31, 2020 and a decrease to cost of products sold totaling $184.5 million for the six months ended June 30, 2019, respectively..
At June 30, 2020,March 31, 2021, the LIFO value of inventory, net of the lower of cost or market reserve, was equal to current costs.
In connection with our announcement of the conversion of our Cheyenne Refinery to renewable diesel production, we recorded a reserve of $6.2 million against our repair and maintenance supplies inventory. This charge was recorded in operating expenses in the second quarter of 2020.
Environmental costs are charged to operating expenses if they relate to an existing condition caused by past operations and do not contribute to current or future revenue generation. We have ongoing investigations of environmental matters at various locations and routinely assess our recorded environmental obligations, if any, with respect to such matters. Liabilities are recorded when site restoration and environmental remediation, cleanup and other obligations are either known or considered probable and can be reasonably estimated. Such estimates are undiscounted and require judgment with respect to costs, time frame and extent of required remedial and cleanup activities and are subject to periodic adjustments based on currently available information. Recoveries of environmental costs through insurance, indemnification arrangements or other sources are included in other assets to the extent such recoveries are considered probable.
We incurred expense of $0.4$0.1 million and $2.3$1.6 million for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $2.0 million and $3.7 million for the six months ended June 30, 2020 and 2019, respectively, for environmental remediation obligations. The accrued environmental liability reflected in our consolidated balance sheets was $115.6$114.0 million and $117.7$115.0 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, of which $94.1$94.9 million and $95.6$94.0 million,, respectively, were classified as other long-term liabilities. These accruals include remediation and monitoring costs expected to be incurred over an extended period of time (up to 30 years for certain projects). Estimated liabilities could increase in the future when the results of ongoing investigations become known, are considered probable and can be reasonably estimated.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 9:Debt
HollyFrontier Credit Agreement
We haveAt March 31, 2021, we had a $1.35 billion senior unsecured revolving credit facility maturing in February 2022 (the “HollyFrontier Credit Agreement”). On April 30, 2021, we amended the HollyFrontier Credit Agreement to extend the maturity date to April 30, 2026 (the “Amended HollyFrontier Credit Agreement”). The Amended HollyFrontier Credit Agreement may be used for revolving credit loans and letters of credit from time to time and is available to fund general corporate purposes. At June 30, 2020,March 31, 2021, we were in compliance with all covenants, had no0 outstanding borrowings and had outstanding letters of credit totaling $4.9$5.7 million under the HollyFrontier Credit Agreement.
Indebtedness under the Amended HollyFrontier Credit Agreement will bear interest, at our option, at either (a) the alternate base rate (as defined in the Amended HollyFrontier Credit Agreement) plus an applicable margin of (ranging from 0.25% to 1.125%), (b) the LIBO Rate (as defined in the Amended HollyFrontier Credit Agreement) plus an applicable margin (ranging from 1.25% to 2.125%) or (c) the CDOR Rate (as defined in the Amended HollyFrontier Credit Agreement) plus an applicable margin (ranging from 1.25% to 2.125%) for Canadian dollar denominated borrowings.
HEP Credit Agreement
At March 31, 2021, HEP hashad a $1.4 billion senior secured revolving credit facility maturing in July 2022 (the “HEP Credit Agreement”). On April 30, 2021, the HEP Credit Agreement was amended, decreasing the commitments under the facility to $1.2 billion and extending the maturity to July 27, 2025 (the “Amended HEP Credit Agreement”). The Amended HEP Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments, working capital and for general partnership purposes. It is also available to fund letters of credit up to a $50 million sub-limit and hascontinues to provide for an accordion feature that allows HEP to increase the commitments under the Amended HEP Credit Agreement up to a $300 million accordion.maximum amount of $1.7 billion. During the sixthree months ended June 30, 2020,March 31, 2021, HEP received advances totaling $168.0$73.0 million and repaid $138.5$90.5 million under the HEP Credit Agreement. At June 30, 2020,March 31, 2021, HEP was in compliance with all of its covenants, had outstanding borrowings of $995.0$896.0 million and no0 outstanding letters of credit under the HEP Credit Agreement.
Prior to the Investment Grade Date (as defined in the Amended HEP Credit Agreement), indebtedness under the Amended HEP Credit Agreement bears interest, at HEP’s option, at either (a) the alternate base rate (as defined in the Amended HEP Credit Agreement) plus an applicable margin or (b) the Eurodollar Rate (as defined in the Amended HEP Credit Agreement) plus an applicable margin. In each case, the applicable margin is based upon HEP’s Total Leverage Ratio (as defined in the Amended HEP Credit Agreement). The weighted average interest rate in effect under the HEP Credit Agreement on HEP’s borrowings was 2.08% for March 31, 2021.
HEP’s obligations under the Amended HEP Credit Agreement are collateralized by substantially all of HEP’s assets and are guaranteed by HEP’s material wholly-owned subsidiaries. Any recourse to the general partner would be limited to the extent of HEP Logistics Holdings, L.P.’s assets, which other than its investment in HEP are not significant. HEP’s creditors have no recourse to our other assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries.
HollyFrontier Senior Notes
OurAt March 31, 2021, our senior notes consisted of the following:
•$350.0 million in aggregate principal amount of 2.625% senior notes maturing October 2023 (the “2.625% Senior Notes”);
•$1.0 billion in aggregate principal amount of 5.875% senior notes ($1 billionmaturing April 2026 (the “5.875% Senior Notes”); and
•$400.0 million in aggregate principal amount of 4.500% senior notes maturing April 2026)October 2030 (the “4.500% Senior Notes”).
These senior notes (collectively, the “HollyFrontier Senior Notes”) are unsecured and unsubordinated obligations of ours and rank equally with all our other existing and future unsecured and unsubordinated indebtedness.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
HollyFrontier Financing Arrangements
In December 2018, certainCertain of our wholly-owned subsidiaries entered into financing arrangements whereby such subsidiaries sold a portion of their precious metals catalyst to a financial institution and then leased back the precious metals catalyst in exchange for total cash received of $32.5 million.cash. The volume of the precious metals catalyst and the lease rate are fixed over the term of each lease, and the lease payments are recorded as interest expense. The current leases mature on February 1, 2021.2022. Upon maturity, we must either satisfy the obligation at fair market value or refinance to extend the maturity. These financing arrangements are recorded at a Level 2 fair value totaling $35.0$48.8 million and $40.0$43.9 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, and are included in “Accrued liabilities” in our consolidated balance sheets. See Note 4 for additional information on Level 2 inputs.
HEP Senior Notes
OnIn February 4, 2020, HEP closed a private placement of $500$500.0 million in aggregate principal amount of 5.0% HEP senior unsecured notes maturing February 2028 (the “HEP Senior Notes”). OnSubsequently, in February 5, 2020, HEP redeemed its existing $500$500.0 million aggregate principal amount of 6.0% senior notes maturing August 2024 at a redemption cost of $522.5 million. HEP recognized a $25.9 million early extinguishment loss consisting of a $22.5 million debt redemption premium and unamortized discount and financing costs of $3.4 million. HEP fundedmillion during the $522.5 million redemption with proceeds from the issuance of its 5.0% senior notes and borrowings under the HEP Credit Agreement.three months ended March 31, 2020.
The HEP Senior Notes are unsecured and impose certain restrictive covenants, including limitations on HEP’s ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. HEP was in compliance with the restrictive covenants for the HEP Senior Notes as of June 30, 2020.March 31, 2021. At any time when the HEP Senior Notes are rated investment grade by either Moody’s or Standard & Poor’s and no default or event of default exists, HEP will not be subject to many of the foregoing covenants. Additionally, HEP has certain redemption rights at varying premiums over face value under the HEP Senior Notes.
Indebtedness under the HEP Senior Notes is guaranteed by HEP’s wholly-owned subsidiaries. HEP’s creditors have no recourse to our assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries.
The carrying amounts of long-term debt are as follows:
| | | | | | | | | | | | | | |
| | March 31,
2021 | | December 31,
2020 |
| | | (In thousands) |
| HollyFrontier | | | | |
| 2.625% Senior Notes | | $ | 350,000 | | | $ | 350,000 | |
| 5.875% Senior Notes | | 1,000,000 | | | 1,000,000 | |
| 4.500% Senior Notes | | 400,000 | | | 400,000 | |
| | 1,750,000 | | | 1,750,000 | |
| | | | |
| Unamortized discount and debt issuance costs | | (12,244) | | | (12,885) | |
| | | | |
| Total HollyFrontier long-term debt | | 1,737,756 | | | 1,737,115 | |
| | | | |
| HEP Credit Agreement | | 896,000 | | | 913,500 | |
| | | | |
| HEP 5.000% Senior Notes | | | | |
| Principal | | 500,000 | | | 500,000 | |
| Unamortized discount and debt issuance costs | | (7,665) | | | (7,897) | |
| | | | |
| Total HEP long-term debt | | 1,388,335 | | | 1,405,603 | |
| | | | |
| Total long-term debt | | $ | 3,126,091 | | | $ | 3,142,718 | |
|
| | | | | | | | |
| | | June 30,
2020 | | December 31,
2019 |
| | | (In thousands) |
| HollyFrontier 5.875% Senior Notes | | | | |
| Principal | | $ | 1,000,000 |
| | $ | 1,000,000 |
|
| Unamortized discount and debt issuance costs | | (5,902 | ) | | (6,391 | ) |
| | | 994,098 |
| | 993,609 |
|
| | | | | |
| HEP Credit Agreement | | 995,000 |
| | 965,500 |
|
| | | | | |
| HEP 5.0% Senior Notes | | | | |
| Principal | | 500,000 |
| | — |
|
| Unamortized discount and debt issuance costs | | (8,352 | ) | | — |
|
| | | 491,648 |
| | — |
|
| | | | | |
| HEP 6.0% Senior Notes | | | | |
| Principal | | — |
| | 500,000 |
|
| Unamortized discount and debt issuance costs | | — |
| | (3,469 | ) |
| | | — |
| | 496,531 |
|
| | | | | |
| Total HEP long-term debt | | 1,486,648 |
| | 1,462,031 |
|
| | | | | |
| Total long-term debt | | $ | 2,480,746 |
| | $ | 2,455,640 |
|
HOLLYFRONTIER CORPORATION
(Unaudited) Continued
The fair values of the senior notes are as follows:
| | | | | | | | | | | | | | |
| | March 31,
2021 | | December 31,
2020 |
| | (In thousands) |
| | | | |
| HollyFrontier Senior Notes | | $ | 1,908,586 | | | $ | 1,903,867 | |
| | | | |
| HEP Senior Notes | | $ | 504,960 | | | $ | 506,540 | |
|
| | | | | | | | |
| | | June 30,
2020 | | December 31,
2019 |
| | | (In thousands) |
| | | | | |
| HollyFrontier senior notes | | $ | 1,105,120 |
| | $ | 1,127,610 |
|
| | | | | |
| HEP senior notes | | $ | 477,835 |
| | $ | 522,045 |
|
These fair values are based on a Level 2 input. See Note 4 for additional information on Level 2 inputs.
Our primary market risk is commodity price risk. We are exposed to market risks related to the volatility in crude oil and refined products, as well as volatility in the price of natural gas used in our refining operations. We periodically enter into derivative contracts in the form of commodity price swaps, forward purchase and sales and futures contracts to mitigate price exposure with respect to our inventory positions, natural gas purchases, sales prices of refined products and crude oil costs.
We are exposed to market risk related to the volatility in foreign currency exchange rates. We periodically enter into derivative contracts in the form of foreign exchange forward and foreign exchange swap contracts to mitigate the exposure associated with fluctuations on intercompany notes with our foreign subsidiaries that are not denominated in the U.S. dollar.
We have swap contracts serving as cash flow hedges against price risk on forecasted purchases of natural gas andgas. We also periodically have swap contracts to lock in basis spread differentials on forecasted purchases of crude oil. We also periodically haveoil and forward sales contracts that lock in the prices of future sales of crude oil and refined product. These contracts have been designated as accounting hedges and are measured at fair value with offsetting adjustments (gains/losses) recorded directly to other comprehensive income. These fair value adjustments are later reclassified to earnings as the hedging instruments mature.
The following table presents the pre-tax effect on other comprehensive income (“OCI”) and earnings due to fair value adjustments and maturities of hedging instruments under hedge accounting:
The following table presents the pre-tax effect on income due to maturities and fair value adjustments of our economic hedges:
The following table presents the fair value and balance sheet locations of our outstanding derivative instruments. These amounts are presented on a gross basis with offsetting balances that reconcile to a net asset or liability position in our consolidated balance sheets. We present on a net basis to reflect the net settlement of these positions in accordance with provisions of our master netting arrangements.
In November 2019, our Board of Directors approved a $1.0 billion share repurchase program, which replaced all existing share repurchase programs, authorizing us to repurchase common stock in the open market or through privately negotiated transactions. The timing and amount of stock repurchases will depend on market conditions and corporate, regulatory and other relevant considerations. This program may be discontinued at any time by the Board of Directors. As of June 30, 2020,March 31, 2021, we had not repurchased common stock under this stock repurchase program. In addition, we are authorized by our Board of Directors to repurchase shares in an amount sufficient to offset shares issued under our compensation programs.
The components and allocated tax effects of other comprehensive income are as follows:
We are a party to various litigation and legal proceedings which we believe, based on advice of counsel, will not either individually or in the aggregate have a materially adverse effect on our financial condition, results of operations or cash flows.
During 2017, 2018 and 2019, the EPA granted the Cheyenne Refinery and Woods Cross Refinery each a one-year small refinery exemption from the Renewable Fuel Standard (“RFS”) program requirements for the 2016, 2017 and 2018, respectively, calendar years. As a result, the Cheyenne Refinery’s and Woods Cross Refinery’s gasoline and diesel production are not subject to the Renewable Volume Obligation for the respective years. Upon each exemption granted, we increased our inventory of RINs and reduced our cost of products sold.
Our operations are organized into 3 reportable segments, Refining, Lubricants and Specialty Products and HEP. Our operations that are not included in the Refining, Lubricants and Specialty Products and HEP segments are included in Corporate and Other. Intersegment transactions are eliminated in our consolidated financial statements and are included in Eliminations. Corporate and
Other and Eliminations are aggregated and presented under the Corporate, Other and Eliminations column.
The Lubricants and Specialty Products segment involves PCLI’s production operations, located in Mississauga, Ontario, that includes lubricant products such as base oils, white oils, specialty products and finished lubricants, and the operations of our Petro- CanadaPetro-Canada Lubricants business that includes the marketing of products to both retail and wholesale outlets through a global sales network with locations in Canada, the United States, Europe and China. Additionally, the Lubricants and Specialty Products segment includes specialty lubricant products produced at our Tulsa Refineries that are marketed throughout North America and are distributed in Central and South America and Red Giant Oil, one of the largest suppliers of locomotive engine oil in North America. Also, effective with our acquisition that closed February 1, 2019, the Lubricants and Specialty Products segment includes Sonneborn, a producer of specialty hydrocarbon chemicals such as white oils, petrolatums and waxes with manufacturing facilities in the United States and Europe.
The HEP segment includes all of the operations of HEP, which owns and operates logistics and refinery assets consisting of petroleum product and crude oil pipelines, terminals, tankage, loading rack facilities and refinery processing units in the Mid-Continent, Southwest and Rocky Mountain geographic regions of the United States. As of June 30, 2020, theThe HEP segment also includes a 75% ownership interest in UNEV (a consolidated subsidiary of HEP) and 50% ownership interests in each of the Osage Pipeline, the Cheyenne Pipeline and Cushing Connect. Revenues from the HEP segment are earned through transactions with unaffiliated parties for pipeline transportation, rental and terminalling operations as well as revenues relating to pipeline transportation services provided for our refining operations. Due to certain basis differences, our reported amounts for the HEP segment may not agree to amounts reported in HEP’s periodic public filings.
This Item 2 contains “forward-looking” statements. See “Forward-Looking Statements” at the beginning of Part I of this Quarterly Report on Form 10-Q. In this document, the words “we,” “our,” “ours” and “us” refer only to HollyFrontier Corporation (“HollyFrontier”) and its consolidated subsidiaries or to HollyFrontier or an individual subsidiary and not to any other person with certain exceptions. Generally, the words “we,” “our,” “ours” and “us” include Holly Energy Partners, L.P. (“HEP”) and its subsidiaries as consolidated subsidiaries of HollyFrontier, unless when used in disclosures of transactions or obligations between HEP and HollyFrontier or its other subsidiaries. This document contains certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of HollyFrontier. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.
Pursuant to the 2007 Energy Independence and Security Act, the EPAEnvironmental Protection Agency (“EPA”) promulgated the Renewable Fuel Standard (“RFS”) regulations, which increased the volume of renewable fuels mandated to be blended into the nation’s fuel supply. The regulations, in part, require refiners to add annually increasing amounts of “renewable fuels” to their petroleum products or purchase credits, known as renewable identification numbers (“RINs”), in lieu of such blending. Compliance with RFS regulations significantly increases our cost of products sold, with RINs costs totaling $32.5$69.4 million for the three months ended June 30, 2020.March 31, 2021. At March 31, 2021, our open RINs credit obligations were $43.3 million. We will continue to monitor and adjust our RINs position commensurate with our production levels, market conditions and RFS regulations.
Impact of COVID-19 on Our Business
The COVID-19 pandemic caused a decline in U.S. and global economic activity starting in the first quarter of 2020. This decrease reduced both volumes and unit margins across our businesses, resulting in lower gross margins and earnings. OverFollowing a rebound in the courselate second and third quarters of the second quarter,2020, demand for transportation fuels and lubricants stabilized and showed incremental improvement late inimproved slightly through the quarter.first quarter of 2021, but continued to be weak compared to 2019 levels. In response to this level of demand during the second quarter of 2020,as well as both planned and unplanned maintenance, we operated our Refining segment refineries at an average crude charge of 349,580 BPD.348,170 BPD during the first quarter of 2021.
In our Lubricants and Specialty Products segment, the Rack Forward portion saw improvement in industrial and transportation- related end markets, which drove higher demand and unit margins beginning in the second half of 2020, which continued through the first quarter of 2021. Within the Rack Back portion, a combination of strong demand compared to prior periods as well as limited supply due to a number of factors, drove higher margins and earnings in our Lubricants and Specialty Products segment during the first quarter of 2021.
The stabilization ofsmall but steady improvement in demand drove a broad increase in commodity prices, resulting in values for our inventories held at June 30, 2020March 31, 2021 above the costs of these inventories using the last-in, first-out (“LIFO”) method and in a lower of cost or market valuation gain of $269.9$200.0 million for the three months ended June 30, 2020. Additionally, this stabilization of demand and commodity prices resulted in a smaller than expected use of working capital during the quarter.March 31, 2021.
As a result of these conditions, we have reduced our 2020 expected total consolidated capital expenditures by approximately 15%, to a range of $525 million to $625 million. Additionally, during the second quarter, we completed a corporate restructuring program expected to save approximately $30 million per year in ongoing cash expenses.
HollyFrontier’sOur standalone (excluding HEP) liquidity was over $2.2approximately $2.5 billion at June 30, 2020,March 31, 2021, consisting of a cash balanceand cash equivalents of $883.6 million$1.2 billion and an undrawn $1.35 billion credit facility maturing in 2022. HollyFrontier’s earliest2026. Our standalone (excluding HEP) principal amount of long-term debt maturity is $1.0was $1.75 billion as of March 31, 2021, which consists of $350.0 million in 2.625% senior notes due in 2026.2023, $1.0 billion of 5.875% senior notes due in 2026 and $400.0 million in 4.500% senior notes due in 2030.
OUTLOOK
The impact of the COVID-19 pandemic on the global macroeconomy has created an unprecedented reduction in demand, as well as a lack of forward visibility, for many of the transportation fuels, lubricants and specialty products and the associated transportation and terminal services we provide. Other factors expected to impact crude oil supply include production levels implemented by OPEC members, other large oil producers such as Russia and domestic and Canadian oil producers. While we have seen a recent stabilizationSince the declines in demand and commodity and expect a strong recoveryat the beginning of demand for all of these essential products in the long-run, there remains little visibility on the timing for or extent of this recovery in the near term.
In response to the COVID-19 pandemic, we began to see improvement in demand for these products and services beginning in the second quarter of 2020 that continued through the first quarter of 2021, and with the health and safetyincreasing availability of vaccines, we believe there is a path to a fulsome recovery in demand in 2021.
With the increasing availability of vaccines, more of our employees as a top priority,have started to return to work at our locations, and we have continued several initiatives, including limiting onsite staff at allmaintained our safety protocols such as the use of our facilities to essential operational personnel only, using a work from home policy for certain employeesmasks and restricting travel unless approved by senior leadership.social distancing. We will continue to monitor developments in the COVID-19 developmentspandemic and the dynamic environment it has created to properly address these policies going forward.
Within our Refining segment, for the thirdsecond quarter 2020,of 2021, we expect to run between 340,000-370,000400,000-420,000 barrels per day of crude oil based on market demand for transportation fuels. Currently, the primary determinants of demand are the various government orders and guidance restricting or discouraging most forms of travel.oil. We expect to adjust refinery production levels commensurate with market demand.
InWithin our Lubricants and Specialty Products segment, for the full year 2021, we have withdrawn 2020 guidance forexpect to earn between $180 million to $220 million in income from operations and $230 million to $270 million of EBITDA in the Rack Forward business. Within our industrial and passenger car-related end markets, demand saw improvement over the courseportion of the second quarter as compared to the depressed levels we saw at the end of the first quarter of 2020, while in our personal care end markets, demand continues to run slightly below historical levels. We expect industrial demand to continue to rebound with the broader economy.segment. Within the Rack Back portion, for the second quarter of 2021, we expect base oil demandmargins to rebound withfall from spot market levels, but remain higher than the reopening of its primary transportation-related end markets.past three years. Similar to our Refining segment, we intendexpect to matchadjust production tolevels commensurate with market demand.
At HEP, we have seen an improvement inexpect to see demand for transportation and terminal services duringgrow with underlying demand for transportation fuels and crude oil. In 2021, HEP expects to hold the second quarter of 2020 as compared to the first quarter of 2020, and we expect that trend to continue. HEP maintained its quarterly distribution toconstant at $0.35 per unit, representative of a newor $1.40 on an annualized basis. HEP remains committed to its distribution policystrategy focused on funding all capital expenditures and distributions within operating cash flow and improving distributable cash flow coverage to 1.3x or greater andwith the goal of reducing leverage to 3.0-3.5x.
During the third quarter of 2020, we announced plansincreased our liquidity by $750.0 million with the issuance of $350.0 million in 2.625% senior notes due in 2023 and $400.0 million in 4.500% senior notes due in 2030. This additional liquidity may be used for general corporate purposes and is expected to further expandsupport the planned growth of our renewables business throughand the constructionunexpected economic impact of a pre-treatment unit located at the Navajo Refinery’s Artesia facility and conversion of the Cheyenne Refinery to renewable diesel production. Including this decision, we maintained the range of our 2020 consolidated capital budget at $525 million to $625 million. Additionally, we implemented a corporate restructuring program expected to save approximately $30 million of annual expenses. We continue to evaluate additional ways to reduce cash costs including operating, sales, general and administrative spending reductionsCOVID-19, as well as incremental capital spending reductions.needed. We do not intend to repurchase common stock under our $1.0 billion share repurchase program until commodity prices and demand for our products normalize. In addition, we announced the Acquisition, which is expected to close in the fourth quarter of 2021, subject to regulatory clearance and other customary closing conditions. We expect to fund the Acquisition with a one-year suspension of our regular quarterly dividend and cash on hand. Our Board of Directors approved the one-year suspension of the regular quarterly dividend effective with the dividend to be declared for the first quarter of 2021 and is expected to resume the dividend after such time.
On March 27, 2020, the U.S. government passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), an approximately $2 trillion stimulus package that includesincluded various provisions intended to provide relief to individuals and businesses in the form of tax changes, loans and grants, among others. At this time, we have not sought relief in the form of loans or grants from the CARES Act; however, we have benefited from certain tax deferrals in the CARES Act and may benefit from other tax provisions if we meet the requirements to do so.
The extent to which our future results are affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic;pandemic, additional actions by businesses and governments in response to the pandemic and the speed and effectiveness of responses to combat the virus. The COVID-19 pandemic, and the volatile regional and global economic conditions stemming from the pandemic,it, could also exacerbate the risk factors identified in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and in this Form 10-Q.2020. The COVID-19 pandemic may also materially adversely affect our results in a manner that is either not currently known or that we do not currently consider to be a significant risk to our business.
See “Item 1A - Risk Factors” for other potential impacts of COVID-19 on our business.
A more detailed discussion of our financial and operating results for the three and six months ended June 30,March 31, 2021 and 2020 and 2019 is presented in the following sections.
RESULTS OF OPERATIONS
Financial Data
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, | | Change from 2020 |
| | | 2021 | | 2020 | | Change | | Percent |
| | | (In thousands, except per share data) |
| Sales and other revenues | | $ | 3,504,293 | | | $ | 3,400,545 | | | $ | 103,748 | | | 3 | % |
| Operating costs and expenses: | | | | | | | | |
| Cost of products sold (exclusive of depreciation and amortization): | | | | | | | | |
| Cost of products sold (exclusive of lower of cost or market inventory valuation adjustment) | | 2,960,305 | | | 2,693,726 | | | 266,579 | | | 10 | |
| Lower of cost or market inventory valuation adjustment | | (200,037) | | | 560,464 | | | (760,501) | | | (136) | |
| | 2,760,268 | | | 3,254,190 | | | (493,922) | | | (15) | |
| Operating expenses (exclusive of depreciation and amortization) | | 399,909 | | | 328,345 | | | 71,564 | | | 22 | |
| Selling, general and administrative expenses (exclusive of depreciation and amortization) | | 81,975 | | | 87,737 | | | (5,762) | | | (7) | |
| Depreciation and amortization | | 124,079 | | | 140,575 | | | (16,496) | | | (12) | |
| | | | | | | | |
| Total operating costs and expenses | | 3,366,231 | | | 3,810,847 | | | (444,616) | | | (12) | |
| Income (loss) from operations | | 138,062 | | | (410,302) | | | 548,364 | | | (134) | |
| Other income (expense): | | | | | | | | |
| Earnings of equity method investments | | 1,763 | | | 1,714 | | | 49 | | | 3 | |
| Interest income | | 1,031 | | | 4,073 | | | (3,042) | | | (75) | |
| Interest expense | | (38,386) | | | (22,639) | | | (15,747) | | | 70 | |
| | | | | | | | |
| | | | | | | | |
| Gain on tariff settlement | | 51,500 | | | — | | | 51,500 | | | — | |
| Loss on early extinguishment of debt | | — | | | (25,915) | | | 25,915 | | | (100) | |
| Loss on foreign currency transactions | | (1,317) | | | (4,233) | | | 2,916 | | | (69) | |
| Other, net | | 1,890 | | | 1,850 | | | 40 | | | 2 | |
| | 16,481 | | | (45,150) | | | 61,631 | | | (137) | |
| Income (loss) before income taxes | | 154,543 | | | (455,452) | | | 609,995 | | | (134) | |
| Income tax benefit | | (28,307) | | | (162,166) | | | 133,859 | | | (83) | |
| Net income (loss) | | 182,850 | | | (293,286) | | | 476,136 | | | (162) | |
| Less net income attributable to noncontrolling interest | | 34,633 | | | 11,337 | | | 23,296 | | | 205 | |
| Net income (loss) attributable to HollyFrontier stockholders | | $ | 148,217 | | | $ | (304,623) | | | $ | 452,840 | | | (149) | % |
| Earnings (loss) per share: | | | | | | | | |
| Basic | | $ | 0.90 | | | $ | (1.88) | | | $ | 2.78 | | | (148) | % |
| Diluted | | $ | 0.90 | | | $ | (1.88) | | | $ | 2.78 | | | (148) | % |
| Cash dividends declared per common share | | $ | 0.35 | | | $ | 0.35 | | | $ | — | | | — | % |
| Average number of common shares outstanding: | | | | | | | | |
| Basic | | 162,479 | | | 161,873 | | | 606 | | | — | % |
| Diluted | | 162,479 | | | 161,873 | | | 606 | | | — | % |
Financial
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Change from 2019 |
| | | 2020 | | 2019 | | Change | | Percent |
| | | (In thousands, except per share data) |
| Sales and other revenues | | $ | 2,062,930 |
| | $ | 4,782,615 |
| | $ | (2,719,685 | ) | | (57 | )% |
| Operating costs and expenses: | | | | | | | | |
| Cost of products sold (exclusive of depreciation and amortization): | | | | | | | | |
| Cost of products sold (exclusive of lower of cost or market inventory valuation adjustment) | | 1,576,996 |
| | 3,704,884 |
| | (2,127,888 | ) | | (57 | ) |
| Lower of cost or market inventory valuation adjustment | | (269,904 | ) | | 47,801 |
| | (317,705 | ) | | (665 | ) |
| | | 1,307,092 |
| | 3,752,685 |
| | (2,445,593 | ) | | (65 | ) |
| Operating expenses (exclusive of depreciation and amortization) | | 303,359 |
| | 333,252 |
| | (29,893 | ) | | (9 | ) |
| Selling, general and administrative expenses (exclusive of depreciation and amortization) | | 75,369 |
| | 85,317 |
| | (9,948 | ) | | (12 | ) |
| Depreciation and amortization | | 130,178 |
| | 126,908 |
| | 3,270 |
| | 3 |
|
| Long-lived asset and goodwill impairments | | 436,908 |
| | 152,712 |
| | 284,196 |
| | 186 |
|
| Total operating costs and expenses | | 2,252,906 |
| | 4,450,874 |
| | (2,197,968 | ) | | (49 | ) |
| Income (loss) from operations | | (189,976 | ) | | 331,741 |
| | (521,717 | ) | | (157 | ) |
| Other income (expense): | | | | | | | | |
| Earnings of equity method investments | | 2,156 |
| | 1,783 |
| | 373 |
| | 21 |
|
| Interest income | | 1,506 |
| | 4,588 |
| | (3,082 | ) | | (67 | ) |
| Interest expense | | (32,695 | ) | | (34,264 | ) | | 1,569 |
| | (5 | ) |
| Gain on sales-type leases | | 33,834 |
| | — |
| | 33,834 |
| | — |
|
| Gain on foreign currency transactions | | 2,285 |
| | 2,213 |
| | 72 |
| | 3 |
|
| Other, net | | 1,572 |
| | 92 |
| | 1,480 |
| | 1,609 |
|
| | | 8,658 |
| | (25,588 | ) | | 34,246 |
| | (134 | ) |
| Income (loss) before income taxes | | (181,318 | ) | | 306,153 |
| | (487,471 | ) | | (159 | ) |
| Income tax expense (benefit) | | (30,911 | ) | | 89,336 |
| | (120,247 | ) | | (135 | ) |
| Net income (loss) | | (150,407 | ) | | 216,817 |
| | (367,224 | ) | | (169 | ) |
| Less net income attributable to noncontrolling interest | | 26,270 |
| | 19,902 |
| | 6,368 |
| | 32 |
|
| Net income (loss) attributable to HollyFrontier stockholders | | $ | (176,677 | ) | | $ | 196,915 |
| | $ | (373,592 | ) | | (190 | )% |
| Earnings (loss) per share attributable to HollyFrontier stockholders: | | | | | | | | |
| Basic | | $ | (1.09 | ) | | $ | 1.16 |
| | $ | (2.25 | ) | | (194 | )% |
| Diluted | | $ | (1.09 | ) | | $ | 1.15 |
| | $ | (2.24 | ) | | (195 | )% |
| Cash dividends declared per common share | | $ | 0.35 |
| | $ | 0.33 |
| | $ | 0.02 |
| | 6 | % |
| Average number of common shares outstanding: | | | | | | | | |
| Basic | | 161,889 |
| | 169,356 |
| | (7,467 | ) | | (4 | )% |
| Diluted | | 161,889 |
| | 170,547 |
| | (8,658 | ) | | (5 | )% |
| | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 |
| | (Unaudited) | | |
| | | (In thousands) |
| Cash and cash equivalents | | $ | 1,193,428 | | | $ | 1,368,318 | |
| Working capital | | $ | 1,942,968 | | | $ | 1,935,605 | |
| Total assets | | $ | 11,934,817 | | | $ | 11,506,864 | |
| Long-term debt | | $ | 3,126,091 | | | $ | 3,142,718 | |
| Total equity | | $ | 5,838,046 | | | $ | 5,722,203 | |
|
| | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, | | Change from 2019 |
| | | 2020 | | 2019 | | Change | | Percent |
| | | (In thousands, except per share data) |
| Sales and other revenues | | $ | 5,463,475 |
| | $ | 8,679,862 |
| | $ | (3,216,387 | ) | | (37 | )% |
| Operating costs and expenses: | | | | | | | | |
| Cost of products sold (exclusive of depreciation and amortization): | | | | | | | | |
| Cost of products sold (exclusive of lower of cost or market inventory valuation adjustment) | | 4,270,722 |
| | 6,904,089 |
| | (2,633,367 | ) | | (38 | ) |
| Lower of cost or market inventory valuation adjustment | | 290,560 |
| | (184,545 | ) | | 475,105 |
| | (257 | ) |
| | | 4,561,282 |
| | 6,719,544 |
| | (2,158,262 | ) | | (32 | ) |
| Operating expenses (exclusive of depreciation and amortization) | | 631,704 |
| | 664,844 |
| | (33,140 | ) | | (5 | ) |
| Selling, general and administrative expenses (exclusive of depreciation and amortization) | | 163,106 |
| | 173,351 |
| | (10,245 | ) | | (6 | ) |
| Depreciation and amortization | | 270,753 |
| | 248,329 |
| | 22,424 |
| | 9 |
|
| Long-lived asset and goodwill impairments | | 436,908 |
| | 152,712 |
| | 284,196 |
| | 186 |
|
| Total operating costs and expenses | | 6,063,753 |
| | 7,958,780 |
| | (1,895,027 | ) | | (24 | ) |
| Income (loss) from operations | | (600,278 | ) | | 721,082 |
| | (1,321,360 | ) | | (183 | ) |
| Other income (expense): | | | | | | | | |
| Earnings of equity method investments | | 3,870 |
| | 3,883 |
| | (13 | ) | | — |
|
| Interest income | | 5,579 |
| | 10,963 |
| | (5,384 | ) | | (49 | ) |
| Interest expense | | (55,334 | ) | | (70,911 | ) | | 15,577 |
| | (22 | ) |
| Gain on sales-type leases | | 33,834 |
| | — |
| | 33,834 |
| | — |
|
| Loss on early extinguishment of debt | | (25,915 | ) | | — |
| | (25,915 | ) | | — |
|
| Gain (loss) on foreign currency transactions | | (1,948 | ) | | 4,478 |
| | (6,426 | ) | | (144 | ) |
| Other, net | | 3,422 |
| | 649 |
| | 2,773 |
| | 427 |
|
| | | (36,492 | ) | | (50,938 | ) | | 14,446 |
| | (28 | ) |
| Income (loss) before income taxes | | (636,770 | ) | | 670,144 |
| | (1,306,914 | ) | | (195 | ) |
| Income tax expense (benefit) | | (193,077 | ) | | 176,841 |
| | (369,918 | ) | | (209 | ) |
| Net income (loss) | | (443,693 | ) | | 493,303 |
| | (936,996 | ) | | (190 | ) |
| Less net income attributable to noncontrolling interest | | 37,607 |
| | 43,333 |
| | (5,726 | ) | | (13 | ) |
| Net income (loss) attributable to HollyFrontier stockholders | | $ | (481,300 | ) | | $ | 449,970 |
| | $ | (931,270 | ) | | (207 | )% |
| Earnings (loss) per share attributable to HollyFrontier stockholders: | | | | | | | | |
| Basic | | $ | (2.97 | ) | | $ | 2.64 |
| | $ | (5.61 | ) | | (213 | )% |
| Diluted | | $ | (2.97 | ) | | $ | 2.62 |
| | $ | (5.59 | ) | | (213 | )% |
| Cash dividends declared per common share | | $ | 0.70 |
| | $ | 0.66 |
| | $ | 0.04 |
| | 6 | % |
| Average number of common shares outstanding: | | | | | | | | |
| Basic | | 161,882 |
| | 170,100 |
| | (8,218 | ) | | (5 | )% |
| Diluted | | 161,882 |
| | 171,264 |
| | (9,382 | ) | | (5 | )% |
|
| | | | | | | | |
| | | June 30, 2020 | | December 31, 2019 |
| | | (Unaudited) | | |
| | | (In thousands) |
| Cash and cash equivalents | | $ | 902,509 |
| | $ | 885,162 |
|
| Working capital | | $ | 1,470,492 |
| | $ | 1,620,261 |
|
| Total assets | | $ | 11,063,820 |
| | $ | 12,164,841 |
|
| Long-term debt | | $ | 2,480,746 |
| | $ | 2,455,640 |
|
| Total equity | | $ | 5,914,511 |
| | $ | 6,509,426 |
|
Other Financial Data
| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | 2021 | | 2020 | | | | |
| | | (In thousands) |
| Net cash provided by operating activities | | $ | 62,326 | | | $ | 190,098 | | | | | |
| Net cash used for investing activities | | $ | (147,064) | | | $ | (86,094) | | | | | |
| Net cash used for financing activities | | $ | (89,561) | | | $ | (71,457) | | | | | |
| Capital expenditures | | $ | 149,961 | | | $ | 83,749 | | | | | |
EBITDA (1) | | $ | 281,344 | | | $ | (307,648) | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | (In thousands) |
| Net cash provided by operating activities | | $ | 119,204 |
| | $ | 752,734 |
| | $ | 309,302 |
| | $ | 969,550 |
|
| Net cash used for investing activities | | $ | (45,572 | ) | | $ | (55,584 | ) | | $ | (131,666 | ) | | $ | (782,309 | ) |
| Net cash used for financing activities | | $ | (84,062 | ) | | $ | (279,736 | ) | | $ | (155,519 | ) | | $ | (429,864 | ) |
| Capital expenditures | | $ | 45,987 |
| | $ | 56,734 |
| | $ | 129,736 |
| | $ | 120,469 |
|
EBITDA (1) | | $ | (46,221 | ) | | $ | 442,835 |
| | $ | (353,869 | ) | | $ | 935,088 |
|
(1)Earnings before interest, taxes, depreciation and amortization, which we refer to as “EBITDA,” is calculated as net income (loss) attributable to HollyFrontier stockholders plus (i) interest expense, net of interest income, (ii) income tax provision, and (iii) depreciation and amortization. EBITDA is not a calculation provided for under GAAP; however, the amounts included in the EBITDA calculation are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies. EBITDA is presented here because it is a widely used financial indicator used by investors and analysts to measure performance. EBITDA is also used by our management for internal analysis and as a basis for financial covenants. EBITDA presented above is reconciled to net income under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.
| |
(1) | Earnings before interest, taxes, depreciation and amortization, which we refer to as “EBITDA,” is calculated as net income (loss) attributable to HollyFrontier stockholders plus (i) interest expense, net of interest income, (ii) income tax provision, and (iii) depreciation and amortization. EBITDA is not a calculation provided for under GAAP; however, the amounts included in the EBITDA calculation are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies. EBITDA is presented here because it is a widely used financial indicator used by investors and analysts to measure performance. EBITDA is also used by our management for internal analysis and as a basis for financial covenants. EBITDA presented above is reconciled to net income under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q. |
Segment Operating Data
Our operations are organized into three reportable segments, Refining, Lubricants and Specialty Products and HEP. See Note 1514 “Segment Information” in the Notes to Consolidated Financial Statements for additional information on our reportable segments.
Refining Segment Operating Data
Our refinery operations include the El Dorado, Tulsa, Navajo Cheyenne and Woods Cross Refineries. The following tables set forth information, including non-GAAP performance measures, about our consolidated refinery operations. The cost of products and refinery gross and net operating margins do not include the non-cash effects of long-lived asset impairment charges, lower of cost or market inventory valuation adjustments and depreciation and amortization. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.
In the third quarter of 2020, we permanently ceased petroleum refining operations at our Cheyenne Refinery and subsequently began converting certain assets at our Cheyenne Refinery to renewable diesel production. The disaggregation of our refining geographic operating data is presented in two regions, Mid-Continent and West, to best reflect the economic drivers of our refining operations. The Mid-Continent region continues to be comprised of the El Dorado and Tulsa Refineries, and the new West region is comprised of the Navajo and Woods Cross Refineries. Refining segment operating data for the three months ended March 31, 2020 has been retrospectively adjusted to reflect the revised regional groupings.
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| Mid-Continent Region (El Dorado and Tulsa Refineries) | | | | | | |
Crude charge (BPD) (1) | | 206,950 |
| | 264,290 |
| | 229,670 |
| | 238,890 |
|
Refinery throughput (BPD) (2) | | 220,010 |
| | 278,710 |
| | 245,470 |
| | 254,520 |
|
Sales of produced refined products (BPD) (3) | | 216,280 |
| | 273,010 |
| | 237,760 |
| | 245,450 |
|
Refinery utilization (4) | | 79.6 | % | | 101.7 | % | | 88.3 | % | | 91.9 | % |
| | | | | | | | | |
Average per produced barrel (5) | | | | | | | | |
| Refinery gross margin | | $ | 6.31 |
| | $ | 17.17 |
| | $ | 8.07 |
| | $ | 14.51 |
|
Refinery operating expenses (6) | | 5.68 |
| | 5.02 |
| | 5.47 |
| | 5.74 |
|
| Net operating margin | | $ | 0.63 |
| | $ | 12.15 |
| | $ | 2.60 |
| | $ | 8.77 |
|
| | | | | | | | | |
Refinery operating expenses per throughput barrel (7) | | $ | 5.58 |
| | $ | 4.92 |
| | $ | 5.30 |
| | $ | 5.54 |
|
| | | | | | | | | |
| Feedstocks: | | | | | | | | |
| Sweet crude oil | | 61 | % | | 57 | % | | 56 | % | | 54 | % |
| Sour crude oil | | 16 | % | | 22 | % | | 19 | % | | 23 | % |
| Heavy sour crude oil | | 17 | % | | 16 | % | | 19 | % | | 17 | % |
| Other feedstocks and blends | | 6 | % | | 5 | % | | 6 | % | | 6 | % |
| Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | | 2021 | | 2020 | | | | |
| Mid-Continent Region (El Dorado and Tulsa Refineries) | | | | | | |
Crude charge (BPD) (1) | | 216,290 | | | 252,380 | | | | | |
Refinery throughput (BPD) (2) | | 229,560 | | | 270,920 | | | | | |
Sales of produced refined products (BPD) (3) | | 210,680 | | | 259,240 | | | | | |
Refinery utilization (4) | | 83.2 | % | | 97.1 | % | | | | |
| | | | | | | | |
Average per produced barrel (5) | | | | | | | | |
| Refinery gross margin | | $ | 6.45 | | | $ | 9.54 | | | | | |
Refinery operating expenses (6) | | 9.91 | | | 5.30 | | | | | |
| Net operating margin | | $ | (3.46) | | | $ | 4.24 | | | | | |
| | | | | | | | |
Refinery operating expenses per throughput barrel (7) | | $ | 9.09 | | | $ | 5.07 | | | | | |
| | | | | | | | |
| Feedstocks: | | | | | | | | |
| Sweet crude oil | | 59 | % | | 52 | % | | | | |
| Sour crude oil | | 13 | % | | 22 | % | | | | |
| Heavy sour crude oil | | 22 | % | | 19 | % | | | | |
| Other feedstocks and blends | | 6 | % | | 7 | % | | | | |
| Total | | 100 | % | | 100 | % | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Sales of produced refined products: | | | | | | | | |
| Gasolines | | 51 | % | | 51 | % | | | | |
| Diesel fuels | | 34 | % | | 32 | % | | | | |
| Jet fuels | | 5 | % | | 7 | % | | | | |
| Fuel oil | | 1 | % | | 1 | % | | | | |
| Asphalt | | 3 | % | | 3 | % | | | | |
| Base oils | | 4 | % | | 4 | % | | | | |
| LPG and other | | 2 | % | | 2 | % | | | | |
| Total | | 100 | % | | 100 | % | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | |
| | | | | | | | |
| West Region (Navajo and Woods Cross Refineries) | | | | | | | | |
Crude charge (BPD) (1) | | 131,880 | | | 140,250 | | | | | |
Refinery throughput (BPD) (2) | | 144,600 | | | 154,340 | | | | | |
Sales of produced refined products (BPD) (3) | | 144,260 | | | 150,610 | | | | | |
Refinery utilization (4) | | 91.0 | % | | 96.7 | % | | | | |
| | | | | | | | |
Average per produced barrel (5) | | | | | | | | |
| Refinery gross margin | | $ | 10.26 | | | $ | 13.68 | | | | | |
Refinery operating expenses (6) | | 8.09 | | | 6.91 | | | | | |
| Net operating margin | | $ | 2.17 | | | $ | 6.77 | | | | | |
| | | | | | | | |
Refinery operating expenses per throughput barrel (7) | | $ | 8.07 | | | $ | 6.74 | | | | | |
| | | | | | | | |
| Feedstocks: | | | | | | | | |
| Sweet crude oil | | 24 | % | | 27 | % | | | | |
| Sour crude oil | | 59 | % | | 52 | % | | | | |
| Black wax crude oil | | 8 | % | | 12 | % | | | | |
| Other feedstocks and blends | | 9 | % | | 9 | % | | | | |
| Total | | 100 | % | | 100 | % | | | | |
| | | | | | | | |
| Sales of produced refined products: | | | | | | | | |
| Gasolines | | 55 | % | | 56 | % | | | | |
| Diesel fuels | | 36 | % | | 36 | % | | | | |
| Fuel oil | | 2 | % | | 3 | % | | | | |
| Asphalt | | 4 | % | | 2 | % | | | | |
| LPG and other | | 3 | % | | 3 | % | | | | |
| Total | | 100 | % | | 100 | % | | | | |
|
| | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| Mid-Continent Region (El Dorado and Tulsa Refineries) | | | | | | | | |
| Sales of produced refined products: | | | | | | | | |
| Gasolines | | 54 | % | | 51 | % | | 53 | % | | 52 | % |
| Diesel fuels | | 36 | % | | 34 | % | | 33 | % | | 31 | % |
| Jet fuels | | 1 | % | | 6 | % | | 4 | % | | 7 | % |
| Fuel oil | | 1 | % | | 1 | % | | 1 | % | | 1 | % |
| Asphalt | | 3 | % | | 2 | % | | 3 | % | | 3 | % |
| Base oils | | 3 | % | | 4 | % | | 4 | % | | 4 | % |
| LPG and other | | 2 | % | | 2 | % | | 2 | % | | 2 | % |
| Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
|
| | | | | | | | | | | | | | | | |
| Southwest Region (Navajo Refinery) | | | | | | | | |
Crude charge (BPD) (1) | | 79,460 |
| | 109,080 |
| | 93,130 |
| | 107,560 |
|
Refinery throughput (BPD) (2) | | 89,470 |
| | 119,480 |
| | 103,460 |
| | 117,860 |
|
Sales of produced refined products (BPD) (3) | | 101,880 |
| | 122,090 |
| | 107,740 |
| | 122,730 |
|
Refinery utilization (4) | | 79.5 | % | | 109.1 | % | | 93.1 | % | | 107.6 | % |
| | | | | | | | | |
Average per produced barrel (5) | | | | | | | | |
| Refinery gross margin | | $ | 11.08 |
| | $ | 23.45 |
| | $ | 11.89 |
| | $ | 19.70 |
|
Refinery operating expenses (6) | | 5.12 |
| | 4.53 |
| | 5.20 |
| | 4.73 |
|
| Net operating margin | | $ | 5.96 |
| | $ | 18.92 |
| | $ | 6.69 |
| | $ | 14.97 |
|
| | | | | | | | | |
Refinery operating expenses per throughput barrel (7) | | $ | 5.83 |
| | $ | 4.63 |
| | $ | 5.42 |
| | $ | 4.93 |
|
| | | | | | | | | |
| Feedstocks: | | | | | | | | |
| Sweet crude oil | | 25 | % | | 24 | % | | 24 | % | | 20 | % |
| Sour crude oil | | 64 | % | | 67 | % | | 66 | % | | 71 | % |
| Other feedstocks and blends | | 11 | % | | 9 | % | | 10 | % | | 9 | % |
| Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| | | | | | | | | |
| Sales of produced refined products: | | | | | | | | |
| Gasolines | | 53 | % | | 48 | % | | 54 | % | | 51 | % |
| Diesel fuels | | 34 | % | | 40 | % | | 36 | % | | 38 | % |
| Fuel oil | | 2 | % | | 4 | % | | 2 | % | | 3 | % |
| Asphalt | | 8 | % | | 6 | % | | 5 | % | | 5 | % |
| LPG and other | | 3 | % | | 2 | % | | 3 | % | | 3 | % |
| Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
|
| | | | | | | | | | | | | | | | |
| Rocky Mountain Region (Cheyenne and Woods Cross Refineries) | | | | | | |
Crude charge (BPD) (1) | | 63,170 |
| | 79,660 |
| | 70,170 |
| | 80,440 |
|
Refinery throughput (BPD) (2) | | 68,020 |
| | 86,700 |
| | 75,610 |
| | 87,080 |
|
Sales of produced refined products (BPD) (3) | | 64,750 |
| | 74,000 |
| | 72,100 |
| | 78,000 |
|
Refinery utilization (4) | | 65.1 | % | | 82.1 | % | | 72.3 | % | | 82.9 | % |
| | | | | | | | | |
Average per produced barrel (5) | | | | | | | | |
| Refinery gross margin | | $ | 11.41 |
| | $ | 22.48 |
| | $ | 13.54 |
| | $ | 17.07 |
|
Refinery operating expenses (6) | | 13.60 |
| | 11.53 |
| | 12.17 |
| | 11.11 |
|
| Net operating margin | | $ | (2.19 | ) | | $ | 10.95 |
| | $ | 1.37 |
| | $ | 5.96 |
|
| | | | | | | | | |
Refinery operating expenses per throughput barrel (7) | | $ | 12.95 |
| | $ | 9.84 |
| | $ | 11.61 |
| | $ | 9.95 |
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2021 | | 2020 | | | | |
| Consolidated | | | | | | | | |
Crude charge (BPD) (1) | | 348,170 | | | 392,630 | | | | | |
Refinery throughput (BPD) (2) | | 374,160 | | | 425,260 | | | | | |
Sales of produced refined products (BPD) (3) | | 354,940 | | | 409,850 | | | | | |
Refinery utilization (4) | | 86.0 | % | | 96.9 | % | | | | |
| | | | | | | | |
Average per produced barrel (5) | | | | | | | | |
| Refinery gross margin | | $ | 8.00 | | | $ | 11.06 | | | | | |
Refinery operating expenses (6) | | 9.17 | | | 5.89 | | | | | |
| Net operating margin | | $ | (1.17) | | | $ | 5.17 | | | | | |
| | | | | | | | |
Refinery operating expenses per throughput barrel (7) | | $ | 8.70 | | | $ | 5.68 | | | | | |
|
| | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| Rocky Mountain Region (Cheyenne and Woods Cross Refineries) | | | | | | |
| Feedstocks: | | | | | | | | |
| Sweet crude oil | | 37 | % | | 34 | % | | 36 | % | | 35 | % |
| Heavy sour crude oil | | 41 | % | | 35 | % | | 38 | % | | 35 | % |
| Black wax crude oil | | 15 | % | | 23 | % | | 19 | % | | 22 | % |
| Other feedstocks and blends | | 7 | % | | 8 | % | | 7 | % | | 8 | % |
| Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| | | | | | | | | |
| Sales of produced refined products: | | | | | | | | |
| Gasolines | | 54 | % | | 50 | % | | 55 | % | | 52 | % |
| Diesel fuels | | 35 | % | | 37 | % | | 33 | % | | 35 | % |
| Fuel oil | | 2 | % | | 4 | % | | 3 | % | | 4 | % |
| Asphalt | | 6 | % | | 6 | % | | 6 | % | | 6 | % |
| LPG and other | | 3 | % | | 3 | % | | 3 | % | | 3 | % |
| Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
|
| | | | | | | | | | | | | | | | |
| Consolidated | | | | | | | | |
Crude charge (BPD) (1) | | 349,580 |
| | 453,030 |
| | 392,970 |
| | 426,890 |
|
Refinery throughput (BPD) (2) | | 377,500 |
| | 484,890 |
| | 424,540 |
| | 459,460 |
|
Sales of produced refined products (BPD) (3) | | 382,910 |
| | 469,100 |
| | 417,600 |
| | 446,190 |
|
Refinery utilization (4) | | 76.5 | % | | 99.1 | % | | 86.0 | % | | 93.4 | % |
| | | | | | | | | |
Average per produced barrel (5) | | | | | | | | |
| Refinery gross margin | | $ | 8.44 |
| | $ | 19.64 |
| | $ | 10.00 |
| | $ | 16.39 |
|
Refinery operating expenses (6) | | 6.87 |
| | 5.92 |
| | 6.56 |
| | 6.40 |
|
| Net operating margin | | $ | 1.57 |
| | $ | 13.72 |
| | $ | 3.44 |
| | $ | 9.99 |
|
| | | | | | | | | |
Refinery operating expenses per throughput barrel (7) | | $ | 6.97 |
| | $ | 5.73 |
| | $ | 6.45 |
| | $ | 6.22 |
|
| | | | | | | | | |
| Feedstocks: | | | | | | | | |
| Sweet crude oil | | 48 | % | | 44 | % | | 45 | % | | 42 | % |
| Sour crude oil | | 25 | % | | 29 | % | | 27 | % | | 31 | % |
| Heavy sour crude oil | | 17 | % | | 16 | % | | 17 | % | | 16 | % |
| Black wax crude oil | | 3 | % | | 4 | % | | 4 | % | | 4 | % |
| Other feedstocks and blends | | 7 | % | | 7 | % | | 7 | % | | 7 | % |
| Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| | | | Consolidated | | Consolidated | | |
| Feedstocks: | | Feedstocks: | | |
| Sweet crude oil | | Sweet crude oil | | 45 | % | | 43 | % | |
| Sour crude oil | | Sour crude oil | | 31 | % | | 32 | % | |
| Heavy sour crude oil | | Heavy sour crude oil | | 14 | % | | 12 | % | |
| Black wax crude oil | | Black wax crude oil | | 3 | % | | 5 | % | |
| Other feedstocks and blends | | Other feedstocks and blends | | 7 | % | | 8 | % | |
| Total | | Total | | 100 | % | | 100 | % | |
| | Sales of produced refined products: | | | | | | | | | Sales of produced refined products: | | |
| Gasolines | | 54 | % | | 50 | % | | 53 | % | | 52 | % | Gasolines | | 54 | % | | 53 | % | |
| Diesel fuels | | 35 | % | | 36 | % | | 34 | % | | 34 | % | Diesel fuels | | 35 | % | | 33 | % | |
| Jet fuels | | 1 | % | | 4 | % | | 3 | % | | 4 | % | Jet fuels | | 3 | % | | 4 | % | |
| Fuel oil | | 1 | % | | 2 | % | | 1 | % | | 2 | % | Fuel oil | | 1 | % | | 1 | % | |
| Asphalt | | 4 | % | | 4 | % | | 4 | % | | 4 | % | Asphalt | | 3 | % | | 3 | % | |
| Base oils | | 2 | % | | 2 | % | | 2 | % | | 2 | % | Base oils | | 2 | % | | 3 | % | |
| LPG and other | | 3 | % | | 2 | % | | 3 | % | | 2 | % | LPG and other | | 2 | % | | 3 | % | |
| Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % | Total | | 100 | % | | 100 | % | |
| |
(1) | Crude charge represents the barrels per day of crude oil processed at our refineries. |
| |
(2) | Refinery throughput represents the barrels per day of crude and other refinery feedstocks input to the crude units and other conversion units at our refineries. |
| |
(3) | Represents barrels sold of refined products produced at our refineries (including HFC Asphalt) and does not include volumes |
(1)Crude charge represents the barrels per day of crude oil processed at our refineries.
(2)Refinery throughput represents the barrels per day of crude and other refinery feedstocks input to the crude units and other conversion units at our refineries.
(3)Represents barrels sold of refined products produced at our refineries (including HFC Asphalt) and does not include volumes of refined products purchased for resale or volumes of excess crude oil sold.
| |
(4) | Represents crude charge divided by total crude capacity (BPSD). Our consolidated crude capacity is 457,000 BPSD. |
| |
(5) | (4)Represents crude charge divided by total crude capacity (BPSD). Our consolidated crude capacity is 405,000 BPSD. (5)Represents average amount per produced barrel sold, which is a non-GAAP measure. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q. |
| |
(6) | Represents total refining segment operating expenses, exclusive of depreciation and amortization, divided by sales volumes |
(6)Represents total refining segment operating expenses, exclusive of depreciation and amortization and Cheyenne Refinery operating expenses, divided by sales volumes of refined products produced at our refineries.
| |
(7) | Represents total refining segment operating expenses, exclusive of depreciation and amortization, divided by refinery throughput. |
(7)Represents total refining segment operating expenses, exclusive of depreciation and amortization and Cheyenne Refinery operating expenses, divided by refinery throughput.
Lubricants and Specialty Products Operating Data
The following table sets forth information about our lubricants and specialty products operations. For the six months ended June 30, 2019, our lubricants and specialty products operating results reflect the operations of our Sonneborn business for the period February 1, 2019 (date of acquisition) through June 30, 2019.
|
| | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| Lubricants and Specialty Products | | | | | | | | |
| Throughput (BPD) | | 16,370 |
| | 16,990 |
| | 19,060 |
| | 18,390 |
|
| Sales of produced refined products (BPD) | | 26,990 |
| | 34,660 |
| | 31,900 |
| | 34,050 |
|
| | | | | | | | | |
| Sales of produced refined products: | | | | | | | | |
| Finished products | | 56 | % | | 52 | % | | 51 | % | | 50 | % |
| Base oils | | 19 | % | | 32 | % | | 23 | % | | 29 | % |
| Other | | 25 | % | | 16 | % | | 26 | % | | 21 | % |
| Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2021 | | 2020 | | | | |
| Lubricants and Specialty Products | | | | | | | | |
| Throughput (BPD) | | 20,410 | | | 21,750 | | | | | |
| Sales of produced refined products (BPD) | | 32,570 | | | 36,800 | | | | | |
| | | | | | | | |
| Sales of produced refined products: | | | | | | | | |
| Finished products | | 52 | % | | 47 | % | | | | |
| Base oils | | 26 | % | | 26 | % | | | | |
| Other | | 22 | % | | 27 | % | | | | |
| Total | | 100 | % | | 100 | % | | | | |
Supplemental financial data attributable to our Lubricants and Specialty Products segment is presented below.
| | | | | | | | | | | | Rack Back (1) | | Rack Forward (2) | | Eliminations (3) | | Total Lubricants and Specialty Products |
| | | Rack Back (1) | | Rack Forward (2) | | Eliminations (3) | | Total Lubricants and Specialty Products | | (In thousands) |
| | | (In thousands) | |
| Three months ended June 30, 2020 | | | | | | | | | |
| Three months ended March 31, 2021 | | Three months ended March 31, 2021 | |
| Sales and other revenues | | $ | 85,857 |
| | $ | 343,927 |
| | $ | (72,497 | ) | | $ | 357,287 |
| Sales and other revenues | | $ | 173,442 | | | $ | 483,246 | | | $ | (132,125) | | | $ | 524,563 | |
| Cost of products sold | | $ | 67,210 |
| | $ | 263,634 |
| | $ | (72,497 | ) | | $ | 258,347 |
| Cost of products sold | | $ | 132,532 | | | $ | 331,116 | | | $ | (132,125) | | | $ | 331,523 | |
| Operating expenses | | $ | 21,034 |
| | $ | 26,806 |
| | $ | — |
| | $ | 47,840 |
| Operating expenses | | $ | 28,621 | | | $ | 32,132 | | | $ | — | | | $ | 60,753 | |
| Selling, general and administrative expenses | | $ | 5,617 |
| | $ | 30,302 |
| | $ | — |
| | $ | 35,919 |
| Selling, general and administrative expenses | | $ | 6,739 | | | $ | 38,814 | | | $ | — | | | $ | 45,553 | |
| Depreciation and amortization | | $ | 5,877 |
| | $ | 13,902 |
| | $ | — |
| | $ | 19,779 |
| Depreciation and amortization | | $ | 7,305 | | | $ | 12,816 | | | $ | — | | | $ | 20,121 | |
| Long-lived asset impairment | | $ | 167,017 |
| | $ | 37,691 |
| | $ | — |
| | $ | 204,708 |
| |
| | Income (loss) from operations | | $ | (180,898 | ) | | $ | (28,408 | ) | | $ | — |
| | $ | (209,306 | ) | Income (loss) from operations | | $ | (1,755) | | | $ | 68,368 | | | $ | — | | | $ | 66,613 | |
| | | | | | | | | | |
| Three months ended June 30, 2019 | | | | | | | | | |
| Three months ended March 31, 2020 | | Three months ended March 31, 2020 | |
| Sales and other revenues | | $ | 133,225 |
| | $ | 507,183 |
| | $ | (95,062 | ) | | $ | 545,346 |
| Sales and other revenues | | $ | 164,829 | | | $ | 474,057 | | | $ | (112,283) | | | $ | 526,603 | |
| Cost of products sold | | $ | 131,725 |
| | $ | 378,690 |
| | $ | (95,062 | ) | | $ | 415,353 |
| Cost of products sold | | $ | 180,600 | | | $ | 323,063 | | | $ | (112,283) | | | $ | 391,380 | |
| Operating expenses | | $ | 30,585 |
| | $ | 28,537 |
| | $ | — |
| | $ | 59,122 |
| Operating expenses | | $ | 23,269 | | | $ | 30,862 | | | $ | — | | | $ | 54,131 | |
| Selling, general and administrative expenses | | $ | 6,366 |
| | $ | 35,721 |
| | $ | — |
| | $ | 42,087 |
| Selling, general and administrative expenses | | $ | 5,363 | | | $ | 43,599 | | | $ | — | | | $ | 48,962 | |
| Depreciation and amortization | | $ | 11,075 |
| | $ | 11,945 |
| | $ | — |
| | $ | 23,020 |
| Depreciation and amortization | | $ | 10,867 | | | $ | 11,182 | | | $ | — | | | $ | 22,049 | |
Goodwill impairment (4) | | $ | 152,712 |
| | $ | — |
| | $ | — |
| | $ | 152,712 |
| |
| | Income (loss) from operations | | $ | (199,238 | ) | | $ | 52,290 |
| | $ | — |
| | $ | (146,948 | ) | Income (loss) from operations | | $ | (55,270) | | | $ | 65,351 | | | $ | — | | | $ | 10,081 | |
|
| | | | | | | | | | | | | | | | |
| | | Rack Back (1) | | Rack Forward (2) | | Eliminations (3) | | Total Lubricants and Specialty Products |
| | | (In thousands) |
| Six months ended June 30, 2020 | | | | | | | | |
| Sales and other revenues | | $ | 250,686 |
| | $ | 817,984 |
| | $ | (184,780 | ) | | $ | 883,890 |
|
| Cost of products sold | | $ | 247,810 |
| | $ | 586,697 |
| | $ | (184,780 | ) | | $ | 649,727 |
|
| Operating expenses | | $ | 44,303 |
| | $ | 57,668 |
| | $ | — |
| | $ | 101,971 |
|
| Selling, general and administrative expenses | | $ | 10,980 |
| | $ | 73,901 |
| | $ | — |
| | $ | 84,881 |
|
| Depreciation and amortization | | $ | 16,744 |
| | $ | 25,084 |
| | $ | — |
| | $ | 41,828 |
|
| Long-lived asset impairment | | $ | 167,017 |
| | $ | 37,691 |
| | $ | — |
| | $ | 204,708 |
|
| Income (loss) from operations | | $ | (236,168 | ) | | $ | 36,943 |
| | $ | — |
| | $ | (199,225 | ) |
| | | | | | | | | |
| Six months ended June 30, 2019 | | | | | | | | |
| Sales and other revenues | | $ | 289,680 |
| | $ | 951,525 |
| | $ | (202,525 | ) | | $ | 1,038,680 |
|
| Cost of products sold | | $ | 277,543 |
| | $ | 729,352 |
| | $ | (202,525 | ) | | $ | 804,370 |
|
| Operating expenses | | $ | 60,145 |
| | $ | 52,536 |
| | $ | — |
| | $ | 112,681 |
|
| Selling, general and administrative expenses | | $ | 19,845 |
| | $ | 61,961 |
| | $ | — |
| | $ | 81,806 |
|
| Depreciation and amortization | | $ | 21,601 |
| | $ | 21,590 |
| | $ | — |
| | $ | 43,191 |
|
Goodwill impairment (4) | | $ | 152,712 |
| | $ | — |
| | $ | — |
| | $ | 152,712 |
|
| Income (loss) from operations | | $ | (242,166 | ) | | $ | 86,086 |
| | $ | — |
| | $ | (156,080 | ) |
(1) Rack backBack consists of our PCLI base oil production activities, by-product sales to third parties and intra-segment base oil sales to rack forward.Rack Forward.
(2) Rack forwardForward activities include the purchase of base oils from rack backRack Back and the blending, packaging, marketing and distribution and sales of finished lubricants and specialty products to third parties.
(3) Intra-segment sales of rack backRack Back produced base oils to rack forwardRack Forward are eliminated under the “Eliminations” column.
(4) During the three months ended June 30, 2019, a goodwill impairment charge of $152.7 million was recorded in the PCLI reporting unit within the Lubricants and Specialty Products segment. We separately allocated this goodwill impairment charge for purposes of management’s discussion and analysis presentation of Rack Back and Rack Forward results entirely to Rack Back.
Results of Operations – Three Months Ended June 30, 2020March 31, 2021 Compared to Three Months Ended June 30, 2019March 31, 2020
Summary
Net lossincome attributable to HollyFrontier stockholders for the three months ended June 30, 2020March 31, 2021 was $(176.7)$148.2 million ($(1.09)0.90 per basic and diluted share), a $373.6$452.8 million decrease compared toincrease from a net incomeloss of $196.9$304.6 million ($1.16(1.88) per basic and $1.15 per diluted share) for the three months ended June 30, 2019. NetMarch 31, 2020. The increase in net income decreasedwas principally due principally to long-lived asset impairment charges of $436.9 million, lower gross refining margins and lower refining segment sales volumes. For the three months ended June 30, 2020, lower of cost or market inventory reserve adjustments that increased pre-tax earnings by $269.9 million compared to a decrease to pre-tax earnings of $47.8$200.0 million for the three months ended June 30, 2019.March 31, 2021 and decreased pre-tax earnings by $560.5 million for the three months ended March 31, 2020. Net income for the three months ended March 31, 2021 was also impacted by winter storm Uri, which increased natural gas costs by approximately $65 million across our refining system. Refinery gross margins for the three months ended June 30, 2020March 31, 2021 decreased to $8.44$8.00 per produced barrel sold from $19.64$11.06 for the three months ended June 30, 2019. The three months ended June 30, 2019 included a goodwill impairment chargeMarch 31, 2020.
Sales and Other Revenues
Sales and other revenues decreased 57%increased 3% from $4,782.6$3,400.5 million for the three months ended June 30, 2019March 31, 2020 to $2,062.9$3,504.3 million for the three months ended June 30, 2020March 31, 2021 due to a year-over-year decreasethe increase in second quarteraverage per barrel sold sales prices, andpartially offset by lower refined product sales volumes. Sales and other revenues for the three months ended June 30,March 31, 2021 and 2020 and 2019 included $19.2$25.3 million and $28.4$26.4 million, respectively, inof HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties. Additionally, sales and other revenues included $353.6$522.0 million and $545.3$523.5 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively.
Cost of Products Sold
Total cost of products sold decreased 65%15% from $3,752.7$3,254.2 million for the three months ended June 30, 2019March 31, 2020 to $1,307.1$2,760.3 million for the three months ended June 30, 2020 due principally to lower crude oil costs and lower refined product sales volumes. Additionally, duringMarch 31, 2021. During the secondfirst quarter of 2020,2021, we recognized a lower of cost or market inventory valuation adjustment benefit of $269.9$200.0 million compared to a charge of $47.8$560.5 million for the same period of 2019,in 2020, resulting in a new $530.9$118.8 million inventory lower of cost or market reserve at June 30, 2020.March 31, 2021. The lower of cost or market reserve at June 30, 2020 isMarch 31, 2021 was based on market conditions and prices at that time. This decrease in cost of products sold was partially offset by an increase in crude oil and feedstock prices.
Gross Refinery Margins
Gross refinery margin per produced barrel sold decreased 57%28% from $19.64$11.06 for the three months ended June 30, 2019March 31, 2020 to $8.44$8.00 for the three months ended June 30, 2020. ThisMarch 31, 2021. The decrease was due todriven by the effectsimpacts of a decrease in the average per barrel sold sales price during the current year quarter, partially offset by decreasedplanned maintenance and winter storm Uri on our operations and lower realized margins along with higher laid-in crude oil and feedstock prices.costs. Gross refinery margin per barrel does not include the non-cash effects of lower of cost or market inventory valuation adjustments or depreciation and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q for a reconciliation to the income statement of sale prices of products sold and cost of products purchased.
Operating Expenses
Operating expenses, exclusive of depreciation and amortization, decreased 9%increased 22% from $333.3$328.3 million for the three months ended June 30, 2019March 31, 2020 to $303.4$399.9 million for the three months ended June 30, 2020March 31, 2021 primarily due principally to lowera temporary increase in natural gas prices during winter storm Uri and higher planned and unplanned repair and maintenance costs forcompared to the three months ended June 30, 2020 compared to prior period. Prior year period operating expenses included higher repair and maintenance costs related to a February 2019 fire in an FCC unit at our El Dorado Refinery.March 31, 2020.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 12%7% from $85.3$87.7 million for the three months ended June 30, 2019March 31, 2020 to $75.4$82.0 million for the three months ended June 30, 2020March 31, 2021 primarily due principally to lower incentive compensation costsprofessional services and travel expenses, partially offset by an increase in employee-related travels expenses. We incurred $0.6 millionexpenses as a result of the restructuring we initiated within our Lubricants and $3.6 million in direct acquisition and integration costs of our Sonneborn businessSpecialty Products segment during the three months ended June 30, 2020 and 2019, respectively.first quarter of 2021.
Depreciation and Amortization Expenses
Depreciation and amortization increased 3%decreased 12% from $126.9$140.6 million for the three months ended June 30, 2019March 31, 2020 to $130.2$124.1 million for the three months ended June 30, 2020.March 31, 2021. This increasedecrease was primarily due principally to depreciation and amortization attributable to capitalized improvement projects andlower capitalized refinery turnaround costs partially offset byduring 2020 and lower depreciation expense resulting from the assets impaired assets in the current quarter.second quarter of 2020.
Long-lived Asset and Goodwill ImpairmentsInterest Expense
DuringInterest expense was $38.4 million for the three months ended June 30, 2020, we recorded long-lived asset impairment charges of $232.2March 31, 2021 compared to $22.6 million that related to our Cheyenne Refinery and $204.7 million related to PCLI. Duringfor the three months ended June 30, 2019,March 31, 2020. This increase was primarily due to interest expense on our senior notes issued in September 2020 and net losses related to our catalyst financing arrangements during the three months ended March 31, 2021 as compared to net gains during the three months ended March 31, 2020. The increase was partially offset by lower weighted average balance and lower market interest rates on HEP’s credit facility. For the three months ended March 31, 2021 and 2020, interest expense included $13.2 million and $16.1 million, respectively, in interest costs attributable to HEP.
Gain on Tariff Settlement
For the three months ended March 31, 2021, we recorded a goodwill impairment chargegain of $152.7$51.5 million that related to PCLI.upon the settlement of a tariff rate case. See Note 1 “Description of Business and Presentation of Financial Statements”13 “Contingencies” in the Notes to Consolidated Financial Statements for additional information on these impairments.
Interest Income
Interest income for the three months ended June 30, 2020 was $1.5 million compared to $4.6 million for the three months ended June 30, 2019. This decrease was primarily due to lower interest rates on cash investments during the current year quarter.
Interest Expensethis case and settlement.
Interest expense was
$32.7 million for the three months ended June 30, 2020 compared to $34.3 million for the three months ended June 30, 2019. This decrease was primarily due to lower market interest rates
Loss on HEP’s credit facility and HEP’s refinancingEarly Extinguishment of its 6.0% senior notes due 2024, partially offset by an unrealized loss on the mark-to-market change of the fair value of the embedded derivative in our catalyst financing arrangements during the current year quarter. Debt
For the three months ended June 30, 2020 and 2019, interest expense included $12.1 million and $19.2 million, respectively, in interest costs attributable to HEP operations.
Gain on Sales-type Leases
During the second quarter ofMarch 31, 2020, HEP and Delek US Holdings, Inc. renewedrecorded a $25.9 million loss on the original throughput agreement on specific HEP assets. Portionsredemption of the new throughput agreement meet the definitionits $500 million aggregate principal amount of sales-type leases, which resulted in an accounting gain of 6% senior notes maturing August 2024 for $522.5 million.
$33.8 million upon the initial recognition of the sales-type lease during the three months ended June 30, 2020.
GainLoss on Foreign Currency Transactions
Remeasurement adjustments resulting from the foreign currency conversion of the intercompany financing notes payable by PCLIPetro-Canada Lubricants Inc. (“PCLI”) net of mark-to-market valuations on foreign exchange forward contracts with banks which hedge the foreign currency exposure on these intercompany notes were net gainslosses of $2.3$1.3 million and $2.2$4.2 million for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively. For the three months ended June 30,March 31, 2021 and 2020, and 2019, gainloss on foreign currency transactions included a loss of $14.3$6.7 million and $7.1a gain of $33.5 million, respectively, on foreign exchange forward contracts (utilized as an economic hedge).
Income Taxes
For the three months ended June 30, 2020,March 31, 2021, we recorded an income tax benefit of $30.9$28.3 million compared to income tax expense of $89.3$162.2 million for the three months ended June 30, 2019.March 31, 2020. This decrease in income tax benefit was due principally to a pre-tax lossincome during the three months ended June 30, 2020March 31, 2021 compared to a pre-tax earningsloss in the same period of 2019.2020. Our effective tax rates were 17.0%(18.3)% and 29.2%35.6% for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively. The year-over-year decrease in the effective tax rate is due principally to the relationship between the pre-tax results and the earnings attributable to the noncontrolling interest that is not included in income for tax purposes.
Results of Operations – Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Summary
Net loss attributable to HollyFrontier stockholders for the six months ended June 30, 2020 was $(481.3) million ($(2.97) per basic and diluted share), a $931.3 million decrease compared to net income of $450.0 million ($2.64 per basic and $2.62 per diluted share) for the six months ended June 30, 2019. Net income decreased due principally to long-lived asset impairment charges of $436.9 million, lower gross refining margins and lower refining segment sales volumes. For the six months ended June 30, 2020, lower of cost or market inventory reserve adjustments decreased pre-tax earnings by $290.6 million compared to an increase to pre-tax earnings of $184.5 million for the six months ended June 30, 2019. Refinery gross margins for the six months ended June 30, 2020 decreased to $10.00 per barrel sold from $16.39 for the six months ended June 30, 2019. The six months ended June 30, 2019 included a goodwill impairment charge of $152.7 million.
Sales and Other Revenues
Sales and other revenues decreased 37% from $8,679.9 million for the six months ended June 30, 2019 to $5,463.5 million for the six months ended June 30, 2020 due to a year-over-year decrease in sales prices and lower refined product sales volumes. Sales and other revenues for the six months ended June 30, 2020 and 2019 include $45.7 million and $59.5 million, respectively, in HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties. Additionally, sales and other revenues included $877.1 million and $1,038.7 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the six months ended June 30, 2020 and 2019, respectively.
Cost of Products Sold
Total cost of products sold decreased 32% from $6,719.5 million for the six months ended June 30, 2019 to $4,561.3 million for the six months ended June 30, 2020 due principally to lower crude oil costs and lower refined product sales volumes. Additionally, we recognized a lower of cost or market inventory valuation charge of $290.6 million for the six months ended June 30, 2020 compared to a benefit of $184.5 million for the same period of 2019, resulting in a new $530.9 million lower of cost or market reserve at June 30, 2020. The lower of cost or market reserve at June 30, 2020 is based on market conditions and prices at that time.
Gross Refinery Margins
Gross refinery margin per barrel sold decreased 39% from $16.39 for the six months ended June 30, 2019 to $10.00 for the six months ended June 30, 2020. This was due to the effects of a decrease in the average per barrel sold sales price during the current year-to-date period, partially offset by decreased crude oil and feedstock prices. Gross refinery margin per barrel does not include the non-cash effects of lower of cost or market inventory valuation adjustments or depreciation and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q for a reconciliation to the income statement of sales prices of products sold and cost of products purchased.
Operating Expenses
Operating expenses, exclusive of depreciation and amortization, decreased 5% from $664.8 million for the six months ended June 30, 2019 to $631.7 million for the six months ended June 30, 2020 due principally to lower repair and maintenance costs compared to prior period. Prior year period operating expenses included higher repair and maintenance costs related to a February 2019 fire in an FCC unit at our El Dorado Refinery.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 6% from $173.4 million for the six months ended June 30, 2019 to $163.1 million for the six months ended June 30, 2020 due principally to lower incentive compensation costs and employee travel-related expenses. We incurred $1.9 million and $16.2 million in direct acquisition and integration costs of our Sonneborn business during the six months ended June 30, 2020 and 2019, respectively.
Depreciation and Amortization Expenses
Depreciation and amortization increased 9% from $248.3 million for the six months ended June 30, 2019 to $270.8 million for the six months ended June 30, 2020. This increase was due principally to depreciation and amortization attributable to capitalized improvement projects and capitalized refinery turnaround costs, partially offset by lower depreciation expense resulting from the impaired assets in the current period.
Long-lived Asset and Goodwill Impairments
During the six months ended June 30, 2020, we recorded long-lived asset impairment charges of $232.2 million that related to our Cheyenne Refinery and $204.7 million related to PCLI. During the six months ended June 30, 2019, we recorded a goodwill impairment charge of $152.7 million that related to PCLI. See Note 1 “Description of Business and Presentation of Financial Statements” in the Notes to Consolidated Financial Statements for additional information on these impairments.
Interest Income
Interest income for the six months ended June 30, 2020 was $5.6 million compared to $11.0 million for the six months ended June 30, 2019. This decrease was primarily due to lower average cash balances and lower interest rates on cash investments.
Interest Expense
Interest expense was $55.3 million for the six months ended June 30, 2020 compared to $70.9 million for the six months ended June 30, 2019. This decrease was primarily due to lower market interest rates on HEP’s credit facility and HEP’s refinancing of its 6.0% senior notes due 2024. Additionally, we recorded an unrealized gain on the mark-to-market change in the fair value of the embedded derivative in our catalyst financing arrangements of $4.7 million for the six months ended June 30, 2020 compared to an unrealized loss of $1.3 million for the same period in 2019. For the six months ended June 30, 2020 and 2019, interest expense included $28.2 million and $38.3 million, respectively, in interest costs attributable to HEP operations.
Gain on Sales-type Leases
During the second quarter of 2020, HEP and Delek US Holdings, Inc. renewed the original throughput agreement on specific HEP assets. Portions of the new throughput agreement meet the definition of sales-type leases, which resulted in an accounting gain of $33.8 million upon the initial recognition of the sales-type lease during the six months ended June 30, 2020.
Loss on Early Extinguishment of Debt
For the six months ended June 30, 2020, HEP recorded a $25.9 million loss on the redemption of its $500 million aggregate principal amount of 6% senior notes maturing August 2024 at a redemption cost of $522.5 million.
Gain (Loss) on Foreign Currency Transactions
Remeasurement adjustments resulting from the foreign currency conversion of the intercompany financing notes payable by PCLI net of mark-to-market valuations on foreign exchange forward contracts with banks which hedge the foreign currency exposure on these intercompany notes were a loss of $1.9 million for the six months ended June 30, 2020 compared to a net gain of $4.5 million for the six months ended June 30, 2019. For the six months ended June 30, 2020 and 2019, gain / loss on foreign currency transactions included a gain of $19.2 million and a loss of $14.7 million, respectively, on foreign exchange forward contracts (utilized as an economic hedge).
Income Taxes
For the six months ended June 30, 2020, we recorded an income tax benefit of $193.1 million compared to income tax expense of $176.8 million for the six months ended June 30, 2019. This decrease was due principally to a pre-tax loss during the six months ended June 30, 2020 compared to pre-tax earnings in the same period of 2019. Our effective tax rates were 30.3% and 26.4% for the six months ended June 30, 2020 and 2019, respectively. The year-over-year increase in the effective tax rate is due principally to the relationship between the pre-tax results and the earnings attributable to the noncontrolling interest that is not included in income for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
HollyFrontier Credit Agreement
We haveAt March 31, 2021, we had a $1.35 billion senior unsecured revolving credit facility maturing in February 2022 (the “HollyFrontier Credit Agreement”). On April 30, 2021, we amended the HollyFrontier Credit Agreement to extend the maturity date to April 30, 2026 (the “Amended HollyFrontier Credit Agreement”). The Amended HollyFrontier Credit Agreement may be used for revolving credit loans and letters of credit from time to time and is available to fund general corporate purposes. At June 30, 2020,March 31, 2021, we were in compliance with all covenants, had no outstanding borrowings and had outstanding letters of credit totaling $4.9$5.7 million under the HollyFrontier Credit Agreement.
HollyFrontier Financing Arrangements
In December 2018, certainCertain of our wholly-owned subsidiaries entered into financing arrangements whereby such subsidiaries sold a portion of their precious metals catalyst to a financial institution and then leased back the precious metals catalyst in exchange for total cash received of $32.5 million.cash. The volume of the precious metals catalyst and the lease rate are fixed over the term of each lease, and the lease payments are recorded as interest expense. The current leases mature on February 1, 2021.2022. Upon maturity, we must either satisfy the obligation at fair market value or refinance to extend the maturity.
HEP Credit Agreement
At March 31, 2021, HEP hashad a $1.4 billion senior secured revolving credit facility maturing in July 2022 (the “HEP Credit Agreement”). On April 30, 2021, the HEP Credit Agreement was amended, decreasing the commitments under the facility to $1.2 billion and extending the maturity to July 27, 2025 (the “Amended HEP Credit Agreement”). The Amended HEP Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments, working capital and for general partnership purposes. It is also available to fund letters of credit up to a $50 million sub-limit and hascontinues to provide for an accordion feature that allows HEP to increase the commitments under the Amended HEP Credit Agreement up to a $300 million accordion.maximum amount of $1.7 billion. During the sixthree months ended June 30, 2020,March 31, 2021, HEP received advances totaling $168.0$73.0 million and repaid $138.5$90.5 million under the HEP Credit Agreement. At June 30, 2020,March 31, 2021, HEP was in compliance with all of its covenants, had outstanding borrowings of $995.0$896.0 million and no outstanding letters of credit under the HEP Credit Agreement.
HEP Senior Notes
On February 4, 2020, HEP closed a private placement of $500 million in aggregate principal amount of 5.0% HEP senior unsecured notes maturing February 2028. On February 5, 2020, HEP redeemed its existing $500 million aggregate principal amount of 6.0% senior notes maturing August 2024 at a redemption cost of $522.5 million. HEP recognized a $25.9 million early extinguishment loss consisting of a $22.5 million debt redemption premium and unamortized discount and financing costs of $3.4 million. HEP funded the $522.5 million redemption with proceeds from the issuance of its 5.0% senior notes and borrowings under the HEP Credit Agreement.
See Note 9 “Debt” in the Notes to Consolidated Financial Statements for additional information on our debt instruments.
HEP Common Unit Continuous Offering Program
In May 2016, HEP establishedhas a continuous offering program under which HEP may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million. During the sixthree months ended June 30, 2020,March 31, 2021, HEP did not issue any common units under this program. As of June 30, 2020,March 31, 2021, HEP has issued 2,413,153 units undersince the inception of this program, providing $82.3 million in gross proceeds.
Liquidity
We believe our current cash and cash equivalents, along with future internally generated cash flow and funds available under our credit facilities, will provide sufficient resources to fund currently planned capital projects and our liquidity needs for the foreseeable future. We expect that, to the extent necessary, we can raise additional funds from time to time through equity or debt financings in the public and private capital markets. In addition, subject to our current cash conservation strategies as discussed above in “Outlook,” components of our growth strategy include the expansion of existing units at our facilities and selective acquisition of complementary assets for our refining operations intended to increase earnings and cash flow. We also expect to use cash for paymentIn connection with the acquisition of cash dividends, which are at the discretion ofPuget Sound Refinery, our Board of Directors and, once commodity prices and demand for products normalize,approved a one-year suspension of the regular quarterly dividend effective with the dividend to be declared for the repurchasesfirst quarter of our common stock under our share repurchase program.2021 and is expected to resume the dividend after such time.
Our standalone (excluding HEP) liquidity was over $2.2approximately $2.5 billion at June 30, 2020,March 31, 2021, consisting of cash and cash equivalents totaling $883.6 millionof $1.2 billion and an undrawnundrawn $1.35 billion credit facility maturing in 2022. Our earliest standalone (excluding HEP) debt maturity is $1.0 billion of senior notes in 2026.facility.
We consider all highly-liquid instruments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. These primarily consist of investments in conservative, highly-rated instruments issued by financial institutions, government and corporate entities with strong credit standings and money market funds. Cash equivalents are stated at cost, which approximates market value.
In November 2019, our Board of Directors approved a $1.0 billion share repurchase program, which replaced all existing share repurchase programs, authorizing us to repurchase common stock in the open market or through privately negotiated transactions. The timing and amount of stock repurchases will depend on market conditions and corporate, regulatory and other relevant considerations. This program may be discontinued at any time by the Board of Directors. As of June 30, 2020,March 31, 2021, we had not repurchased common stock under this stock repurchase program. In addition, we are authorized by our Board of Directors to repurchase shares in an amount sufficient to offset shares issued under our compensation programs. In order to preserve liquidity, weWe do not intend to repurchase common stock under our $1.0 billion share repurchase program until commodity prices and demand for products normalize.completion of our ongoing renewables capital projects at the earliest.
Cash and cash equivalents increased $17.3 million for the six months ended June 30, 2020. Net cash provided by operating activities of $309.3 million exceeded net cash used by investing and financing activities of $131.7 million, and $155.5 million, respectively.
Cash Flows – Operating Activities
SixThree Months Ended June 30, 2020March 31, 2021 Compared to SixThree Months Ended June 30, 2019March 31, 2020
Net cash flows provided by operating activities were $309.3$62.3 million for the sixthree months ended June 30, 2020March 31, 2021 compared to $969.6$190.1 million for the sixthree months ended June 30, 2019, March 31, 2020, a decrease of $660.2$127.8 million. Net loss forThe decrease in operating cash flows was primarily due to lower gross refinery margins and higher operating expenses, partially offset by timing of turnaround expenditures and $51.5 million received upon settlement of a tariff rate case. For the sixthree months ended June 30, 2020 of $(443.7)March 31, 2021, turnaround expenditures decreased to $24.8 million was a decrease of $937.0 million compared to net income of $493.3 million for the six months ended June 30, 2019. Non-cash adjustments to net income consisting of depreciation and amortization, long-lived asset and goodwill impairments, lower of cost or market inventory valuation adjustment, earnings of equity method investments, inclusive of distributions, loss on early extinguishment of debt, gain on sales-type leases, gain / loss on sale of assets, deferred income taxes, equity-based compensation expense and fair value changes to derivative instruments totaled $877.5 million for the six months ended June 30, 2020 compared to $327.8from $38.7 million for the same period in 2019. Adjusted for non-cash items, changesof 2020.
Changes in working capitalcapital increased operating cash flows by $14.1 million and decreased operating cash flows by $103.3 million and increased operating cash flows by $246.9$65.4 million, for the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively. Additionally,Changes in working capital items adjust for the six months ended June 30, 2020, turnaround expenditures decreased to $49.2 million from $110.3 million from the same periodtiming of 2019.receipts and payments of actual cash.
Cash Flows – Investing Activities and Planned Capital Expenditures
SixThree Months Ended June 30, 2020March 31, 2021 Compared to SixThree Months Ended June 30, 2019March 31, 2020
Net cash flows used for investing activities were $131.7$147.1 million for the sixthree months ended June 30, 2020March 31, 2021 compared to $782.3$86.1 million for the sixthree months ended June 30, 2019, a decreaseMarch 31, 2020, an increase of $650.6$61.0 million. Cash expenditures for properties, plants and equipment for the first sixthree months of 20202021 increased to $129.7$150.0 million from $120.5$83.7 million for the same period in 2019. These2020, primarily due to expenditures related to our renewable diesel units that are expected to be completed in early 2022. Cash expenditures for properties, plants and equipment include HEP capital expenditures of $30.7$33.2 million and $17.8$18.9 million for the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively. Additionally,For the three months ended March 31, 2020, HEP also invested $2.4$2.3 million in the Cushing Connect Pipeline & Terminal LLC joint venture. Prior year investing activities reflected a net cash outflow
Planned Capital Expenditures
HollyFrontier Corporation
Each year our Board of Directors approves our annual capital budget which includes specific projects that management is authorized to undertake. Additionally, when conditions warrant or as new opportunities arise, additional projects may be approved. The funds appropriated for a particular capital project may be expended over a period of several years, depending on the time required to complete the project. Therefore, our planned capital expenditures for a given year consist of expenditures appropriated in that year’s capital budget plus expenditures for projects appropriated in prior years which have not yet been completed. Refinery turnaround spending is amortized over the useful life of the turnaround.
The refining industry is capital intensive and requires on-going investments to sustain our refining operations. This includes replacement of, or rebuilding, refinery units and components that extend the useful life. We also invest in projects that improve operational reliability and profitability via enhancements that improve refinery processing capabilities as well as production yield and flexibility. Our capital expenditures also include projects related to renewable diesel, environmental, health and safety compliance and include initiatives as a result of federal and state mandates.
Our refinery operations and related emissions are highly regulated at both federal and state levels, and we invest in our facilities as needed to remain in compliance with these standards. Additionally, when faced with new emissions or fuels standards, we seek to execute projects that facilitate compliance and also improve the operating costs and / or yields of associated refining processes.
HEP
Each year the Holly Logistic Services, L.L.C. board of directors approves HEP’s annual capital budget, which specifies capital projects that HEP management is authorized to undertake. Additionally, at times when conditions warrant or as new opportunities arise, special projects may be approved. The funds allocated for a particular capital project may be expended over a period in excess of a year, depending on the time required to complete the project. Therefore, HEP’s planned capital expenditures for a given year consist of expenditures approved for capital projects included in its current year capital budget as well as, in certain cases, expenditures approved for capital projects in capital budgets for prior years. HEP expects the majority of the expansion capital budget in 2020 to be invested in the Cushing Connect joint venture. In addition, HEP may spend funds periodically to perform capital upgrades or additions to its assets where a customer reimburses HEP for such costs. The upgrades or additions would generally benefit the customer over the remaining life of the related service agreements.
Due to the COVID-19 pandemic and resulting decline in U.S. and global economic activities, we have reduced our 2020 expected total consolidated capital expenditures by approximately 15% from our approved annual capital budget. Expected capital and turnaround cash spending for 20202021 is as follows:
| | | | | | | | | | | |
| Expected Cash Spending Range |
| (In millions) |
| HollyFrontier Capital Expenditures | | | |
| Refining | $ | 190.0 | | | $ | 220.0 | |
| Renewables | 625.0 | | | 675.0 | |
| Lubricants and Specialty Products | 40.0 | | | 50.0 | |
| Turnarounds and catalyst | 320.0 | | | 350.0 | |
| Total HollyFrontier | 1,175.0 | | | 1,295.0 | |
| | | |
| HEP | | | |
| Maintenance | 14.0 | | | 18.0 | |
| Expansion and joint venture investment | 30.0 | | | 35.0 | |
| Refining unit turnarounds | 5.0 | | | 8.0 | |
| Total HEP | 49.0 | | | 61.0 | |
| Total | $ | 1,224.0 | | | $ | 1,356.0 | |
|
| | | | | | | |
| | Expected Cash Spending Range |
| | (In millions) |
| HollyFrontier Capital Expenditures | | | |
| Refining | $ | 202.0 |
| | $ | 221.0 |
|
| Renewable Diesel Unit | 150.0 |
| | 180.0 |
|
| Lubricants and Specialty Products | 30.0 |
| | 45.0 |
|
| Turnarounds and catalyst | 85.0 |
| | 110.0 |
|
| Total HollyFrontier | 467.0 |
| | 556.0 |
|
| | | | |
| HEP | | | |
| Maintenance | 8.0 |
| | 12.0 |
|
| Expansion and joint venture investment | 45.0 |
| | 50.0 |
|
| Refining unit turnarounds | 5.0 |
| | 7.0 |
|
| Total HEP | 58.0 |
| | 69.0 |
|
| Total | $ | 525.0 |
| | $ | 625.0 |
|
Cash Flows – Financing Activities
SixThree Months Ended June 30, 2020March 31, 2021 Compared to SixThree Months Ended June 30, 2019March 31, 2020
NetFor the three months ended March 31, 2021, our net cash flows used for financing activities were $155.5 million for the six months ended June 30, 2020 compared to $429.9 million for the six months ended June 30, 2019, a decrease of $274.3$89.6 million. During the sixthree months ended June 30,March 31, 2021, we paid $57.7 million in dividends. Also during this period, HEP had net repayments of $17.5 million under the HEP Credit Agreement and paid distributions of $20.0 million to noncontrolling interests. For the three months ended March 31, 2021, HEP received contributions from noncontrolling interests of $6.3 million.
For the three months ended March 31, 2020, our net cash flows used for financing activities were $71.5 million. During the three months ended March 31, 2020, we purchased $1.2 million of treasury stock and paid $114.4$57.2 million in dividends. Also during this period, HEP received $168.0$112.0 million and repaid $138.5$67.0 million under the HEP Credit Agreement, paid $522.5 million upon the redemption of HEP’s 6.0% senior notes and received $491.3$491.5 million in net proceeds from the issuance of HEP 5.0% senior notes paid distributions of $51.0 million to noncontrolling interests and received contributions from noncontrolling interests of $13.3 million. During the six months ended June 30, 2019, we purchased $267.0 million of treasury stock and paid $113.5 million in dividends. Also during this period, HEP received $175.0 million and repaid $156.5 million under the HEP Credit Agreement and paid distributions of $66.7$33.9 million to noncontrolling interests.
Contractual Obligations and Commitments
HollyFrontier Corporation
There were no significant changes to our long-term contractual obligations during the sixthree months ended June 30, 2020.March 31, 2021.
HEP
In February 2020, HEP issued $500 million in aggregate principal amount of 5.0% HEP senior notes maturing February 2028 and redeemed its existing $500 million 6.0% senior notes maturing August 2024.
During the sixthree months ended June 30, 2020,March 31, 2021, HEP had net borrowingsnet repayments of $29.5$17.5 million resulting in $995.0$896.0 million of outstanding borrowings under the HEP Credit Agreement at June 30, 2020.March 31, 2021.
There were no other significant changes to HEP’s long-term contractual obligations during this period.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2019.2020. Certain critical accounting policies that materially affect the amounts recorded in our consolidated financial statements include the use of the last-in, first-out (“LIFO”) method of valuing certain inventories, assessing the possible impairment of certain long-lived assets and goodwill, and assessing contingent liabilities for probable losses.
Inventory Valuation: Inventories related to our refining operations are stated at the lower of cost, using the LIFO method for crude oil and unfinished and finished refined products, or market. In periods of rapidly declining prices, LIFO inventories may have to be written down to market value due to the higher costs assigned to LIFO layers in prior periods. In addition, the use of the LIFO inventory method may result in increases or decreases to cost of sales in years that inventory volumes decline as the result of charging cost of sales with LIFO inventory costs generated in prior periods. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final year-end LIFO inventory valuation.
At June 30, 2020,March 31, 2021, our lower of cost or market inventory valuation reserve was $530.9$118.8 million. This amount, or a portion thereof, is subject to reversal as a reduction to cost of products sold in subsequent periods as inventories giving rise to the reserve are sold, and a new reserve is established. Such a reduction to cost of products sold could be significant if inventory values return to historical cost price levels. Additionally, further decreases in overall inventory values could result in additional charges to cost of products sold should the lower of cost or market inventory valuation reserve be increased.
Inventories consisting of process chemicals, materials and maintenance supplies and RINs are stated at the lower of weighted-average cost or net realizable value. Inventories of our Petro-Canada Lubricants and Sonneborn businesses are stated at the lower of cost, using the FIFO method, or net realizable value.
Goodwill and Long-lived Assets: As of June 30, 2020,March 31, 2021, our goodwill balance was $2.4$2.3 billion, with goodwill assigned to our Refining, Lubricants and Specialty Products and HEP segments of $1,733.5 million, $327.6$247.1 million and $312.9 million, respectively. Goodwill represents the excess of the cost of an acquired entity over the fair value of the assets acquired and liabilities assumed. Goodwill is not subject to amortization and is tested annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our goodwill impairment testing first entails either a quantitative assessment or an optional qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that based on the qualitative factors that it is more likely than not that the faircarrying value of the reporting unit is greater than its carrying amount,fair value, a quantitative test is performed in which we estimate the fair value of the related reporting unit. If the carrying amount of a reporting unit exceeds its fair value, the goodwill of that reporting unit is impaired, and we measure goodwill impairment as the excess of the carrying amount of reporting unit over the related fair value.
For purposes of long-lived asset impairment evaluation, we have grouped our long-lived assets as follows: (i) our refinery asset groups, which include certain HEP logistics assets, (ii) our Lubricants and Specialty Products asset groups and (iii) our HEP asset groups, which comprises HEP assets not included in our refinery asset groups. These asset groups represent the lowest level for which independent cash flows can be identified. Our long-lived assets are evaluated for impairment by identifying whether indicators of impairment exist and if so, assessing whether the long-lived assets are recoverable from estimated future undiscounted cash flows. The actual amount of impairment loss measured, if any, is equal to the amount by which the asset group’s carrying value exceeds its fair value.
GoodwillWe continually monitor and long-lived asset impairments
Due to the recent economic slowdown caused by the COVID-19 pandemic, we determined thatevaluate various factors for potential indicators of potential goodwill impairment for our Refining and Lubricants and Specialty Products reporting units were present. In addition, we determined that these indicators were also evidence of potential long-lived asset impairments. These indicators included reductions in the prices of our finished goods and raw materials and the related decrease in our gross margins, as well as the recent decline in our common share price which has resulted in a decrease in our market capitalization. Additionally, our recent announcement of the conversion of our Cheyenne Refinery to renewable diesel production was also considered a triggering event requiring assessment of potential impairments to the carrying value of our Cheyenne Refinery asset group. During the second quarter of 2020, we performed interim goodwill and long-lived asset impairment testing as of May 31, 2020.
In performing our impairment tests of goodwill and long-lived assets we developed cash flow forecasts for each of our reporting units and asset groups. Significant judgment is involved in performing these fair value estimates since the results are based on forecasted financial information. The cash flow forecasts include significant assumptions such as planned utilization, end-user demand, selling prices, gross margins, operating costs and capital expenditures. Another key assumption applied to these forecasts to determine the fair value of a reporting unit or an asset group is the discount rate. The discount rate is intended to reflect the weighted average cost of capital for a market participant and the risks associated with the realization of the estimated future cash flows. Assumptions about the effects of the COVID-19 pandemic on future demand and market conditions are inherently subjective and difficult to forecast. Our fair value estimates are based on projected cash flows, which we believe to be reasonable.
As a result of our long-lived asset impairment testing, we determined that the carrying value of the long-lived assets of our Cheyenne Refinery and PCLI asset groups were not recoverable, and thus recorded long-lived asset impairment charges of $232.2 million and $204.7 million, respectively, in the second quarter of 2020. Our testing did not result in any other impairment of long-lived assets.
Our interim goodwill impairment testing indicated that the fair values of our Refining and Lubricants and Specialty Products reporting units were in excess of their respective carrying amounts ranging from 9% to 283%; therefore, there was no impairment of goodwill at our Refining and Lubricants and Specialty Products reporting units. Increasing the discount rate by 1.0% or reducing the terminal cash flow growth rate by 1.0% would not have changed the results of our goodwill impairment testing.
impairment. A reasonable expectation exists that further deterioration in our operating results or overall economic conditions could result in an impairment of goodwill and / or additional long-lived asset impairments at some point in the future. Future impairment charges could be material to our results of operations and financial condition. Our annual goodwill impairment testing is performed on July 1.
Contingencies
We are subject to proceedings, lawsuits and other claims related to environmental, labor, product and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.
RISK MANAGEMENT
We use certain strategies to reduce some commodity price and operational risks. We do not attempt to eliminate all market risk exposures when we believe that the exposure relating to such risk would not be significant to our future earnings, financial position, capital resources or liquidity or that the cost of eliminating the exposure would outweigh the benefit.
Commodity Price Risk Management
Our primary market risk is commodity price risk. We are exposed to market risks related to the volatility in crude oil and refined products, as well as volatility in the price of natural gas used in our refining operations. We periodically enter into derivative contracts in the form of commodity price swaps, forward purchase and sales and futures contracts to mitigate price exposure with respect to our inventory positions, natural gas purchases, sales prices of refined products and crude oil costs.
Foreign Currency Risk Management
We are exposed to market risk related to the volatility in foreign currency exchange rates. We periodically enter into derivative contracts in the form of foreign exchange forward and foreign exchange swap contracts to mitigate the exposure associated with fluctuations on intercompany notes with our foreign subsidiaries that are not denominated in the U.S. dollar.
As of June 30, 2020,March 31, 2021, we have the following notional contract volumes related to all outstanding derivative instruments used to mitigate commodity price and foreign currency risk:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Notional Contract Volumes by Year of Maturity | | | | | | |
| Derivative Instrument | | Total Outstanding Notional | | 2021 | | 2022 | | | | | | Unit of Measure |
| | | | | | | | | | | | |
| Natural gas price swaps - long | | 1,350,000 | | | 1,350,000 | | | — | | | | | | | MMBTU |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| NYMEX futures (WTI) - short | | 805,000 | | | 805,000 | | | — | | | | | | | Barrels |
| Forward gasoline and diesel contracts - long | | 315,000 | | | 315,000 | | | — | | | | | | | Barrels |
| Forward gasoline contracts - short | | 400,000 | | | 400,000 | | | — | | | | | | | Barrels |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Foreign currency forward contracts | | 421,800,661 | | | 311,887,682 | | | 109,912,979 | | | | | | | U.S. dollar |
Forward commodity contracts (platinum) (1) | | 40,767 | | | — | | | 40,767 | | | | | | | Troy ounces |
|
| | | | | | | | | | | |
| | | | | Notional Contract Volumes by Year of Maturity | | |
| Derivative Instrument | | Total Outstanding Notional | | 2020 | | 2021 | | Unit of Measure |
| | | | | | | | | |
| Natural gas price swaps - long | | 2,700,000 |
| | 900,000 |
| | 1,800,000 |
| | MMBTU |
| Crude oil price swaps (basis spread) - long | | 3,128,000 |
| | 3,128,000 |
| | — |
| | Barrels |
| NYMEX futures (WTI) - short | | 890,000 |
| | 890,000 |
| | — |
| | Barrels |
| Forward gasoline and diesel contracts - long | | 464,000 |
| | 464,000 |
| | — |
| | Barrels |
| Forward diesel contracts - short | | 200,000 |
| | 200,000 |
| | — |
| | Barrels |
| Foreign currency forward contracts | | 422,074,120 |
| | 214,491,576 |
| | 207,582,544 |
| | U.S. dollar |
Forward commodity contracts (platinum) (1) | | 40,867 |
| | — |
| | 40,867 |
| | Troy ounces |
(1) Represents an embedded derivative within our catalyst financing arrangements, which may be refinanced or require repayment under certain conditions. See Note 9 “Debt” in the Notes to Consolidated Financial Statements for additional information on these financing arrangements.
The following sensitivity analysis provides the hypothetical effects of market price fluctuations to the commodity positions hedged under our derivative contracts:
| | | | | | | | | | | | | | |
| | Estimated Change in Fair Value at March 31, |
| Commodity-based Derivative Contracts | | 2021 | | 2020 |
| | (In thousands) |
| Hypothetical 10% change in underlying commodity prices | | $ | 4,420 | | | $ | 319 | |
|
| | | | | | | | |
| | | Estimated Change in Fair Value at June 30 |
| Commodity-based Derivative Contracts | | 2020 | | 2019 |
| | | (In thousands) |
| Hypothetical 10% change in underlying commodity prices | | $ | 2,826 |
| | $ | 2,902 |
|
Interest Rate Risk Management
The market risk inherent in our fixed-rate debt is the potential change arising from increases or decreases in interest rates as discussed below.
For the fixed rate HollyFrontier Senior Notes and HEP Senior Notes, changes in interest rates will generally affect fair value of the debt, but not earnings or cash flows. The outstanding principal, estimated fair value and estimated change in fair value (assuming a hypothetical 10% change in the yield-to-maturity rates) for this debt as of June 30, 2020March 31, 2021 is presented below:
| | | | | | | | | | | | | | | | | | | | |
| | Outstanding
Principal | | Estimated
Fair Value | | Estimated
Change in
Fair Value |
| | | (In thousands) |
| HollyFrontier Senior Notes | | $ | 1,750,000 | | | $ | 1,908,586 | | | $ | 28,997 | |
| | | | | | |
| HEP Senior Notes | | $ | 500,000 | | | $ | 504,960 | | | $ | 14,201 | |
|
| | | | | | | | | | | | |
| | | Outstanding Principal | | Estimated Fair Value | | Estimated Change in Fair Value |
| | | (In thousands) |
| HollyFrontier Senior Notes | | $ | 1,000,000 |
| | $ | 1,105,120 |
| | $ | 20,828 |
|
| HEP Senior Notes | | $ | 500,000 |
| | $ | 477,835 |
| | $ | 17,322 |
|
For the variable rate HEP Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. At June 30, 2020,March 31, 2021, outstanding borrowings under the HEP Credit Agreement were $995.0 million.$896.0 million. A hypothetical 10% change in interest rates applicable to the HEP Credit Agreement would not materially affect cash flows.
Our operations are subject to hazards of petroleum processing operations, including but not limited to fire, explosion and weather-related perils. We maintain various insurance coverages, including property damage and business interruption insurance, subject to certain deductibles.deductibles and insurance policy terms and conditions. We are not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do not justify such expenditures.
Financial information is reviewed on the counterparties in order to review and monitor their financial stability and assess their ongoing ability to honor their commitments under the derivative contracts. We have not experienced, nor do we expect to experience, any difficulty in the counterparties honoring their commitments.
We have a risk management oversight committee consisting of members from our senior management. This committee oversees our risk enterprise program, monitors our risk environment and provides direction for activities to mitigate identified risks that may adversely affect the achievement of our goals.
| |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Item 3.Quantitative and Qualitative Disclosures About Market Risk
See “Risk Management” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles
Reconciliations of earnings before interest, taxes, depreciation and amortization (“EBITDA”) to amounts reported under generally accepted accounting principles in financial statements.
Earnings before interest, taxes, depreciation and amortization, which we refer to as EBITDA, is calculated as net income (loss) attributable to HollyFrontier stockholders plus (i) interest expense, net of interest income, (ii) income tax provision, and (iii) depreciation and amortization. EBITDA is not a calculation provided for under GAAP; however, the amounts included in the EBITDA calculation are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies. EBITDA is presented here because it is a widely used financial indicator used by investors and analysts to measure performance. EBITDA is also used by our management for internal analysis and as a basis for financial covenants.
Set forth below is our calculation of EBITDA. | | | | | | | | | | | | | Three Months Ended March 31, | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | |
| | | (In thousands) | | | (In thousands) |
| Net income (loss) attributable to HollyFrontier stockholders | | $ | (176,677 | ) | | $ | 196,915 |
| | $ | (481,300 | ) | | $ | 449,970 |
| Net income (loss) attributable to HollyFrontier stockholders | | $ | 148,217 | | | $ | (304,623) | | |
| Add interest expense | | 32,695 |
| | 34,264 |
| | 55,334 |
| | 70,911 |
| Add interest expense | | 38,386 | | | 22,639 | | |
| Subtract interest income | | (1,506 | ) | | (4,588 | ) | | (5,579 | ) | | (10,963 | ) | Subtract interest income | | (1,031) | | | (4,073) | | |
| Add income tax expense (benefit) | | (30,911 | ) | | 89,336 |
| | (193,077 | ) | | 176,841 |
| |
| Subtract income tax benefit | | Subtract income tax benefit | | (28,307) | | | (162,166) | | |
| Add depreciation and amortization | | 130,178 |
| | 126,908 |
| | 270,753 |
| | 248,329 |
| Add depreciation and amortization | | 124,079 | | | 140,575 | | |
| EBITDA | | $ | (46,221 | ) | | $ | 442,835 |
| | $ | (353,869 | ) | | $ | 935,088 |
| EBITDA | | $ | 281,344 | | | $ | (307,648) | | |
Reconciliations of refinery operating information (non-GAAP performance measures) to amounts reported under generally accepted accounting principles in financial statements.
Refinery gross margin and net operating margin are non-GAAP performance measures that are used by our management and others to compare our refining performance to that of other companies in our industry. We believe these margin measures are helpful to investors in evaluating our refining performance on a relative and absolute basis. Refinery gross margin per produced barrel sold is total refining segment revenues less total refining segment cost of products sold, exclusive of lower of cost or market inventory valuation adjustments, divided by sales volumes of produced refined products sold. Net operating margin per barrel sold is the difference between refinery gross margin and refinery operating expenses per produced barrel sold. These two margins do not include the non-cash effects of long-lived asset impairment charges, lower of cost or market inventory valuation adjustments or depreciation and amortization. Each of these component performance measures can be reconciled directly to our consolidated statements of income.operations. Other companies in our industry may not calculate these performance measures in the same manner.
Below are reconciliations to our consolidated statements of incomeoperations for refinery net operating and gross margin and operating expenses, in each case averaged per produced barrel sold. Due to rounding of reported numbers, some amounts may not calculate exactly.
Reconciliation of average refining segment net operating margin per produced barrel sold to refinery gross margin to total sales
and other revenues
| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | | | | |
| | | 2021 | | 2020 | | | | |
| | | (Dollars in thousands, except per barrel amounts) |
| Consolidated | | | | | | | | |
| Net operating margin per produced barrel sold | | $ | (1.17) | | | $ | 5.17 | | | | | |
| Add average refinery operating expenses per produced barrel sold | | 9.17 | | | 5.89 | | | | | |
| Refinery gross margin per produced barrel sold | | 8.00 | | | 11.06 | | | | | |
| Times produced barrels sold (BPD) | | 354,940 | | | 409,850 | | | | | |
| Times number of days in period | | 90 | | | 91 | | | | | |
| Refining gross margin | | 255,557 | | | 412,498 | | | | | |
| Add (subtract) rounding | | (5) | | | 146 | | | | | |
| West and Mid-Continent regions gross margin | | 255,552 | | | 412,644 | | | | | |
| Add West and Mid-Continent regions cost of products sold | | 2,761,943 | | | 2,287,109 | | | | | |
| Add Cheyenne Refinery sales and other revenues | | — | | | 235,113 | | | | | |
| Refining segment sales and other revenues | | 3,017,495 | | | 2,934,866 | | | | | |
| Add lubricants and specialty products segment sales and other revenues | | 524,563 | | | 526,603 | | | | | |
| Add HEP segment sales and other revenues | | 127,184 | | | 127,854 | | | | | |
| Subtract corporate, other and eliminations | | (164,949) | | | (188,778) | | | | | |
| Sales and other revenues | | $ | 3,504,293 | | | $ | 3,400,545 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | (Dollars in thousands, except per barrel amounts) |
| Consolidated | | | | | | | | |
| Net operating margin per produced barrel sold | | $ | 1.57 |
| | $ | 13.72 |
| | $ | 3.44 |
| | $ | 9.99 |
|
| Add average refinery operating expenses per produced barrel sold | | 6.87 |
| | 5.92 |
| | 6.56 |
| | 6.40 |
|
| Refinery gross margin per produced barrel sold | | 8.44 |
| | 19.64 |
|
| 10.00 |
| | 16.39 |
|
| Times produced barrels sold (BPD) | | 382,910 |
| | 469,100 |
| | 417,600 |
| | 446,190 |
|
| Times number of days in period | | 91 |
| | 91 |
| | 182 |
| | 181 |
|
| Refining segment gross margin | | 294,090 |
| | 838,394 |
|
| 760,032 |
| | 1,323,663 |
|
| Add (subtract) rounding | | (23 | ) | | 34 |
| | 150 |
| | (365 | ) |
| Total refining segment gross margin | | 294,067 |
| | 838,428 |
|
| 760,182 |
| | 1,323,298 |
|
| Add refining segment cost of products sold | | 1,433,437 |
| | 3,458,832 |
| | 3,902,188 |
| | 6,421,372 |
|
| Refining segment sales and other revenues | | 1,727,504 |
| | 4,297,260 |
| | 4,662,370 |
| | 7,744,670 |
|
| Add lubricants and specialty products segment sales and other revenues | | 357,287 |
| | 545,346 |
| | 883,890 |
| | 1,038,680 |
|
| Add HEP segment sales and other revenues | | 114,807 |
| | 130,751 |
| | 242,661 |
| | 265,248 |
|
| Subtract corporate, other and eliminations | | (136,668 | ) | | (190,742 | ) | | (325,446 | ) | | (368,736 | ) |
| Sales and other revenues | | $ | 2,062,930 |
| | $ | 4,782,615 |
| | $ | 5,463,475 |
| | $ | 8,679,862 |
|
Reconciliation of average refining segment operating expenses per produced barrel sold to total operating expenses
| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | | | | |
| | | 2021 | | 2020 | | | | |
| | | (Dollars in thousands, except per barrel amounts) |
| Consolidated | | | | | | | | |
| Average refinery operating expenses per produced barrel sold | | $ | 9.17 | | | $ | 5.89 | | | | | |
| Times produced barrels sold (BPD) | | 354,940 | | | 409,850 | | | | | |
| Times number of days in period | | 90 | | | 91 | | | | | |
| Refinery operating expenses | | 292,932 | | | 219,676 | | | | | |
| Add (subtract) rounding | | (77) | | | (22) | | | | | |
| West and Mid-Continent regions operating expenses | | 292,855 | | | 219,654 | | | | | |
| Add Cheyenne Refinery operating expenses | | — | | | 39,520 | | | | | |
| Refining segment operating expenses | | 292,855 | | | 259,174 | | | | | |
| Add lubricants and specialty products segment operating expenses | | 60,753 | | | 54,131 | | | | | |
| Add HEP segment operating expenses | | 41,365 | | | 34,981 | | | | | |
| Add (subtract) corporate, other and eliminations | | 4,936 | | | (19,941) | | | | | |
| Operating expenses (exclusive of depreciation and amortization) | | $ | 399,909 | | | $ | 328,345 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| | | (Dollars in thousands, except per barrel amounts) |
| Consolidated | | | | | | | | |
| Average refinery operating expenses per produced barrel sold | | $ | 6.87 |
| | $ | 5.92 |
| | $ | 6.56 |
| | $ | 6.40 |
|
| Times produced barrels sold (BPD) | | 382,910 |
| | 469,100 |
| | 417,600 |
| | 446,190 |
|
| Times number of days in period | | 91 |
| | 91 |
| | 182 |
| | 181 |
|
| Refinery operating expenses | | 239,384 |
| | 252,714 |
| | 498,581 |
| | 516,866 |
|
| Add (subtract) rounding | | (25 | ) | | 1 |
| | (48 | ) | | 346 |
|
| Total refining segment operating expenses | | 239,359 |
| | 252,715 |
| | 498,533 |
| | 517,212 |
|
| Add lubricants and specialty products segment operating expenses | | 47,840 |
| | 59,122 |
| | 101,971 |
| | 112,681 |
|
| Add HEP segment operating expenses | | 34,737 |
| | 40,608 |
| | 69,718 |
| | 78,121 |
|
| Subtract corporate, other and eliminations | | (18,577 | ) | | (19,193 | ) | | (38,518 | ) | | (43,170 | ) |
| Operating expenses (exclusive of depreciation and amortization) | | $ | 303,359 |
| | $ | 333,252 |
| | $ | 631,704 |
| | $ | 664,844 |
|
| |
Item 4. | Controls and Procedures |
Item 4.Controls and Procedures
Evaluation of disclosure controls and procedures. Our principal executive officer and principal financial officer have evaluated, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2020.March 31, 2021.
Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
In the ordinary course of business, we may become party to legal, regulatory or administrative proceedings or governmental investigations, including environmental and other matters. Damages or penalties may be sought from us in some matters and certain matters may require years to resolve. While the outcome and impact of these proceedings and investigations on us cannot be predicted with certainty, based on advice of counsel and information currently available to us, management believes that the resolution of these proceedings and investigations through settlement or adverse judgment will not either individually or in the aggregate have a material adverse effect on our financial condition, results of operations or cash flows.
The environmental proceedings are reported to comply with SEC regulations which require us to disclose proceedings arising under provisions regulating the discharge of materials into the environment or protecting the environment ifwhen a governmental authority is party to the proceedings and such proceedings involve potential monetary sanctions that we reasonably believe that such proceedings may result in monetary sanctions ofcould exceed $300,000 or more. Certain disclosures made under the SEC’s prior $100,000 or more.threshold will remain until their resolution.
Environmental Matters
Cheyenne
HollyFrontier Cheyenne Refining LLC (“HFCR”) has been in discussions with the Wyoming Department of Environmental Quality (“WDEQ”) and the United States Environmental Protection Agency (“EPA”) relating to alleged violations of air quality emission limitations and requirements related to operation of certain refinery units at the Cheyenne Refinery.
Notices of Violations were issued by the WDEQ in late 2016 and 2018. On July 18, 2019, HFCR and the WDEQ entered into a consent decree, and on August 9, 2019, HFCR paid penalties in the amount of $117,000 related to alleged violations of air quality limits that occurred during the second quarter of 2016 through the second quarter of 2017. Separately, on October 23, 2019, HFCR received a Notice of Violation from the WDEQ for possible violations of air quality standards during the first and second quarters of 2019. No penalty demand has yet been made by the WDEQ relating to such possible violations. HFCR and WDEQ are in discussionsagreed to resolve WDEQ’s alleged violations of air quality limits that occurred during the third quarter of 2017 through calendar year 2019.
On August 19, 2019 and October 30, 2019, HFCR received letters fromduring the EPA providingfirst quarter of 2020 through the cessation of petroleum refining operations at the Cheyenne Refinery in the third quarter of 2020. During a preliminary estimatesettlement conference on November 9, 2020, WDEQ proposed a settlement that would impose a penalty of stipulated penalties related$95,075 to resolve the alleged violations that occurred during the third quarter of 2017 through the second quarterdate of 2019, pursuant tothe refinery shutdown. As part of the settlement process, on January 15, 2021, the State of Wyoming filed a complaint with the Wyoming District Court addressing the alleged violations. On February 18, 2021, WDEQ and HFCR filed a Joint Motion for Entry of Consent Decree memorializing the terms of the settlement with the Wyoming District Court. The Court entered the Consent Decree on February 23, 2021, and HFCR paid the penalty amount on March 4, 2021. HFCR’s federal consent decree. HFCR respondedpayment of the penalty, together with a previously completed Supplemental Environmental Project, fully satisfied its obligations under the Consent Decree. Pursuant to the EPA preliminary estimateterms of stipulated penalties related to the alleged violations that occurred duringConsent Decree, on March 31, 2021 the third quarter of 2017 through calendar year 2018 in a letter dated September 18, 2019, followed by meetingsCourt entered an order terminating the Consent Decree and dismissing the action with the EPA and the WDEQ on November 14, 2019 and December 4, 2019, to discuss an appropriate resolution of all alleged violations. HFCR settled the allegations in the EPA's August 19, 2019 and October 30, 2019 letters, and pursuant to a demand letter dated January 9, 2020, HFCR was assessed stipulated penalties totaling $700,000 pursuant to HFCR's federal consent decree. HFCR remitted payment of this amount to resolve the alleged violations.prejudice.
El Dorado
HollyFrontier El Dorado Refining LLC (“HFEDR”) has been engaged in discussions with, and has responded to document requests from, the EPA, the U.S. Department of Justice (“DOJ”) and the State of Kansas regarding alleged Clean Air Act civil violations relating to flaring devices and other equipment at the refinery. Topics of the discussions includedincluded: (a) three information requests for activities beginning in January 2009, (b) the Clean Air Act’s Risk Management Program (“RMP”) compliance issues relating to a November 2014 inspection and subsequent events, (c) a Notice of Violation issued by the EPA in August 2017, and (d) possible late reporting under the Emergency Planning and Community Right-to-Know Act for the release of sulfur dioxide and visible emissions from October 2018.
Some of the foregoing civil investigations resulted from fires that occurred at the El Dorado Refinery in September 2017, October 2018 and March 2019. An employee fatality occurred during the September 2017 event. On May 28, 2020, HFEDR reached a settlement in the form of a proposed consent decree with the EPA, the DOJ, and the State of Kansas regarding the alleged Clean Air Act civil violations relating to flaring devices and other equipment at the refinery, as well as compliance with the Clean Air Act’s Risk Management Program (“RMP”).RMP.
The proposed consent decree was lodged with the U.S. District Court for the District of Kansas, and the 30-day public comment period ended on July 18, 2020. On July 27, 2020, the EPA, the DOJ and the State of Kansas filed their Unopposed Motion to enter the Consent Decree with the U.S. District Court for the District of Kansas. TheKansas, and on August 27, 2020, the consent decree will become effective whenwas entered by the district judge.judge and became effective. Pursuant to the consent decree, among other terms and conditions, HFEDR is required to complete certain projects, implement protocols regarding the examination of its fired heaters and conduct a third party RMP audit of certain of its processes. In addition, HFEDR will bewas required to pay a civil penalty of $2 million to the United States and $2 million to the State of Kansas in two installments, the first half within 30 days of entry of the consent decree and the second within six months of entry of the consent decree. All payments have been timely made, and HFEDR has undertaken several of the required projects. The proposed consent decree will resolveresolves the alleged federal and state civil Clean Air Act liability for penalties and injunctive relief, other than potential civil penalties for RMP violations. Finally, as part of the settlement, a 2009 consent decree applicable to the refinery will bewas terminated. In March 2021, the EPA contacted HFEDR to begin discussions on potential civil penalties for the RMP violations noted above.
The Occupational Safety and Health Administration (“OSHA”) conducted investigations into both the September 2017 and March 2019 events identified above, and HFEDR settled the OSHA claims related to those investigations in 2018 and 2019, respectively. In April 2019, HFEDR became aware that the EPA also initiated a criminal investigation into one or more of the foregoing events. HFEDR has received a grand jury subpoena requesting certain documents be provided to the EPA with respect to the September 2017 event. HFEDR cooperated with the EPA in responding to the subpoena. In April 2021, the EPA informed HFEDR that the records HFEDR produced in response to the subpoena would be returned to HFEDR. We are cooperating with this investigation.do not believe that criminal charges will be brought.
Tulsa
HollyFrontier Tulsa Refining LLC (“HFTR”) operates under two Consent Decrees with the EPA and the Oklahoma Department of Environmental Quality (“ODEQ”) for the East and West Refineries. On December 13, 2017, during a meeting between the parties, ODEQ proposed stipulated penalties related to violations of the two Consent Decrees. The violations concern Clean Air Act regulated fuel gas and flare operations. On July 1, 2019, ODEQ issued a demand letter for stipulated penalties under the East Refinery Consent Decree as proposed in the 2017 meeting. In August 2019, HFTR paid the penalties set forth in the demand letter to ODEQ and the EPA satisfying the requirements of the East Refinery Consent Decree. On September 16, 2019, ODEQ issued a demand letter for stipulated penalties under the West Refinery Consent Decree. Following discussions with ODEQ, in a letter dated April 17, 2020, ODEQ reduced its September 2019 demand for stipulated penalties. In May 2020, HFTR paid to ODEQ and the EPA the penalty set forth in the April 17, 2020 demand letter, which satisfied the requirements of the West Refinery Consent Decree. Separately, on April 3, 2019, during a meeting between the parties, the EPA notified HFTR of potential monitoring violations of the Consent Decrees. HFTR is working with theOn December 1, 2020, ODEQ, on behalf of ODEQ and the EPA, issued two demand letters alleging violations under the Consent Decrees, which stemmed from inspections conducted by the EPA at the refineries from May 1 through 5, 2017, as well as from a review of the refineries’ records. The alleged violations included the failure to documentcomply with applicable continuous emissions monitoring system (CEMS) requirements and exceedances of the hydrogen sulfide (H2S) emission limits. During a settlement agreementfollow-up conference call with ODEQ, on January 6, 2021, ODEQ shared its stipulated penalty amounts for alleged violations pursuant to the two Consent Decrees. HFTR submitted timely responses to the ODEQ demand letters on February 8, 2021. Based on HFTR’s responses, during a follow-up conference call on April 9, 2021, ODEQ confirmed both ODEQ and EPA had reduced the stipulated penalties for the additional actions.alleged violations of the two Consent Decrees and was seeking total stipulated penalties of $93,500. On April 9, 2021, HFTR confirmed acceptance of the above-referenced penalties. This matter will be resolved once HFTR pays the penalty following its receipt of the revised demand letter from ODEQ.
Federal Trade CommissionWoods Cross
HollyFrontier Woods Cross Refining LLC (“HFWCR”) operates under a federal consent decree with the EPA and the Utah Department of Environmental Quality. On July 23, 2019,November 3, 2020, HFWCR received a letter from the Federal Trade Commission (“FTC”) issuedEPA identifying potential violations of HFWCR’s federal consent decree that occurred from calendar year 2015 through the date of the letter. HFWCR provided a Civil Investigative Demand and a related Subpoena Duces Tecum requesting we provide specified information relatingresponse letter to the Sonneborn acquisition that closedEPA on December 3, 2020 disputing certain of the potential violations in the EPA's November 3, 2020 letter, and HFWCR supplemented its response letter on February 1, 2019. We are in the process of responding to the FTC request. Based on the limited information that we have at this time, we are unable5, 2021, March 5, 2021 March 31, 2021 and April 16, 2021, with additional information. It is too soon to predict the outcome of this request. On December 14, 2018, we received early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act from the FTC and Department of Justice with respect to the Sonneborn acquisition. On January 17, 2019, we received early termination of the applicable waiting period under the German antitrust laws with respect to the Sonneborn acquisition. Early termination is granted to transactions that the antitrust agencies determine raise no substantive competition concerns.matter.
Renewable Fuel Standard
Various subsidiaries of HollyFrontier moved to interveneare currently intervenors in fourthree lawsuits brought by renewable fuel interest groups against the EPA in federal courts alleging violations of the Renewable Fuel Standard under the Clean Air Act and challenging the EPA’s handling of small refinery exemptions. We intervened to vigorously defend the EPA’s position on small refinery exemptions because we believe the EPA correctly applied applicable law to the matters at issue. The U.S. Court of Appeals for the DC Circuit dismissed one of these four lawsuits on November 12, 2019 for lack of jurisdiction.
On January 24, 2020, in the first of these lawsuits, the U.S. Court of Appeals for the Tenth Circuit vacated the small refinery exemptions granted to two of our refineries for 2016 and remanded the case to the EPA for further proceedings. On March 24, 2020, various subsidiaries of HollyFrontier filed a Petition for Rehearing with the U.S. Court of Appeals for the Tenth Circuit. On April 7, 2020, the Tenth Circuit denied our request to reconsider its decision, and on April 15, 2020, the Tenth Circuit entered its mandate, remanding the matter back to the EPA. It isOn September 4, 2020, various subsidiaries of HollyFrontier filed a Petition for a Writ of Certiorari with the U.S. Supreme Court appealing the Tenth Circuit decision. On January 8, 2021, the U.S. Supreme Court granted HollyFrontier’s petition. The oral argument occurred on April 27, 2021. We anticipate decision from the Supreme Court in June 2021. We expect that we will not clear at this timeknow what steps the EPA will take with respect to our 2016 small refinery exemptions or how the case will impact future small refinery exemptions.
The second lawsuit is before the Tenth Circuit. The matter is fully briefed and remains pending before that court.
The third lawsuit is before the DC Circuit. Briefing of the issues before the court commenced on December 7, 2020; however, in light of the Supreme Court’s decision to hear HollyFrontier’s appeal of the Tenth Circuit decision, this case was stayed pending a decision from the Supreme Court.
In December 2020, various subsidiaries of HollyFrontier also filed a petition for review in the DC Circuit challenging EPA’s denial of small refinery exemption petitions for years prior to 2016. The petition was consolidated with petitions from eight other refining companies challenging the same decision. In light of the Supreme Court’s decision to hear HollyFrontier’s appeal of the Tenth Circuit decision, this case was stayed pending a decision from the Supreme Court.
Other
We are a party to various other litigation and proceedings that we believe, based on advice of counsel, will not either individually or in the aggregate have a materially adverse impact on our financial condition, results of operations or cash flows.
Item 1A.Risk Factors
Except for the additional risk factorfactors below, there have been no material changes in our risk factors as previously disclosed in Part 1, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and in Part II, “Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. You should carefully consider the risk factors discussed below and in our 20192020 Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
Our pending Puget Sound Refinery acquisition may not be consummated. Failure to complete the acquisition within the expected timeframe or at all could adversely affect our stock price and our future business dependsand financial results.
The Puget Sound Refinery acquisition (the “Acquisition”) is subject to regulatory clearance and other customary closing conditions. If these conditions are not satisfied or waived, the acquisition will not be consummated. If the closing of the Acquisition is substantially delayed or does not occur at all, or if the terms of the Acquisition are required to be modified substantially due to regulatory concerns, we may not realize the anticipated benefits of the Acquisition fully or at all. Certain of the conditions remaining to be satisfied include the absence of a law or order prohibiting the transactions contemplated by the related sale and purchase agreement and the expiration or termination of the applicable waiting periods under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, with respect to the Acquisition. We will also incur substantial transaction costs whether or not the Acquisition is completed. Any failure to complete the Acquisition could have a material adverse effect on hydrocarbon supplyour stock price and demand fundamentals, which can be adversely affected by numerous factors outsideour future business and financial results.
The anticipated benefits of our control, including the widespread outbreak of an illness, pandemic (like COVID-19) or any other public health crisis as well as actions taken by oil producers.
Our success depends on the demand for petroleum products such as transportation fuels and finished lubricant products, which is largely driven by the conditions of local and worldwide economies, and the supply of crude oil and other feedstocks. COVID-19’s spread across the globe and governmental actions in response thereto have negatively affected worldwide economic and commercial activity, reduced global demand for oil, gas and refined products, and created significant volatility and disruption of financial and commodity markets. Other factors currently impacting crude oil supply include production levels implemented by OPEC members, other large oil producers such as Russia and domestic and Canadian oil producers. The oversupply of crude oil in the market has caused certain domestic and Canadian oil producers from whom we source crude oil to shut-in their production, which could impact our ability to readily source crude oil once the stored crude oil is depleted. While there has been a recent stabilization in demand for refined products in the second quarter of 2020, this combination of events has contributed to an overall drop in prices for crude oil and refined products in the first half of 2020. In addition, the supply and demand for refined and finished lubricant products will depend on many other factors outside of our control, some of which include:
changes in domestic and international demand for, and the marketability of, our refined and finished lubricant products due to governmental actions, including travel bans and restrictions, quarantines, shelter in place orders, and shutdowns, which could result in a full or partial shutdown of our facilities;
increased price volatility, including the price we receive for refined and finished lubricant products;
the health of our workforce, including contractors and subcontractors, and their access to our facilities, which could result in a full or partial shutdown of our facilities if a significant portion of the workforce at a facility is impacted;
the ability or willingness of our vendors and suppliers to provide the equipment, parts, crude oil or other raw materials for our operations or otherwise fulfill their contractual obligations, which could reduce our production levels or otherwise cause our delay or failure to deliver refined or other finished lubricant products timelypending Puget Sound Refinery acquisition may not be realized fully or at all or cause delay or failuremay take longer to complete projects at our facilities;realize than expected.
| |
• | the ability or willingness of our customers to fulfill their contractual obligations or any material reduction in, or loss of, revenue from our customers;
|
increased potential for the occurrence of operational hazards, including terrorism, cyberattacks or domestic vandalism, as well as information system failures or communication network disruptions;
increased cost and reduced availability of capital for growth or capital expenditures;
availability and operability of terminals, tankage and pipelines that store and transport crude oil and refined and finished lubricant products;
delay by government authorities in issuing or maintaining permits necessary for our business or our capital projects;
shareholder activism and activities by non-governmental organizations to limit sources of funding for the energy sector;
increased costs of operation in relation to the COVID-19 outbreak, which costs may not be fully recoverable or adequately covered by insurance; and
| |
• | the impact of any economic downturn, recession or other disruption of the U.S. and global economies and financial and commodity markets.
|
The spread of COVID-19 has caused usAcquisition will require management to significantly modifydevote significant attention and resources to integrating the Puget Sound Refinery business with our business practices (including limiting employee and contractor presence at our work locations, restricting travel unless approved by senior leadership, quarantining employees when necessary, reducing our expected total consolidated capital expenditures for 2020 and reducing utilization at our refineries), and we may take further actions as may be required by government authorities or that we determine arebusiness. Delays in the best interests of our employees, contractors, customers, suppliers and communities. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be adversely impacted. In addition, a reasonable expectation exists that further deterioration in gross margins or a prolonged economic slowdown due to the COVID-19 pandemic could result in an additional impairment of assets or of goodwill at some point in the future. Such impairment charges could be material.
As the potential effects of COVID-19 are difficult to predict, the duration of any potential business disruption or the extent to which it may negatively affect our operating results is uncertain. Any potential impact will depend on future developments and new information that may emerge regarding the spread, severity and duration of the COVID-19 pandemic and the actions taken by authorities to contain it or manage its impact, all of which are beyond our control. In addition, if the volatility and seasonality in the oil and gas industry were to increase, the demand for our products and the prices that we will be able to charge for those products may decline. We are monitoring the situation to assess further possible implications to our business and to take actions in an effort to mitigate adverse consequences. These potential effects, while uncertain,this process could adversely affect our business, financial results, financial condition resultsand stock price. Even if we are able to integrate our business operations successfully, there can be no assurance that this integration will result in the realization of operations and/the full benefits of synergies, cost savings, innovation and operational efficiencies that we currently expect from this integration or cash flows, as well as our ability to pay dividends to our shareholders.that these benefits will be achieved within the anticipated time frame.
| |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
(c) Common Stock Repurchases Made in the Quarter
Under our common stock repurchase programs, repurchases are being made from time to time in the open market or privately negotiated transactions based on market conditions, securities law limitations and other factors. The following table includes repurchases made under these programs during the secondfirst quarter of 2020.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of
Shares Purchased | | Average Price
Paid per Share | | Total Number of
Shares Purchased
as Part of Publicly Announced Plans or Programs | | Maximum Dollar
Value of Shares
that May Yet Be
Purchased Under the Plans or Programs |
| January 2021 | | — | | | $ | — | | | — | | | $ | 1,000,000,000 | |
| February 2021 | | — | | | $ | — | | | — | | | $ | 1,000,000,000 | |
| March 2021 | | — | | | $ | — | | | — | | | $ | 1,000,000,000 | |
| Total for January to March 2021 | | — | | | | | — | | | |
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| April 2020 | | — |
| | $ | — |
| | — |
| | $ | 1,000,000,000 |
|
| May 2020 | | — |
| | $ | — |
| | — |
| | $ | 1,000,000,000 |
|
| June 2020 | | — |
| | $ | — |
| | — |
| | $ | 1,000,000,000 |
|
| Total for April to June 2020 | | — |
| | | | — |
| | |
Item 6.Exhibits
| | | | | | | | |
Item 6.Exhibit Number | Exhibits |
The Exhibit Index on page 62 of this Quarterly Report on Form 10-Q lists the exhibits that are filed or furnished, as applicable, as part of the Quarterly Report on Form 10-Q.
Table of ContentDescription
Exhibit Index
| | | | | 2.1+ | | | | Description2.1 of Registrant’s Current Report on Form 8-K filed May 4, 2021, File No. 1-03876). | | | | | 3.1 | | | | | | | 3.2 | | | | | | 10.1*+ | | | | | | 10.2+ | | HollyFrontier Corporation 2020 Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed May 15,10-K for the fiscal year ended December 31, 2020, File No. 1-03876). | | | | 10.3+ | | HollyFrontier Corporation 2020 Long Term Incentive Plan Sub-Plan for U.K. Employees (incorporated by reference to Exhibit 4.4 of Registrant’s Registration Statement on Form S-8 filed June 1, 2020, File No. 333-238835)
| | | | 10.4*10.1 | | SecondThird Amendment to Third Amended and Restated Crude Pipelines and Tankage Agreement datedentered into as of May 26, 2020,February 8, 2021, effective as of January 1, 2021, by and among HollyFrontier Navajo Refining LLC, HollyFrontier Woods Cross Refining LLC, HollyFrontier Refining & Marketing LLC, Holly Energy Partners - Operating, L.P., HEP Pipeline, L.L.C. and HEP Woods Cross, L.L.C. (incorporated by reference to Exhibit 10.8 of Registrant’s Current Report on Form 8-K filed February 11, 2021, File No. 1-03876).
| | | | 10.5*10.2 | | | | | | | 10.3 | | | | | | | 10.4 | | | | | | | 10.5 | | Fourth Amended and Restated Services and Secondment Agreement, entered into as of February 8, 2021, effective as of January 1, 2021, by and among Holly Logistic Services, L.L.C., certain subsidiaries of Holly Energy Partners, L.P., and certain subsidiaries of HollyFrontier Corporation (incorporated by reference to Exhibit 10.7 to Registrant's Current Report on 8-K filed February 11, 2021, File No. 1-03876). | | | | | 10.6 | | Sixth Amended and Restated Master Lease and Access Agreement , dated as of August 4, 2020,February 8, 2021, effective as of January 23, 2020,1, 2021, by and among certain subsidiaries of Holly Energy Partners, L.P. and certain subsidiaries of HollyFrontier Corporation. | | | | 10.6+ | | Form of Restricted Stock Unit Agreement (for employees)Corporation (incorporated by reference to Exhibit 10.210.6 of Registrant’s QuarterlyRegistrant's Current Report on Form 10-Q for the quarterly period ended March 31, 2020,8-K filed February 11, 2021, File No. 1-03876). | | | | 10.7+10.7 | | FormServices Agreement, entered into as of Performance Share Unit AgreementFebruary 8, 2021, effective as of January 1, 2021, by and between HollyFrontier Refining & Marketing LLC and Holly Energy Partners - Operating, L.P. (incorporated by reference to Exhibit 10.3 of Registrant’s QuarterlyRegistrant's Current Report on Form 10-Q for the quarterly period ended March 31, 2020,8-K filed February 11, 2021, File No. 1-03876). | | | | 31.1*10.8 | | | | | | | 10.9* | |
| | | | | 10.10+ | | Second Amendment to Senior Unsecured 5-Year Revolving Credit Agreement, dated as of April 30, 2021, among HollyFrontier Corporation, as borrower, MUFG Bank, Ltd., as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed May 3, 2021, File No. 1-03876). | | | | | 31.1* | | | | | | | 31.2* | | | | | | | 32.1** | | | | | | | 32.2** | | | | | |
| | | | | | | | | | Exhibit Number | | Description | | | | | 101++ | | The following financial information from HollyFrontier Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020,March 31, 2021, formatted as inline XBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income,Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, and (v) Notes to the Consolidated Financial Statements. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
| | | | 104104++ | | Cover page Interactive Data File (formatted as inline XBRL and contained in exhibit 101). |
* Filed herewith. ** Furnished herewith. + Constitutes management contracts or compensatory plans or arrangements. Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant agrees to furnish supplementally a copy of the omitted schedules and exhibits to the SEC upon request. ++Filed electronically herewith.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | | | | | | | | | | | | | | | HOLLYFRONTIER CORPORATION | | | HOLLYFRONTIER CORPORATION(Registrant) | | | (Registrant) | | | Date: May 5, 2021 | | | | Date: August 6, 2020 | | | /s/ Richard L. Voliva III | | | | Richard L.Voliva III | | | | Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
| | | | | Date: August 6, 2020May 5, 2021 | | | /s/ Indira Agarwal | | | | Indira Agarwal | | | | Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
|
|