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" includeHolly 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 (now known asSinclair 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 toSeptember 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 ," and also referred to as the "Parco 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 1,300 Sinclair branded stations and license the use of the Sinclair brand at more than 300 additional locations throughout the country. In addition, our subsidiaries produce and market base oils and other specialized lubricants 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 endedSeptember 30, 2022 , net income attributable toHF Sinclair stockholders was$954.4 million compared to$280.8 million for the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , net income attributable toHF Sinclair stockholders was$2,335.6 million compared to$597.9 million for the nine months endedSeptember 30, 2021 . Gross refining margin per produced barrel sold in our Refining segment increased 112% for the three months endedSeptember 30, 2022 over the same period of 2021. Our results for the third quarter and nine months of 2022 were favorably impacted by continued strong global economic activity with global demand for transportation fuels, lubricants and the transportation and terminal services having returned to pre-pandemic levels. Following the rapid increases in crude oil prices and market crack spreads during the second quarter of 2022, crude oil prices and market crack spreads remained at a high level during the third quarter as a result of continued robust demand and the global supply disruption related to actions taken in response to both the COVID-19 pandemic and sanctions imposed 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. 41 -------------------------------------------------------------------------------- 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 "SinclairHoldCo "). 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 (now known asSinclair 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 1,300 Sinclair 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, SinclairHoldCo's integrated crude and refined products pipelines and terminal assets, including approximately 1,200 miles of integrated crude and refined product pipeline supporting the Sinclair refineries and third parties, eight product terminals and two crude terminals with approximately 4.5 million barrels of operated storage. In addition, HEP acquired STC's interests in three pipeline joint ventures for crude gathering and product offtake including:Saddle Butte Pipeline III, LLC (25.06% non-operated interest); Pioneer Pipeline (49.995% non-operated interest); 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 (now known asHF Sinclair 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$261.6 million and$668.4 million for the three and nine months endedSeptember 30, 2022 , respectively. AtSeptember 30, 2022 , our open RINs credit obligations were$81.2 million . See Note 2 "Acquisitions" in the Notes to Consolidated Financial Statements for additional information on RINs credit obligations assumed in the Sinclair Transactions. Under the RFS regulations, 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 nine months endedSeptember 30, 2022 related to the modification of the 2020 and 2021 volume targets. 42 -------------------------------------------------------------------------------- Table of Content RecentU.S. Tax Legislation OnAugust 16, 2022 , theU.S. government enacted the Inflation Reduction Act of 2022 (the "Inflation Reduction Act") into law. The Inflation Reduction Act includes a new corporate alternative minimum tax (the "Corporate AMT") of 15% on the adjusted financial statement income ("AFSI") of corporations with average AFSI exceeding$1.0 billion over a three-year period. The Corporate AMT is effective for the Company beginningJanuary 1, 2023 . We are evaluating the Corporate AMT and its potential impact on our futureU.S. tax expense, cash taxes, and effective tax rate. The Inflation Reduction Act also extends the federal blender's tax credit at the current rate of$1 per gallon for renewable diesel through the end of 2024. Additionally, the Inflation Reduction Act imposes an excise tax of 1% tax on the fair market value of net stock repurchases made afterDecember 31, 2022 . The impact of this provision will be dependent on the extent of net share repurchases made in future periods.
OUTLOOK
Within our Refining segment, for the fourth quarter of 2022, we expect to run between 620,000 - 650,000 barrels per day of crude oil. This guidance reflects the strong underlying refined product margins driven by constrained refined product supply in the markets we serve.
Within our Lubricants and Specialty Products segment, we expect the recent trends related to the FIFO impact of higher priced feedstocks experienced in the third quarter of 2022 to continue in the fourth quarter of 2022.
Within our Renewables segment, for the fourth quarter of 2022, we expect to see strong demand for renewable diesel and solid margins driven by D4 RIN price strength. We had planned maintenance at our Sinclair renewable diesel unit duringOctober 2022 , and we expect to reach full operating rates in the second half of the fourth quarter of 2022 across all of our renewable facilities. In the fourth quarter of 2022, HEP expects to hold the quarterly distribution constant at$0.35 per unit, or$1.40 on an annualized basis. HEP remains committed to its distribution strategy focused on funding all capital expenditures and distributions within operating cash flow and maintaining distributable cash flow coverage of 1.3x or greater with the goal of reducing leverage to 3.0-3.5x. InSeptember 2022 , our Board of Directors authorized a new$1.0 billion share repurchase program, and we expect to actively repurchase shares throughout the fourth quarter of 2022. Our Board of Directors also declared a regular quarterly dividend in the amount of$0.40 per share, payable onDecember 5, 2022 to holders of record of common stock onNovember 21, 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. During the second quarter of 2022, we received$83 million in cash tax benefit from the net operating loss carryback provisions under the CARES Act. We have received all the carryback claims related to the CARES Act. A more detailed discussion of our financial and operating results for the three and nine months endedSeptember 30, 2022 and 2021 is presented in the following sections. 43
--------------------------------------------------------------------------------
Table of Content
RESULTS OF OPERATIONS
Financial Data
Three Months Ended
September 30, Change from 2021
2022 2021 Change Percent
(In thousands, except per share data)
Sales and other revenues $ 10,599,002 $ 4,685,059 $ 5,913,943 126 %
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) 8,375,253 3,822,858 4,552,395 119
Lower of cost or market inventory valuation
adjustment 16,847 - 16,847 -
8,392,100 3,822,858 4,569,242 120
Operating expenses (exclusive of depreciation and
amortization) 604,591 352,520 252,071 72
Selling, general and administrative expenses
(exclusive of depreciation and amortization) 102,677 91,056 11,621 13
Depreciation and amortization 171,973 121,220 50,753 42
Total operating costs and expenses 9,271,341 4,387,654 4,883,687 111
Income from operations 1,327,661 297,405 1,030,256 346
Other income (expense):
Earnings (loss) of equity method investments (16,334) 3,689 (20,023) (543)
Interest income 9,821 1,018 8,803 865
Interest expense (44,830) (26,892) (17,938) 67
Gain (loss) on foreign currency transactions 1,544 (3,492) 5,036 (144)
Gain on sale of assets and other 2,130 85,779 (83,649) (98)
(47,669) 60,102 (107,771) (179)
Income before income taxes 1,279,992 357,507 922,485 258
Income tax expense 301,853 54,766 247,087 451
Net income 978,139 302,741 675,398 223
Less net income attributable to noncontrolling
interest 23,734 21,954 1,780 8
Net income attributable to
$ 280,787 $ 673,618 240 % Earnings per share attributable toHF Sinclair stockholders: Basic$ 4.45 $ 1.71 $ 2.74 160 % Diluted$ 4.45 $ 1.71 $ 2.74 160 % Cash dividends declared per common share$ 0.40 $ - $ 0.40 100 % Average number of common shares outstanding: Basic 212,388 162,551 49,837 31 % Diluted 212,388 162,551 49,837 31 % 44
--------------------------------------------------------------------------------
Table of Content
Nine Months Ended
September 30, Change from 2021
2022 2021 Change Percent
(In thousands, except per share data)
Sales and other revenues $ 29,219,912 $ 12,766,475 16,453,437 129 %
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) 23,457,180 10,608,892 12,848,288 121
Lower of cost or market inventory valuation
adjustment 42,839 (318,862) 361,701 (113)
23,500,019 10,290,030 13,209,989 128
Operating expenses (exclusive of depreciation and
amortization) 1,688,152 1,086,620 601,532 55
Selling, general and administrative expenses
(exclusive of depreciation and amortization) 323,974 250,785 73,189 29
Depreciation and amortization 480,618 369,341 111,277 30
Total operating costs and expenses 25,992,763 11,996,776 13,995,987 117
Income from operations 3,227,149 769,699 2,457,450 319
Other income (expense):
Earnings (loss) of equity method investments (7,261) 8,875 (16,136) (182)
Interest income 12,662 3,078 9,584 311
Interest expense (118,650) (94,220) (24,430) 26
Gain on tariff settlement - 51,500 (51,500) (100)
Gain (loss) on foreign currency transactions 778 (4,226) 5,004 (118)
Gain on sale of assets and other 8,345 95,596 (87,251) (91)
(104,126) 60,603 (164,729) (272)
Income before income taxes 3,123,023 830,302 2,292,721 276
Income tax expense 706,675 149,944 556,731 371
Net income 2,416,348 680,358 1,735,990 255
Less net income attributable to noncontrolling
interest 80,707 82,504 (1,797) (2)
Net income attributable to
$ 597,854 $ 1,737,787 291 % Earnings per share attributable toHF Sinclair stockholders: Basic$ 11.35 $ 3.63 $ 7.72 213 % Diluted$ 11.35 $ 3.63 $ 7.72 213 % Cash dividends declared per common share$ 0.80 $ 0.35 $ 0.45 129 % Average number of common shares outstanding: Basic 203,610 162,518 41,092 25 % Diluted 203,610 162,518 41,092 25 % Balance Sheet Data September 30, 2022 December 31, 2021 (Unaudited) (In thousands) Cash and cash equivalents $ 1,447,359 $ 234,444 Working capital $ 3,585,175$ 1,696,990 Total assets$ 18,226,285 $ 12,916,613 Long-term debt $ 3,334,200$ 3,072,737 Total equity $ 9,778,525$ 6,294,465 45
--------------------------------------------------------------------------------
Table of Content
Other Financial Data
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(In thousands)
Net cash provided by operating activities
$ 99,703 $ 215,504 $ 417,443$ 548,345 EBITDA (1)$ 1,463,240 $ 482,647 $ 3,628,922 $ 1,208,281 (1)Earnings before interest, taxes, depreciation and amortization, which we refer to as "EBITDA," is calculated as net income attributable toHF 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 toSeptember 30, 2022 . In addition, the refinery operations of the Sinclair andCasper Refineries are included for the periodMarch 14, 2022 (date of acquisition) throughSeptember 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 September 30, Nine Months Ended September 30, 2022 2021 2022 (8) 2021Mid-Continent Region Crude charge (BPD) (1) 278,410 280,220 282,130 258,530 Refinery throughput (BPD) (2) 293,890 294,970 297,240 272,770 Sales of produced refined products (BPD) (3) 280,390 277,310 279,940 258,800 Refinery utilization (4) 107.1 % 107.8 % 108.5 % 99.4 % Average per produced barrel (5) Refinery gross margin$ 25.72 $ 13.59 $ 22.62 $ 10.65 Refinery operating expenses (6) 6.12 5.72 6.12 6.68 Net operating margin$ 19.60 $ 7.87 $ 16.50 $ 3.97 Refinery operating expenses per throughput barrel (7) $ 5.84$ 5.37 $ 5.76$ 6.33 46
--------------------------------------------------------------------------------
Table of Content
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 (8) 2021
Mid-Continent Region
Feedstocks:
Sweet crude oil 59 % 66 % 58 % 63 %
Sour crude oil 26 % 13 % 21 % 14 %
Heavy sour crude oil 10 % 16 % 16 % 18 %
Other feedstocks and blends 5 % 5 % 5 % 5 %
Total 100 % 100 % 100 % 100 %
Sales of produced refined products:
Gasolines 50 % 52 % 50 % 51 %
Diesel fuels 34 % 32 % 34 % 33 %
Jet fuels 6 % 5 % 6 % 5 %
Fuel oil 1 % 1 % 1 % 1 %
Asphalt 4 % 4 % 3 % 3 %
Base oils 3 % 4 % 4 % 4 %
LPG and other 2 % 2 % 2 % 3 %
Total 100 % 100 % 100 % 100 %
West Region
Crude charge (BPD) (1) 367,370 136,210 317,700 135,370
Refinery throughput (BPD) (2) 391,230 149,760 340,920 148,700
Sales of produced refined products
(BPD) (3) 394,980 144,710 338,330 148,410
Refinery utilization (4) 87.9 % 93.9 % 81.2 % 93.4 %
Average per produced barrel (5)
Refinery gross margin $ 35.56 $ 17.33 $ 32.40 $ 13.67
Refinery operating expenses (6) 8.72 7.70 9.00 7.43
Net operating margin $ 26.84 $ 9.63 Refinery operating expenses per throughput barrel (7)$ 8.80 $ 7.44 $ 8.93 $ 7.41 Feedstocks: Sweet crude oil 25 % 22 % 27 % 22 % Sour crude oil 50 % 58 % 50 % 59 % Heavy sour crude oil 14 % - % 11 % - % Black wax crude oil 5 % 11 % 5 % 10 % Other feedstocks and blends 6 % 9 % 7 % 9 % Total 100 % 100 % 100 % 100 % Sales of produced refined products: Gasolines 53 % 51 % 52 % 52 % Diesel fuels 34 % 39 % 32 % 38 % Jet fuels 5 % - % 5 % - % Fuel oil 1 % 3 % 4 % 3 % Asphalt 3 % 5 % 3 % 4 % LPG and other 4 % 2 % 4 % 3 % Total 100 % 100 % 100 % 100 % 47
--------------------------------------------------------------------------------
Table of Content
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 (8) 2021
Consolidated
Crude charge (BPD) (1) 645,780 416,430 599,830 393,900
Refinery throughput (BPD) (2) 685,120 444,730 638,160 421,470
Sales of produced refined products
(BPD) (3) 675,370 422,020 618,270 407,210
Refinery utilization (4) 95.2 % 102.8 % 92.2 % 97.3 %
Average per produced barrel (5)
Refinery gross margin $ 31.47 $ 14.87 $ 27.97 $ 11.75
Refinery operating expenses (6) 7.64 6.40 7.70 6.95
Net operating margin $ 23.83 $ 8.47 $ 20.27 $ 4.80
Refinery operating expenses per
throughput barrel (7) $ 7.53 $ 6.07 $ 8.51 $ 6.71
Feedstocks:
Sweet crude oil 39 % 51 % 42 % 49 %
Sour crude oil 39 % 28 % 36 % 29 %
Heavy sour crude oil 13 % 11 % 13 % 12 %
Black wax crude oil 3 % 4 % 3 % 4 %
Other feedstocks and blends 6 % 6 % 6 % 6 %
Total 100 % 100 % 100 % 100 %
Sales of produced refined products:
Gasolines 52 % 51 % 51 % 52 %
Diesel fuels 34 % 35 % 33 % 35 %
Jet fuels 6 % 3 % 6 % 3 %
Fuel oil 1 % 2 % 2 % 1 %
Asphalt 3 % 4 % 3 % 4 %
Base oils 1 % 3 % 2 % 2 %
LPG and other 3 % 2 % 3 % 3 %
Total 100 % 100 % 100 % 100 %
(1)Crude charge represents the barrels per day of crude oil processed at our
refineries.
(2)Refinery throughput represents the barrels per day of crude and other
refinery feedstocks input to the crude units and other conversion units at our
refineries.
(3)Represents barrels sold of refined products produced at our refineries
(including Asphalt and inter-segment sales) and does not include volumes of
refined products purchased for resale or volumes of excess crude oil sold.
(4)Represents crude charge divided by total crude capacity (BPSD). As a result
of our acquisition of the Puget Sound Refinery on November 1, 2021 , and the
Sinclair and Casper Refineries on March 14, 2022 , our consolidated crude
capacity increased from 405,000 BPSD at September 30, 2021 to 678,000 BPSD at
September 30, 2022 .
(5)Represents average amount per produced barrel sold, which is a non-GAAP
measure. Reconciliations to amounts reported under GAAP are provided under
"Reconciliations to Amounts Reported Under Generally Accepted Accounting
Principles" following Item 3 of Part I of this Form 10-Q.
(6)Represents total Refining segment operating expenses, exclusive of
depreciation and amortization, divided by sales volumes of refined products
produced at our refineries.
(7)Represents total Refining segment operating expenses, exclusive of
depreciation and amortization, divided by refinery throughput.
(8)We acquired the Sinclair and Casper Refineries on March 14, 2022 . Refining
operating data for the nine months ended September 30, 2022 includes crude oil
and feedstocks processed and refined products sold at our Sinclair and Casper
Refineries for the period March 14, 2022 through September 30, 2022 only,
averaged over the 273 days in the nine months ended September 30, 2022 .
48
--------------------------------------------------------------------------------
Table of Content
Renewables Operating Data
The following table sets forth information about our renewables operations and
includes our Sinclair businesses for the period
Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2022
Renewables
Sales volumes (in thousand gallons) 51,840 82,471
Average per produced gallon (1)
Renewables gross margin $ 0.19 $ 0.18
Renewables operating expenses (2) 0.45 0.97
Net operating margin $ (0.26) $ (0.79)
(1)Represents average amount per produced gallon sold, which is a non-GAAP measure. Reconciliations to amounts reported under GAAP are provided under "Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles" following Item 3 of Part I of this Form 10-Q. (2)Represents total Renewables segment operating expenses, exclusive of depreciation and amortization, divided by sales volumes of renewable diesel produced at our renewable diesel units.
Marketing Operating Data
The following table sets forth information about our Marketing operations and
includes our Sinclair business for the period
Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2022
Marketing
Number of branded sites at period end 1,358 1,358
Sales volumes (in thousand gallons) 362,499 782,518
Margin per gallon of sales (1) $ 0.03 $ 0.05
(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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Lubricants and Specialty Products
Throughput (BPD) 17,870 18,260 19,150 19,320
Sales of produced refined products
(BPD) 32,610 31,700 33,870 33,640
Sales of produced refined products:
Finished products 49 % 53 % 51 % 52 %
Base oils 26 % 28 % 28 % 28 %
Other 25 % 19 % 21 % 20 %
Total 100 % 100 % 100 % 100 %
49--------------------------------------------------------------------------------
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 September 30, 2022
Sales and other revenues $ 342,688 $ 740,321 $ (259,570) $ 823,439
Cost of products sold $ 324,157 $ 632,277 $ (259,570) $ 696,864
Operating expenses $ 33,193 $ 36,313 $ - $ 69,506
Selling, general and administrative
expenses $ 5,810 $ 36,023 $ - $ 41,833
Depreciation and amortization $ 7,452 $ 12,775 $ - $ 20,227
Income (loss) from operations $ (27,924) $ 22,933 $ - $ (4,991)
Three months ended September 30, 2021
Sales and other revenues $ 270,207 $ 634,654 $ (238,327) $ 666,534
Cost of products sold $ 148,171 $ 572,689 $ (238,327) $ 482,533
Operating expenses $ 29,046 $ 31,894 $ - $ 60,940
Selling, general and administrative
expenses $ 7,058 $ 34,418 $ - $ 41,476
Depreciation and amortization $ 6,375 $ 12,851 $ - $ 19,226
Income (loss) from operations $ 79,557 $ (17,198) $ - $ 62,359
Nine months ended September 30, 2022
Sales and other revenues $ 979,902 $
2,182,710
$ 751,791 $
1,760,301
$ 102,080 $ 107,897 $ -$ 209,977 Selling, general and administrative expenses$ 17,653 $ 109,484 $ -$ 127,137 Depreciation and amortization$ 22,721 $ 38,705 $ -$ 61,426 Income from operations$ 85,657 $ 166,323 $ -$ 251,980 Nine months endedSeptember 30, 2021 Sales and other revenues$ 698,134 $
1,747,111
$ 443,983 $
1,446,250
$ 86,773 $ 96,230 $ -$ 183,003 Selling, general and administrative expenses$ 19,711 $ 104,901 $ -$ 124,612 Depreciation and amortization$ 19,910 $ 38,589 $ -$ 58,499 Income from operations$ 127,757 $ 61,141 $ -$ 188,898 (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 endedSeptember 30, 2022 was$954.4 million ($4.45 per basic and diluted share), a$673.6 million increase from a net income of$280.8 million ($1.71 per basic and diluted share) for the three months endedSeptember 30, 2021 . The increase in net income was principally driven by stronger product demand, higher sales prices and the acquisition of thePuget Sound Refinery and the Acquired Sinclair Businesses, which resulted in higher refined product sales volumes and an increase in refinery gross margins. Lower of cost or market inventory reserve adjustments related to our renewables inventories decreased pre-tax earnings by$16.8 million for the three months endedSeptember 30, 2022 . Refinery gross margins for the three months endedSeptember 30, 2022 increased to$31.47 per produced barrel sold from$14.87 for the three months endedSeptember 30, 2021 . 50 -------------------------------------------------------------------------------- Table of Content Sales and Other Revenues Sales and other revenues increased 126% from$4,685.1 million for the three months endedSeptember 30, 2021 to$10,599.0 million for the three months endedSeptember 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$1,266.7 million ,$820.6 million and$255.0 million in unaffiliated revenues related to our Marketing, Lubricants and Specialty Products and Renewables segments, respectively, for the three months endedSeptember 30, 2022 . Sales and other revenues included$666.0 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the three months endedSeptember 30, 2021 . Cost of Products Sold Total cost of products sold increased 120% from$3,822.9 million for the three months endedSeptember 30, 2021 to$8,392.1 million for the three months endedSeptember 30, 2022 principally due to higher crude oil costs and higher refined product sales volumes as a result of the acquisition of thePuget Sound Refinery and the Acquired Sinclair Businesses. During the third quarter of 2022, we recognized a lower of cost or market inventory valuation adjustment charge related to our renewables inventories of$16.8 million . The increase in costs of products sold was also driven by consumption of higher priced feedstock inventory in our Lubricants and Specialty Products segment during the third quarter of 2022. Within our Lubricants and Specialty Products segment, FIFO impact was a charge of$44.4 million for the three months endedSeptember 30, 2022 and a benefit of$9.6 million for the three months endedSeptember 30, 2021 . Gross Refinery MarginsGross refinery margin per produced barrel sold increased 112% from$14.87 for the three months endedSeptember 30, 2021 to$31.47 for the three months endedSeptember 30, 2022 . The increase was due to the effects of an increase in the average per barrel sold sales price during the current year quarter, partially offset by increased crude oil and feedstock prices. Gross refinery margin per barrel does not include the non-cash effects of lower of cost or market inventory valuation adjustments or depreciation and amortization. See "Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles" following Item 3 of Part I of this Form 10-Q for a reconciliation to the income statement of sale prices of products sold and cost of products purchased. Operating Expenses Operating expenses, exclusive of depreciation and amortization, increased 72% from$352.5 million for the three months endedSeptember 30, 2021 to$604.6 million for the three months endedSeptember 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 13% from$91.1 million for the three months endedSeptember 30, 2021 to$102.7 million for the three months endedSeptember 30, 2022 primarily due to higher employee related expenses from recent acquisitions and professional services and legal costs incurred in connection with the Sinclair Transactions. See Note 2 "Acquisitions" in the Notes to Consolidated Financial Statements for additional information on this acquisition. Depreciation and Amortization Expenses Depreciation and amortization increased 42% from$121.2 million for the three months endedSeptember 30, 2021 to$172.0 million for the three months endedSeptember 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. Earnings (Loss) of Equity Method Investments For the three months endedSeptember 30, 2022 , we recorded a loss of$16.3 million compared to earnings of$3.7 million of equity method investments for the three months endedSeptember 30, 2021 . Net loss during the three months endedSeptember 30, 2022 was primarily due to HEP's 50% share of incurred and estimated environmental remediation and recovery expenses, net of insurance proceeds received to date, forOsage Pipe Line Company, LLC ("Osage Pipeline"). InJuly 2022 , Osage Pipeline, which carries crude oil fromCushing, Oklahoma toEl Dorado, Kansas , suffered a release of crude oil. The pipeline resumed operations during the third quarter of 2022 and remediation efforts are underway. Interest Income Interest income was$9.8 million for the three months endedSeptember 30, 2022 compared to$1.0 million for the three months endedSeptember 30, 2021 . The increase in interest income was primarily due to the increase in the average cash balance and higher interest rates on cash investments. 51
--------------------------------------------------------------------------------
Table of Content
Interest Expense Interest expense was$44.8 million for the three months endedSeptember 30, 2022 compared to$26.9 million for the three months endedSeptember 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 , lower capitalized interest driven by higher renewables capital spend in 2021 and higher market interest rates on HEP's revolving credit facility during the three months endedSeptember 30, 2022 .
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 gain of$1.5 million and a net loss of$3.5 million for the three months endedSeptember 30, 2022 and 2021, respectively. For the three months endedSeptember 30, 2022 and 2021, gain (loss) on foreign currency transactions included gains of$28.9 million and$9.7 million , respectively, on foreign exchange forward contracts (utilized as an economic hedge). Gain on Sale of Assets and Other For the three months endedSeptember 30, 2021 , we recorded an$86.0 million gain related to the sale of real property inMississauga, Ontario . See Note 1 "Description of Business and Presentation of Financial Statements" in the Notes to Consolidated Financial Statements for additional information. Income Taxes For the three months endedSeptember 30, 2022 , we recorded an income tax expense of$301.9 million compared to$54.8 million for the three months endedSeptember 30, 2021 . This increase was principally due to higher pre-tax income during the three months endedSeptember 30, 2022 compared to the same period of 2021. Our effective tax rates were 23.6% and 15.3% for the three months endedSeptember 30, 2022 and 2021, respectively. The increase in the effective tax rate is principally due to the relationship between the pre-tax results and the earnings attributable to the noncontrolling interest that is not included in income for tax purposes.
Results of Operations - Nine Months Ended
Summary
Net income attributable toHF Sinclair stockholders for the nine months endedSeptember 30, 2022 was$2,335.6 million ($11.35 per basic and diluted share), a$1,737.8 million increase compared to net income of$597.9 million ($3.63 per basic and diluted share) for the nine months endedSeptember 30, 2021 . The increase in net income was principally driven by stronger product demand, higher sales prices and the acquisition of thePuget Sound Refinery and the Acquired Sinclair Businesses, which resulted in higher refined product sales volumes and an increase in refinery gross margins. Lower of cost or market inventory reserve adjustments related to our renewables inventories decreased pre-tax earnings by$42.8 million for the nine months endedSeptember 30, 2022 and lower of cost or market inventory adjustment related to our refining inventories increased pre-tax earnings by$318.9 million for the nine months endedSeptember 30, 2021 . Net income for the nine months endedSeptember 30, 2021 was impacted by winter storm Uri, which increased natural gas costs across our refining system. Refinery gross margins for the nine months endedSeptember 30, 2022 increased to$27.97 per barrel sold from$11.75 for the nine months endedSeptember 30, 2021 . Sales and Other Revenues Sales and other revenues increased 129% from$12,766.5 million for the nine months endedSeptember 30, 2021 to$29,219.9 million for the nine months endedSeptember 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$2,880.0 million ,$2,419.2 million and$399.2 million in unaffiliated revenues related to our Marketing, Lubricants and Specialty Products and Renewables segments, respectively, for the nine months endedSeptember 30, 2022 . Sales and other revenues included$1,850.8 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the nine months endedSeptember 30, 2021 . 52 -------------------------------------------------------------------------------- Table of Content Cost of Products Sold Total cost of products sold increased 128% from$10,290.0 million for the nine months endedSeptember 30, 2021 to$23,500.0 million for the nine months endedSeptember 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 nine months endedSeptember 30, 2022 and 2021, we recognized a lower of cost or market inventory valuation adjustment charge related to our renewables inventories of$42.8 million and a benefit related to our refining inventories of$318.9 million , respectively. Within our Lubricants and Specialty Products segment, FIFO impact was a benefit of$84.9 million and$64.5 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Gross Refinery MarginsGross refinery margin per barrel sold increased 138% from$11.75 for the nine months endedSeptember 30, 2021 to$27.97 for the nine months endedSeptember 30, 2022 principally due to the increase in the average per barrel sold sales prices during the current period, partially offset by the increase in crude oil and feedstock prices. Gross refinery margin per barrel does not include the non-cash effects of lower of cost or market inventory valuation adjustments or depreciation and amortization. See "Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles" following Item 3 of Part I of this Form 10-Q for a reconciliation to the income statement of sales prices of products sold and cost of products purchased. Operating Expenses Operating expenses, exclusive of depreciation and amortization, increased 55% from$1,086.6 million for the nine months endedSeptember 30, 2021 to$1,688.2 million for the nine months endedSeptember 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 29% from$250.8 million for the nine months endedSeptember 30, 2021 to$324.0 million for the nine months endedSeptember 30, 2022 primarily due to higher employee related expenses from recent acquisitions and professional services and legal costs primarily incurred in connection with the Sinclair Transactions. See Note 2 "Acquisitions" in the Notes to Consolidated Financial Statements for additional information on these acquisitions. Depreciation and Amortization Expenses Depreciation and amortization increased 30% from$369.3 million for the nine months endedSeptember 30, 2021 to$480.6 million for the nine months endedSeptember 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. Earnings (Loss) of Equity Method Investments For the nine months endedSeptember 30, 2022 , we recorded a net loss of$7.3 million as compared to net earnings of$8.9 million of equity method investments for the nine months endedSeptember 30, 2021 . Net loss during the nine months endedSeptember 30, 2022 was primarily due to HEP's 50% share of incurred and estimated environmental remediation and recovery expenses, net of insurance proceeds received to date, for Osage Pipeline. InJuly 2022 , Osage Pipeline, which carries crude oil fromCushing, Oklahoma toEl Dorado, Kansas , suffered a release of crude oil. The pipeline resumed operations during the third quarter of 2022 and remediation efforts are underway. Interest Income Interest income was$12.7 million for the nine months endedSeptember 30, 2022 compared to$3.1 million for the nine months endedSeptember 30, 2021 . The increase in interest income was primarily due to higher interest rates on cash investments. Interest Expense Interest expense was$118.7 million for the nine months endedSeptember 30, 2022 compared to$94.2 million for the nine months endedSeptember 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 and higher market interest rates on HEP's revolving credit facility during the nine months endedSeptember 30, 2022 .
For the nine months ended
Gain on Tariff Settlement For the nine months endedSeptember 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. 53 -------------------------------------------------------------------------------- Table of Content Gain (Loss) on Foreign Currency Transactions Remeasurement adjustments resulting from the foreign currency conversion of the intercompany financing notes payable by PCLI net of mark-to-market valuations on foreign exchange forward contracts with banks which hedge the foreign currency exposure on these intercompany notes were a net gain of$0.8 million and a net loss of$4.2 million for the nine months endedSeptember 30, 2022 and 2021, respectively. For the nine months endedSeptember 30, 2022 and 2021, gain / loss on foreign currency transactions included a net gain of$35.5 million and a loss of$3.2 million , respectively, on foreign exchange forward contracts (utilized as an economic hedge). Gain on Sale of Assets and Other For the nine months endedSeptember 30, 2021 , we recorded an$86.0 million gain related to the sale of real property inMississauga, Ontario , and HEP recorded a$5.3 million gain related to the sale of certain pipeline assets. See Note 1 "Description of Business and Presentation of Financial Statements" in the Notes to Consolidated Financial Statements for additional information. Income Taxes For the nine months endedSeptember 30, 2022 , we recorded an income tax expense of$706.7 million compared to$149.9 million for the nine months endedSeptember 30, 2021 . This increase was principally due to higher pre-tax income during the nine months endedSeptember 30, 2022 compared to the same period of 2021. Our effective tax rates were 22.6% and 18.1% for the nine months endedSeptember 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 . AtSeptember 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 andHF Sinclair Senior Notes 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.
Following the settlement of the exchange offers and consent solicitations, the
aggregate principal amount of the
Title of Series of
(In thousands)
2.625%
54
--------------------------------------------------------------------------------
Table of Content
Following the settlement of the exchange offers and consent solicitations, the
aggregate principal amount of the HollyFrontier Senior Notes that were not
tendered and exchanged, and which remain outstanding, consisted of the
following:
Title of Series of
(In thousands)
2.625% HollyFrontier Senior Notes maturing 2023 $ 59,652
5.875%
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.
The HF Sinclair Senior Notes are unsecured and unsubordinated obligations of
ours and rank equally with all our other existing and future unsecured and
unsubordinated indebtedness. Each series of HF Sinclair Senior Notes has the
same interest rate (including interest rate adjustment provisions, as
applicable), interest payment dates, maturity date and redemption terms as the
corresponding series of HollyFrontier Senior Notes. The HF Sinclair Senior Notes
were issued in exchange for the HollyFrontier Senior Notes pursuant to a private
exchange offer exempt from registration under the Securities Act of 1933, as
amended (the Securities Act").
On September 12, 2022 , HF Sinclair filed a registration statement, which was
declared effective on September 21, 2022 , to exchange the HF Sinclair Senior
Notes for an equal principal amount of the respective series of the HF Sinclair
Senior Notes (the "Registered HF Sinclair Senior Notes"). The Registered HF
Sinclair Senior Notes are substantially identical to the HF Sinclair Senior
Notes in all material respects except the Registered HF Sinclair Senior Notes
are registered under the Securities Act and will not be subject to restrictions
on transfer or to any increase in annual interest rate for failure to comply
with the Registration Rights Agreement, dated April 27, 2022 , and will not have
the registration rights applicable to the HF Sinclair Senior Notes.
On
Further, we may from time to time seek to retire some or all of our outstanding debt or debt agreements through cash purchases, and/or exchanges, open market purchases, privately negotiated transactions, tender offers or otherwise. Such transactions, if any, may be material and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. HF Sinclair Financing Arrangements Certain of our wholly owned subsidiaries entered into financing arrangements whereby such subsidiaries sold a portion of their precious metals catalyst to a financial institution and then leased back the precious metals catalyst in exchange for cash. The volume of the precious metals catalyst and the lease rate are fixed over the term of each lease, and the lease payments are recorded as interest expense. The current leases mature in one year or less. Upon maturity, we must either satisfy the obligation at fair market value or refinance to extend the maturity. HEP Credit Agreement HEP has a$1.2 billion senior secured revolving credit facility maturing inJuly 2025 (the "HEP Credit Agreement"). InAugust 2022 , the HEP Credit Agreement was amended to, among other things, provide an alternative reference rate for LIBOR. The HEP Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments, working capital and for general partnership purposes. It is also available to fund letters of credit up to a$50 million sub-limit and has an accordion feature that allows HEP to increase the commitments under the HEP Credit Agreement up to a maximum amount of$1.7 billion . During the nine months endedSeptember 30, 2022 , HEP had net repayments of$134.0 million under the HEP Credit Agreement. AtSeptember 30, 2022 , HEP was in compliance with all of its covenants, had outstanding borrowings of$706.0 million and no outstanding letters of credit under the HEP Credit Agreement. 55 -------------------------------------------------------------------------------- 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. Further, we may from time to time seek to retire some or all of our outstanding debt or debt agreements through cash purchases, and/or exchanges, open market purchases, privately negotiated transactions, tender offers or otherwise. Such transactions, if any, may be material and will depend on prevailing market conditions, our liquidity requirements and other factors. In addition, components of our long-term growth strategy include the optimization of existing units at our facilities and selective acquisition of complementary assets for our refining operations intended to increase earnings and cash flow. We also expect to use cash for payment of cash dividends, which are at the discretion of our Board of Directors, and for the repurchase of common stock under our share repurchase program.
Our standalone (excluding HEP) liquidity was approximately
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 at that time, 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 in selling its shares and other limitations. As ofSeptember 30, 2022 , we had repurchased$975.0 million under this share repurchase program, of which$500.0 million were repurchased pursuant to privately negotiated repurchases fromREH Company . OnSeptember 21, 2022 , our Board of Directors approved a new$1.0 billion share repurchase program, which, effectiveSeptember 26, 2022 , replaced all existing share repurchase programs, including$25.0 million remaining under the previously existing$1.0 billion share repurchase program. This new share repurchase program authorizes us to repurchase common stock in the open market or through privately negotiated transactions. Privately negotiated repurchases fromREH Company are also authorized under the share repurchase program, subject toREH Company's interest in selling its shares 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. As ofSeptember 30, 2022 , we repurchased$100.0 million under this new share repurchase program pursuant to a privately negotiated repurchase fromREH Company . In addition, we are authorized by our Board of Directors to repurchase shares in an amount sufficient to offset shares issued under our compensation programs. During the nine months endedSeptember 30, 2022 , we made open market and privately negotiated purchases of 21,610,528 shares for$1,075.0 million under our share repurchase programs, of which 11,842,698 shares were repurchased for$600.0 million pursuant to privately negotiated repurchases fromREH Company . As ofSeptember 30, 2022 , we had remaining authorization to repurchase up to$900.0 million under the new share repurchase program, of which we repurchased 946,911 shares for$51.8 million inOctober 2022 . 56 -------------------------------------------------------------------------------- Table of Content Cash Flows - Operating Activities Nine Months EndedSeptember 30, 2022 Compared to Nine Months EndedSeptember 30, 2021 Net cash flows provided by operating activities were$2,862.2 million for the nine months endedSeptember 30, 2022 compared to$739.5 million for the nine months endedSeptember 30, 2021 , an increase of$2,122.7 million . The increase in operating cash flows was primarily due to the increase in gross refinery margins, partially offset by higher operating expenses. Changes in working capital decreased operating cash flows by$45.7 million and increased operating cash flows by$55.3 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The decrease for the current period is partially due to$462.2 million of net income tax payments during the nine months endedSeptember 30, 2022 . Net income tax payments include$83 million in cash tax benefit received during the nine months endedSeptember 30, 2022 from the net operating loss carryback provisions under the CARES Act.
Cash Flows - Investing Activities and Planned Capital Expenditures
Nine Months EndedSeptember 30, 2022 Compared to Nine Months EndedSeptember 30, 2021 For the nine months endedSeptember 30, 2022 , our net cash flows used for investing activities were$665.8 million . OnMarch 14, 2022 , we closed the Sinclair Transactions and paid cash of$251.4 million . The remainder of the purchase consideration was funded with the issuance 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 nine months endedSeptember 30, 2022 were$417.4 million , which include HEP capital expenditures of$31.2 million for the nine months endedSeptember 30, 2022 . For the nine months endedSeptember 30, 2021 , our net cash flows used for investing activities were$438.5 million . Cash expenditures for properties, plants and equipment for the nine months of endedSeptember 30, 2021 were$548.3 million primarily due to expenditures related to our renewable diesel units. Cash expenditures for properties, plants and equipment include HEP capital expenditures of$76.9 million for the nine months endedSeptember 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. 57 -------------------------------------------------------------------------------- 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 $ 245.0
Renewables 230.0 260.0
Lubricants and Specialty Products 35.0 50.0
Marketing 10.0 15.0
Corporate 75.0 90.0
Turnarounds and catalyst 110.0 150.0
Total HF Sinclair 685.0 810.0
HEP
Maintenance 20.0 30.0
Expansion and joint venture investment 10.0 15.0
Refining unit turnarounds 25.0 30.0
Total HEP 55.0 75.0
Total $ 740.0 $ 885.0 Cash Flows - Financing Activities
Nine Months EndedSeptember 30, 2022 Compared to Nine Months EndedSeptember 30, 2021 For the nine months endedSeptember 30, 2022 , our net cash flows used for financing activities were$975.5 million . During the nine months endedSeptember 30, 2022 , we repurchased$977.0 million of our common stock and paid$175.4 million in dividends. During the nine months endedSeptember 30, 2022 , HEP received$400.0 million in proceeds from the issuance of the HEP 6.375% Senior Notes, had net repayments of$134.0 million under the HEP Credit Agreement and paid distributions of$70.4 million to noncontrolling interests. For the nine months endedSeptember 30, 2021 , our net cash flows used for financing activities were$184.2 million . During the nine months endedSeptember 30, 2021 , we paid$57.7 million in dividends and$7.9 million of deferred financing costs in connection with the amendment of theHollyFrontier Credit Agreement inApril 2021 . During the nine months endedSeptember 30, 2021 , HEP had net repayments of$73.0 million under the HEP Credit Agreement and paid$6.6 million of deferred financing costs in connection with the amendment of the HEP Credit Agreement inApril 2021 . In addition, during the nine months endedSeptember 30, 2021 , HEP paid distributions of$57.2 million to noncontrolling interests and received contributions from noncontrolling interests of$21.3 million .
Contractual Obligations and Commitments
There were no significant changes to our long-term contractual obligations
during the nine months ended
Payments Due by Period
Contractual Obligations and
Commitments Total 2022 2023 & 2024 2025 & 2026 Thereafter
(In thousands)
Supply agreements (1) $ 159,995 $ 159,995 $ - $ - $ -
Transportation agreements (2) 426,414 10,677 85,418 85,418 244,901
Total $ 586,409 $ 170,672 $ 85,418 $ 85,418 $ 244,901
(1)We have long-term supply agreements to secure certain quantities of crude oil
used in the production process at market prices. We have estimated future
payments under these fixed-quantity agreements expiring in 2022 using current
market prices.
(2)Consists of contractual obligations under agreements with third parties for
the transportation of crude oil to our refineries under contracts expiring
between 2029 and 2034.
58
--------------------------------------------------------------------------------
Table of Content
HEP
During the nine 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$51.6 million and$8.7 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. A new market reserve of$51.6 million as ofSeptember 30, 2022 was based on market conditions and prices at that time. The effect of the change in the lower of cost or market reserve was an increase to cost of products sold totaling$16.8 million and$42.8 million for the three and nine months endedSeptember 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.
59
--------------------------------------------------------------------------------
Table of Content
Goodwill
As of September 30, 2022 , our goodwill balance was $3.0 billion , with goodwill
assigned to our Refining, Renewables, Marketing, Lubricants and Specialty
Products and HEP segments. Goodwill represents the excess of the cost of an
acquired entity over the fair value of the assets acquired and liabilities
assumed. Goodwill is not subject to amortization and is tested annually or more
frequently if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount.
Our goodwill impairment testing first entails either a quantitative assessment
or an optional qualitative assessment to determine whether it is more likely
than not that the fair value of a reporting unit is less than its carrying
amount. If we determine that based on the qualitative factors that it is more
likely than not that the carrying value of the reporting unit is greater than
its fair value, a quantitative test is performed in which we estimate the fair
value of the related reporting unit. If the carrying amount of a reporting unit
exceeds its fair value, the goodwill of that reporting unit is impaired, and we
measure goodwill impairment as the excess of the carrying amount of reporting
unit over the related fair value.
We performed our annual goodwill impairment testing quantitatively as of July 1,
2022 and determined there was no impairment of goodwill attributable to our
reporting units. The estimated fair values of our reporting units were derived
using a combination of income and market approaches. The income approach
reflects expected future cash flows based on estimated forecasted production
levels, selling prices, gross margins, operating costs and capital expenditures.
Our market approaches include both the guideline public company and guideline
transaction methods. Both methods utilize pricing multiples derived from
historical market transactions of other like kind assets. The excess of the fair
values of the reporting units over their respective carrying values ranged from
32% to 47%. Increasing the discount rate by 1.0% or reducing the terminal cash
flow growth rate by 1.0% would not have changed the results of our annual
goodwill testing.
In performing our impairment test of goodwill, we developed cash flow forecasts
for each of our reporting units. Significant judgment is involved in performing
these fair value estimates since the results are based on forecasted financial
information. The cash flow forecasts include significant assumptions such as
planned utilization, end-user demand, selling prices, gross margins, operating
costs and capital expenditures. Another key assumption applied to these
forecasts to determine the fair value of a reporting unit is the discount rate.
The discount rate is intended to reflect the weighted average cost of capital
for a market participant and the risks associated with the realization of the
estimated future cash flows. Our fair value estimates are based on projected
cash flows, which we believe to be reasonable.
We continually monitor and evaluate various factors for potential indicators of
goodwill and long-lived asset impairment. A reasonable expectation exists that
further deterioration in our operating results or overall economic conditions
could result in an impairment of goodwill and / or long-lived asset impairments
at some point in the future. Future impairment charges could be material to our
results of operations and financial condition.
Contingencies
We are subject to proceedings, lawsuits and other claims related to environmental, labor, product and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.
RISK MANAGEMENT
We use certain strategies to reduce some commodity price and operational risks. We do not attempt to eliminate all market risk exposures when we believe that the exposure relating to such risk would not be significant to our future earnings, financial position, capital resources or liquidity or that the cost of eliminating the exposure would outweigh the benefit. Commodity Price Risk Management Our primary market risk is commodity price risk. We are exposed to market risks related to the volatility in crude oil and refined products, as well as volatility in the price of natural gas used in our refining operations. We periodically enter into derivative contracts in the form of commodity price swaps, forward purchase and sales and futures contracts to mitigate price exposure with respect to our inventory positions, natural gas purchases, sales prices of refined products and crude oil costs. Foreign Currency Risk Management We are exposed to market risk related to the volatility in foreign currency exchange rates. We periodically enter into derivative contracts in the form of foreign exchange forward contracts to mitigate the exposure associated with fluctuations on intercompany notes with our foreign subsidiaries that are not denominated in theU.S. dollar. 60 -------------------------------------------------------------------------------- Table of Content As ofSeptember 30, 2022 , we have the following notional contract volumes related to all outstanding derivative instruments used to mitigate commodity price and foreign currency risk: Notional Contract Volumes by Year of Maturity Derivative Instrument Total Outstanding Notional 2022 2023 Unit of Measure NYMEX futures (WTI) - short 1,915,000 1,915,000 - Barrels Forward gasoline and diesel contracts - long 50,000 50,000 - Barrels Foreign currency forward contracts 441,917,757 113,398,694 328,519,063 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
September 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. For the fixed rateHF 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 ofSeptember 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 $ 1,660,240 $ 37,957 HEP Senior Notes$ 900,000 $ 822,628 $ 27,167 For the variable rate HEP Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. AtSeptember 30, 2022 , outstanding borrowings under the HEP Credit Agreement were$706.0 million . A hypothetical 10% change in interest rates applicable to the HEP Credit Agreement would not materially affect cash flows. Our operations are subject to catastrophic losses, operational hazards and unforeseen interruptions, including but not limited to fire, explosion, releases or spills, cyberattacks, weather-related perils, vandalism, power failures, mechanical failures and other events beyond our control. We maintain various insurance coverages, including general liability, property damage, business interruption and cyber insurance, subject to certain deductibles and insurance policy terms and conditions. We are not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do not justify such expenditures. Financial information is reviewed on the counterparties in order to review and monitor their financial stability and assess their ongoing ability to honor their commitments under the derivative contracts. We have not experienced, nor do we expect to experience, any difficulty in the counterparties honoring their commitments. 61
--------------------------------------------------------------------------------
Table of Content 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
