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 Corporation ("HollyFrontier") and its consolidated subsidiaries and do not includeHippo Holding LLC , the parent company ofSinclair Oil LLC ,Sinclair Transportation Company LLC 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 toJune 30, 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 and our facility inNew 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, includingHF Sinclair subsidiaries. Market Developments For the three months endedJune 30, 2022 , net income attributable toHF Sinclair stockholders was$1,221.3 million compared to$168.9 million for the three months endedJune 30, 2021 . For the six months endedJune 30, 2022 , net income attributable toHF Sinclair stockholders was$1,381.2 million compared to$317.1 million for the six months endedJune 30, 2021 . Gross refining margin per produced barrel sold in our Refining segment increased 211% for the three months endedJune 30, 2022 over the same period of 2021. Our results for the second quarter and first six 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. The rapid increases in crude oil prices and market crack spreads during the second quarter were driven by both sustained increases in demand and the global supply disruption related to actions taken in response to both the COVID-19 pandemic and sanctions imposed onRussia for its invasion ofUkraine . 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. 40 -------------------------------------------------------------------------------- Table of Content Sinclair Acquisition OnMarch 14, 2022 (the "Closing Date"),HollyFrontier and HEP announced the establishment ofHF Sinclair 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,HF Sinclair completed its previously announced acquisition of Sinclair Oil by effecting (a) a holding company merger 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 ofHippo Holding LLC , the parent company of Sinclair Oil (the "Target Company ") toHF Sinclair in exchange for 60,230,036 shares ofHF Sinclair common stock, resulting in theTarget Company becoming a direct wholly owned subsidiary ofHF Sinclair (the "HFC Transactions"). At the effective time of the HFC Merger, all ofHollyFrontier's outstanding shares were automatically converted into equivalent corresponding shares ofHF Sinclair , andHF 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."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.
See Note 2 "Acquisitions" and Note 3 "
Puget Sound Refinery Acquisition 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 . Renewable Fuel Standard Regulations 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$210.5 million and$406.8 million for the three and six months endedJune 30, 2022 , respectively. AtJune 30, 2022 , our open RINs credit obligations were$79.5 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, theEPA is required to set annual volume targets of renewable fuels that obligated parties, such as us, must blend into petroleum-based transportation fuels consumed inthe United States . These volume requirements are used to determine an obligated party's renewable volume obligation ("RVO"). TheEPA released a final rule onJune 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 theEPA at that time, and in 2021 and the three months endedMarch 31, 2022 , we recognized the cost of the RVO using our estimates. As a result of the final rule released by theEPA onJune 3, 2022 as noted above, we recognized a benefit of$72.0 million in the three and six months endedJune 30, 2022 related to the modification of the 2020 and 2021 volume targets. 41
--------------------------------------------------------------------------------
Table of Content OUTLOOK Within our Refining segment, for the third quarter of 2022, we expect to run between 630,000 - 650,000 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's operating results from theSinclair andCasper refineries. Within our Lubricants and Specialty Products segment, for the third quarter of 2022, we expect continued strength in earnings in ourRack Forward business as well as strong performance in ourRack Back business due to the reduction in base oil supply fromRussia . Within our Renewables business, we completed construction of theArtesia renewable diesel unit and commenced start up in the second quarter of 2022. TheSinclair andCheyenne renewable diesel units and theArtesia pre-treatment unit are all on-line. For the third quarter of 2022, we will continue to ramp up production across these assets as we expect to reach full production levels by the end of the third quarter. We are suspending construction of theSinclair pre-treatment unit until 2023 pending a review of project economics and other potential alternatives. In the third 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 declared a regular quarterly dividend in the amount of$0.40 per share, payable onSeptember 1, 2022 to holders of record of common stock onAugust 18, 2022 . In the second quarter of 2022, we resumed the repurchase of our common stock under our existing$1.0 billion share repurchase program and expect to remain active throughout the second half of 2022. 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. During the second quarter of 2022, we received$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
and six months ended
42--------------------------------------------------------------------------------
Table of Content
RESULTS OF OPERATIONS
Financial Data
Three Months Ended
June 30, Change from 2021
2022 2021 Change Percent
(In thousands, except per share data)
Sales and other revenues $ 11,162,160 $ 4,577,123 $ 6,585,037 144 %
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) 8,579,915 3,825,729 4,754,186 124
Lower of cost or market inventory valuation
adjustment 34,543 (118,825) 153,368 (129)
8,614,458 3,706,904 4,907,554 132
Operating expenses (exclusive of depreciation and
amortization) 606,127 334,191 271,936 81
Selling, general and administrative expenses
(exclusive of depreciation and amortization) 110,875 77,754 33,121 43
Depreciation and amortization 164,044 124,042 40,002 32
Total operating costs and expenses 9,495,504 4,242,891 5,252,613 124
Income from operations 1,666,656 334,232 1,332,424 399
Other income (expense):
Earnings of equity method investments 5,447 3,423 2,024 59
Interest income 1,844 1,029 815 79
Interest expense (38,961) (28,942) (10,019) 35
Gain (loss) on foreign currency transactions (905) 583 (1,488) (255)
Gain on sale of assets and other 2,320 7,927 (5,607) (71)
(30,255) (15,980) (14,275) 89
Income before income taxes 1,636,401 318,252 1,318,149 414
Income tax expense 383,493 123,485 260,008 211
Net income 1,252,908 194,767 1,058,141 543
Less net income attributable to noncontrolling
interest 31,646 25,917 5,729 22
Net income attributable to
$ 168,850 $ 1,052,412 623 % Earnings per share attributable toHF Sinclair stockholders: Basic$ 5.43 $ 1.03 $ 4.40 427 % Diluted$ 5.43 $ 1.03 $ 4.40 427 % Cash dividends declared per common share$ 0.40 $ - $ 0.40 100 % Average number of common shares outstanding: Basic 222,952 162,523 60,429 37 % Diluted 222,952 162,523 60,429 37 % 43
--------------------------------------------------------------------------------
Table of Content
Six Months Ended
June 30, Change from 2021
2022 2021 Change Percent
(In thousands, except per share data)
Sales and other revenues $ 18,620,910 $ 8,081,416 10,539,494 130 %
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) 15,081,927 6,786,034 8,295,893 122
Lower of cost or market inventory valuation
adjustment 25,992 (318,862) 344,854 (108)
15,107,919 6,467,172 8,640,747 134
Operating expenses (exclusive of depreciation and
amortization) 1,083,561 734,100 349,461 48
Selling, general and administrative expenses
(exclusive of depreciation and amortization) 221,297 159,729 61,568 39
Depreciation and amortization 308,645 248,121 60,524 24
Total operating costs and expenses 16,721,422 7,609,122 9,112,300 120
Income from operations 1,899,488 472,294 1,427,194 302
Other income (expense):
Earnings of equity method investments 9,073 5,186 3,887 75
Interest income 2,841 2,060 781 38
Interest expense (73,820) (67,328) (6,492) 10
Gain on tariff settlement - 51,500 (51,500) (100)
Loss on foreign currency transactions (766) (734) (32) 4
Gain on sale of assets and other 6,215 9,817 (3,602) (37)
(56,457) 501 (56,958) (11,369)
Income before income taxes 1,843,031 472,795 1,370,236 290
Income tax expense 404,822 95,178 309,644 325
Net income 1,438,209 377,617 1,060,592 281
Less net income attributable to noncontrolling
interest 56,973 60,550 (3,577) (6)
Net income attributable to
$ 317,067 $ 1,064,169 336 % Earnings (loss) per share attributable toHF Sinclair stockholders: Basic$ 6.86 $ 1.92 $ 4.94 257 % Diluted$ 6.86 $ 1.92 $ 4.94 257 % Cash dividends declared per common share$ 0.40 $ 0.35 $ 0.05 14 % Average number of common shares outstanding: Basic 199,149 162,501 36,648 23 % Diluted 199,149 162,501 36,648 23 % Balance Sheet Data June 30, 2022 December 31, 2021 (Unaudited) (In thousands) Cash and cash equivalents$ 1,702,286 $ 234,444 Working capital$ 3,636,627 $ 1,696,990 Total assets$ 19,177,854 $ 12,916,613 Long-term debt$ 3,348,103 $ 3,072,737 Total equity$ 9,874,910 $ 6,294,465 44
--------------------------------------------------------------------------------
Table of Content
Other Financial Data
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(In thousands)
Net cash provided by operating
activities $ 1,528,356 $ 427,755 $ 1,989,392 $ 490,081
Net cash used for investing activities $ (153,835) $ (175,248) $ (539,011) $ (322,312)
Net cash provided by (used for)
financing activities $ (261,214) $ (48,917) $ 20,172 $ (138,478)
Capital expenditures $ 159,444 $ 182,880 $ 317,740 $ 332,841
EBITDA (1) $ 1,805,916 $ 444,290 $ 2,165,682 $ 725,634
(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 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 toJune 30, 2022 . In addition, the refinery operations of theSinclair andCasper Refineries are included for the periodMarch 14, 2022 (date of acquisition) throughJune 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. Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 (8) 2021Mid-Continent Region Crude charge (BPD) (1) 277,930 278,380 284,030 247,500 Refinery throughput (BPD) (2) 292,570 293,050 298,950 257,030 Sales of produced refined products (BPD) (3) 279,170 287,680 279,710 249,400 Refinery utilization (4) 106.9 % 107.1 % 109.2 % 95.2 % Average per produced barrel (5) Refinery gross margin$ 32.53 $ 10.82 $ 20.96 $ 8.99 Refinery operating expenses (6) 6.21 5.27 6.11 7.22 Net operating margin$ 26.32 $ 5.55 $ 14.85 $ 1.77 Refinery operating expenses per throughput barrel (7)$ 5.92 $ 5.18 $ 5.72 $ 6.89 45
--------------------------------------------------------------------------------
Table of Content
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 (8) 2021
Mid-Continent Region
Feedstocks:
Sweet crude oil 54 % 64 % 58 % 62 %
Sour crude oil 22 % 14 % 18 % 14 %
Heavy sour crude oil 19 % 17 % 19 % 19 %
Other feedstocks and blends 5 % 5 % 5 % 5 %
Total 100 % 100 % 100 % 100 %
Sales of produced refined products:
Gasolines 49 % 51 % 50 % 51 %
Diesel fuels 35 % 34 % 34 % 34 %
Jet fuels 5 % 4 % 6 % 5 %
Fuel oil 1 % 1 % 1 % 1 %
Asphalt 4 % 2 % 3 % 2 %
Base oils 4 % 4 % 4 % 4 %
LPG and other 2 % 4 % 2 % 3 %
Total 100 % 100 % 100 % 100 %
West Region
Crude charge (BPD) (1) 349,380 137,970 292,450 134,940
Refinery throughput (BPD) (2) 370,740 151,680 315,350 148,160
Sales of produced refined products (BPD)
(3) 376,400 156,260 309,530 150,290
Refinery utilization (4) 83.6 % 95.2 % 77.6 % 93.1 %
Average per produced barrel (5)
Refinery gross margin $ 39.21 $ 13.35 $ 30.42 $ 11.88
Refinery operating expenses (6) 9.10 6.57 9.19 7.29
Net operating margin $ 30.11 $
6.78
Refinery operating expenses per throughput barrel (7)$ 9.24 $ 6.77 $ 9.02 $ 7.40 Feedstocks: Sweet crude oil 33 % 22 % 29 % 23 % Sour crude oil 46 % 59 % 50 % 59 % Heavy sour crude oil 10 % - % 9 % - % Black wax crude oil 5 % 10 % 5 % 9 % Other feedstocks and blends 6 % 9 % 7 % 9 % Total 100 % 100 % 100 % 100 % Sales of produced refined products: Gasolines 53 % 52 % 53 % 53 % Diesel fuels 33 % 37 % 31 % 37 % Jet fuels 5 % - % 5 % - % Fuel oil 2 % 3 % 5 % 3 % Asphalt 3 % 5 % 2 % 4 % LPG and other 4 % 3 % 4 % 3 % Total 100 % 100 % 100 % 100 % 46
--------------------------------------------------------------------------------
Table of Content
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 (8) 2021
Consolidated
Crude charge (BPD) (1) 627,310 416,350 576,480 382,440
Refinery throughput (BPD) (2) 663,310 444,730 614,300 405,190
Sales of produced refined products (BPD)
(3) 655,570 443,940 589,240 399,690
Refinery utilization (4) 92.5 % 102.8 % 90.5 % 94.4 %
Average per produced barrel (5)
Refinery gross margin $ 36.36 $ 11.71 $ 25.93 $ 10.07
Refinery operating expenses (6) 7.87 5.73 7.73 7.25
Net operating margin $ 28.49 $ 5.98 $ 18.20 $ 2.82
Refinery operating expenses per
throughput barrel (7) $ 7.77 $ 5.72 $ 8.25 $ 7.07
Feedstocks:
Sweet crude oil 42 % 50 % 43 % 48 %
Sour crude oil 36 % 30 % 34 % 30 %
Heavy sour crude oil 14 % 11 % 14 % 12 %
Black wax crude oil 3 % 3 % 3 % 3 %
Other feedstocks and blends 5 % 6 % 6 % 7 %
Total 100 % 100 % 100 % 100 %
Sales of produced refined products:
Gasolines 51 % 51 % 51 % 52 %
Diesel fuels 34 % 35 % 32 % 35 %
Jet fuels 5 % 3 % 6 % 3 %
Fuel oil 2 % 1 % 3 % 1 %
Asphalt 3 % 3 % 3 % 3 %
Base oils 2 % 3 % 2 % 3 %
LPG and other 3 % 4 % 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 HFC 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 June 30, 2021 to 678,000 BPSD at
June 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 six months ended June 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 June 30, 2022 only, averaged
over the 181 days in the six months ended June 30, 2022 .
47
--------------------------------------------------------------------------------
Table of Content
Renewables Operating Data
The following table sets forth information about our renewables operations and
includes our
Three Months Ended Six Months Ended
June 30, 2022 June 30, 2022
Renewables
Sales volumes (in thousand gallons) 25,688 30,632
Average per produced gallon (1)
Renewables gross margin $ 0.07 $ 0.16
Renewables operating expenses (2) 1.14 1.84
Net operating margin $ (1.07) $ (1.68)
(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 Six Months Ended
June 30, 2022 June 30, 2022
Marketing
Number of branded sites at period end 1,329 1,329
Sales volumes (in thousand gallons) 335,106 420,019
Margin per gallon of sales (1) $ 0.07 $ 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 June 30, Six Months Ended June 30,
2022 2021 2022 2021
Lubricants and Specialty Products
Throughput (BPD) 20,260 19,310 19,800 19,860
Sales of produced refined products (BPD) 34,000 36,670 34,510 34,630
Sales of produced refined products:
Finished products 53 % 51 % 52 % 52 %
Base oils 27 % 29 % 29 % 27 %
Other 20 % 20 % 19 % 21 %
Total 100 % 100 % 100 % 100 %
48--------------------------------------------------------------------------------
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 June 30, 2022
Sales and other revenues $ 358,628 $ 754,442 $ (263,129) $ 849,941
Cost of products sold $ 249,095 $ 590,462 $ (263,129) $ 576,428
Operating expenses $ 38,073 $ 36,397 $ - $ 74,470
Selling, general and administrative
expenses $ 5,636 $ 37,919 $ - $ 43,555
Depreciation and amortization $ 7,712 $ 12,893 $ - $ 20,605
Income from operations $ 58,112 $ 76,771 $ - $ 134,883
Three months ended June 30, 2021
Sales and other revenues $ 254,485 $ 629,211 $ (214,507) $ 669,189
Cost of products sold $ 163,280 $ 542,445 $ (214,507) $ 491,218
Operating expenses $ 29,106 $ 32,204 $ - $ 61,310
Selling, general and administrative
expenses $ 5,914 $ 31,669 $ - $ 37,583
Depreciation and amortization $ 6,230 $ 12,922 $ - $ 19,152
Income from operations $ 49,955 $ 9,971 $ - $ 59,926
Six months ended June 30, 2022
Sales and other revenues $ 637,214 $
1,442,389
$ 427,634 $
1,128,024
$ 68,887 $ 71,584 $ -$ 140,471 Selling, general and administrative expenses$ 11,843 $ 73,461 $ -$ 85,304 Depreciation and amortization$ 15,269 $ 25,930 $ -$ 41,199 Income from operations$ 113,581 $ 143,390 $ -$ 256,971 Six months endedJune 30, 2021 Sales and other revenues$ 427,927 $
1,112,457
$ 295,812 $ 873,561 $ (346,632) $ 822,741 Operating expenses$ 57,727 $ 64,336 $ -$ 122,063 Selling, general and administrative expenses$ 12,653 $ 70,483 $ -$ 83,136 Depreciation and amortization$ 13,535 $ 25,738 $ -$ 39,273 Income from operations$ 48,200 $ 78,339 $ -$ 126,539 (1)Rack Back consists of ourPetro-Canada Lubricants, Inc. ("PCLI") base oil production activities, by-product sales to third parties and intra-segment base oil sales toRack Forward . (2)Rack Forward activities include the purchase of base oils fromRack Back and the blending, packaging, marketing and distribution and sales of finished lubricants and specialty products to third parties. (3)Intra-segment sales ofRack Back produced base oils toRack Forward are eliminated under the "Eliminations" column.
Results of Operations - Three Months Ended
Summary
Net income attributable toHF Sinclair stockholders for the three months endedJune 30, 2022 was$1,221.3 million ($5.43 per basic and diluted share), an$1,052.4 million increase from a net income of$168.9 million ($1.03 per basic and diluted share) for the three months endedJune 30, 2021 . The increase in net income was principally driven by stronger product demand and higher sales prices which resulted in an increase in refinery gross margins and higher refined product sales volumes. Lower of cost or market inventory reserve adjustments related to our renewables inventories decreased pre-tax earnings by$34.5 million for the three months endedJune 30, 2022 and lower of cost or market inventory adjustments related to our refining inventories increased pre-tax earnings by$118.8 million for the three months endedJune 30, 2021 . Refinery gross margins for the three months endedJune 30, 2022 increased to$36.36 per produced barrel sold from$11.71 for the three months endedJune 30, 2021 . 49 -------------------------------------------------------------------------------- Table of Content Sales and Other Revenues Sales and other revenues increased 144% from$4,577.1 million for the three months endedJune 30, 2021 to$11,162.2 million for the three months endedJune 30, 2022 principally due to the increase in sales prices and higher refined product sales volumes, primarily due to the acquisition of thePuget Sound Refinery and the Acquired Sinclair Businesses. Sales and other revenues included$1,336.3 million ,$845.0 million and$115.9 million in unaffiliated revenues related to our Marketing, Lubricants and Specialty Products and Renewables segments, respectively, for the three months endedJune 30, 2022 . Sales and other revenues included$662.8 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the three months endedJune 30, 2021 . Cost of Products Sold Total cost of products sold increased 132% from$3,706.9 million for the three months endedJune 30, 2021 to$8,614.5 million for the three months endedJune 30, 2022 principally due to higher crude oil costs and higher refined product sales volumes, primarily due to the acquisition of thePuget Sound Refinery and the Acquired Sinclair Businesses. During the second quarters of 2022 and 2021, we recognized a lower of cost or market inventory valuation adjustment charge related to our renewables inventories of$34.5 million and a benefit related to our refining inventories of$118.8 million , respectively. Gross Refinery MarginsGross refinery margin per produced barrel sold increased 211% from$11.71 for the three months endedJune 30, 2021 to$36.36 for the three months endedJune 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 81% from$334.2 million for the three months endedJune 30, 2021 to$606.1 million for the three months endedJune 30, 2022 primarily due to the acquisition of thePuget Sound Refinery and the Acquired Sinclair Businesses. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 43% from$77.8 million for the three months endedJune 30, 2021 to$110.9 million for the three months endedJune 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 32% from$124.0 million for the three months endedJune 30, 2021 to$164.0 million for the three months endedJune 30, 2022 . This increase was due principally to depreciation and amortization attributable to the acquisition of thePuget Sound Refinery , the Acquired Sinclair Businesses and newly capitalized projects related to our renewable diesel units.
Interest Expense
Interest expense was
For the three months ended
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 loss of$0.9 million and a net gain of$0.6 million for the three months endedJune 30, 2022 and 2021, respectively. For the three months endedJune 30, 2022 and 2021, gain (loss) on foreign currency transactions included a gain of$13.0 million and a loss of$6.1 million , respectively, on foreign exchange forward contracts (utilized as an economic hedge). 50 -------------------------------------------------------------------------------- Table of Content Income Taxes For the three months endedJune 30, 2022 , we recorded an income tax expense of$383.5 million compared to$123.5 million for the three months endedJune 30, 2021 . This increase was principally due to higher pre-tax income during the three months endedJune 30, 2022 compared to the same period of 2021. Our effective tax rates were 23.4% and 38.8% for the three months endedJune 30, 2022 and 2021, respectively. The decrease 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.
Results of Operations - Six Months Ended
Summary
Net income attributable toHF Sinclair stockholders for the six months endedJune 30, 2022 was$1,381.2 million ($6.86 per basic and diluted share), a$1,064.2 million increase compared to net income of$317.1 million ($1.92 per basic and diluted share) for the six months endedJune 30, 2021 . The increase in net income was principally driven by stronger product demand and higher sales prices which resulted in an increase in refinery gross margins and higher refined product sales volumes. Lower of cost or market inventory reserve adjustments related to our renewables inventories decreased pre-tax earnings by$26.0 million for the six months endedJune 30, 2022 and lower of cost or market inventory adjustment related to our refining inventories increased pre-tax earnings by$318.9 million and for the six months endedJune 30, 2021 . Net income for the six months endedJune 30, 2021 was impacted by winter storm Uri, which increased natural gas costs across our refining system. Refinery gross margins for the six months endedJune 30, 2022 increased to$25.93 per barrel sold from$10.07 for the six months endedJune 30, 2021 . Sales and Other Revenues Sales and other revenues increased 130% from$8,081.4 million for the six months endedJune 30, 2021 to$18,620.9 million for the six months endedJune 30, 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 Acquired Sinclair Businesses. Sales and other revenues included$1,613.3 million ,$1,598.6 million and$144.3 million in unaffiliated revenues related to our Marketing, Lubricants and Specialty Products and Renewables segments, respectively, for the six months endedJune 30, 2022 . Sales and other revenues included$1,184.8 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the six months endedJune 30, 2021 . Cost of Products Sold Total cost of products sold increased 134% from$6,467.2 million for the six months endedJune 30, 2021 to$15,107.9 million for the six months endedJune 30, 2022 principally due to higher crude oil costs and higher refined product sales volumes, in part due to the acquisition of thePuget Sound Refinery and the Acquired Sinclair Businesses. During the six months endedJune 30, 2022 and 2021, we recognized a lower of cost or market inventory valuation adjustment charge related to our renewables inventories of$26.0 million and a benefit related to our refining inventories of$318.9 million , respectively. Gross Refinery MarginsGross refinery margin per barrel sold increased 157% from$10.07 for the six months endedJune 30, 2021 to$25.93 for the six months endedJune 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 48% from$734.1 million for the six months endedJune 30, 2021 to$1,083.6 million for the six months endedJune 30, 2022 primarily due to the acquisition of thePuget Sound Refinery and the Acquired Sinclair Businesses. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 39% from$159.7 million for the six months endedJune 30, 2021 to$221.3 million for the six months endedJune 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 these acquisitions. 51 -------------------------------------------------------------------------------- Table of Content Depreciation and Amortization Expenses Depreciation and amortization increased 24% from$248.1 million for the six months endedJune 30, 2021 to$308.6 million for the six months endedJune 30, 2022 . This increase was due principally to depreciation and amortization attributable to the acquisition of thePuget Sound Refinery , the Acquired Sinclair Businesses and newly capitalized projects related to our renewable diesel units. Interest Expense Interest expense was$73.8 million for the six months endedJune 30, 2022 compared to$67.3 million for the six months endedJune 30, 2021 . This increase was primarily due to theApril 2022 issuance of$400 million in aggregate principal amount of HEP's 6.375% senior notes maturing inApril 2027 .
For the six months ended
Gain on Tariff Settlement For the six months endedJune 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. Gain (Loss) on Foreign Currency Transactions Remeasurement adjustments resulting from the foreign currency conversion of the intercompany financing notes payable by PCLI net of mark-to-market valuations on foreign exchange forward contracts with banks which hedge the foreign currency exposure on these intercompany notes were net losses of$0.8 million and$0.7 million for the six months endedJune 30, 2022 and 2021, respectively. For the six months endedJune 30, 2022 and 2021, losses on foreign currency transactions included a net gain of$6.5 million and a loss of$12.8 million , respectively, on foreign exchange forward contracts (utilized as an economic hedge). Income Taxes For the six months endedJune 30, 2022 , we recorded an income tax expense of$404.8 million compared to$95.2 million for the six months endedJune 30, 2021 . This increase was principally due to higher pre-tax income during the six months endedJune 30, 2022 compared to the same period of 2021. Our effective tax rates were 22.0% and 20.1% for the six months endedJune 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 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 , which was terminated onApril 27, 2022 . AtJune 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 OnApril 27, 2022 ,HF Sinclair completed its offers to exchange any and all outstandingHollyFrontier 2.625% senior notes maturingOctober 2023 (the "HollyFrontier 2.625% Senior Notes"), 5.875% senior notes maturingApril 2026 (the "HollyFrontier 5.875% Senior Notes") and 4.500% senior notes maturingOctober 2030 (the "HollyFrontier 4.500% Senior Notes") (and, collectively, the "HollyFrontier Senior Notes") for 2.625% senior notes maturingOctober 2023 (the "HF Sinclair 2.625% Senior Notes"), 5.875% senior notes maturingApril 2026 (the "HF Sinclair 5.875% Senior Notes") and 4.500% senior notes maturingOctober 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. 52 -------------------------------------------------------------------------------- Table of Content Following the settlement of the exchange offers and consent solicitations, the aggregate principal amount of theHF Sinclair Senior Notes consisted of the following:
Title of Series of
(In thousands)
2.625%
TheHF 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 ofHF 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 ofHollyFrontier Senior Notes. TheHF Sinclair Senior Notes were issued in exchange for theHollyFrontier 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 theHF 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 theHF 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 toApril 27, 2023 , or if a shelf registration statement with respect to theHF 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, the
aggregate principal amount of the
Title of Series of
(In thousands)
2.625%
In connection with the exchange offers and consent solicitations,HollyFrontier amended the indenture governing theHollyFrontier 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) theSEC reporting covenant and (iv) with respect to theHollyFrontier 2.625% Senior Notes and theHollyFrontier 4.500% Senior Notes only, the offer to repurchase such senior notes upon certain change of control triggering events. 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 six months endedJune 30, 2022 , HEP had net repayments of$119.0 million under the HEP Credit Agreement. AtJune 30, 2022 , HEP was in compliance with all of its covenants, had outstanding borrowings of$721.0 million and no outstanding letters of credit under the HEP Credit Agreement. 53 -------------------------------------------------------------------------------- Table of Content HEP Senior Notes OnApril 8, 2022 , HEP closed a private placement of$400 million in aggregate principal amount of 6.375% senior notes maturingApril 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. 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
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. InJune 2022 , our Board of Directors determined that privately negotiated repurchases fromREH Company (formerly known asThe Sinclair Companies ) are also authorized under the share repurchase program, subject toREH Company's interest and other limitations. The timing and amount of share repurchases, including those fromREH 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. During the second quarter of 2022, we repurchased 2,730,000 shares of common stock for$132.3 million in connection with our share repurchase program. As ofJune 30, 2022 , we had remaining authorization to repurchase up to$867.7 million under this stock repurchase program, of which we repurchased 2,965,642 shares for$132.9 million inJuly 2022 . 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.
Cash Flows - Operating Activities
Six Months EndedJune 30, 2022 Compared to Six Months EndedJune 30, 2021 Net cash flows provided by operating activities were$1,989.4 million for the six months endedJune 30, 2022 compared to$490.1 million for the six months endedJune 30, 2021 , an increase of$1,499.3 million . The increase in operating cash flows was primarily due to the increase in gross refinery margins, partially offset by higher operating expenses. In addition, we received$83 million in cash tax benefit during the six months endedJune 30, 2022 from the net operating loss carryback provisions under the CARES Act. Changes in working capital increased operating cash flows by$246.3 million and$149.0 million for the six months endedJune 30, 2022 and 2021, respectively. The increase for the current period is partially due to$83 million in cash tax benefit received during the six months endedJune 30, 2022 from the net operating loss carryback provisions under the CARES Act. 54 -------------------------------------------------------------------------------- Table of Content Cash Flows - Investing Activities and Planned Capital Expenditures Six Months EndedJune 30, 2022 Compared to Six Months EndedJune 30, 2021 For the six months endedJune 30, 2022 , our net cash flows used for investing activities were$539.0 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 six months endedJune 30, 2022 were$317.7 million , which include HEP capital expenditures of$23.2 million for the six months endedJune 30, 2022 . For the six months endedJune 30, 2021 , our net cash flows used for investing activities were$322.3 million . Cash expenditures for properties, plants and equipment for the six months of endedJune 30, 2021 were$332.8 million primarily due to expenditures related to our renewable diesel units. Cash expenditures for properties, plants and equipment include HEP capital expenditures of$57.7 million for the six months endedJune 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 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. 55 -------------------------------------------------------------------------------- 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 $ 225.0 $ 250.0
Renewables 250.0 300.0
Lubricants and Specialty Products 45.0 60.0
Marketing 15.0 25.0
Corporate 90.0 110.0
Turnarounds and catalyst 110.0 130.0
Total HollyFrontier 735.0 875.0
HEP
Maintenance 20.0 30.0
Expansion and joint venture investment 5.0 10.0
Refining unit turnarounds 25.0 35.0
Total HEP 50.0 75.0
Total $ 785.0 $ 950.0 Cash Flows - Financing Activities
Six Months EndedJune 30, 2022 Compared to Six Months EndedJune 30, 2021 For the six months endedJune 30, 2022 , our net cash flows provided by financing activities were$20.2 million . During the six months endedJune 30, 2022 , we repurchased$110.8 million of our common stock and paid$90.2 million in dividends. During the six months endedJune 30, 2022 , HEP received$400.0 million in proceeds from the issuance of the HEP 6.375% Senior Notes, had net repayments of$119.0 million under the HEP Credit Agreement and paid distributions of$44.9 million to noncontrolling interests. For the six months endedJune 30, 2021 , our net cash flows used for financing activities were$138.5 million . During the six months endedJune 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 inApril 2021 . During the six months endedJune 30, 2021 , HEP had net repayments of$43.5 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 inApril 2021 . In addition, HEP paid distributions of$38.2 million to noncontrolling interests and received contributions from noncontrolling interests of$17.6 million .
Contractual Obligations and Commitments
There were no significant changes to our long-term contractual obligations
during the six months ended
Payments Due by Period
Contractual Obligations and
Commitments Total 2022 2023 & 2024 2025 & 2026 Thereafter
(In thousands)
Supply agreements (1) $ 319,990 $ 319,990 $ - $ - $ -
Transportation agreements (2) 437,092 21,355 85,418 85,418 244,901
Total $ 757,082 $ 341,345 $ 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.
56
--------------------------------------------------------------------------------
Table of Content
HEP
During the six months ended
In
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$34.7 million and$8.7 million atJune 30, 2022 andDecember 31, 2021 , respectively. A new market reserve of$34.7 million as ofJune 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$34.5 million and$26.0 million for the three and six months endedJune 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 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.
57
--------------------------------------------------------------------------------
Table of Content
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 theU.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 1,245,000 1,245,000 - Barrels
Forward gasoline and diesel contracts
- long 270,000 270,000 - Barrels
Foreign currency forward contracts 445,568,948 226,327,761 219,241,187 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 June
30,
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.
58
--------------------------------------------------------------------------------
Table of Content
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 June 30, 2022 is presented
below:
Estimated
Outstanding Estimated Change in
Principal Fair Value Fair Value
(In thousands)
HollyFrontier and HF Sinclair Senior Notes $ 1,750,000 $ 1,717,195 $ 35,470
HEP Senior Notes $ 900,000 $ 808,706 $ 28,881
For the variable rate HEP Credit Agreement, changes in interest rates would
affect cash flows, but not the fair value. At June 30, 2022 , outstanding
borrowings under the HEP Credit Agreement were $721.0 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.
© Edgar Online, source
