Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 3.36M
3: EX-10.10 Material Contract HTML 91K
2: EX-10.9 Material Contract HTML 95K
4: EX-31.1 Certification -- §302 - SOA'02 HTML 26K
5: EX-31.2 Certification -- §302 - SOA'02 HTML 26K
6: EX-32.1 Certification -- §906 - SOA'02 HTML 23K
7: EX-32.2 Certification -- §906 - SOA'02 HTML 23K
13: R1 Cover Page HTML 76K
14: R2 Consolidated Balance Sheets HTML 151K
15: R3 Consolidated Balance Sheets (Parenthetical) HTML 81K
16: R4 Consolidated Statements of Operations HTML 134K
17: R5 Consolidated Statements of Comprehensive Income HTML 90K
18: R6 Consolidated Statements of Cash Flows HTML 139K
19: R7 Consolidated Statements of Equity HTML 140K
20: R8 Consolidated Statements of Equity (Parenthetical) HTML 24K
21: R9 Description of Business and Presentation of HTML 52K
Financial Statements
22: R10 Acquisitions HTML 68K
23: R11 Holly Energy Partners HTML 48K
24: R12 Revenues HTML 97K
25: R13 Fair Value Measurements HTML 80K
26: R14 Earnings Per Share HTML 47K
27: R15 Stock-Based Compensation HTML 38K
28: R16 Inventories HTML 37K
29: R17 Environmental HTML 29K
30: R18 Debt HTML 71K
31: R19 Derivative Instruments and Hedging Activities HTML 152K
32: R20 Equity HTML 33K
33: R21 Other Comprehensive Income (Loss) HTML 119K
34: R22 Contingencies HTML 31K
35: R23 Segment Information HTML 232K
36: R24 Description of Business and Presentation of HTML 72K
Financial Statements (Policy)
37: R25 Acquisitions (Tables) HTML 60K
38: R26 Holly Energy Partners (Tables) HTML 35K
39: R27 Revenues (Tables) HTML 97K
40: R28 Fair Value Measurements (Tables) HTML 75K
41: R29 Earnings Per Share (Tables) HTML 47K
42: R30 Stock-Based Compensation (Tables) HTML 46K
43: R31 Inventories (Tables) HTML 37K
44: R32 Debt (Tables) HTML 56K
45: R33 Derivative Instruments and Hedging Activities HTML 156K
(Tables)
46: R34 Other Comprehensive Income (Loss) (Tables) HTML 123K
47: R35 Segment Information (Tables) HTML 222K
48: R36 Description of Business and Presentation of HTML 78K
Financial Statements (Details)
49: R37 Acquisitions - Narrative (Details) HTML 112K
50: R38 Acquisitions - Schedule of Recognized Identified HTML 42K
Assets Acquired and Liabilities Assumed (Details)
51: R39 Acquisitions - Schedule of Preliminary Purchase HTML 66K
Consideration (Details)
52: R40 Acquisitions - Schedule of Pro Forma Information HTML 28K
(Details)
53: R41 Holly Energy Partners - Narrative (Details) HTML 77K
54: R42 Holly Energy Partners - Schedule of Lease Income HTML 31K
(Details)
55: R43 Revenues - Schedule of Disaggregated Revenues HTML 67K
(Details)
56: R44 Revenues - Schedule Contract Liabilities (Details) HTML 28K
57: R45 Revenues - Schedule of Performance Obligations HTML 49K
(Details)
58: R46 Fair Value Measurements (Details) HTML 59K
59: R47 Earnings Per Share (Details) HTML 61K
60: R48 Stock-Based Compensation - Narrative (Details) HTML 42K
61: R49 Stock-Based Compensation - Schedule Of Restricted HTML 40K
Stock and Performance Share Activity (Details)
62: R50 Inventories - Schedule of Inventories (Details) HTML 36K
63: R51 Inventories - Narrative (Details) HTML 26K
64: R52 Environmental (Details) HTML 35K
65: R53 Debt - Narrative (Details) HTML 101K
66: R54 Debt - Carrying Amounts Of Long-Term Debt HTML 73K
(Details)
67: R55 Derivative Instruments and Hedging Activities- HTML 35K
Location of Gain Loss in Income Statement
(Details)
68: R56 Derivative Instruments and Hedging Activities - HTML 34K
Pre-tax effect on Income Due to Maturities and
Fair Value Adjustments of Economic Hedges
(Details)
69: R57 Derivative Instruments and Hedging Activities - HTML 46K
Notional Contracts by Derivative Type (Details)
70: R58 Derivative Instruments and Hedging Activities - HTML 64K
Summary Of Balance Sheet Locations And Related
Fair Values Of Outstanding Derivative Instruments
(Details)
71: R59 Equity (Details) HTML 54K
72: R60 Other Comprehensive Income (Loss) - Components And HTML 48K
Allocated Tax Effects Of Other Comprehensive
Income (Loss) (Details)
73: R61 Other Comprehensive Income (Loss) - Other HTML 77K
Comprehensive Income (Loss) Amounts Reclassified
to Income Statement (Details)
74: R62 Other Comprehensive Income (Loss) - Accumulated HTML 48K
Other Comprehensive Income (Loss) In Equity
(Details)
75: R63 Contingencies (Details) HTML 30K
76: R64 Segment Information - Narrative (Details) HTML 38K
77: R65 Segment Information - Schedule Of Segment HTML 99K
Reporting Information (Details)
80: XML IDEA XML File -- Filing Summary XML 145K
78: XML XBRL Instance -- dino-20220930_htm XML 3.70M
79: EXCEL IDEA Workbook of Financial Reports XLSX 188K
9: EX-101.CAL XBRL Calculations -- dino-20220930_cal XML 219K
10: EX-101.DEF XBRL Definitions -- dino-20220930_def XML 923K
11: EX-101.LAB XBRL Labels -- dino-20220930_lab XML 1.79M
12: EX-101.PRE XBRL Presentations -- dino-20220930_pre XML 1.17M
8: EX-101.SCH XBRL Schema -- dino-20220930 XSD 176K
81: JSON XBRL Instance as JSON Data -- MetaLinks 469± 706K
82: ZIP XBRL Zipped Folder -- 0001915657-22-000091-xbrl Zip 608K
(Former name, former address and former fiscal year, if changed since last report)
Securities
registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock $0.01 par value
iDINO
iNew
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. iYes☒ 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). iYes☒ 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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
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 i☐ No ☒
i200,730,536
shares of Common Stock, par value $.01 per share, were outstanding on November 4, 2022.
On March 14, 2022 (the “Closing Date”), HollyFrontier Corporation (“HollyFrontier”) and Holly Energy Partners, L.P. (“HEP”) announced the establishment of HF Sinclair Corporation, a Delaware corporation (“HF Sinclair”), as the new parent holding company of HollyFrontier and HEP and their subsidiaries, and the completion of their respective acquisitions of Sinclair Oil Corporation (now known as Sinclair Oil LLC, “Sinclair Oil”) and Sinclair Transportation Company LLC (“STC”) from The Sinclair Companies (now known as REH Company and referred to herein as “Sinclair HoldCo”). On the Closing Date, pursuant to that certain Business Combination
Agreement, dated as of August 2, 2021 (as amended on March 14, 2022, the “Business Combination Agreement”), by and among HollyFrontier, HF Sinclair, Hippo Merger Sub, Inc., a wholly owned subsidiary of HF Sinclair (“Parent Merger Sub”), Sinclair HoldCo, and Hippo Holding LLC (now known as Sinclair Holding LLC), a wholly owned subsidiary of Sinclair HoldCo (the “Target Company”), HF Sinclair completed its previously announced acquisition of the Target Company by effecting (a) a holding company merger in accordance with Section 251(g) of the Delaware General Corporation Law whereby HollyFrontier merged with and into Parent Merger Sub, with HollyFrontier surviving such merger as a direct wholly owned subsidiary of HF Sinclair (the “HFC Merger”) and (b) immediately following the HFC Merger, a contribution whereby Sinclair HoldCo contributed all
of the equity interests of the Target Company to HF Sinclair in exchange for shares of HF Sinclair, resulting in the Target Company becoming a direct wholly owned subsidiary of HF Sinclair (the “HFC Transactions”). At the effective time of the HFC Merger, HollyFrontier became a wholly owned subsidiary of HF Sinclair, and all of HollyFrontier’s outstanding shares were automatically converted into equivalent corresponding shares of HF Sinclair. Pursuant to the HFC Merger, HF Sinclair became the successor issuer to HollyFrontier pursuant to Rule 12g-3(a) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and replaced HollyFrontier as the public company trading on the New York Stock Exchange (“NYSE”) under the symbol “DINO.”
In connection with the closing of the HFC Transactions, HF Sinclair issued 60,230,036 shares of HF Sinclair
common stock, par value $0.01 per share, to Sinclair HoldCo, representing 27% of the pro forma equity of HF Sinclair with a value of approximately $2,149 million based on HollyFrontier’s fully diluted shares of common stock outstanding and closing stock price on March 11, 2022. Pursuant to the Business Combination Agreement, Sinclair HoldCo made a $77.5 million cash payment to HF Sinclair, inclusive of final working capital adjustments, which reduced the aggregate transaction value to approximately $2,072 million. Of the 60,230,036 shares of HF Sinclair common stock, 2,570,000 shares are currently held in escrow to secure Sinclair HoldCo’s renewable identification numbers (“RINs”) credit obligations under Section 6.22 of the Business Combination Agreement. Additionally, on the Closing Date, and immediately prior to the consummation of the HFC Transactions, HEP completed its acquisition of STC, Sinclair HoldCo’s
integrated crude and refined products midstream business, and issued 21,000,000 common limited partner units and paid cash consideration of $329.0 million, inclusive of final working capital adjustments, to Sinclair HoldCo in exchange for all the outstanding equity interests of STC (the “HEP Transaction” and together with the HFC Transactions, the “Sinclair Transactions”). Of these 21,000,000 common limited partner units, 5,290,000 units are currently held in escrow to secure Sinclair HoldCo’s RINs credit obligations to HF Sinclair under Section 6.22 of the Business Combination Agreement. HF Sinclair, and not HEP, would be entitled to the HEP common units held in escrow in the event of Sinclair HoldCo’s breach of its RINs credit obligations under the Business Combination Agreement.
References herein to HF Sinclair, “we,”“our,”“ours,” and “us”
with respect to time periods prior to March 14, 2022 refer to HollyFrontier and its consolidated subsidiaries and do not include the Target Company, STC or their respective consolidated subsidiaries (collectively, the “Acquired Sinclair Businesses”). References herein to HF Sinclair, “we,”“our,”“ours,” and “us” with respect to time periods from and after March 14, 2022 include the operations of the Acquired Sinclair Businesses. Unless otherwise specified, the financial statements included herein include financial information for HF Sinclair, which for the time period from March 14, 2022 to September 30,
2022 includes the combined business operations of HollyFrontier and its consolidated subsidiaries and the Acquired Sinclair Businesses.
In this document, the words “we,”“our,”“ours” and “us” refer only to HF Sinclair and its consolidated subsidiaries or to HF Sinclair or an individual subsidiary and not to any other person with certain exceptions. Generally, the words “we,”“our,”“ours” and “us” include HEP and its subsidiaries as consolidated subsidiaries of HF Sinclair,
unless when used in disclosures of transactions or obligations between HEP and HF Sinclair 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 HF Sinclair. 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,”“will,”“expect,”“plan,”“goal,”“forecast,”“strategy,”“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. Unless 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 and HEP’s ability to successfully integrate the
Acquired Sinclair Businesses with our existing operations and fully realize the expected synergies of the Sinclair Transactions or on the expected timeline;
•our ability to successfully integrate the operation of the Puget Sound refinery with our existing operations;
•the demand for and supply of crude oil and refined products, including uncertainty regarding the effects of the continuing coronavirus (“COVID-19”) pandemic on future demand and increasing societal expectations that companies address climate change;
•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, accidents, unexpected leaks or spills, unscheduled shutdowns, weather events, civil unrest, expropriation of assets, and other economic, diplomatic, legislative, or political events or developments, terrorism, cyberattacks, or other catastrophes or disruptions affecting our operations, production facilities, machinery, pipelines and other logistics assets, equipment, or information systems, or any of the foregoing of our suppliers, customers, or third-party providers,
and any potential asset impairments resulting from, or the failure to have adequate insurance coverage for or receive insurance recoveries from, such actions;
•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 and increases in interest rates;
•the availability and cost of our financing;
•the effectiveness of our capital investments and marketing strategies;
•our and HEP’s efficiency in carrying out and consummating construction projects, including our ability to complete announced capital projects on time and within
capital guidance;
•our and HEP’s 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;
•uncertainty regarding the effects and duration of global hostilities, including the Russia-Ukraine war, and any associated military campaigns which may disrupt crude oil supplies and markets for our refined products and create instability in the financial markets that could restrict our ability
to raise capital;
•general economic conditions, including uncertainty regarding the timing, pace and extent of an economic recovery in the United States;
•a prolonged economic slowdown due to the COVID-19 pandemic, inflation and labor costs, which could result in an impairment of goodwill and/or long-lived asset impairments; and
•other financial, operational and legal risks and uncertainties detailed from time to time in our and HEP’s Securities Exchange Commission 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 HollyFrontier’s Annual Report on Form 10-K for the year ended December 31, 2021 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 headings “Outlook” and “Liquidity and Capital 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.
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 renewable feedstock such as vegetable oil 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.
Cash and cash equivalents (HEP:$i15,551 and $i14,381,
respectively)
$
i1,447,359
$
i234,444
Accounts
receivable: Product, transportation and other (HEP: $i14,828 and $i12,745, respectively)
i1,742,907
i1,130,485
Crude
oil resales
i63,039
i111,403
i1,805,946
i1,241,888
Inventories: Crude
oil and refined products
i3,077,652
i1,879,131
Materials,
supplies and other (HEP: $i1,345 and $i1,070, respectively)
i359,500
i242,997
i3,437,152
i2,122,128
Income
taxes receivable
i30,873
i97,382
Prepayments
and other (HEP: $i2,759 and $i5,381, respectively)
i106,136
i66,612
Total
current assets
i6,827,466
i3,762,454
Properties,
plants and equipment, at cost (HEP: $i2,182,763 and $i2,037,527,
respectively)
i10,061,476
i8,448,207
Less
accumulated depreciation (HEP: $(i741,614) and $(i682,143),
respectively)
(i3,328,444)
(i3,033,353)
i6,733,032
i5,414,854
Operating
lease right-of-use assets (HEP: $i67,235 and $i69,134, respectively)
i358,337
i396,191
Other
assets: Turnaround costs
i361,652
i397,385
Goodwill
(HEP: $i411,231 and $i312,873, respectively)
i2,968,711
i2,293,044
Intangibles
and other (HEP: $i358,895 and $i214,436, respectively)
i977,087
i652,685
i4,307,450
i3,343,114
Total
assets
$
i18,226,285
$
i12,916,613
LIABILITIES
AND EQUITY
Current liabilities:
Accounts payable (HEP: $i26,977 and $i28,954,
respectively)
$
i2,415,332
$
i1,613,484
Income
taxes payable
i183,433
i25,156
Operating
lease liabilities (HEP: $i4,165 and $i3,710, respectively)
i110,165
i110,606
Accrued
liabilities (HEP: $i32,011 and $i18,479, respectively)
i533,361
i316,218
Total
current liabilities
i3,242,291
i2,065,464
Long-term
debt (HEP: $i1,593,797 and $i1,333,049, respectively)
i3,334,200
i3,072,737
Noncurrent
operating lease liabilities (HEP: $i63,528 and $i65,799, respectively)
i263,447
i308,747
Deferred
income taxes (HEP: $i386 and $i396, respectively)
i1,228,855
i837,401
Other
long-term liabilities (HEP: $i51,151 and $i43,033, respectively)
i378,967
i337,799
Equity:
HF
Sinclair stockholders’ equity:
Preferred stock, $ii1.00/
par value – ii5,000,000/ shares
authorized; iinone/ issued
i—
i—
Common
stock $ii.01/ par value – ii320,000,000/
shares authorized; i223,231,546 and i256,046,051 shares issued as of September 30, 2022 and December 31,
2021, respectively
Parenthetical
amounts represent asset and liability balances attributable to Holly Energy Partners, L.P. (“HEP”) as of September 30, 2022 and December 31, 2021. HEP is a variable interest entity.
NOTE 1:iDescription
of Business and Presentation of Financial Statements
On March 14, 2022 (the “Closing Date”), HollyFrontier Corporation (“HollyFrontier”) and Holly Energy Partners, L.P. (“HEP”) announced the establishment of HF Sinclair Corporation, a Delaware corporation (“HF Sinclair”), as the new parent holding company of HollyFrontier and HEP and their subsidiaries, and the completion of their respective acquisitions of Sinclair Oil Corporation (now known as Sinclair Oil LLC, “Sinclair Oil”) and Sinclair Transportation Company LLC (“STC”) from The Sinclair Companies (now known as REH Company and referred to herein as “Sinclair HoldCo”). On the Closing Date, pursuant to that certain Business Combination Agreement,
dated as of August 2, 2021 (as amended on March 14, 2022, the “Business Combination Agreement”), by and among HollyFrontier, HF Sinclair, Hippo Merger Sub, Inc., a wholly owned subsidiary of HF Sinclair (“Parent Merger Sub”), Sinclair HoldCo, and Hippo Holding LLC (now known as Sinclair Holding LLC), a wholly owned subsidiary of Sinclair HoldCo (the “Target Company”), HF Sinclair completed its previously announced acquisition of the Target Company by effecting (a) a holding company merger in accordance with Section 251(g) of the Delaware General Corporation Law whereby HollyFrontier merged with and into Parent Merger Sub, with HollyFrontier surviving such merger as a direct wholly owned subsidiary of HF Sinclair (the “HFC Merger”) and (b) immediately following the HFC Merger, a contribution whereby Sinclair HoldCo contributed all of the equity
interests of the Target Company to HF Sinclair in exchange for i60,230,036 shares of HF Sinclair common stock, resulting in the Target Company becoming a direct wholly owned subsidiary of HF Sinclair (the “HFC Transactions”). At the effective time of the HFC Merger, HollyFrontier became a wholly owned subsidiary of HF Sinclair, and all of HollyFrontier’s outstanding shares were automatically converted into equivalent corresponding shares of HF Sinclair. Pursuant
to the HFC Merger, HF Sinclair became the successor issuer to HollyFrontier pursuant to Rule 12g-3(a) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and replaced HollyFrontier as the public company trading on the New York Stock Exchange (“NYSE”) under the symbol “DINO.”
See Note 2 “Acquisitions” and Note 3 “Holly Energy Partners” in the Notes to Consolidated Financial Statements for additional information.
References herein to HF Sinclair “we,”“our,”“ours,” and “us” with respect to time periods prior to March 14, 2022 refer to HollyFrontier and its consolidated subsidiaries
and do not include the Target Company, STC or their respective consolidated subsidiaries (collectively, the “Acquired Sinclair Businesses”). References herein to HF Sinclair “we,”“our,”“ours,” and “us” with respect to time periods from and after March 14, 2022 include the operations of the Acquired Sinclair Businesses. Unless otherwise specified, the financial statements included herein include financial information for HF Sinclair, which for the time period from March 14, 2022 to September 30, 2022 includes the combined business operations of HollyFrontier and the Acquired Sinclair Businesses.
i
In
these financial statements, the words “we,”“our,”“ours” and “us” refer only to HF Sinclair and its consolidated subsidiaries or to HF Sinclair or an individual subsidiary and not to any other person, with certain exceptions. Generally, the words “we,”“our,”“ours” and “us” include HEP and its subsidiaries as consolidated subsidiaries of HF Sinclair, unless when used in disclosures of transactions or obligations between HEP and HF Sinclair 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 HF Sinclair. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.
We are an independent energy company that produces and markets high-value light products such as gasoline, diesel fuel, jet fuel, renewable diesel and other specialty products. We own and operate refineries located in Kansas, Oklahoma, New Mexico, Wyoming, Washington and Utah and market our refined products principally in the Southwest United States, the Rocky Mountains extending into the Pacific Northwest and in other neighboring Plains states. We supply high-quality fuels to more than
1,300 Sinclair branded stations and license the use of the Sinclair brand at more than 300 additional locations throughout the country. In addition, our subsidiaries produce and market base oils and other specialized lubricants in the United States, Canada and the Netherlands, and export products to more than 80 countries. Through our subsidiaries, we produce renewable diesel at two of our facilities in Wyoming and our facility in New Mexico. At September 30, 2022, we owned a i47%
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 Mountains geographic regions of the United States.
/
13
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
On
May 4, 2021, HollyFrontier Puget Sound Refining LLC (now known as HF Sinclair Puget Sound Refining LLC), a wholly owned subsidiary of HollyFrontier, entered into a sale and purchase agreement with Equilon Enterprises LLC d/b/a Shell Oil Products US (“Shell”) to acquire Shell’s Puget Sound refinery and related assets, including the on-site cogeneration facility and related logistics assets. The acquisition closed on November 1, 2021.
On April 27, 2021, our wholly owned subsidiary, 7037619 Canada Inc., entered into a contract for sale of real property in Mississauga, Ontario for base consideration of $i98.8 million,
or CAD i125 million. The transaction closed on September 15, 2021, and we recorded a gain on sale of assets totaling $i86.0 million
for the three months ended September 30, 2021, which was recognized in “Gain on sale of assets and other” in our consolidated statements of operations.
During the first quarter of 2021, we initiated a restructuring within our Lubricants and Specialty Products segment. As a result of this restructuring, we recorded $i7.8 million in employee severance costs for the nine months ended September 30, 2021,
which were recognized primarily as selling, general and administrative expenses in our Lubricants and Specialty Products segment.
In the third quarter of 2020, we permanently ceased petroleum refining operations at our Cheyenne, Wyoming refinery (the “Cheyenne Refinery”) and subsequently began converting certain assets at the Cheyenne Refinery to renewable diesel production. In connection with the cessation of petroleum refining operations at the Cheyenne Refinery, we recognized $i1.5 million
in decommissioning expense for the nine months ended September 30, 2022, and $i6.7 million and $i23.1 million for the three and nine months ended
September 30, 2021, respectively. We also recognized $i0.2 million and $i0.9 million in employee severance costs for the three and nine months ended September 30,
2021, respectively. These charges were all recognized in operating expenses in our Corporate and Other segment.
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 September 30, 2022, the consolidated results of operations, comprehensive income and statements of equity for the three and nine months ended September 30, 2022 and 2021 and consolidated cash flows for the nine months ended September 30, 2022 and 2021 in accordance with the
rules and regulations of the Securities and Exchange Commission (“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 HollyFrontier’s Annual Report on Form 10-K for the year ended December 31, 2021 that has been filed with the SEC.
Beginning March 14, 2022, our business operations reflect the Acquired Sinclair Businesses (see Note 2). Our results of operations for the nine months ended September 30, 2022
are not necessarily indicative of the results of operations to be realized for the year ending December 31, 2022.
iAccounts Receivable: Our accounts receivable primarily consist of amounts due from customers that are primarily from sales of refined products and renewable diesel. 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 expected 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 expected credit losses when an account is deemed uncollectible. Our allowance for expected credit losses was $i7.5 million at September 30, 2022 and $i3.7
million at December 31, 2021.
iInventories: 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. Inventories related to our renewables business are stated at the lower of cost, using the LIFO method for feedstock and unfinished and finished renewable 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.
14
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited) Continued
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 RINs are stated at the lower of weighted-average cost or net realizable value.
i
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, at cost” and “Accrued liabilities” and “Other long-term liabilities” on our consolidated balance sheet.
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 a lease.
iGoodwill: As of September 30, 2022, our goodwill balance was $i3.0
billion, with goodwill assigned to our Refining, Renewables, Marketing, Lubricants and Specialty Products and HEP segments. During 2022, we recognized $i677.2 million in preliminary goodwill as a result of the Sinclair Transactions (as defined in Note 2), of which $i98.4
million was related to HEP. The carrying amount of our goodwill may fluctuate from period to period due to the effects of foreign currency translation adjustments. 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 carrying value of the reporting unit is greater than its 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.
We performed our annual goodwill impairment testing quantitatively as of July 1, 2022 and determined there was no impairment of goodwill attributable to our reporting units.
i
Revenue
Recognition: Revenues on refined product, including branded fuel sales and renewable diesel, 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.
15
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
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.
i
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.
We have intercompany notes that were issued to fund certain of our foreign businesses. Remeasurement adjustments resulting from the conversion of intercompany financing amounts to functional currencies are recorded as gains and losses as a component of other income (expense) in the consolidated statements of operations. Such adjustments are not recorded to the Lubricants and Specialty Products segment operations, but to Corporate and Other. See Note 15 for additional information on our segments.
i
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. We account for U.S. tax on global intangible low-taxed income in the period in which it is incurred.
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 nine months ended September 30, 2022, we recorded an income tax expense of $i706.7 million compared to $i149.9
million for the nine months ended September 30, 2021. This increase was principally due to higher pre-tax income during the nine months ended September 30, 2022 compared to the same period of 2021. Our effective tax rates were i22.6% and i18.1%
for the nine months ended September 30, 2022 and 2021, respectively. The increase in the effective tax rate is principally due 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. The difference in the U.S. federal statutory rate and the effective tax rate for the nine months ended September 30, 2022 was primarily due to the increase in state taxes due to increased pre-tax income during the period.
/
iInventory
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 nine months ended September 30, 2022 and 2021, we received proceeds of $i31.8
million and $i32.7 million, respectively, and subsequently repaid $i32.2 million and $i34.1
million, respectively, under these sell / buy transactions.
16
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 2:iAcquisitions
On
March 14, 2022, pursuant to the Business Combination Agreement, HF Sinclair completed its acquisition of the Target Company by effecting (a) the HFC Merger and (b) immediately following the HFC Merger, a contribution whereby Sinclair HoldCo contributed all of the equity interests of the Target Company to HF Sinclair in exchange for shares of HF Sinclair, resulting in the Target Company becoming a direct wholly owned subsidiary of HF Sinclair.
In connection with the closing of the HFC Transactions, HF Sinclair issued i60,230,036
shares of HF Sinclair common stock, par value $i0.01 per share, to Sinclair HoldCo, representing i27%
of the pro forma equity of HF Sinclair with a value of approximately $i2,149 million based on HollyFrontier’s fully diluted shares of common stock outstanding and closing stock price on March 11, 2022. Pursuant to the Business Combination Agreement, Sinclair HoldCo made a $i77.5
million cash payment to HF Sinclair, inclusive of final working capital adjustments, which reduced the aggregate transaction value to approximately $i2,072 million. Of the i60,230,036
shares of HF Sinclair common stock, i2,570,000 shares are currently held in escrow to secure Sinclair HoldCo’s renewable identification numbers (“RINs”) credit obligations under Section 6.22 of the Business Combination Agreement. Additionally, on the Closing Date, and immediately prior to the consummation of the HFC Transactions, HEP completed its acquisition of STC, Sinclair HoldCo’s integrated crude and refined products midstream business, and
issued i21,000,000 common limited partner units and paid cash consideration of $i329.0
million, inclusive of final working capital adjustments, to Sinclair HoldCo in exchange for all the outstanding equity interests of STC (the “HEP Transaction” and together with the HFC Transactions, the “Sinclair Transactions”). Of these i21,000,000 common limited partner units, i5,290,000
units are currently held in escrow to secure Sinclair HoldCo’s RINs credit obligations to HF Sinclair under Section 6.22 of the Business Combination Agreement. HF Sinclair, and not HEP, would be entitled to the HEP common units held in escrow in the event of Sinclair HoldCo’s breach of its RINs credit obligations under the Business Combination Agreement.
HollyFrontier’s senior management team at the Closing Date will continue to operate the combined company. Pursuant to that certain stockholders agreement (the “Stockholders Agreement”) by and among HF Sinclair, Sinclair HoldCo and the stockholders of Sinclair HoldCo (together with Sinclair HoldCo and each of their permitted transferees, the “Sinclair Parties”), Sinclair HoldCo was granted the right to nominate, and has nominated, itwo
directors to our Board of Directors at the Closing Date. The Sinclair HoldCo stockholders also agreed to certain customary lock up, voting and standstill restrictions, as well as customary registration rights, for the HF Sinclair common stock issued to the stockholders of Sinclair HoldCo. HF Sinclair is headquartered in Dallas, Texas, with combined business offices in Salt Lake City, Utah.
Under the terms of the Business Combination Agreement, HF Sinclair acquired Sinclair HoldCo’s refining, branded marketing, renewables, and midstream businesses. The branded marketing business supplies high-quality fuels to more than i1,300
Sinclair branded stations and licenses the use of the Sinclair brand at more than i300 additional locations throughout the United States. The renewables business includes the operation of a renewable diesel unit located in Sinclair, Wyoming. The refining business includes two Rocky Mountains-based refineries located in Casper, Wyoming and Sinclair, Wyoming. Under the terms of the Contribution Agreement (as defined in Note 3), HEP acquired STC, Sinclair HoldCo’s integrated crude and refined products pipelines and terminal assets, including approximately i1,200
miles of integrated crude and refined product pipeline supporting the Sinclair refineries and third parties, ieight product terminals and itwo crude terminals with approximately
i4.5 million barrels of operated storage. In addition, HEP acquired STC’s interests in three pipeline joint ventures for crude gathering and product offtake including: Saddle Butte Pipeline III, LLC (i25.06%
non-operated interest); Pioneer Pipeline (i49.995% non-operated interest); and UNEV Pipeline (the i25% non-operated interest not already owned by HEP, resulting
in UNEV Pipeline, LLC (“UNEV”) becoming a wholly owned subsidiary of HEP). The addition of the Acquired Sinclair Businesses to the HollyFrontier business created a combined company with increased scale and ability to diversify and is expected to drive growth through the expanded refining and renewables business. In addition, the HFC Transactions added an integrated branded wholesale distribution network to our business.
The Sinclair Transactions were accounted for as a business combination using the acquisition method of accounting, with the assets acquired and liabilities assumed at their respective acquisition date fair values at the effective date, with the excess consideration recorded as goodwill.
17
HF
SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
ii
The
following tables present the purchase consideration and preliminary purchase price allocation of the assets acquired and liabilities assumed on March 14, 2022:
Purchase Consideration (in thousands except for per share amounts)
Shares of HF Sinclair common stock issued
i60,230
Closing
price per share of HFC common stock (1)
$
i35.68
Purchase consideration paid in HF Sinclair common stock
i2,149,008
Shares
of HEP common units issued to Sinclair
i21,000
Closing price per share of HEP common units (2)
$
i16.62
Purchase
consideration paid in HEP common units
i349,020
Total equity consideration
i2,498,028
Cash
consideration paid by HEP
i328,955
Cash consideration received by HFC
(i77,507)
Total
cash consideration
i251,448
Total purchase consideration
$
i2,749,476
(1)Based
on the HollyFrontier closing stock price on March 11, 2022.
(2)Based on the HEP closing unit price on March 11, 2022.
//
i
(In
thousands)
Assets Acquired
Accounts receivable
$
i460,391
Inventories:
Crude oil and refined products
i889,340
Inventories: Materials, supplies and other
i33,172
Properties,
plants and equipment
i1,286,656
Operating lease right-of-use assets
i4,585
Other
assets: Intangibles and other
i487,368
Total assets acquired
$
i3,161,512
Liabilities
Assumed
Accounts payable
$
i580,040
Operating
lease liabilities
i1,030
Accrued liabilities
i84,298
Noncurrent
operating lease liabilities
i3,554
Deferred income taxes
i353,813
Other
long-term liabilities
i66,526
Total liabilities assumed
$
i1,089,261
Net
assets acquired
$
i2,072,251
Goodwill
$
i677,225
/
The
preliminary purchase price allocation resulted in the recognition of $i677.2 million in goodwill, of which $i98.4 million was related to HEP. The goodwill recognized is primarily attributable to operating and administrative synergies and net deferred tax liabilities
arising from the differences between the estimated fair values of assets and liabilities and the tax basis of these assets and liabilities. There are qualitative assumptions of long-term factors that this acquisition creates for our stockholders, including increased scale and diversification that is expected to drive growth through the expanded refining and renewables businesses and the addition of an integrated branded wholesale distribution network. This goodwill is not deductible for income tax purposes.
18
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
The fair value of properties, plants
and equipment was based on the combination of the cost and market approaches. Key assumptions in the cost approach include determining the replacement cost by evaluating recent published data and adjusting replacement cost for physical deterioration, functional, and economic obsolescence. We used the market approach to measure the value of certain assets through an analysis of recent sales or offerings of comparable properties.
The fair value of crude oil and refined products inventory was based on market prices as of the acquisition date.
Intangibles include the Sinclair trade name, fuel agreements and customer relationships totaling $i213.1 million
that are being amortized on a straight-line basis over a range of four to itwenty-year period. The intangible assets were valued using the income approach.
The fair value of equity method investments totaled $i234.3
million and was based on a combination of valuation methods including discounted cash flows and the guideline public company method.
Accrued liabilities include $i70.6 million of RINs credit obligations, including 2022 obligations through the Closing Date, which were valued based on market prices for RINs at the effective date, a Level 2 input. Sinclair
HoldCo is financially responsible for satisfaction of RINs credit obligations for all periods prior to the closing. This receivable totaled $i68.4 million and was valued based on market prices for RINs at the effective date.
All other fair values discussed above were based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements.
The
fair values of all other current receivable and payables were equivalent to their carrying values due to their short-term nature.
These fair value estimates are preliminary and, therefore, the final fair values of assets acquired and liabilities assumed and the resulting effect on our financial position may change once all needed information has become available and we finalize our valuations.
Our consolidated financial and operating results reflect the Acquired Sinclair Businesses operations beginning March 14, 2022. Our results of operations for the three months ended September 30, 2022 included revenue and income from operations of $i1,837.6
million and $i371.2 million, respectively, and revenue and income from operations of $i4,271.1 million
and $i728.4 million for the period from March 14, 2022 through September 30, 2022, respectively, related to the Acquired Sinclair Businesses operations.
During the three and nine months ended September 30,
2022, we incurred $i10.7 million and $i48.1 million in incremental direct acquisition and integration
costs that principally relate to legal, advisory and other professional fees and are presented as selling, general and administrative expenses in our statements of operations.
The following unaudited pro forma combined condensed financial data for the three and nine months ended September 30, 2022 and 2021 was derived from our historical financial statements giving effect to the Sinclair Transactions as if they had occurred on January 1, 2021. The below information reflects pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including the depreciation of the fair-valued properties, plants and equipment acquired in the Sinclair Transactions and the estimated tax impacts of the pro
forma adjustments.
Additionally, pro forma earnings include certain non-recurring charges, the substantial majority of which consist of transaction costs related to financial advisors, legal advisors and professional accounting services.
19
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
The pro forma results of operations do not include any cost savings or other synergies that may result from the Sinclair Transactions. iThe
pro forma combined condensed financial data has been included for comparative purposes only and is not necessarily indicative of the results that might have occurred had the Sinclair Transactions taken place on January 1, 2021 and is not intended to be a projection of future results.
Net
income attributable to HF Sinclair stockholders
$
i400,118
$
i2,265,579
$
i732,158
NOTE
3:iHolly Energy Partners
HEP is a publicly held master limited partnership that owns and / or 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 Mountains geographic regions of the United States. Additionally, as of September 30,
2022, HEP owned a iii50//%
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 pipeline that runs from Cushing, Oklahoma to our Tulsa West and Tulsa East facilities (collectively, the “Tulsa Refineries”); and a i25.06%
ownership interest in Saddle Butte Pipeline III, LLC, the owner of a 220-mile crude oil pipeline from the Powder River Basin to Casper, Wyoming (the “Saddle Butte Pipeline”); and a i49.995% ownership interest in Pioneer Investments Corp., the owner of a 310-mile pipeline from Sinclair, Wyoming to the North Salt Lake City, Utah Terminal (the “Pioneer Pipeline”).
At September 30, 2022, we owned a i47%
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.
HEP 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 i80%
of HEP’s total revenues for the nine months ended September 30, 2022. We do not provide financial or equity support through any liquidity arrangements and / or debt guarantees to HEP.
HEP has outstanding debt under its 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 10 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.
20
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Cushing Connect Joint Venture
In October 2019, HEP Cushing LLC (“HEP Cushing”), a wholly owned subsidiary of
HEP, and Plains Marketing, L.P., 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 operation of a new i160,000 barrel per day common carrier crude oil pipeline (the “Cushing Connect Pipeline”) that connects the Cushing, Oklahoma crude oil hub to our Tulsa Refineries and (ii) the ownership and operation of i1.5 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 was placed in service during the third quarter of 2021. Long-term commercial agreements have been entered into to support the Cushing Connect assets.
Cushing Connect entered into a contract with an affiliate of HEP to manage the 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. However, HEP is solely responsible for any Cushing Connect Pipeline construction costs that exceed the budget by more than i10%.
HEP’s share of the cost of the Cushing Connect Terminal contributed by Plains and Cushing Connect Pipeline construction costs are approximately $i73 million.
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 constructed and operates 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.
Sinclair Transportation Company Acquisition
On August 2, 2021, HEP, Sinclair HoldCo and STC, a wholly owned subsidiary of Sinclair HoldCo, entered into a contribution agreement (as amended on March 14, 2022, the “Contribution Agreement”), which closed on March 14, 2022. Pursuant
to the Contribution Agreement, HEP acquired all of the outstanding equity interests of STC in exchange for i21,000,000 newly issued common limited partner units of HEP with a value of approximately $i349.0
million based on HEP’s fully diluted common limited partner units outstanding and HEP’s closing unit price on March 11, 2022, and cash consideration equal to $i329.0 million, inclusive of final working capital adjustments pursuant to the Contribution Agreement for an aggregate transaction value of $i678.0
million.
As a result of this common unit issuance and our resulting HEP ownership change, we adjusted additional capital and equity attributable to HEP’s noncontrolling interest holders to reallocate HEP’s equity among its unitholders.
As part of HEP’s acquisition of STC, HEP acquired the i25.0% non-operated interest of UNEV not already owned by HEP and as such, UNEV, the owner of
a pipeline running from Woods Cross, Utah to Las Vegas, Nevada and associated product terminals, became a wholly owned subsidiary of HEP.
HEP’s existing senior management team continues to operate HEP. Pursuant to that certain unitholders agreement (the “Unitholders Agreement”) by and among HEP, Holly Logistic Services, L.L.C., Navajo Pipeline Co., L.P. and the Sinclair Parties, Sinclair HoldCo was granted the right to nominate, and has nominated, one director to the HEP Board of Directors at the Closing Date. Sinclair HoldCo’s stockholders have also agreed to certain customary lock up restrictions and registration rights for the HEP common limited partner units to be issued to the stockholders of Sinclair HoldCo. HEP will continue to be named Holly Energy Partners, L.P.
Contemporaneous with the
closing of the Sinclair Transactions, HEP and HollyFrontier amended certain intercompany agreements, including the master throughput agreement, to include within the scope of such agreements certain of the assets acquired by HEP pursuant to the Contribution Agreement.
21
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Transportation Agreements
HEP serves our refineries under long-term pipeline, terminal and tankage throughput agreements and refinery processing tolling agreements expiring from 2022 through
2037. Under 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. 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 September 30, 2022, these agreements require minimum annualized payments to HEP of $i445.9
million.
Our transactions with HEP and fees paid under our transportation agreements with HEP are eliminated and have no impact on our consolidated financial statements.
Lessor Accounting
Our consolidated statements of operations reflect lease revenue recognized by HEP for contracts with third parties in which HEP is the lessor.
Lease
revenues relating to variable lease payments not included in measurement of the sales-type lease receivable
$
i659
$
i648
$
i1,728
$
i1,505
/
NOTE
4:iRevenues
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.
(1)Transportation
fuels revenues are attributable to our Refining segment wholesale marketing 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 revenues include revenues attributable to our Refining and Lubricants and Specialty Products segments of $i416.2 million
and $i87.5 million, respectively, for the three months ended September 30, 2022, $i1,227.2
million and $i254.2 million, respectively, for the nine months ended September 30, 2022, $i213.7
million and $i47.1 million, respectively, for the three months ended September 30, 2021, $i496.9
million and $i144.2 million for the nine months ended September 30, 2021.
(4)Excess crude oil revenues represent sales of purchased crude oil inventory that at times exceeds the supply needs of our refineries.
(5)Renewable diesel revenues are attributable to our Renewables segment.
(6)Marketing
revenues consist primarily of branded gasoline and diesel fuel.
(7)Other revenues are principally attributable to our Refining segment.
/
23
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
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 our Sonneborn operations. iThe following table presents changes to our contract liabilities during the nine months ended September 30, 2022 and 2021.
As
of September 30, 2022, 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 2025. 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. iAggregate
minimum volumes expected to be sold (future performance obligations) under our long-term product sales contracts with customers are as follows, which include branded sales volumes assumed upon our acquisition of the Acquired Sinclair Businesses:
Remainder
of 2022
2023
2024
Thereafter
Total
(In thousands)
Refined product sales volumes (barrels)
i10,303
i32,409
i26,187
i47,187
i116,086
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 through 2025. Annual minimum revenues attributable to HEP’s third-party contracts as of September 30, 2022 are presented below:
Remainder
of 2022
2023
2024
Thereafter
Total
(In thousands)
HEP contractual minimum revenues
$
i2,827
$
i11,017
$
i11,017
$
i3,017
$
i27,878
NOTE
5:iFair Value Measurements
Our financial instruments measured at fair value on a recurring basis consist of derivative instruments and RINs receivable and credit obligations.
i
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.
24
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
i
The
carrying amounts of derivative instruments and RINs receivable and credit obligations at September 30, 2022 and December 31, 2021 were as follows:
(1)Sinclair
HoldCo is financially responsible for satisfaction of RINs credit obligations for all periods prior to the closing of the Sinclair Transactions. See Note 2 for additional information on RINs credit obligations assumed in the Sinclair Transactions.
/
(2)Represents obligations for RINs credits for which we did not have sufficient quantities at December 31, 2021 to satisfy our Environmental 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 forward sales and purchase contracts and foreign currency forward contracts are measured and recorded at fair value using Level 2 inputs. The fair value of the forward sales and purchase contracts are computed using quoted forward commodity 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. RINs receivable and RINs credit obligations are valued based on current market RINs prices.
25
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 6:iEarnings
Per Share
Basic earnings per share is calculated as net income attributable to HF Sinclair stockholders, adjusted for participating securities’ share in earnings divided by the average number of shares of common stock outstanding. Diluted earnings per share includes the incremental shares resulting from certain share-based awards. iThe following is a reconciliation of the denominators of the basic and diluted per share computations for net income
attributable to HF Sinclair stockholders:
Net income attributable to HF Sinclair stockholders
$
i954,405
$
i280,787
$
i2,335,641
$
i597,854
Participating
securities’ share in earnings (1)
i8,939
i3,553
i24,023
i7,888
Net
income attributable to common shares
$
i945,466
$
i277,234
$
i2,311,618
$
i589,966
Average
number of shares of common stock outstanding
i212,388
i162,551
i203,610
i162,518
Average
number of shares of common stock outstanding assuming dilution
i212,388
i162,551
i203,610
i162,518
Basic
earnings per share
$
i4.45
$
i1.71
$
i11.35
$
i3.63
Diluted
earnings per share
$
i4.45
$
i1.71
$
i11.35
$
i3.63
(1)Unvested
restricted stock unit awards and unvested performance share units that settle in HF Sinclair common stock represent participating securities because they participate in nonforfeitable dividends or distributions with the common stockholders of HF Sinclair. Participating earnings represent the distributed and undistributed earnings of HF Sinclair attributable to the participating securities. Unvested restricted stock unit awards and performance share units do not participate in undistributed net losses as they are not contractually obligated to do so.
NOTE 7:iStock-Based
Compensation
In connection with the Sinclair Transactions, we assumed all obligations of HollyFrontier under HollyFrontier’s existing stock-based compensation plans, which includes the HF Sinclair Corporation 2007 Long-Term Incentive Compensation Plan (previously known as the HollyFrontier Corporation Long-Term Incentive Compensation Plan, the “2007 Plan”) and the HF Sinclair Corporation Amended and Restated 2020 Long Term Incentive Plan (previously known as the HollyFrontier Corporation 2020 Long Term Incentive Plan, the “2020 Plan”). Awards are no longer granted, but continue to remain outstanding, under the 2007 Plan. The 2007 Plan previously provided for, and the 2020 Plan currently provides for, the grant of unrestricted and restricted stock, restricted stock units, other stock based awards, stock options, performance awards, substitute awards, cash awards and stock appreciation
rights. The restricted stock unit awards generally vest over a period of one to ithree 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 ithree
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 izero to i200%
of target award amounts. The holders of unvested restricted stock units and performance share units have the right to receive dividends. We also have a stock compensation deferral plan which allows non-employee directors to defer settlement of vested stock granted under our share-based compensation plan.
The compensation cost for these plans was $i8.2 million and $i9.2
million for the three months ended September 30, 2022 and 2021, respectively, and $i25.6 million and $i32.0
million for the nine months ended September 30, 2022 and 2021, respectively.
Additionally, HEP maintains an equity-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 equity-based compensation plan was $i0.3 million and $i0.6
million for the three months ended September 30, 2022 and 2021, respectively, and $i1.5 million and $i1.9
million, for the nine months ended September 30, 2022 and 2021, respectively.
26
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
ii
A
summary of restricted stock unit and performance share unit activity during the nine months ended September 30, 2022 is presented below:
(1)Other
raw materials and unfinished products include feedstocks and blendstocks, other than crude.
(2)Finished products include gasolines, jet fuels, diesels, renewable diesels, lubricants, asphalts, LPG’s and residual fuels.
(3)Process chemicals include additives and other chemicals.
(4)Includes RINs.
/
Our renewables inventories that are valued at the lower of LIFO cost or market reflect a valuation reserve of $i51.6
million and $i8.7 million at September 30, 2022 and December 31, 2021, respectively. A new market reserve of $i51.6
million as of September 30, 2022 was based on market conditions and prices at that time. The effect of the change in the lower of cost or market reserve was an increase to cost of products sold totaling $i16.8 million and $i42.8
million for the three and nine months ended September 30, 2022, respectively.
At September 30, 2022, the LIFO value of our refining inventories was equal to cost. For the nine months ended September 30, 2021, we recorded a decrease to cost of products sold of $i318.9 million due to the effect
of the change in the lower of cost or market reserve recorded on our refinery inventories at that time.
NOTE 9:iEnvironmental
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.
27
HF
SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
We incurred expense of $i1.3 million and $i0.5
million for the three months ended September 30, 2022 and 2021, respectively, and $i4.1 million and $i2.5
million for the nine months ended September 30, 2022 and 2021, respectively, for environmental remediation obligations. The accrued environmental liability reflected in our consolidated balance sheets was $i165.4 million and $i117.2
million at September 30, 2022 and December 31, 2021, respectively, of which $i143.1 million and $i99.1
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. Accrued environmental liabilities assumed in the Sinclair Transactions were $i50.7 million at the acquisition date. Estimated liabilities could increase in the future
when the results of ongoing investigations become known, are considered probable and can be reasonably estimated.
NOTE 10:iDebt
HF Sinclair Credit Agreement
On April 27, 2022, after
giving effect to the consummation of the exchange offers and the issuance of the HF Sinclair Senior Notes (as defined below), HF Sinclair entered into a $i1.65 billion senior unsecured revolving credit facility maturing in April 2026 (the “HF Sinclair Credit Agreement”). The HF Sinclair 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. The HF Sinclair Credit Agreement replaced the $i1.35 billion
senior unsecured credit facility of HollyFrontier, which was terminated on April 27, 2022. At September 30, 2022, we were in compliance with all covenants, had ino outstanding borrowings and had outstanding letters of credit totaling $i2.3
million under the HF Sinclair Credit Agreement.
Indebtedness under the HF Sinclair Credit Agreement bears interest, at our option based on the currency of such indebtedness at either (a) a base rate equal to the highest of the Federal Funds Effective Rate (as defined in the HF Sinclair Credit Agreement) plus half of 1%, Spread Adjusted Term SOFR (as defined in the HF Sinclair Credit Agreement) for a one-month interest period plus i1% and the prime rate (as publicly announced from
time to time by the administrative agent), as applicable, plus an applicable margin (ranging from i0.25% to i1.125%), (b) the CDOR Rate (as defined in the HF Sinclair
Credit Agreement) plus an applicable margin (ranging from i1.25% to i2.125%) (c) the Spread Adjusted Term SOFR (as defined in the HF Sinclair Credit Agreement)
plus an applicable margin (ranging from i1.25% to i2.125%) or (d) the Daily Simple RFR (as defined in the HF Sinclair Credit Agreement) plus an applicable margin
(ranging from i1.25% to i2.125%).
HEP Credit Agreement
HEP
has a $i1.2 billion senior secured revolving credit facility maturing in July 2025 (the “HEP Credit Agreement”). In August 2022, the HEP Credit Agreement was amended to, among other things, provide an alternative reference rate for LIBOR. The 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 $i50
million sub-limit and has an accordion feature that allows HEP to increase the commitments under the HEP Credit Agreement up to a maximum amount of $i1.7 billion. At September 30, 2022, HEP was in compliance with all of its covenants, had outstanding borrowings of $i706.0
million and ino outstanding letters of credit under the HEP Credit Agreement.
Prior to the Investment Grade Date (as defined in the HEP Credit Agreement), indebtedness under the HEP Credit Agreement bears interest, at HEP’s option, at either (a) the alternate base rate (as defined in the HEP Credit Agreement) plus an applicable margin or (b) the Eurodollar Rate (as defined in the 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 HEP Credit Agreement). The weighted average interest rate in effect under the HEP Credit Agreement on HEP’s borrowings was i4.98% as of September 30, 2022.
HEP’s obligations under the 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.
28
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
HollyFrontier Bond Exchange and HF Sinclair Senior Notes
On April
27, 2022, HF Sinclair completed its offers to exchange any and all outstanding HollyFrontier i2.625% senior notes maturing October 2023 (the “HollyFrontier i2.625% Senior
Notes”), i5.875% senior notes maturing April 2026 (the “HollyFrontier i5.875% Senior Notes”) and i4.500%
senior notes maturing October 2030 (the “HollyFrontier i4.500% Senior Notes”) (and, collectively, the “HollyFrontier Senior Notes”) for i2.625% senior notes maturing
October 2023 (the “HF Sinclair i2.625% Senior Notes”), i5.875% senior notes maturing April 2026 (the “HF Sinclair i5.875%
Senior Notes”) and i4.500% senior notes maturing October 2030 (the “HF Sinclair i4.500% Senior Notes”) (and, collectively, the “HF Sinclair Senior Notes”) to be
issued by HF Sinclair and cash. Additionally, HF Sinclair solicited consents to adopt certain amendments to the indenture governing the HollyFrontier Senior Notes.
In connection with the exchange offers and consent solicitations, HollyFrontier amended the indenture governing the HollyFrontier Senior Notes to eliminate (i) substantially all of the restrictive covenants, (ii) certain of the events which may lead to an “Event of Default”, (iii) the SEC reporting covenant and (iv) with respect to the HollyFrontier i2.625%
Senior Notes and the HollyFrontier i4.500% Senior Notes only, the offer to repurchase such senior notes upon certain change of control triggering events.
The HF Sinclair Senior Notes are unsecured and unsubordinated obligations of ours and rank equally with all our other existing and future unsecured and unsubordinated indebtedness. Each series of HF Sinclair Senior Notes has the same interest rate (including interest rate adjustment provisions, as applicable), interest payment dates, maturity
date and redemption terms as the corresponding series of HollyFrontier Senior Notes. The HF Sinclair Senior Notes were issued in exchange for the HollyFrontier Senior Notes pursuant to a private exchange offer exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”).
On September 12, 2022, HF Sinclair filed a registration statement, which was declared effective on September 21, 2022, to exchange the HF Sinclair Senior Notes for an equal principal amount of the respective series of the HF Sinclair Senior Notes (the “Registered HF Sinclair Senior Notes”). The Registered HF Sinclair Senior Notes are substantially identical to the HF Sinclair Senior Notes in all material respects except the Registered HF Sinclair Senior Notes are registered
under the Securities Act and will not be subject to restrictions on transfer or to any increase in annual interest rate for failure to comply with the Registration Rights Agreement, dated April 27, 2022, and will not have the registration rights applicable to the HF Sinclair Senior Notes.
On October 21, 2022, HF Sinclair completed its offers to exchange HF Sinclair Senior Notes for Registered HF Sinclair Senior Notes.
Further, we may from time to time seek to retire some or all of our outstanding debt or debt agreements through cash purchases, and/or exchanges, open market purchases, privately negotiated transactions,
tender offers or otherwise. Such transactions, if any, may be material and will depend on prevailing market conditions, our liquidity requirements and other factors..
HF Sinclair Financing Arrangements
Certain 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 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 in one year or less. 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 $i33.3 million and $i37.4
million at September 30, 2022 and December 31, 2021, respectively, and are included in “Accrued liabilities” on our consolidated balance sheets. See Note 5 for additional information on Level 2 inputs.
HEP Senior Notes
On April 8, 2022, HEP closed a private placement of $i400 million in aggregate
principal amount of i6.375% senior notes maturing April 2027 (the “HEP i6.375% Senior Notes”) at par for net proceeds of approximately $i393
million, after deducting the initial purchasers’ discounts and commissions and estimated offering expenses. The net proceeds from the offering of the HEP i6.375% Senior Notes were used to partially repay outstanding borrowings under the HEP Credit Agreement.
29
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Continued
In addition, HEP has $i500.0 million in aggregate principal amount of i5.0% senior notes maturing February 2028 (the “HEP
i5.0% Senior Notes,” and together with the HEP i6.375% Senior Notes, 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 September 30, 2022. At any time when the HEP Senior Notes are rated investment grade by either Moody’s Investors Service, Inc. or S&P Global Ratings 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 certain of 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.
i
The carrying amounts of long-term debt are as follows:
These fair values are based on a Level 2 input. See Note 5 for additional information on Level 2 inputs.
We capitalized $i0.7 million and $i4.8
million for the three months ended September 30, 2022 and 2021, respectively, and $i5.6 million and $i9.5
million for the nine months ended September 30, 2022 and 2021, respectively, of interest attributable to construction projects.
NOTE 11:iDerivative Instruments and Hedging
Activities
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 contracts to mitigate the exposure associated with fluctuations on intercompany notes with our foreign subsidiaries that are not denominated in the U.S. dollar.
Accounting Hedges
We had swap contracts serving as cash flow hedges against price risk on forecasted purchases of natural gas that matured as of December
31, 2021. We also periodically have 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 (loss). These fair value adjustments are later reclassified to earnings as the hedging instruments mature.
i
The
following table presents the pre-tax effect on other comprehensive income (loss) (“OCI”) and earnings due to fair value adjustments and maturities of hedging instruments under hedge accounting:
Net
Unrealized Gain (Loss) Recognized in OCI
Gain (Loss) Reclassified into Earnings
Derivatives Designated as Cash Flow Hedging Instruments
We have commodity contracts including NYMEX futures contracts to lock in prices on forecasted purchases and sales of inventory and forward purchase and sell contracts that serve as economic hedges (derivatives used for risk management, but not designated as accounting hedges). We also have forward currency contracts to fix the rate of foreign currency. In addition, our catalyst financing arrangements discussed in Note 10 could require repayment under certain conditions based on the future pricing of platinum, which is an embedded derivative. These contracts
are measured at fair value with offsetting adjustments (gains/losses) recorded directly to earnings.
31
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
i
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.
As a result of the HFC Transactions, discussed in Note 2, each share of HollyFrontier common stock issued and outstanding immediately prior to the closing of the HFC Transactions (other than treasury shares which were cancelled pursuant to the Business Combination Agreement) was automatically converted into one validly issued, fully paid and non-assessable share of HF Sinclair common stock, having the same designations, rights, powers and preferences
and the qualifications, limitations and restrictions as a share of HollyFrontier common stock immediately prior to the closing of the HFC Transactions.
In November 2019, our Board of Directors approved a $i1.0 billion share repurchase program, which replaced all existing share repurchase programs at that time, authorizing us to repurchase common stock in the open market or through privately negotiated transactions. In June 2022, our Board of Directors determined
that privately negotiated repurchases from REH Company (formerly known as The Sinclair Companies) are also authorized under the share repurchase program, subject to REH Company’s interest in selling its shares and other limitations. As of September 30, 2022, we had repurchased $i975.0 million under this share repurchase program, of which $i500.0 million
were repurchased pursuant to privately negotiated repurchases from REH Company.
On September 21, 2022, our Board of Directors approved a new $i1.0 billion share repurchase program, which, effective September 26, 2022, replaced all existing share repurchase programs, including $i25.0
million remaining under the previously existing $i1.0 billion share repurchase program. This new share repurchase program authorizes us to repurchase common stock in the open market or through privately negotiated transactions. Privately negotiated repurchases from REH Company are also authorized under the share repurchase program, subject to REH Company’s interest in selling its shares and other limitations. The timing and amount of share repurchases, including those from REH Company, will depend on market conditions and corporate, tax, regulatory
and other relevant considerations. This program may be discontinued at any time by our Board of Directors. As of September 30, 2022, we repurchased $i100.0 million under this new share repurchase program pursuant to a privately negotiated repurchase from REH Company. 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.
During
the nine months ended September 30, 2022, we made open market and privately negotiated purchases of i21,610,528 shares for $i1,075.0
million under our share repurchase programs, of which i11,842,698 shares were repurchased for $i600.0 million pursuant to privately negotiated
repurchases from REH Company. As of September 30, 2022, we had remaining authorization to repurchase up to $i900.0 million under the new share repurchase program, of which we repurchased i946,911
shares for $i51.8 million in October 2022. iNo share repurchases were made during the nine months ended September 30,
2021.
33
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
During the nine months ended September 30, 2022 and 2021, we withheld i35,427
and i18,581 shares, respectively, of our common stock under the terms of stock-based compensation agreements to provide funds for the payment of payroll and income taxes due at the vesting of share-based awards.
Our Board of Directors declared a regular quarterly dividend in the amount of $i0.40
per share, payable on December 5, 2022 to holders of record of common stock on November 21, 2022.
NOTE 13:iOther Comprehensive Income (Loss)
i
The
components and allocated tax effects of other comprehensive income (loss) are as follows:
Net change in foreign currency translation adjustment
$
(i10,411)
$
(i2,192)
$
(i8,219)
Net
unrealized gain on hedging instruments
i1,742
i431
i1,311
Net
change in pension and other post-retirement benefit obligations
(i2,792)
(i698)
(i2,094)
Other
comprehensive loss attributable to HF Sinclair stockholders
$
(i11,461)
$
(i2,459)
$
(i9,002)
/
34
HF
SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
i
The following table presents the statements of operations line item effects for reclassifications out of accumulated other comprehensive income (loss) (“AOCI”):
Unrealized
gain on post-retirement benefit obligations
i7,421
i9,342
Unrealized
loss on hedging instruments
i—
(i259)
Accumulated
other comprehensive income (loss)
$
(i36,348)
$
i2,671
/
NOTE
14:iContingencies
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.
36
HF SINCLAIR CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Pursuant to the Business Combination Agreement, all pre-closing RINs obligations of Sinclair HoldCo’s subsidiaries (which are now subsidiaries of HF Sinclair as a result of the HFC Transactions) remain with Sinclair HoldCo. Sinclair HoldCo is required to transfer to HF Sinclair the number of each applicable type of RIN required for Sinclair HoldCo to demonstrate compliance for any pre-closing obligations it retained by the deadlines set forth in the Business Combination Agreement. If Sinclair HoldCo does not deliver all the required RINs by the applicable deadline, then, within five days following the delivery of an invoice therefor, Sinclair
HoldCo is required to pay to HF Sinclair the amount of all out-of-pocket costs and expenses incurred by HF Sinclair to comply with Sinclair HoldCo’s pre-closing obligations prior to such deadline, including the price of any RINs purchased by HF Sinclair. In relation to this, i2,570,000 shares of HF Sinclair common stock and i5,290,000
HEP common units, in each case, out of the purchase consideration paid to Sinclair HoldCo, are held in escrow to secure Sinclair HoldCo’s RINs credit obligations under the Business Combination Agreement. HF Sinclair, and not HEP, would be entitled to the HEP common units held in escrow in the event of Sinclair HoldCo’s breach of its RINs credit obligations under the Business Combination Agreement.
During 2017, 2018 and 2019, the EPA granted the Cheyenne Refinery and the refinery in Woods Cross, Utah (the “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.
On April 7, 2022, the EPA issued a decision reversing the grant of small refinery exemptions for our Woods Cross and Cheyenne refineries for the 2018 compliance year. On June 3, 2022, the EPA issued a decision reversing the grant of small refinery exemptions for our Woods Cross and Cheyenne refineries for the 2016 compliance year and denying small refinery exemption petitions for our Woods Cross and Cheyenne refineries for the 2019 and 2020 compliance years. Various subsidiaries of HollyFrontier are currently pursuing legal challenges to the EPA’s decisions to reverse its grant of small refinery exemptions for the 2016 and 2018 compliance
years. The first lawsuit, filed against the EPA on May 6, 2022 and currently pending before the U.S. Court of Appeals for the DC Circuit, seeks to have the EPA’s reversal of our 2018 small refinery exemption petitions overturned. The second lawsuit, filed against the EPA on August 5, 2022 and currently pending before the U.S. Court of Appeals for the DC Circuit, seeks to have the EPA’s reversal of our 2016 small refinery exemption petitions overturned and to have the EPA’s denial of our 2019 and 2020 small refinery exemption petitions reversed. In addition, for both the 2016 and 2018 compliance years, pursuant to the June 2022 and April 2022 decisions, respectively, the EPA established an alternative compliance demonstration for small refineries pursuant to which the EPA is not imposing any obligations for the small refineries whose exemptions were reversed. On June
24, 2022, Growth Energy filed two lawsuits in the U.S. Court of Appeals for the DC Circuit against the EPA challenging the alternative compliance demonstration for the 2016 and 2018 compliance years. On July 25, 2022, various subsidiaries of HollyFrontier intervened on behalf of the EPA to aid the defense of the EPA’s alternative compliance demonstration decision. It is too early to predict the outcome of these matters. We are unable to estimate the costs we may incur, if any, at this time.
We have been party to multiple proceedings before the Federal Energy Regulatory Commission (“FERC”) challenging the rates charged by SFPP, L.P. (“SFPP”) on its East Line pipeline facilities from El Paso, Texas to Phoenix, Arizona. In March
2018, FERC ruled that SFPP, as a master limited partnership, was prohibited from including an allowance for investor income taxes in the cost of service underlying its East Line rates. We reached a negotiated settlement with SFPP that provides for a payment to us of $i51.5 million. FERC approved the settlement on December 31, 2020 subject to a rehearing period that resulted in a settlement effective date of February 2, 2021. Under the terms of the settlement agreement,
SFPP made the $i51.5 million payment to us on February 10, 2021 and we recorded a “Gain on tariff settlement” on our consolidated statements of operations for the nine months ended September 30, 2021.
NOTE 15:iSegment
Information
Effective the first quarter of 2022, we revised our reportable segments to align with certain changes in how our chief operating decision maker manages and allocates resources to our businesses. Accordingly, we created two new reportable segments, Renewables and Marketing. Our operations are now organized into ifive reportable segments, Refining, Renewables, Marketing, Lubricants and Specialty Products and HEP. Our operations that are not included in one of these five reportable
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.
37
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
As a result of the Sinclair Transactions that closed on March 14, 2022, the operations of the Acquired Sinclair Businesses are reported in the Refining, Renewables, Marketing and HEP segments.
The
Refining segment represents the operations of our El Dorado, Tulsa, Navajo and Woods Cross refineries and HF Sinclair Asphalt Company LLC (“Asphalt”). Also, effective with our acquisition that closed on November 1, 2021, the Refining segment includes our Puget Sound refinery, and effective with our acquisition that closed on March 14, 2022, includes our Sinclair (also referred to as Parco) and Casper refineries. Refining activities involve the purchase and refining of crude oil and wholesale marketing of refined products, such as gasoline, diesel fuel and jet fuel. These petroleum products are primarily marketed in the Mid-Continent, Southwest and Rocky Mountains extending into the Pacific Northwest geographic regions of the United States. Asphalt operates various asphalt terminals in Arizona, New Mexico and Oklahoma.
The
Renewables segment represents the operations of the Cheyenne renewable diesel unit (“RDU”), which was mechanically complete in the fourth quarter of 2021 and fully operational in the first quarter of 2022, the pre-treatment unit (“PTU”) at our Artesia, New Mexico facility, which was completed and fully operational in the first quarter of 2022 and the Artesia RDU, which was completed and fully operational in the second quarter of 2022. Also, effective with our acquisition that closed on March 14, 2022, the Renewables segment includes the Sinclair RDU. During the construction phase of our RDUs and PTU, operating expense and capital expenditures were reported in the Corporate and Other segment, and this financial information has been retrospectively adjusted to reflect our current segment presentation.
Effective with our acquisition
that closed on March 14, 2022, the Marketing segment includes branded fuel sales through more than 300 distributors to more than 1,300 branded sites in the United States and licensing fees for the use of the Sinclair brand at more than 300 additional locations throughout the country.
The Lubricants and Specialty Products segment represents Petro-Canada Lubricants Inc.’s (“PCLI”) 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-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 the operations of Red Giant Oil Company LLC, one of the largest suppliers of locomotive engine oil in North America. Also, 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 Mountains geographic regions of the United States. The HEP segment also includes iii50//%
ownership interests in each of the Osage Pipeline, the Cheyenne Pipeline and Cushing Connect, a i25.06% ownership interest in the Saddle Butte Pipeline and a i49.995% ownership interest in
the Pioneer Pipeline. 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.
The accounting policies for our segments are the same as those described in the summary of significant accounting policies in HollyFrontier’s Annual Report on Form 10-K for the year ended December 31, 2021.
As discussed above, we revised our reportable segments to align with certain changes in how our chief operating decision maker manages
and allocates resources to our business. As a result of these changes, assets by segment are no longer a measure used to assess the performance of the segments by our chief operating decision maker and thus are not reported in our disclosures.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 HF Sinclair Corporation (“HF Sinclair”) and its consolidated subsidiaries or to HF Sinclair 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 HF Sinclair, unless when used in disclosures of transactions or obligations between HEP and HF Sinclair 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 HF Sinclair. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries. References herein to HF Sinclair “we,”“our,”“ours,” and “us” with respect to time periods prior to March
14, 2022 refer to HollyFrontier Corporation (“HollyFrontier”) and its consolidated subsidiaries and do not include Hippo Holding LLC (now known as Sinclair Holding LLC), the parent company of Sinclair Oil LLC, Sinclair Transportation Company LLC or their respective consolidated subsidiaries (collectively, the “Acquired Sinclair Businesses”). References herein to HF Sinclair “we,”“our,”“ours,” and “us” with respect to time periods from and after March 14, 2022 include the operations of the Acquired Sinclair Businesses. Unless otherwise specified, the financial statements included herein include financial information for HF Sinclair, which for the time period from March
14, 2022 to September 30, 2022 includes the combined business operations of HollyFrontier and the Acquired Sinclair Businesses.
OVERVIEW
We are an independent energy company that produces and markets high-value light products such as gasoline, diesel fuel, jet fuel, renewable diesel and other specialty products. We own and operate refineries located in El Dorado, Kansas (the “El Dorado Refinery”); Tulsa, Oklahoma, which comprise two production facilities, the Tulsa West and Tulsa East facilities (collectively, the “Tulsa Refineries”); Anacortes, Washington (the “Puget Sound Refinery”);
Artesia, New Mexico, which operates in conjunction with crude oil distillation, vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the “Navajo Refinery”); Woods Cross, Utah (the “Woods Cross Refinery”); Sinclair, Wyoming (the “Sinclair Refinery,” and also referred to as the “Parco Refinery”) and Casper, Wyoming (the “Casper Refinery”). We market our refined products principally in the Southwest United States, the Rocky Mountains extending into the Pacific Northwest and in other neighboring Plains states. We supply high-quality fuels to more than 1,300 Sinclair branded stations and license the use of the Sinclair brand at more than 300 additional locations throughout the country. In addition, our subsidiaries produce and market base oils and other specialized lubricants in the United States,
Canada and the Netherlands, and export products to more than 80 countries. Through our subsidiaries, we produce renewable diesel at two of our facilities in Wyoming and our facility in New Mexico. We also own a 47% limited partner interest and a non-economic general partner interest in HEP, a master limited partnership that provides petroleum product and crude oil transportation, terminalling, storage and throughput services to the petroleum industry, including HF Sinclair subsidiaries.
Market Developments
For the three months ended September 30, 2022, net income attributable to HF Sinclair stockholders was $954.4
million compared to $280.8 million for the three months ended September 30, 2021. For the nine months ended September 30, 2022, net income attributable to HF Sinclair stockholders was $2,335.6 million compared to $597.9 million for the nine months ended September 30, 2021. Gross refining margin per produced barrel sold in our Refining segment increased 112% for the three months ended September 30, 2022 over the same period of 2021.
Our results for the third quarter and nine months of 2022 were favorably impacted by continued strong global economic activity with global demand for transportation fuels, lubricants and the transportation and terminal services having returned to pre-pandemic
levels. Following the rapid increases in crude oil prices and market crack spreads during the second quarter of 2022, crude oil prices and market crack spreads remained at a high level during the third quarter as a result of continued robust demand and the global supply disruption related to actions taken in response to both the COVID-19 pandemic and sanctions imposed on Russia for its invasion of Ukraine. We continue to adjust our operational plans to the evolving market conditions. The extent to which our future results are affected by the COVID-19 pandemic or volatile regional and global economic conditions will depend on various factors and consequences beyond our control.
On March 14, 2022 (the “Closing Date”), HollyFrontier and HEP announced the establishment of HF Sinclair as the new parent holding company of HollyFrontier and HEP and their subsidiaries, and the completion of their respective acquisitions of Sinclair Oil Corporation (now known as Sinclair Oil LLC, “Sinclair Oil”) and Sinclair Transportation Company LLC (“STC”) from The Sinclair Companies (now known as REH Company and referred to herein as “Sinclair HoldCo”). On the Closing Date, HF Sinclair completed its previously announced acquisition of Sinclair Oil by effecting (a) a holding company merger with HollyFrontier surviving such merger as a direct wholly owned subsidiary of HF Sinclair (the “HFC Merger”) and (b) immediately following the
HFC Merger, a contribution whereby Sinclair HoldCo contributed all of the equity interests of Hippo Holding LLC (now known as Sinclair Holding LLC), the parent company of Sinclair Oil (the “Target Company”) to HF Sinclair in exchange for 60,230,036 shares of HF Sinclair common stock, resulting in the Target Company becoming a direct wholly owned subsidiary of HF Sinclair (the “HFC Transactions”). At the effective time of the HFC Merger, all of HollyFrontier’s outstanding shares were automatically converted into equivalent corresponding shares of HF Sinclair, and HF Sinclair became the successor issuer to HollyFrontier pursuant to Rule 12g-3(a) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and replaced HollyFrontier as the public company trading on the New York Stock Exchange (“NYSE”) under the symbol “DINO.”
HF Sinclair
acquired Sinclair HoldCo’s refining, branded marketing, renewables, and midstream businesses. The branded marketing business supplies high-quality fuels to more than 1,300 Sinclair branded stations and licenses the use of the Sinclair brand at more than 300 additional locations throughout the United States. The renewables business includes the operation of a renewable diesel unit located in Sinclair, Wyoming. The refining business includes two Rocky Mountains-based refineries located in Casper, Wyoming and Sinclair, Wyoming. Under the terms of the Contribution Agreement, HEP acquired STC, Sinclair HoldCo’s integrated crude and refined products pipelines and terminal assets, including approximately 1,200 miles of integrated crude and refined product pipeline supporting the Sinclair refineries and third parties, eight product terminals and two crude terminals with approximately 4.5 million barrels of operated storage. In addition, HEP acquired STC’s interests in three
pipeline joint ventures for crude gathering and product offtake including: Saddle Butte Pipeline III, LLC (25.06% non-operated interest); Pioneer Pipeline (49.995% non-operated interest); and UNEV Pipeline, LLC (“UNEV”) (the 25% non-operated interest not already owned by HEP, resulting in UNEV becoming a wholly owned subsidiary of HEP). The addition of Sinclair Oil and STC to the HollyFrontier business created a combined company with increased scale and ability to diversify and is expected to drive growth through the expanded refining and renewables business. In addition, the HFC Transactions added an integrated branded wholesale distribution network to our business.
See Note 2 “Acquisitions” and Note 3 “Holly Energy Partners” in the Notes to Consolidated Financial Statements for additional information.
Puget
Sound Refinery Acquisition
On May 4, 2021, HollyFrontier Puget Sound Refining LLC (now known as HF Sinclair Puget Sound Refining LLC), a wholly owned subsidiary of HollyFrontier, entered into a sale and purchase agreement with Equilon Enterprises LLC d/b/a Shell Oil Products US (“Shell”) to acquire Shell’s Puget Sound refinery and related assets, including the on-site cogeneration facility and related logistics assets. The acquisition closed on November 1, 2021.
Renewable Fuel Standard Regulations
Pursuant to the 2007 Energy Independence and Security Act, the Environmental 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 $261.6 million and $668.4 million for the three and nine months ended September 30, 2022, respectively. At September 30, 2022, our open RINs credit obligations were $81.2 million. See Note 2 “Acquisitions” in the Notes to Consolidated Financial Statements for additional information on RINs credit obligations assumed in the Sinclair Transactions.
Under the RFS
regulations, the EPA is required to set annual volume targets of renewable fuels that obligated parties, such as us, must blend into petroleum-based transportation fuels consumed in the United States. These volume requirements are used to determine an obligated party’s renewable volume obligation (“RVO”). The EPA released a final rule on June 3, 2022 that, among other things, reduced the volume targets for 2020 and established targets for 2021 and 2022. In 2020, we recognized the cost of the RVO using the 2020 volume targets set by the EPA at that time, and in 2021 and the three months ended March 31, 2022, we recognized the cost of the RVO using our estimates. As a result of the final rule released by the EPA on June 3, 2022 as noted above, we recognized a benefit of $72.0 million in the nine months ended September
30, 2022 related to the modification of the 2020 and 2021 volume targets.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the "Inflation Reduction Act") into law. The Inflation Reduction Act includes a new corporate alternative minimum tax (the "Corporate AMT") of 15% on the adjusted financial statement income ("AFSI") of corporations with average AFSI exceeding $1.0 billion over a three-year period. The Corporate AMT is effective for
the Company beginning January 1, 2023. We are evaluating the Corporate AMT and its potential impact on our future U.S. tax expense, cash taxes, and effective tax rate. The Inflation Reduction Act also extends the federal blender’s tax credit at the current rate of $1 per gallon for renewable diesel through the end of 2024. Additionally, the Inflation Reduction Act imposes an excise tax of 1% tax on the fair market value of net stock repurchases made after December 31, 2022. The impact of this provision will be dependent on the extent of net share repurchases made in future periods.
OUTLOOK
Within
our Refining segment, for the fourth quarter of 2022, we expect to run between 620,000 – 650,000 barrels per day of crude oil. This guidance reflects the strong underlying refined product margins driven by constrained refined product supply in the markets we serve.
Within our Lubricants and Specialty Products segment, we expect the recent trends related to the FIFO impact of higher priced feedstocks experienced in the third quarter of 2022 to continue in the fourth quarter of 2022.
Within our Renewables segment, for the fourth quarter of 2022, we expect to see strong demand for renewable diesel and solid margins driven by D4 RIN price strength. We had planned maintenance at our Sinclair renewable diesel unit during October 2022, and we expect to reach full operating rates in the second half of the fourth
quarter of 2022 across all of our renewable facilities.
In the fourth quarter of 2022, HEP expects to hold the quarterly distribution constant at $0.35 per unit, or $1.40 on an annualized basis. HEP remains committed to its distribution strategy focused on funding all capital expenditures and distributions within operating cash flow and maintaining distributable cash flow coverage of 1.3x or greater with the goal of reducing leverage to 3.0-3.5x.
In September 2022, our Board of Directors authorized a new $1.0 billion share repurchase program, and we expect to actively repurchase shares throughout the fourth quarter of 2022. Our Board of Directors also declared a regular quarterly dividend in the amount of $0.40 per share, payable on December 5, 2022 to
holders of record of common stock on November 21, 2022.
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 included 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. During the second quarter of 2022, we received $83 million in cash tax benefit from the net operating loss carryback provisions under the CARES Act. We have received all the carryback claims related to the CARES Act.
A more detailed discussion
of our financial and operating results for the three and nine months ended September 30, 2022 and 2021 is presented in the following sections.
(1)Earnings before interest, taxes, depreciation and amortization, which we refer to as “EBITDA,” is calculated as net income attributable to HF Sinclair 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 five reportable segments, Refining, Renewables, Marketing, Lubricants and Specialty Products and HEP. See Note 15 “Segment Information” in the Notes to Consolidated Financial Statements for additional information on our reportable segments.
Refining Segment Operating Data
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 is comprised of the El Dorado and Tulsa Refineries. The West region is comprised of the Puget Sound, Navajo, Woods Cross, Sinclair and Casper Refineries. The Puget Sound Refinery was acquired November
1, 2021, and thus is included for the period January 1, 2022 to September 30, 2022. In addition, the refinery operations of the Sinclair and Casper Refineries are included for the period March 14, 2022 (date of acquisition) through September 30, 2022. 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 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.
Refinery operating expenses per
throughput barrel (7)
$
7.53
$
6.07
$
8.51
$
6.71
Feedstocks:
Sweet
crude oil
39
%
51
%
42
%
49
%
Sour crude oil
39
%
28
%
36
%
29
%
Heavy
sour crude oil
13
%
11
%
13
%
12
%
Black wax crude oil
3
%
4
%
3
%
4
%
Other
feedstocks and blends
6
%
6
%
6
%
6
%
Total
100
%
100
%
100
%
100
%
Sales
of produced refined products:
Gasolines
52
%
51
%
51
%
52
%
Diesel fuels
34
%
35
%
33
%
35
%
Jet
fuels
6
%
3
%
6
%
3
%
Fuel oil
1
%
2
%
2
%
1
%
Asphalt
3
%
4
%
3
%
4
%
Base
oils
1
%
3
%
2
%
2
%
LPG and other
3
%
2
%
3
%
3
%
Total
100
%
100
%
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 Asphalt and inter-segment sales) 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). As a result of our acquisition of the Puget Sound Refinery on November 1, 2021, and the Sinclair and Casper Refineries on March 14, 2022,
our consolidated crude capacity increased from 405,000 BPSD at September 30, 2021 to 678,000 BPSD at September 30, 2022.
(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 of refined products produced at our refineries.
(7)Represents total Refining segment operating expenses, exclusive of depreciation and amortization,
divided by refinery throughput.
(8)We acquired the Sinclair and Casper Refineries on March 14, 2022. Refining operating data for the nine months ended September 30, 2022 includes crude oil and feedstocks processed and refined products sold at our Sinclair and Casper Refineries for the period March 14, 2022 through September 30, 2022 only, averaged over the 273 days in the nine months ended September 30, 2022.
The following table sets forth information about our renewables operations and includes our Sinclair businesses for the period March 14, 2022 (the date of acquisition) through September 30, 2022.
(1)Represents
average amount per produced gallon 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.
(2)Represents total Renewables segment operating expenses, exclusive of depreciation and amortization, divided by sales volumes of renewable diesel produced at our renewable diesel units.
Marketing Operating Data
The following table sets forth information about our Marketing operations and includes our Sinclair business for the period March 14, 2022 (the date of acquisition) through September 30,
2022.
(1)Represents
average amount per gallon 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.
Lubricants and Specialty Products Operating Data
The following table sets forth information about our lubricants and specialty products operations.
(1)Rack Back consists of our Petro-Canada Lubricants Inc. (“PCLI”) base oil production activities, by-product sales to third parties and intra-segment base oil sales to Rack Forward.
(2)Rack Forward activities include the
purchase of base oils from Rack 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 Back produced base oils to Rack Forward are eliminated under the “Eliminations” column.
Net income attributable to HF Sinclair stockholders for the three months
ended September 30, 2022 was $954.4 million ($4.45 per basic and diluted share), a $673.6 million increase from a net income of $280.8 million ($1.71 per basic and diluted share) for the three months ended September 30, 2021. The increase in net income was principally driven by stronger product demand, higher sales prices and the acquisition of the Puget Sound Refinery and the Acquired Sinclair Businesses, which resulted in higher refined product sales volumes and an increase in refinery gross margins. Lower of cost or market inventory reserve adjustments related to our renewables inventories decreased pre-tax earnings by $16.8 million for the three months ended September 30, 2022. Refinery gross margins for the three months ended September 30,
2022 increased to $31.47 per produced barrel sold from $14.87 for the three months ended September 30, 2021.
Sales and other revenues increased 126% from $4,685.1 million for the three months ended September 30, 2021 to $10,599.0 million for the three months ended September 30, 2022 principally due to the increase in sales prices and higher refined product sales volumes, primarily due to the acquisition of
the Puget Sound Refinery and the Acquired Sinclair Businesses. Sales and other revenues included $1,266.7 million, $820.6 million and $255.0 million in unaffiliated revenues related to our Marketing, Lubricants and Specialty Products and Renewables segments, respectively, for the three months ended September 30, 2022. Sales and other revenues included $666.0 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the three months ended September 30, 2021.
Cost of Products Sold
Total cost of products sold increased 120% from $3,822.9 million for the three months ended September 30, 2021 to $8,392.1 million for the three months ended September 30,
2022 principally due to higher crude oil costs and higher refined product sales volumes as a result of the acquisition of the Puget Sound Refinery and the Acquired Sinclair Businesses. During the third quarter of 2022, we recognized a lower of cost or market inventory valuation adjustment charge related to our renewables inventories of $16.8 million. The increase in costs of products sold was also driven by consumption of higher priced feedstock inventory in our Lubricants and Specialty Products segment during the third quarter of 2022. Within our Lubricants and Specialty Products segment, FIFO impact was a charge of $44.4 million for the three months ended September 30, 2022 and a benefit of $9.6 million for the three months ended September 30, 2021.
Gross Refinery Margins
Gross
refinery margin per produced barrel sold increased 112% from $14.87 for the three months ended September 30, 2021 to $31.47 for the three months ended September 30, 2022. The increase was due to the effects of an increase in the average per barrel sold sales price during the current year quarter, partially offset by increased 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 sale prices of products sold and cost of products purchased.
Operating Expenses
Operating
expenses, exclusive of depreciation and amortization, increased 72% from $352.5 million for the three months ended September 30, 2021 to $604.6 million for the three months ended September 30, 2022 primarily due to the acquisition of the Puget Sound Refinery and the Acquired Sinclair Businesses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 13% from $91.1 million for the three months ended September 30, 2021 to $102.7 million for the three months ended September 30, 2022 primarily due to higher employee related expenses from recent acquisitions and professional services and legal costs incurred
in connection with the Sinclair Transactions. See Note 2 “Acquisitions” in the Notes to Consolidated Financial Statements for additional information on this acquisition.
Depreciation and Amortization Expenses
Depreciation and amortization increased 42% from $121.2 million for the three months ended September 30, 2021 to $172.0 million for the three months ended September 30, 2022. This increase was due principally to depreciation and amortization attributable to the acquisition of the Puget Sound Refinery, the Acquired Sinclair Businesses and newly capitalized projects related to our renewable diesel units.
Earnings (Loss) of Equity Method Investments
For
the three months ended September 30, 2022, we recorded a loss of $16.3 million compared to earnings of $3.7 million of equity method investments for the three months ended September 30, 2021. Net loss during the three months ended September 30, 2022 was primarily due to HEP’s 50% share of incurred and estimated environmental remediation and recovery expenses, net of insurance proceeds received to date, for Osage Pipe Line Company, LLC (“Osage Pipeline”). In July 2022, Osage Pipeline, which carries crude oil from Cushing, Oklahoma to El Dorado, Kansas, suffered a release of crude oil. The pipeline resumed operations during the third quarter of 2022 and remediation efforts are underway.
Interest Income
Interest
income was $9.8 million for the three months ended September 30, 2022 compared to $1.0 million for the three months ended September 30, 2021. The increase in interest income was primarily due to the increase in the average cash balance and higher interest rates on cash investments.
Interest expense was $44.8 million for the three months ended September 30, 2022 compared to $26.9 million for the three months ended September 30,
2021. This increase was primarily due to the April 2022 issuance of $400 million in aggregate principal amount of HEP’s 6.375% senior notes maturing in April 2027, lower capitalized interest driven by higher renewables capital spend in 2021 and higher market interest rates on HEP’s revolving credit facility during the three months ended September 30, 2022.
For the three months ended September 30, 2022 and 2021, interest expense attributable to our HEP segment was $23.0 million and $13.4 million, respectively.
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 was a net gain of $1.5 million and a net loss of $3.5 million for the three months ended September 30, 2022 and 2021, respectively. For the three months ended September 30, 2022 and 2021, gain (loss) on foreign currency transactions included gains of $28.9 million and $9.7 million, respectively, on foreign exchange forward contracts
(utilized as an economic hedge).
Gain on Sale of Assets and Other
For the three months ended September 30, 2021, we recorded an $86.0 million gain related to the sale of real property in Mississauga, Ontario. See Note 1 “Description of Business and Presentation of Financial Statements” in the Notes to Consolidated Financial Statements for additional information.
Income Taxes
For the three months ended September 30, 2022, we recorded an income tax expense of $301.9 million compared to $54.8 million for the three months ended September 30, 2021. This increase was principally
due to higher pre-tax income during the three months ended September 30, 2022 compared to the same period of 2021. Our effective tax rates were 23.6% and 15.3% for the three months ended September 30, 2022 and 2021, respectively. The increase in the effective tax rate is principally due 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.
Net income attributable to HF Sinclair stockholders for the nine months ended September 30, 2022 was $2,335.6 million ($11.35 per basic and diluted share), a $1,737.8 million increase compared to net income of $597.9 million ($3.63 per basic and diluted share) for the nine months ended September 30, 2021. The increase in net income was principally driven by stronger product demand, higher sales prices and the acquisition of the Puget Sound Refinery and the Acquired Sinclair Businesses, which resulted in higher refined product sales volumes and an increase in refinery gross margins. Lower of cost or market inventory reserve adjustments related to our renewables inventories decreased pre-tax earnings by $42.8 million for the nine months ended September 30,
2022 and lower of cost or market inventory adjustment related to our refining inventories increased pre-tax earnings by $318.9 million for the nine months ended September 30, 2021. Net income for the nine months ended September 30, 2021 was impacted by winter storm Uri, which increased natural gas costs across our refining system. Refinery gross margins for the nine months ended September 30, 2022 increased to $27.97 per barrel sold from $11.75 for the nine months ended September 30, 2021.
Sales and Other Revenues
Sales and other revenues increased 129% from $12,766.5 million for the nine months ended September 30,
2021 to $29,219.9 million for the nine months ended September 30, 2022 principally due to the increase in sales prices and higher refined product sales volumes, in part due to the acquisition of the Puget Sound Refinery and the Acquired Sinclair Businesses. Sales and other revenues included $2,880.0 million, $2,419.2 million and $399.2 million in unaffiliated revenues related to our Marketing, Lubricants and Specialty Products and Renewables segments, respectively, for the nine months ended September 30, 2022. Sales and other revenues included $1,850.8 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the nine months ended September 30, 2021.
Total cost of products sold increased 128% from $10,290.0 million for the nine months ended September 30, 2021 to $23,500.0 million for the nine months ended September 30, 2022 principally due to higher crude oil costs and higher refined product sales volumes, in part due to the acquisition of the Puget Sound Refinery and the Acquired Sinclair Businesses. During the nine months ended September 30, 2022 and 2021, we recognized a lower of cost or market inventory valuation adjustment charge related to our renewables inventories of $42.8 million and a benefit related to our refining inventories of $318.9 million, respectively. Within our Lubricants and Specialty
Products segment, FIFO impact was a benefit of $84.9 million and $64.5 million for the nine months ended September 30, 2022 and 2021, respectively.
Gross Refinery Margins
Gross refinery margin per barrel sold increased 138% from $11.75 for the nine months ended September 30, 2021 to $27.97 for the nine months ended September 30, 2022 principally due to the increase in the average per barrel sold sales prices during the current period, partially offset by the increase in 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, increased 55% from $1,086.6 million for the nine months ended September 30, 2021 to $1,688.2 million for the nine months ended September 30, 2022 primarily due to the acquisition of the Puget Sound Refinery and the Acquired Sinclair Businesses.
Selling, General and Administrative Expenses
Selling, general and administrative
expenses increased 29% from $250.8 million for the nine months ended September 30, 2021 to $324.0 million for the nine months ended September 30, 2022 primarily due to higher employee related expenses from recent acquisitions and professional services and legal costs primarily incurred in connection with the Sinclair Transactions. See Note 2 “Acquisitions” in the Notes to Consolidated Financial Statements for additional information on these acquisitions.
Depreciation and Amortization Expenses
Depreciation and amortization increased 30% from $369.3 million for the nine months ended September 30, 2021 to $480.6 million for the nine months ended September 30, 2022.
This increase was due principally to depreciation and amortization attributable to the acquisition of the Puget Sound Refinery, the Acquired Sinclair Businesses and newly capitalized projects related to our renewable diesel units.
Earnings (Loss) of Equity Method Investments
For the nine months ended September 30, 2022, we recorded a net loss of $7.3 million as compared to net earnings of $8.9 million of equity method investments for the nine months ended September 30, 2021. Net loss during the nine months ended September 30, 2022 was primarily due to HEP’s 50% share of incurred and estimated environmental remediation and recovery expenses, net of insurance proceeds received to date, for Osage Pipeline.
In July 2022, Osage Pipeline, which carries crude oil from Cushing, Oklahoma to El Dorado, Kansas, suffered a release of crude oil. The pipeline resumed operations during the third quarter of 2022 and remediation efforts are underway.
Interest Income
Interest income was $12.7 million for the nine months ended September 30, 2022 compared to $3.1 million for the nine months ended September 30, 2021. The increase in interest income was primarily due to higher interest rates on cash investments.
Interest Expense
Interest expense was $118.7 million for the nine months ended September 30, 2022 compared to $94.2 million
for the nine months ended September 30, 2021. This increase was primarily due to the April 2022 issuance of $400 million in aggregate principal amount of HEP’s 6.375% senior notes maturing in April 2027 and higher market interest rates on HEP’s revolving credit facility during the nine months ended September 30, 2022.
For the nine months ended September 30, 2022 and 2021, interest expense attributable to our HEP Segment was $57.0 million and $40.6 million, respectively.
Gain on Tariff Settlement
For the nine months
ended September 30, 2021, we recorded a gain of $51.5 million upon the settlement of a tariff rate case. See Note 14 “Contingencies” in the Notes to Consolidated Financial Statements for additional information on this case and settlement.
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 net gain of $0.8 million and a net loss of $4.2 million for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 2021, gain / loss on foreign currency transactions included a net gain of $35.5 million and a loss of $3.2 million, respectively, on foreign exchange forward contracts (utilized as an economic hedge).
Gain on Sale of Assets and Other
For the nine months ended September
30, 2021, we recorded an $86.0 million gain related to the sale of real property in Mississauga, Ontario, and HEP recorded a $5.3 million gain related to the sale of certain pipeline assets. See Note 1 “Description of Business and Presentation of Financial Statements” in the Notes to Consolidated Financial Statements for additional information.
Income Taxes
For the nine months ended September 30, 2022, we recorded an income tax expense of $706.7 million compared to $149.9 million for the nine months ended September 30, 2021. This increase was principally due to higher pre-tax income during the nine months ended September 30, 2022 compared to the same period of 2021. Our effective tax rates were
22.6% and 18.1% for the nine months ended September 30, 2022 and 2021, respectively. The year-over-year increase in the effective tax rate is principally due 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
HF Sinclair Credit Agreement
On April 27, 2022, after giving effect to the consummation of the exchange
offers and the issuance of the HF Sinclair Senior Notes (as defined below), HF Sinclair entered into a $1.65 billion senior unsecured revolving credit facility maturing in April 2026 (the “HF Sinclair Credit Agreement”). The HF Sinclair 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. The HF Sinclair Credit Agreement replaced the $1.35 billion senior unsecured revolving credit facility of HollyFrontier, which was terminated on April 27, 2022. At September 30, 2022, HF Sinclair was in compliance with all covenants, had no outstanding borrowings and had outstanding letters of credit totaling $2.3 million under the HF Sinclair Credit Agreement.
HollyFrontier Bond
Exchange and HF Sinclair Senior Notes
On April 27, 2022, HF Sinclair completed its offers to exchange any and all outstanding HollyFrontier 2.625% senior notes maturing October 2023 (the “HollyFrontier 2.625% Senior Notes”), 5.875% senior notes maturing April 2026 (the “HollyFrontier 5.875% Senior Notes”) and 4.500% senior notes maturing October 2030 (the “HollyFrontier 4.500% Senior Notes”) (and, collectively, the “HollyFrontier Senior Notes”) for 2.625% senior notes maturing October 2023 (the “HF Sinclair 2.625% Senior Notes”), 5.875% senior notes maturing April 2026 (the “HF Sinclair 5.875% Senior Notes”) and 4.500% senior notes maturing October 2030 (the “HF Sinclair 4.500% Senior Notes”) (and, collectively, the “HF Sinclair Senior Notes”) to be issued by HF Sinclair and cash. Additionally, HF Sinclair solicited consents
to adopt certain amendments to the indenture governing the HollyFrontier Senior Notes.
Following the settlement of the exchange offers and consent solicitations, the aggregate principal amount of the HF Sinclair Senior Notes consisted of the following:
Following the settlement of the exchange offers and consent solicitations, the aggregate principal amount of the HollyFrontier Senior Notes that were not tendered and exchanged, and which remain outstanding, consisted of the following:
In connection with the exchange offers and consent solicitations, HollyFrontier amended the indenture
governing the HollyFrontier Senior Notes to eliminate (i) substantially all of the restrictive covenants, (ii) certain of the events which may lead to an “Event of Default”, (iii) the SEC reporting covenant and (iv) with respect to the HollyFrontier 2.625% Senior Notes and the HollyFrontier 4.500% Senior Notes only, the offer to repurchase such senior notes upon certain change of control triggering events.
The HF Sinclair Senior Notes are unsecured and unsubordinated obligations of ours and rank equally with all our other existing and future unsecured and unsubordinated indebtedness. Each series of HF Sinclair Senior Notes has the same interest rate (including interest rate adjustment provisions, as applicable), interest payment dates, maturity date and redemption terms as the corresponding series of HollyFrontier Senior Notes. The HF Sinclair Senior Notes were issued in exchange
for the HollyFrontier Senior Notes pursuant to a private exchange offer exempt from registration under the Securities Act of 1933, as amended (the Securities Act”).
On September 12, 2022, HF Sinclair filed a registration statement, which was declared effective on September 21, 2022, to exchange the HF Sinclair Senior Notes for an equal principal amount of the respective series of the HF Sinclair Senior Notes (the “Registered HF Sinclair Senior Notes”). The Registered HF Sinclair Senior Notes are substantially identical to the HF Sinclair Senior Notes in all material respects except the Registered HF Sinclair Senior Notes are registered under the Securities Act and will not be subject to restrictions on transfer or to any increase in annual interest rate for failure to comply with
the Registration Rights Agreement, dated April 27, 2022, and will not have the registration rights applicable to the HF Sinclair Senior Notes.
On October 21, 2022, HF Sinclair completed its offers to exchange HF Sinclair Senior Notes for Registered HF Sinclair Senior Notes.
Further, we may from time to time seek to retire some or all of our outstanding debt or debt agreements through cash purchases, and/or exchanges, open market purchases, privately negotiated transactions, tender offers or otherwise. Such transactions, if any, may be material and will depend on prevailing market conditions, our liquidity requirements,
contractual restrictions and other factors.
HF Sinclair Financing Arrangements
Certain 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 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 in one year or less. Upon maturity, we must either satisfy the obligation at fair market value or refinance to extend the maturity.
HEP
Credit Agreement
HEP has a $1.2 billion senior secured revolving credit facility maturing in July 2025 (the “HEP Credit Agreement”). In August 2022, the HEP Credit Agreement was amended to, among other things, provide an alternative reference rate for LIBOR. The 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 has an accordion feature that allows HEP to increase the commitments under the HEP Credit Agreement up to a maximum amount of $1.7 billion. During the nine months ended September 30, 2022, HEP had net repayments of $134.0 million under the HEP Credit Agreement. At September 30,
2022, HEP was in compliance with all of its covenants, had outstanding borrowings of $706.0 million and no outstanding letters of credit under the HEP Credit Agreement.
On April 8, 2022, HEP closed a private placement of $400 million in aggregate principal amount of 6.375% senior notes maturing April 2027 (the “HEP 6.375% Senior Notes”) at par for net proceeds of approximately $393 million, after deducting the initial purchasers’ discounts and commissions and estimated offering expenses. The HEP
6.375% 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. The net proceeds from the offering of the HEP 6.375% Senior Notes were used to partially repay outstanding borrowings under the HEP Credit Agreement.
See Note 10 “Debt” in the Notes to Consolidated Financial Statements for additional information on our debt instruments.
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. Further, we may from time to time seek to retire some or all of our outstanding debt or debt agreements through cash purchases, and/or exchanges, open market purchases, privately negotiated transactions, tender offers or otherwise. Such transactions, if any, may be material and will depend on prevailing market conditions, our liquidity requirements and other factors. In addition, components of our long-term growth strategy include the optimization 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 payment of cash dividends, which are at the discretion of our Board of Directors, and for the repurchase
of common stock under our share repurchase program.
Our standalone (excluding HEP) liquidity was approximately $3.08 billion at September 30, 2022, consisting of cash and cash equivalents of $1.43 billion and an undrawn $1.65 billion credit facility.
We consider all highly-liquid instruments with a maturity of three months or less at the time of purchase to be cash equivalents. 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 at that time, authorizing us to repurchase common stock in the open market or through privately negotiated transactions. In June 2022, our Board of Directors determined that privately negotiated repurchases from REH Company (formerly known as The Sinclair Companies) are also authorized under the share repurchase program, subject to REH Company’s interest in selling its shares and other limitations. As of September 30, 2022, we had repurchased $975.0 million under this share repurchase program, of which $500.0 million were repurchased pursuant to privately negotiated repurchases from REH Company.
On September 21, 2022, our Board of Directors approved
a new $1.0 billion share repurchase program, which, effective September 26, 2022, replaced all existing share repurchase programs, including $25.0 million remaining under the previously existing $1.0 billion share repurchase program. This new share repurchase program authorizes us to repurchase common stock in the open market or through privately negotiated transactions. Privately negotiated repurchases from REH Company are also authorized under the share repurchase program, subject to REH Company’s interest in selling its shares and other limitations. The timing and amount of share repurchases, including those from REH Company, will depend on market conditions and corporate, tax, regulatory and other relevant considerations. This program may be discontinued at any time by our Board of Directors. As of September 30, 2022, we repurchased $100.0 million under this new share
repurchase program pursuant to a privately negotiated repurchase from REH Company. 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.
During the nine months ended September 30, 2022, we made open market and privately negotiated purchases of 21,610,528 shares for $1,075.0 million under our share repurchase programs, of which 11,842,698 shares were repurchased for $600.0 million pursuant to privately negotiated repurchases from REH Company. As of September 30, 2022, we had remaining authorization to repurchase up to $900.0 million under the new share repurchase program, of which we repurchased 946,911 shares for $51.8 million in October 2022.
Net cash flows provided by operating activities were $2,862.2 million for the nine months ended September 30, 2022 compared to $739.5 million for the nine months ended September 30, 2021, an increase of $2,122.7 million. The increase in operating cash flows was primarily due to the increase in gross refinery margins, partially offset by higher operating expenses.
Changes in working capital
decreased operating cash flows by $45.7 million and increased operating cash flows by $55.3 million for the nine months ended September 30, 2022 and 2021, respectively. The decrease for the current period is partially due to $462.2 million of net income tax payments during the nine months ended September 30, 2022. Net income tax payments include $83 million in cash tax benefit received during the nine months ended September 30, 2022 from the net operating loss carryback provisions under the CARES Act.
Cash Flows – Investing Activities and Planned Capital Expenditures
For the nine months ended September 30, 2022, our net cash flows used for investing activities were $665.8 million. On March 14, 2022, we closed the Sinclair Transactions and paid cash of $251.4 million. The remainder of the purchase consideration was funded with the issuance of HF Sinclair common stock and HEP common units. See Note 2 “Acquisitions” in the Notes to Consolidated Financial Statements for additional information on the Sinclair Transactions. Cash expenditures for properties, plants and equipment for the nine months ended September 30, 2022 were $417.4 million, which include HEP
capital expenditures of $31.2 million for the nine months ended September 30, 2022.
For the nine months ended September 30, 2021, our net cash flows used for investing activities were $438.5 million. Cash expenditures for properties, plants and equipment for the nine months of ended September 30, 2021 were $548.3 million primarily due to expenditures related to our renewable diesel units. Cash expenditures for properties, plants and equipment include HEP capital expenditures of $76.9 million for the nine months ended September 30, 2021.
HF Sinclair Corporation
Each year
our Board of Directors approves our annual capital budget which includes specific projects that management is authorized to undertake. 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. 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.
For the nine months ended September 30, 2022, our net cash flows used for financing activities were $975.5 million. During the nine months ended September 30, 2022, we repurchased $977.0 million of our common stock and paid $175.4 million in dividends. During the nine months ended September 30, 2022, HEP received $400.0 million in proceeds from the issuance of the HEP 6.375% Senior Notes, had net repayments of $134.0 million under the HEP Credit Agreement and paid distributions of $70.4 million to noncontrolling
interests.
For the nine months ended September 30, 2021, our net cash flows used for financing activities were $184.2 million. During the nine months ended September 30, 2021, we paid $57.7 million in dividends and $7.9 million of deferred financing costs in connection with the amendment of the HollyFrontier Credit Agreement in April 2021. During the nine months ended September 30, 2021, HEP had net repayments of $73.0 million under the HEP Credit Agreement and paid $6.6 million of deferred financing costs in connection with the amendment of the HEP Credit Agreement in April 2021. In addition, during the nine months ended September 30, 2021, HEP paid distributions of $57.2 million to noncontrolling
interests and received contributions from noncontrolling interests of $21.3 million.
Contractual Obligations and Commitments
HF Sinclair Corporation
There were no significant changes to our long-term contractual obligations during the nine months ended September 30, 2022 except for certain contracts that were assumed in the Sinclair Transactions as shown below.
Payments
Due by Period
Contractual Obligations and Commitments
Total
2022
2023 & 2024
2025 & 2026
Thereafter
(In thousands)
Supply agreements (1)
$
159,995
$
159,995
$
—
$
—
$
—
Transportation
agreements (2)
426,414
10,677
85,418
85,418
244,901
Total
$
586,409
$
170,672
$
85,418
$
85,418
$
244,901
(1)We
have long-term supply agreements to secure certain quantities of crude oil used in the production process at market prices. We have estimated future payments under these fixed-quantity agreements expiring in 2022 using current market prices.
(2)Consists of contractual obligations under agreements with third parties for the transportation of crude oil to our refineries under contracts expiring between 2029 and 2034.
During
the nine months ended September 30, 2022, HEP had net repayments of $134.0 million resulting in $706.0 million of outstanding borrowings under the HEP Credit Agreement at September 30, 2022.
In April 2022, HEP issued $400 million in aggregate principal amount of 6.375% senior notes maturing April 2027.
There were no other significant changes to HEP’s long-term contractual obligations during this period.
CRITICAL ACCOUNTING
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 Estimates” in HollyFrontier’s Annual
Report on Form 10-K for the year ended December 31, 2021. 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.
Our renewables inventories that are valued at the lower of LIFO cost or market reflect a valuation reserve of $51.6 million and $8.7 million at September 30, 2022 and December 31, 2021, respectively. A new market reserve of $51.6 million as of September 30,
2022 was based on market conditions and prices at that time. The effect of the change in the lower of cost or market reserve was an increase to cost of products sold totaling $16.8 million and $42.8 million for the three and nine months ended September 30, 2022, respectively.
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 first-in, first-out method, or net realizable value.
At September 30, 2022, the LIFO value of our refining inventories was equal to cost.
Valuation
of Business Combinations
We recognize and measure the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date. Any excess or surplus of the purchase consideration when compared to the fair value of the net tangible assets acquired, if any, is recorded as goodwill or gain from a bargain purchase. The fair value of assets and liabilities as of the acquisition date are often estimated using a combination of approaches, including the income approach, which requires us to project future cash flows and apply an appropriate discount rate; the cost approach, which requires estimates of replacement costs and depreciation and obsolescence estimates; and the market approach which uses market data and adjusts for entity-specific differences. We use all available information to make these fair value determinations and engage third-party consultants
for valuation assistance. The estimates used in determining fair values are based on assumptions believed to be reasonable but which are inherently uncertain. Accordingly, actual results may differ materially from the projected results used to determine fair value.
As of September 30, 2022, our goodwill balance was $3.0 billion, with goodwill assigned to our Refining, Renewables, Marketing, Lubricants and Specialty Products and HEP segments. 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 carrying value of the reporting unit is greater than its 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.
We performed our annual goodwill impairment testing quantitatively as of July 1, 2022 and determined there was no impairment of goodwill attributable to our reporting units. The estimated fair values of our 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. The excess of the fair values of the reporting units over their respective carrying values
ranged from 32% to 47%. 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 annual goodwill testing.
In performing our impairment test of goodwill, we developed cash flow forecasts for each of our reporting units. 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 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. Our fair value estimates are based on projected cash flows, which we believe to be reasonable.
We continually monitor and evaluate various factors for potential indicators of goodwill and long-lived asset 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 long-lived asset impairments at some point in the future. Future impairment charges could be material to our results of operations and financial condition.
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 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 September 30, 2022, we have the following notional contract volumes related to all outstanding derivative instruments used to mitigate commodity price and foreign currency risk:
(1)Represents an embedded derivative within our catalyst financing arrangements, which may be refinanced or require repayment under certain conditions. See Note 10 “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 hedged under our derivative contracts:
Hypothetical 10% change in underlying commodity prices
$
15,089
$
13,569
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 HF Sinclair Senior Notes, 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 September 30, 2022 is presented below:
Outstanding Principal
Estimated Fair
Value
Estimated Change in Fair Value
(In thousands)
HollyFrontier and HF Sinclair Senior Notes
$
1,750,000
$
1,660,240
$
37,957
HEP
Senior Notes
$
900,000
$
822,628
$
27,167
For the variable rate HEP Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. At September 30, 2022, outstanding borrowings under the HEP Credit Agreement were $706.0 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 catastrophic losses, operational hazards and unforeseen interruptions, including but not limited to fire, explosion, releases or spills, cyberattacks, weather-related perils, vandalism, power failures, mechanical failures and other events beyond our control. We maintain various insurance coverages, including general liability, property damage, business interruption and cyber insurance, subject to certain 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
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 attributable to HF Sinclair 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.
Net income attributable to HF Sinclair stockholders
$
954,405
$
280,787
$
2,335,641
$
597,854
Add interest expense
44,830
26,892
118,650
94,220
Subtract
interest income
(9,821)
(1,018)
(12,662)
(3,078)
Add income tax expense
301,853
54,766
706,675
149,944
Add
depreciation and amortization
171,973
121,220
480,618
369,341
EBITDA
$
1,463,240
$
482,647
$
3,628,922
$
1,208,281
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 lower of cost or market inventory valuation adjustments and depreciation and amortization. Each of these component performance measures can be reconciled directly to our consolidated statements of operations. Other companies in our industry may not calculate these performance measures in the same manner.
Below are reconciliations to our consolidated statements of operations 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.
Average
refinery operating expenses per produced barrel sold
$
7.64
$
6.40
$
7.70
$
6.95
Times produced barrels sold (BPD)
675,370
422,020
618,270
407,210
Times
number of days in period
92
92
273
273
Refinery operating expenses
474,704
248,485
1,299,665
772,620
Subtract
rounding
(73)
(169)
(758)
(27)
Total Refining segment operating expenses
474,631
248,316
1,298,907
772,593
Add
Renewables segment operating expenses
23,427
13,117
79,796
37,169
Add Lubricants and Specialty Products segment operating expenses
69,506
60,940
209,977
183,003
Add
HEP segment operating expenses
60,471
42,793
156,994
126,226
Subtract corporate, other and eliminations
(23,444)
(12,646)
(57,522)
(32,371)
Operating
expenses (exclusive of depreciation and amortization)
$
604,591
$
352,520
$
1,688,152
$
1,086,620
Reconciliation of renewables operating information (non-GAAP performance measures) to amounts reported under generally accepted accounting principles in financial statements.
Renewables
gross margin and net operating margin are non-GAAP performance measures that are used by our management and others to compare our renewables performance to that of other companies in our industry. We believe these margin measures are helpful to investors in evaluating our renewables performance on a relative and absolute basis. Renewables gross margin per produced gallon sold is total Renewables segment revenues less total Renewables segment cost of products sold, exclusive of lower of cost or market inventory valuation adjustments, divided by sales volumes of produced renewables products sold. Net operating margin per produced gallon sold is the difference between renewables gross margin and renewables operating expenses per produced gallon sold. These two margins do not include the non-cash effects of lower of cost or market inventory valuation adjustments and depreciation and amortization. Each of these component performance measures can be
reconciled directly to our consolidated statements of income. Other companies in our industry may not calculate these performance measures in the same manner.
Reconciliation of renewables gross margin and operating expenses to gross margin per produced gallon sold and net operating margin per produced gallon sold
Reconciliation of Marketing operating information (non-GAAP performance measures) to amounts reported under generally accepted accounting principles in financial statements.
Marketing
gross margin is a non-GAAP performance measure that is used by our management and others to compare our Marketing performance to that of other companies in our industry. We believe this margin measure is helpful to investors in evaluating our Marketing performance on a relative and absolute basis. Marketing gross margin per gallon sold is total Marketing segment revenues less total Marketing segment cost of products sold divided by sales volumes of Marketing products sold. This margin does not include the non-cash effects of depreciation and amortization. This component performance measure can be reconciled directly to our consolidated statements of income. Other companies in our industry may not calculate these performance measures in the same manner.
Reconciliation of Marketing gross margin to gross margin per gallon sold
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 September 30, 2022.
Changes in internal control over financial reporting. We acquired Sinclair Oil and STC effective March 14, 2022 and have included the operating results and assets and liabilities of the Acquired Sinclair Businesses in our consolidated financial statements as of September 30, 2022 and for the 201 days then ended. On November 1, 2021, we acquired the Puget Sound Refinery. Accordingly, the acquired assets and liabilities assumed are included in our consolidated balance sheets at December
31, 2021 and September 30, 2022 and the results of operations are reported in our consolidated statements of operations for the three and nine months ended September 30, 2022. Other than our internal controls for the Acquired Sinclair Businesses and Puget Sound Refinery, 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.
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 when a governmental authority is party to the proceedings and such proceedings involve potential monetary sanctions that we reasonably believe could exceed $300,000 or more.
Environmental Matters
Navajo
HollyFrontier Navajo Refining LLC (now known as HF Sinclair Navajo Refining LLC (“HFNR”)) has been
engaged in discussions with, and has responded to document requests from, the EPA, the DOJ and the New Mexico Environment Department (“NMED”) (collectively, the “Agencies”) regarding HFNR’s compliance with the Clean Air Act (“CAA”) and underlying regulations, and similar New Mexico laws and regulations, at its Artesia and Lovington, New Mexico refineries. The discussions have included the following topics: (a) alleged noncompliance with CAA’s National Emission Standards for Hazardous Air Pollutants (“NESHAP”) and New Source Performance Standards (“NSPS”) at the Artesia refinery, which were set forth in a Notice of Violation (“May 2020 NOV”) issued by the EPA in May 2020; (b) a Post Inspection Notice issued in June 2020 by the NMED, alleging noncompliance issues similar to those alleged by the EPA in its May 2020 NOV as well as alleged noncompliance with the State Implementation Plan (“SIP”) and the Title V permit operating
programs; (c) an information request issued in September 2020 by the EPA, pursuant to CAA Section 114, related to benzene fenceline monitoring, flare fuel gas, leak detection and repair, storage vessels and tanks, and other information regarding the Artesia refinery; (d) an information request issued by the EPA in May 2021, pursuant to CAA Section 114, requesting additional information and testing related to certain tanks at the Artesia refinery; and (e) informal information requests related to, among other things, the Artesia refinery’s wastewater treatment plant, oil water separators and heat exchangers.
Beginning in the spring of 2021, HFNR and the Agencies began monthly meetings to discuss potential injunctive relief measures to address the alleged noncompliance at the Artesia refinery. In September 2021, the EPA presented to HFNR potential claims for stipulated penalties for alleged
noncompliance with a 2002 consent decree. In April 2022, the EPA alleged additional CAA noncompliance at the Artesia refinery beyond the allegations in the May 2020 NOV, including alleged noncompliance with NESHAP, NSPS, SIP, Title V and other requirements.
HFNR continues to work with the Agencies to resolve these issues. At this time, no penalties have been demanded, and it is too early to predict the outcome of this matter.
Cheyenne
On March 25, 2022, HollyFrontier Cheyenne Refining LLC (now known as HF Sinclair Cheyenne Refining LLC (“HFCR”)) received a “Notice of Assessment of Stipulated Penalties” from the EPA pursuant to a 2009 consent decree entered into between Frontier Refining, Inc.
(now known as HFCR), the EPA and the Wyoming Department of Environmental Quality (“WDEQ”). The notice assesses penalties for alleged violations of air quality standards during the period of time commencing in the third quarter of 2019 through the cessation of refinery operations in Cheyenne in the third quarter of 2020. The allegations include exceedances of emission limits for the refinery’s fluid catalytic cracking unit, sulfur recovery plant and flaring operations and failure to operate several continuous emission monitoring systems at the refinery. On April 21, 2022, HFCR submitted a response to the allegations containing legal and factual defenses. Further discussions between HFCR, the EPA and WDEQ regarding the notice occurred in June 2022. In correspondence dated August 10, 2022, the EPA made a formal penalty demand. In September 2022, HFCR, the EPA and the
WDEQ had discussions and further information exchanges regarding the alleged violations that were the subject of the penalty demand and mitigating factors. On September 28, 2022, the EPA proposed a penalty of $849,850, which HFCR accepted. On October 19, 2022, HFCR received a revised formal demand letter from the EPA and timely paid the penalty. As a result, this matter has been resolved.
In October 2017, Sinclair Oil Corporation (now known as Sinclair Oil
LLC (“Sinclair Oil”)) received a Notice of Claim from the Port of Seattle alleging Sinclair Oil’s responsibility for the clean-up of 12.5 million gallons of bunker fuel improperly disposed of at a facility in the Port of Seattle from 1977 to 1980. Sinclair Oil responded that it did sell bunker fuel for use as a fuel for ships at the Port of Seattle during this time frame but not for disposal as is being alleged. In late 2018, Sinclair Oil received a demand letter from the Port of Seattle. Sinclair Oil and the Port of Seattle entered into a tolling agreement in mid-2019. The parties have exchanged offers, and Sinclair Oil is awaiting a response to its last offer made in August 2020. It is too early to predict the outcome of this matter.
Renewable Fuel Standard
On April
7, 2022, the EPA issued a decision reversing the grant of small refinery exemptions for our Woods Cross and Cheyenne refineries for the 2018 compliance year. On June 3, 2022, the EPA issued a decision reversing the grant of small refinery exemptions for our Woods Cross and Cheyenne refineries for the 2016 compliance year and denying small refinery exemption petitions for our Woods Cross and Cheyenne refineries for the 2019 and 2020 compliance years.
Various subsidiaries of HollyFrontier are currently pursuing legal challenges to the EPA’s decisions to reverse its grant of small refinery exemptions for the 2016 and 2018 compliance years. The first lawsuit, filed against the EPA on May 6, 2022
and currently pending before the U.S. Court of Appeals for the DC Circuit, seeks to have the EPA’s reversal of our 2018 small refinery exemption petitions overturned. The second lawsuit, filed against the EPA on August 5, 2022 and currently pending before the U.S. Court of Appeals for the DC Circuit, seeks to have the EPA’s reversal of our 2016 small refinery exemption petitions overturned and to have the EPA’s denial of our 2019 and 2020 small refinery exemption petitions reversed.
In addition, for both the 2016 and 2018 compliance years, pursuant to the June 2022 and April 2022 decisions, respectively, the EPA established an alternative compliance demonstration for small refineries pursuant to which the EPA is not imposing any obligations for the small refineries whose exemptions were reversed. On June
24, 2022, Growth Energy filed two lawsuits in the U.S. Court of Appeals for the DC Circuit against the EPA challenging the alternative compliance demonstration for the 2016 and 2018 compliance years. On July 25, 2022, various subsidiaries of HollyFrontier intervened on behalf of the EPA to aid the defense of the EPA’s alternative compliance demonstration decision.
It is too early to predict the outcome of these matters.
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
There have been no material changes in our risk factors as previously disclosed in Part I, “Item 1A. Risk Factors” of HollyFrontier’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. You should carefully consider the risk factors discussed in HollyFrontier’s 2021 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.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
(c) Common Stock Repurchases Made in the Quarter
The following table discloses purchases of shares of our common stock made by us
during the third quarter of 2022.
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 (1)
July 2022
2,965,642
$
44.83
2,965,642
$
734,771,157
August
2022
9,911,267
$
50.19
9,911,267
$
237,354,203
September 2022
6,003,619
$
52.03
6,003,619
$
900,000,033
Total
for July to September 2022
18,880,528
18,880,528
(1) On September 21, 2022, our Board of Directors approved a new $1.0 billion share repurchase program, which, effective September 26, 2022, replaced all existing share repurchase programs, including $25.0 million remaining under the previously existing $1.0 billion share repurchase program. This new share repurchase program authorizes us to repurchase common stock in the open market or through privately
negotiated transactions. Privately negotiated repurchases from REH Company (formerly known as The Sinclair Companies) are also authorized under the share repurchase program, subject to REH Company’s interest in selling its shares and other limitations. The timing and amount of share repurchases, including those from REH Company, will depend on market conditions and corporate, tax, regulatory and other relevant considerations. This program may be discontinued at any time by our Board of Directors.
The following financial information from HF Sinclair Corporation’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2022, formatted as inline XBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of 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.
104++
Cover page Interactive Data File (formatted as inline XBRL and contained in exhibit 101).
+ Constitutes management contracts or compensatory plans or arrangements.
++ Filed electronically herewith.
† 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
