HF SINCLAIR CORPORATION 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 toHF Sinclair Corporation ("HF Sinclair") and its consolidated subsidiaries or toHF 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 ofHF Sinclair , unless when used in disclosures of transactions or obligations between HEP andHF 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 ofHF Sinclair . When used in descriptions of agreements and transactions, "HEP" refers to HEP and its consolidated subsidiaries. References herein toHF Sinclair "we," "our," "ours," and "us" with respect to time periods prior toMarch 14, 2022 refer toHollyFrontier and its consolidated subsidiaries and do not include theTarget Company , STC or their respective consolidated subsidiaries (collectively, the "Acquired Sinclair Businesses"). References herein toHF Sinclair "we," "our," "ours," and "us" with respect to time periods from and afterMarch 14, 2022 include the operations of the Acquired Sinclair Businesses. Unless otherwise specified, the financial statements included herein include financial information forHF Sinclair , which for the time period fromMarch 14, 2022 toMarch 31, 2022 includes the combined business operations ofHollyFrontier 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 inEl 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 inLovington, New Mexico (collectively, the "Navajo Refinery ");Woods Cross, Utah (the "Woods Cross Refinery ");Sinclair, Wyoming (the "Sinclair Refinery ") andCasper, Wyoming (the "Casper Refinery "). We market our refined products principally in theSouthwest United States , theRocky Mountains extending into thePacific Northwest and in other neighboring Plains states. We supply high-quality fuels to more than 1,300Sinclair 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 inthe United States ,Canada andthe Netherlands , and export products to more than 80 countries. Through our subsidiaries, we produce renewable diesel at two of our facilities inWyoming . 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, includingHF Sinclair subsidiaries. OnMarch 14, 2022 (the "Closing Date"),HollyFrontier Corporation ("HollyFrontier") and Holly Energy Partners, L.P. ("HEP") announced the establishment ofHF Sinclair Corporation , aDelaware corporation ("HFSinclair "), as the new parent holding company ofHollyFrontier and HEP and their subsidiaries, and the completion of their respective acquisitions ofSinclair Oil Corporation (now known asSinclair Oil LLC , "Sinclair Oil") andSinclair Transportation Company LLC ("STC") fromThe Sinclair Companies (now known asREH Company and referred to herein as "Sinclair HoldCo"). On the Closing Date, pursuant to that certain Business Combination Agreement, dated as ofAugust 2, 2021 (as amended onMarch 14, 2022 , the "Business Combination Agreement"), by and amongHollyFrontier ,HF Sinclair ,Hippo Merger Sub, Inc. , a wholly owned subsidiary ofHF Sinclair ("Parent Merger Sub"), Sinclair HoldCo, andHippo Holding LLC , a wholly owned subsidiary of Sinclair HoldCo (the "Target Company "),HF Sinclair completed its previously announced acquisition of theTarget Company by effecting (a) a holding company merger in accordance with Section 251(g) of the Delaware General Corporation Law wherebyHollyFrontier merged with and into Parent Merger Sub, withHollyFrontier surviving such merger as a direct wholly owned subsidiary ofHF Sinclair (the "HFC Merger") and (b) immediately following the HFC Merger, a contribution whereby Sinclair HoldCo contributed all of the equity interests of theTarget Company toHF Sinclair in exchange for shares ofHF Sinclair , resulting in theTarget Company becoming a direct wholly owned subsidiary ofHF Sinclair (the "HFC Transactions"). At the effective time of the HFC Merger,HollyFrontier became a wholly owned subsidiary ofHF Sinclair , and all ofHollyFrontier's outstanding shares were automatically converted into equivalent corresponding shares ofHF Sinclair . Pursuant to the HFC Merger,HF Sinclair became the successor issuer toHollyFrontier pursuant to Rule 12g-3(a) under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and replacedHollyFrontier as the public company trading on theNew York Stock Exchange ("NYSE") under the symbol "DINO." 38 -------------------------------------------------------------------------------- Table of Content In connection with the closing of the HFC Transactions,HF Sinclair issued 60,230,036 shares ofHF Sinclair common stock to Sinclair HoldCo, representing 27% of the pro forma equity ofHF Sinclair with a value of approximately$2,149 million based onHollyFrontier's fully diluted shares of common stock outstanding and closing stock price onMarch 11, 2022 . On the Closing Date, Sinclair HoldCo made a$90.2 million cash payment toHF Sinclair related to estimated working capital adjustments pursuant to the Business Combination Agreement, which reduced the aggregate transaction value to approximately$2,059 million . Of the 60,230,036 shares ofHF Sinclair common stock, 2,570,000 shares are currently held in escrow to secure Sinclair HoldCo's 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$321.4 million , inclusive of 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 toHF 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. 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 1,300Sinclair branded stations and licenses the use of the Sinclair brand at more than 300 additional locations throughoutthe United States . The renewables business includes the operation of a renewable diesel unit located inSinclair, Wyoming . The refining business includes twoRocky Mountains -based refineries located inCasper, Wyoming andSinclair, 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 theSinclair 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); andUNEV 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 theHollyFrontier 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.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 amongHF 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, two 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 theHF Sinclair common stock issued to the stockholders of Sinclair HoldCo.HF Sinclair is headquartered inDallas, Texas , with combined business offices inSalt Lake City, Utah .
See Note 2 "Acquisitions" and Note 3 "
OnMay 4, 2021 ,HollyFrontier Puget Sound Refining LLC , a wholly owned subsidiary ofHollyFrontier , entered into a sale and purchase agreement withEquilon Enterprises LLC d/b/aShell Oil Products US ("Shell") to acquire Shell'sPuget Sound refinery and related assets, including the on-site cogeneration facility and related logistics assets. The acquisition closed onNovember 1, 2021 . For the three months endedMarch 31, 2022 , net income attributable toHF Sinclair stockholders was$160.0 million compared to$148.2 million for the three months endedMarch 31, 2021 . Gross refining margin per produced barrel sold in our Refining segment increased 59% for the three months endedMarch 31, 2022 over the same period of 2021. Pursuant to the 2007 Energy Independence and Security Act, theEnvironmental 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$196.3 million for the three months endedMarch 31, 2022 . AtMarch 31, 2022 , our open RINs credit obligations were$144.7 million . See Note 2 "Acquisitions" in the Notes to Consolidated Financial Statements for additional information on RINs credit obligations assumed in the Sinclair Transactions. 39
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Impact of COVID-19 on Our Business The COVID-19 pandemic caused a decline inU.S. and global economic activity starting in the first quarter of 2020. This decrease reduced both volumes and unit margins across our businesses, resulting in lower gross margins and earnings. Global demand for transportation fuels, lubricants and the transportation and terminal services we provide began to improve late in the second quarter of 2020 and has returned to pre-pandemic levels. The extent to which our future results are affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the effects of any new variant strains of the underlying virus, additional actions by businesses and governments in response to the pandemic and the speed and effectiveness of responses to combat the virus. The COVID-19 pandemic, and the volatile regional and global economic conditions stemming from it, could also exacerbate the risk factors identified inHollyFrontier's Form 10-K under "Risk Factors" in Item 1A. The COVID-19 pandemic may also materially adversely affect our results in a manner that is either not currently known or that we do not currently consider to be a significant risk to our business.
OUTLOOK
Within our Refining segment, for the second quarter of 2022, we expect to run between 615,000 - 645,000 barrels per day of crude oil. This guidance reflects the strong underlying demand trends in our markets, the reduction of refined product supply driven by the global reaction toRussia's invasion ofUkraine and a full quarter of contribution of theSinclair andCasper refineries. Within our Lubricants and Specialty Products segment, for the second quarter of 2022, we expect seasonal improvement in earnings in ourRack Forward business as well as continued strong performance in ourRack Back business due to the reduction in base oil supply fromRussia . Within our Renewables business, we expect to complete construction of theArtesia renewable diesel unit and commence start up in the second quarter. TheSinclair andCheyenne renewable diesel units and theArtesia pre-treatment unit are all on-line. We will continue to ramp up production across these assets and expect to generate modestly positive earnings in the quarter as we reach full production levels. We are suspending construction of theSinclair pre-treatment unit until 2023 pending a review of project economics and potential other alternatives. In the second 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. Our Board of Directors reinstated our regular quarterly dividend at an increased rate of$0.40 per share, as compared to the first quarter of 2021 dividend of$0.35 per share, effective with the dividend declared for the first quarter of 2022. Following the expected completion of our renewables capital projects in the second quarter of 2022, we intend to resume the repurchase of common stock under our existing$1.0 billion share repurchase program. OnMarch 27, 2020 , theU.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; however, we have benefited from certain tax deferrals in the CARES Act and may benefit from other tax provisions if we meet the requirements to do so. We anticipate$83 million in cash tax benefit in 2022 from the net operating loss carryback provisions under the CARES Act.
A more detailed discussion of our financial and operating results for the three
months ended
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RESULTS OF OPERATIONS
Financial Data
Three Months Ended
March 31, Change from 2021
2022 2021 Change Percent
(In thousands, except per share data)
Sales and other revenues $ 7,458,750 $ 3,504,293 $ 3,954,457 113 %
Operating costs and expenses:
Cost of products sold (exclusive of depreciation
and amortization):
Cost of products sold (exclusive of lower of cost
or market inventory valuation adjustment) 6,502,012 2,960,305 3,541,707 120
Lower of cost or market inventory valuation
adjustment (8,551) (200,037) 191,486 (96)
6,493,461 2,760,268 3,733,193 135
Operating expenses (exclusive of depreciation and
amortization) 477,434 399,909 77,525 19
Selling, general and administrative expenses
(exclusive of depreciation and amortization) 110,422 81,975 28,447 35
Depreciation and amortization 144,601 124,079 20,522 17
Total operating costs and expenses 7,225,918 3,366,231 3,859,687 115
Income from operations 232,832 138,062 94,770 69
Other income (expense):
Earnings of equity method investments 3,626 1,763 1,863 106
Interest income 997 1,031 (34) (3)
Interest expense (34,859) (38,386) 3,527 (9)
Gain on tariff settlement - 51,500 (51,500) (100)
Gain (loss) on foreign currency transactions 139 (1,317) 1,456 (111)
Gain on sale of assets and other 3,895 1,890 2,005 106
(26,202) 16,481 (42,683) (259)
Income before income taxes 206,630 154,543 52,087 34
Income tax expense (benefit) 21,329 (28,307) 49,636 (175)
Net income 185,301 182,850 2,451 1
Less net income attributable to noncontrolling
interest 25,327 34,633 (9,306) (27)
Net income attributable to
$ 148,217 $ 11,757 8 % Earnings per share attributable toHF Sinclair stockholders: Basic$ 0.90 $ 0.90 $ - - % Diluted$ 0.90 $ 0.90 $ - - % Cash dividends declared per common share $ -$ 0.35 $ (0.35) (100) % Average number of common shares outstanding: Basic 175,081 162,479 12,602 8 % Diluted 175,081 162,479 12,602 8 % Balance Sheet Data March 31, 2022 December 31, 2021 (Unaudited) (In thousands) Cash and cash equivalents$ 592,278 $ 234,444 Working capital$ 2,627,703 $ 1,696,990 Total assets$ 17,733,097 $ 12,916,613 Long-term debt$ 3,374,701 $ 3,072,737 Total equity$ 8,876,977 $ 6,294,465 41
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Other Financial Data
Three Months Ended
2022 2021
(In thousands)
Net cash provided by operating activities $ 461,036 $ 62,326
Net cash used for investing activities $ (385,176) $ (147,064)
Net cash provided by (used for) financing activities $ 281,386 $ (89,561)
Capital expenditures $ 158,296 $ 149,961
EBITDA (1) $ 359,766 $ 281,344
(1)Earnings before interest, taxes, depreciation and amortization, which we
refer to as "EBITDA," is calculated as net income (loss) 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 theEl Dorado and Tulsa Refineries. The West region is comprised of thePuget Sound , Navajo,Woods Cross ,Sinclair andCasper Refineries.The Puget Sound Refinery was acquiredNovember 1, 2021 , and thus is included for the periodJanuary 1, 2022 toMarch 31, 2022 . In addition, the refinery operations of theSinclair andCasper Refineries are included for the periodMarch 14, 2022 (date of acquisition) throughMarch 31, 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. Three Months Ended March 31, 2022 (8) 2021Mid-Continent Region Crude charge (BPD) (1) 290,200 216,290 Refinery throughput (BPD) (2) 305,390 229,560 Sales of produced refined products (BPD) (3) 280,260 210,680 Refinery utilization (4) 111.6 % 83.2 % Average per produced barrel (5) Refinery gross margin$ 9.32 $ 6.45 Refinery operating expenses (6) 6.02 9.91 Net operating margin$ 3.30 $ (3.46) Refinery operating expenses per throughput barrel (7)$ 5.53 $ 9.09 42
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Three Months Ended March 31,
2022 (8) 2021
Mid-Continent Region
Feedstocks:
Sweet crude oil 63 % 59 %
Sour crude oil 14 % 13 %
Heavy sour crude oil 18 % 22 %
Other feedstocks and blends 5 % 6 %
Total 100 % 100 %
Sales of produced refined products:
Gasolines 50 % 51 %
Diesel fuels 33 % 34 %
Jet fuels 7 % 5 %
Fuel oil 1 % 1 %
Asphalt 3 % 3 %
Base oils 4 % 4 %
LPG and other 2 % 2 %
Total 100 % 100 %
West Region
Crude charge (BPD) (1) 234,880 131,880
Refinery throughput (BPD) (2) 259,340 144,600
Sales of produced refined products (BPD) (3) 241,910 144,260
Refinery utilization (4) 70.6 %
91.0 %
Average per produced barrel (5) Refinery gross margin$ 16.61 $ 10.26 Refinery operating expenses (6) 9.33
8.09
Net operating margin$ 7.28
Refinery operating expenses per throughput barrel (7)$ 8.70 $ 8.07 Feedstocks: Sweet crude oil 23 % 24 % Sour crude oil 55 % 59 % Heavy sour crude oil 7 % - % Black wax crude oil 6 % 8 % Other feedstocks and blends 9 % 9 % Total 100 % 100 % Sales of produced refined products: Gasolines 52 % 55 % Diesel fuels 27 % 36 % Jet fuels 6 % - % Fuel oil 10 % 2 % Asphalt 2 % 4 % LPG and other 3 % 3 % Total 100 % 100 % 43
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Three Months Ended March 31,
2022 (8) 2021
Consolidated
Crude charge (BPD) (1) 525,080 348,170
Refinery throughput (BPD) (2) 564,730 374,160
Sales of produced refined products (BPD) (3) 522,170 354,940
Refinery utilization (4) 88.6 % 86.0 %
Average per produced barrel (5)
Refinery gross margin $ 12.69 $ 8.00
Refinery operating expenses (6) 7.55 9.17
Net operating margin $ 5.14 $ (1.17)
Refinery operating expenses per throughput barrel (7) $ 6.98 $ 8.70
Feedstocks:
Sweet crude oil 45 % 45 %
Sour crude oil 32 % 31 %
Heavy sour crude oil 13 % 14 %
Black wax crude oil 3 % 3 %
Other feedstocks and blends 7 % 7 %
Total 100 % 100 %
Sales of produced refined products:
Gasolines 51 % 54 %
Diesel fuels 31 % 35 %
Jet fuels 6 % 3 %
Fuel oil 5 % 1 %
Asphalt 2 % 3 %
Base oils 2 % 2 %
LPG and other 3 % 2 %
Total 100 % 100 %
(1)Crude charge represents the barrels per day of crude oil processed at our
refineries.
(2)Refinery throughput represents the barrels per day of crude and other
refinery feedstocks input to the crude units and other conversion units at our
refineries.
(3)Represents barrels sold of refined products produced at our refineries
(including HFC Asphalt) and does not include volumes 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 March 31, 2021 to 669,000 BPSD at March
31, 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 three months ended March 31, 2022 includes crude oil and
feedstocks processed and refined products sold at our Sinclair and Casper
Refineries for the period March 14, 2022 through March 31, 2022 only, averaged
over the 90 days in the three months ended March 31, 2022 .
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Renewables Operating Data
The following table sets forth information about our renewables operations and
includes our
Three Months Ended March 31 , 2022
Renewables
Sales volumes (in thousand gallons)
4,943
Average per produced gallon (1) Renewables gross margin $
0.63
Renewables operating expenses (2) 5.48 Net operating margin $ (4.85)
(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
Three Months Ended March 31, 2022
Marketing
Number of branded sites 1,323
Sales volumes (in thousand gallons) 84,913
Margin per gallon of sales (1) $
0.07
(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.
Three Months Ended March 31,
2022 2021Lubricants and Specialty Products
Throughput (BPD)
19,340 20,410
Sales of produced refined products (BPD)
35,010 32,570
Sales of produced refined products:
Finished products 51 % 52 %
Base oils 30 % 26 %
Other 19 % 22 %
Total 100 % 100 %
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Table of Content Supplemental financial data attributable to our Lubricants and Specialty Products segment is presented below.
Total Lubricants
Rack Forward and Specialty
Rack Back (1) (2) Eliminations (3) Products
(In thousands)
Three months ended March 31, 2022
Sales and other revenues $ 278,586 $ 687,947 $ (211,524) $ 755,009
Cost of products sold $ 178,539 $ 537,562 $ (211,524) $ 504,577
Operating expenses $ 30,814 $ 35,187 $ - $ 66,001
Selling, general and administrative
expenses $ 6,207 $ 35,542 $ - $ 41,749
Depreciation and amortization $ 7,557 $ 13,037 $ - $ 20,594
Income from operations $ 55,469 $ 66,619 $ - $ 122,088
Three months ended March 31, 2021
Sales and other revenues $ 173,442 $ 483,246 $ (132,125) $ 524,563
Cost of products sold $ 132,532 $ 331,116 $ (132,125) $ 331,523
Operating expenses $ 28,621 $ 32,132 $ - $ 60,753
Selling, general and administrative
expenses $ 6,739 $ 38,814 $ - $ 45,553
Depreciation and amortization $ 7,305 $ 12,816 $ - $ 20,121
Income (loss) from operations $ (1,755) $ 68,368 $ - $ 66,613
(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.
Results of Operations - Three Months Ended
Summary
Net income attributable toHF Sinclair stockholders for the three months endedMarch 31, 2022 was$160.0 million ($0.90 per basic and diluted share), an$11.8 million increase from a net income of$148.2 million ($0.90 per basic and diluted share) for the three months endedMarch 31, 2021 . The increase in net income was principally driven by stronger product demand, which resulted in an increase in refinery gross margins and higher refined product sales volumes. Net income for the three months endedMarch 31, 2021 was impacted by winter storm Uri, which increased natural gas costs across our refining system. Refinery gross margins for the three months endedMarch 31, 2022 increased to$12.69 per produced barrel sold from$8.00 for the three months endedMarch 31, 2021 . Sales and Other Revenues Sales and other revenues increased 113% from$3,504.3 million for the three months endedMarch 31, 2021 to$7,458.8 million for the three months endedMarch 31, 2022 principally due to the increase in sales prices and higher refined product sales volumes, in part due to the acquisition of thePuget Sound Refinery and the acquisition of Sinclair Oil. Sales and other revenues for the three months endedMarch 31, 2022 and 2021 included$27.9 million and$25.3 million , respectively, of HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties. Additionally, sales and other revenues included$753.6 million and$522.0 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the three months endedMarch 31, 2022 and 2021, respectively. Cost of Products Sold Total cost of products sold increased 135% from$2,760.3 million for the three months endedMarch 31, 2021 to$6,493.5 million for the three months endedMarch 31, 2022 principally due to higher crude oil costs and higher refined product sales volumes. During the first quarters of 2022 and 2021, we recognized a lower of cost or market inventory valuation adjustment benefits of$8.6 million and$200.0 million , respectively. 46 -------------------------------------------------------------------------------- Table of Content Gross Refinery MarginsGross refinery margin per produced barrel sold increased 59% from$8.00 for the three months endedMarch 31, 2021 to$12.69 for the three months endedMarch 31, 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 19% from$399.9 million for the three months endedMarch 31, 2021 to$477.4 million for the three months endedMarch 31, 2022 primarily due to the acquisition of thePuget Sound Refinery . Selling, General and Administrative Expenses Selling, general and administrative expenses increased 35% from$82.0 million for the three months endedMarch 31, 2021 to$110.4 million for the three months endedMarch 31, 2022 primarily due to higher 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 17% from$124.1 million for the three months endedMarch 31, 2021 to$144.6 million for the three months endedMarch 31, 2022 . This increase was due principally to depreciation and amortization attributable to the acquisition of thePuget Sound Refinery and capitalized improvement projects. Interest Expense Interest expense was$34.9 million for the three months endedMarch 31, 2022 compared to$38.4 million for the three months endedMarch 31, 2021 . This decrease was primarily due to lower net losses related to our catalyst financing arrangements during the three months endedMarch 31, 2022 as compared to the same period in the prior year.
For the three months ended
Gain on Tariff Settlement For the three months endedMarch 31, 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. 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$0.1 million and a net loss of$1.3 million for the three months endedMarch 31, 2022 and 2021, respectively. For the three months endedMarch 31, 2022 and 2021, gain (loss) on foreign currency transactions included losses of$6.4 million and$6.7 million , respectively, on foreign exchange forward contracts (utilized as an economic hedge). Income Taxes For the three months endedMarch 31, 2022 , we recorded an income tax expense of$21.3 million compared to a benefit of$28.3 million for the three months endedMarch 31, 2021 . This increase was principally due to higher pre-tax income during the three months endedMarch 31, 2022 compared to the same period of 2021. Our effective tax rates were 10.3% and (18.3)% for the three months endedMarch 31, 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 theU.S. federal statutory rate and the effective tax rate for the three months endedMarch 31, 2022 was primarily due to the impact of federal tax credits and the decrease in the state tax rate applied to our deferred tax assets and liabilities as a result of theSinclair Transactions. 47
-------------------------------------------------------------------------------- Table of Content LIQUIDITY AND CAPITAL RESOURCES HF Sinclair Credit Agreement OnApril 27, 2022 , after giving effect to the consummation of the exchange offers and the issuance of theHF Sinclair Senior Notes (as defined below),HF Sinclair entered into a$1.65 billion senior unsecured revolving credit facility maturing inApril 2026 (the "HF Sinclair Credit Agreement"). TheHF 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 ofHollyFrontier (the "Terminated HFC Credit Agreement"), which was terminated onApril 27, 2022 . AtMarch 31, 2022 ,HollyFrontier was in compliance with all covenants, had no outstanding borrowings and had outstanding letters of credit totaling$2.3 million under the Terminated HFC Credit Agreement. HFC Bond Exchange OnApril 27, 2022 ,HF Sinclair completed its offers to exchange any and all outstandingHollyFrontier 2.625% senior notes maturing 2023 (the "HollyFrontier 2.625% Senior Notes"), 5.875% senior notes maturing 2026 (the "HollyFrontier 5.875% Senior Notes") and 4.500% senior notes maturing 2030 (the "HollyFrontier 4.500% Senior Notes" and, collectively, the "HollyFrontier Senior Notes") for 2.625% senior notes maturing 2023 (the "HF Sinclair 2.625% Senior Notes"), 5.875% senior notes maturing 2026 (the "HF Sinclair 5.875% Senior Notes") and 4.500% senior notes maturing 2030 (the "HF Sinclair 4.500% Senior Notes" and, collectively, the "HF Sinclair Senior Notes") to be issued byHF Sinclair and cash. Additionally,HF Sinclair solicited consents to adopt certain amendments to the indenture governing theHollyFrontier Senior Notes.
Following the settlement of the exchange offers and consent solicitations, the
Aggregate Principal
Amount (as of April
Title of Series of HF Sinclair Senior Notes 27, 2022)
(In thousands)
2.625% HF Sinclair Senior Notes maturing 2023 $ 290,348
5.875% HF Sinclair Senior Notes maturing 2026 $ 797,100
4.500% HF Sinclair Senior Notes maturing 2030 $ 325,034
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.
In connection with the issuance of the HF Sinclair Senior Notes, HF Sinclair
agreed to use its commercially reasonable efforts to file (and have declared
effective) a registration statement with respect to a registered offer to
exchange the HF Sinclair Senior Notes for substantially identical registered
notes. HF Sinclair will be obligated to pay additional interest if it does not
complete the exchange offer on or prior to April 27, 2023 , or if a shelf
registration statement with respect to the HF Sinclair Senior Notes (if required
to be filed) is not declared effective by the dates indicated in the
Registration Rights Agreement.
Following the settlement of the exchange offers and consent solicitations, as of
Aggregate Principal
Amount (as of April 27,
Title of Series of HollyFrontier Senior Notes 2022)
(In thousands)
2.625% HollyFrontier Senior Notes maturing 2023 $ 59,652
5.875% HollyFrontier Senior Notes maturing 2026 $ 202,900
4.500% HollyFrontier Senior Notes maturing 2030 $ 74,966
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.
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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 inJuly 2025 (the "HEP Credit Agreement") and 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 three months endedMarch 31, 2022 , HEP had net borrowings of$301.5 million under the HEP Credit Agreement. AtMarch 31, 2022 , HEP was in compliance with all of its covenants, had outstanding borrowings of$1.1 billion and no outstanding letters of credit under the HEP Credit Agreement. OnApril 8, 2022 ,HEP and Holly Energy Finance Corp. issued$400 million aggregate principal amount of 6.375% senior notes maturingApril 2027 (the "HEP 6.375% Senior Notes") in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The HEP 6.375% Senior Notes were issued at par for net proceeds of approximately$393 million , after deducting the initial purchasers' discounts and commissions and estimated offering expenses, are unsecured and impose certain restrictive covenants and other terms consistent with the HEP 5.0% Senior Notes described in Note 10 "Debt" in the Notes to Consolidated Financial Statements. 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. 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, upon the expected completion of our renewables capital projects in the second quarter of 2022, for the repurchase of common stock under our share repurchase program. Our standalone (excluding HEP) liquidity was approximately$1.9 billion atMarch 31, 2022 , consisting of cash and cash equivalents of$577.3 million and an undrawn$1.35 billion credit facility. OnApril 27, 2022 , we increased the size of theHF Sinclair credit facility to$1.65 billion . 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. InNovember 2019 , our Board of Directors approved a$1.0 billion share repurchase program, which replaced all existing share repurchase programs, authorizing us to repurchase common stock in the open market or through privately negotiated transactions. The timing and amount of stock repurchases will depend on market conditions and corporate, regulatory and other relevant considerations. This program may be discontinued at any time by our Board of Directors. As ofMarch 31, 2022 , we had not repurchased common stock under this stock repurchase program, and we do not intend to repurchase common stock under this program until completion of our ongoing renewables capital projects. 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. 49 -------------------------------------------------------------------------------- Table of Content Cash Flows - Operating Activities Three Months EndedMarch 31, 2022 Compared to Three Months EndedMarch 31, 2021 Net cash flows provided by operating activities were$461.0 million for the three months endedMarch 31, 2022 compared to$62.3 million for the three months endedMarch 31, 2021 , an increase of$398.7 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 increased operating cash flows by$213.7 million and$14.1 million , for the three months endedMarch 31, 2022 and 2021, respectively. Changes in working capital items adjust for the timing of receipts and payments of actual cash.
Cash Flows - Investing Activities and Planned Capital Expenditures
Three Months EndedMarch 31, 2022 Compared to Three Months EndedMarch 31, 2021 For the three months endedMarch 31, 2022 , our net cash flows used for investing activities were$385.2 million . OnMarch 14, 2022 , we closed theSinclair Transactions and paid cash of$231.2 million . The remainder of the purchase consideration was funded with the issuance ofHF 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 three months endedMarch 31, 2022 were$158.3 million primarily due to expenditures related to our renewable diesel units. Cash expenditures for properties, plants and equipment include HEP capital expenditures of$14.1 million for the three months endedMarch 31, 2022 . For the three months endedMarch 31, 2021 our net cash flows used for investing activities were$147.1 million . Cash expenditures for properties, plants and equipment for the three months of endedMarch 31, 2021 were$150.0 million primarily due to expenditures related to our renewable diesel units. Cash expenditures for properties, plants and equipment include HEP capital expenditures of$33.2 million for the three months endedMarch 31, 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. Additionally, when conditions warrant or as new opportunities arise, additional projects may be approved. The funds appropriated for a particular capital project may be expended over a period of several years, depending on the time required to complete the project. Therefore, our planned capital expenditures for a given year consist of expenditures appropriated in that year's capital budget plus expenditures for projects appropriated in prior years which have not yet been completed. Refinery turnaround spending is amortized over the useful life of the turnaround. The refining industry is capital intensive and requires on-going investments to sustain our refining operations. This includes replacement of, or rebuilding, refinery units and components that extend the useful life. We also invest in projects that improve operational reliability and profitability via enhancements that improve refinery processing capabilities as well as production yield and flexibility. Our capital expenditures also include projects related to renewable diesel, environmental, health and safety compliance and include initiatives as a result of federal and state mandates. Our refinery operations and related emissions are highly regulated at both federal and state levels, and we invest in our facilities as needed to remain in compliance with these standards. Additionally, when faced with new emissions or fuels standards, we seek to execute projects that facilitate compliance and also improve the operating costs and / or yields of associated refining processes.
HEP
Each year theHolly 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. 50 -------------------------------------------------------------------------------- Table of Content Expected capital and turnaround cash spending for 2022 is as follows. Expected Cash Spending
Range
(In millions)
HF Sinclair Capital Expenditures
Refining$ 240.0
Renewables 250.0
320.0
Lubricants and Specialty Products 45.0 60.0 Marketing 15.0 25.0 Corporate 90.0 110.0 Turnarounds and catalyst 110.0 150.0 Total HollyFrontier 750.0 925.0 HEP Maintenance 20.0 25.0 Expansion and joint venture investment 5.0 10.0 Refining unit turnarounds 30.0 40.0 Total HEP 55.0 75.0 Total$ 805.0 $ 1,000.0
Cash Flows - Financing Activities
Three Months EndedMarch 31, 2022 Compared to Three Months EndedMarch 31, 2021 For the three months endedMarch 31, 2022 , our net cash flows provided by financing activities were$281.4 million . During the three months endedMarch 31, 2022 , HEP had net borrowings of$301.5 million under the HEP Credit Agreement and paid distributions of$17.0 million to noncontrolling interests. For the three months endedMarch 31, 2021 , our net cash flows used for financing activities were$89.6 million . During the three months endedMarch 31, 2021 , we paid$57.7 million in dividends. Also during the period, HEP had net repayments of$17.5 million under the HEP Credit Agreement and paid distributions of$20.0 million to noncontrolling interests. For the three months endedMarch 31, 2021 , HEP received contributions from noncontrolling interests of$6.3 million .
Contractual Obligations and Commitments
There were no significant changes to our long-term contractual obligations
during the three months ended
Payments Due by Period
Contractual Obligations and
Commitments Total 2022 2023 & 2024 2025 & 2026 Thereafter
(In thousands)
Supply agreements (1) $ 479,984 $ 479,984 $ - $ - $ -
Transportation agreements (2) 447,769 32,032 85,418 85,418 244,901
Total $ 927,753 $ 512,016 $ 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.
HEP
During the three months endedMarch 31, 2022 , HEP had net borrowings of$301.5 million resulting in$1,141.5 million of outstanding borrowings under the HEP Credit Agreement atMarch 31, 2022 .
In
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Table of Content 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 inthe 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" inHollyFrontier's Annual Report on Form 10-K for the year endedDecember 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$0.2 million and$8.7 million atMarch 31, 2022 andDecember 31, 2021 , respectively. A new market reserve of$0.2 million as ofMarch 31, 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 a decrease to cost of products sold totaling$8.6 million for the three months endedMarch 31, 2022 . 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 ourPetro-Canada Lubricants and Sonneborn businesses are stated at the lower of cost, using the first-in, first-out method, or net realizable value.
At
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.
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.
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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
Notional Contract Volumes by Year of Maturity
Derivative Instrument Total Outstanding Notional 2022 2023 Unit of Measure
NYMEX futures (WTI) - short 2,120,000 2,120,000 - Barrels
Forward gasoline and diesel contracts
- long 805,000 805,000 - Barrels
Foreign currency forward contracts 450,707,774 340,773,326 109,934,448 U.S. dollar
Forward commodity contracts (platinum)
(1) 38,723 3,800 34,923 Troy ounces
(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:
Estimated Change in Fair Value at March
31,
Commodity-based Derivative Contracts 2022 2021
(In thousands)
Hypothetical 10% change in underlying commodity prices
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 rateHF Sinclair 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 ofMarch 31, 2022 is presented below: Estimated Outstanding Estimated Change in Principal Fair Value Fair Value (In thousands) HollyFrontier Senior Notes$ 1,750,000 $ 1,783,443 $ 32,278 HEP Senior Notes$ 500,000 $ 474,605 $ 14,475 53
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Table of Content For the variable rate HEP Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. AtMarch 31, 2022 , outstanding borrowings under the HEP Credit Agreement were$1.1 billion . A hypothetical 10% change in interest rates applicable to the HEP Credit Agreement would not materially affect cash flows. Our operations are subject to hazards of petroleum processing operations, including but not limited to fire, explosion, cyberattacks and weather-related perils. We maintain various insurance coverages, including 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.
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