HOLLYFRONTIER CO. 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 toHollyFrontier Corporation ("HollyFrontier") and its consolidated subsidiaries or toHollyFrontier 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 ofHollyFrontier , unless when used in disclosures of transactions or obligations between HEP andHollyFrontier 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 ofHollyFrontier . When used in descriptions of agreements and transactions, "HEP" refers to HEP and its consolidated subsidiaries.
OVERVIEW
We are an independent petroleum refiner and marketer that produces high-value light products such as gasoline, diesel fuel, jet fuel, specialty lubricant products and specialty and modified asphalt. As ofSeptember 30, 2021 , we owned and operated refineries located inEl Dorado, Kansas (the "El Dorado Refinery "),Tulsa, Oklahoma (the "Tulsa Refineries"), which comprise two production facilities, the Tulsa West and East facilities,Artesia, New Mexico , which operates in conjunction with crude, vacuum distillation and other facilities situated 65 miles away inLovington, New Mexico (collectively, the "Navajo Refinery ") andWoods Cross, Utah (the "Woods Cross Refinery "). We market our refined products principally in theSouthwest United States , theRocky Mountains extending into thePacific Northwest and in other neighboring Plains states. In addition, we produce base oils and other specialized lubricants inthe United States ,Canada andthe Netherlands , and export products to more than 80 countries. We also own a 57% 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, includingHollyFrontier Corporation subsidiaries. OnAugust 2, 2021 ,HollyFrontier ,Hippo Parent Corporation , a wholly owned subsidiary ofHollyFrontier ("New Parent"),Hippo Merger Sub, Inc. , a wholly owned subsidiary of New Parent ("Parent Merger Sub"),The Sinclair Companies ("Sinclair"), andHippo Holding LLC , a wholly owned subsidiary of Sinclair (the "Target Company "), entered into a business combination agreement (the "Business Combination Agreement"). Pursuant to the Business Combination Agreement,HollyFrontier will acquire theTarget Company by effecting (a) a holding company merger in accordance with Section 251(g) of the Delaware General Corporation Law wherebyHollyFrontier will merge with and into Parent Merger Sub, withHollyFrontier surviving such merger as a direct wholly owned subsidiary of New Parent (the "HFC Merger") and (b) immediately following the HFC Merger, a contribution whereby Sinclair will contribute all of the equity interests of theTarget Company to New Parent in exchange for shares of New Parent, resulting in theTarget Company becoming a direct wholly owned subsidiary of New Parent (the "Sinclair Oil Acquisition" and together with the HFC Merger, the "HFC Transactions"). Under the terms of the Business Combination Agreement, (a) each share of common stock ofHollyFrontier , par value$0.01 per share, will be automatically converted into one share of common stock of New Parent, par value$0.01 per share ("New Parent Common Stock") and (b) Sinclair will contribute the equity interests in theTarget Company to New Parent in exchange for 60,230,036 shares of New Parent Common Stock, subject to adjustment if, as a condition to obtaining antitrust clearance for the Sinclair Transactions (as defined below),HollyFrontier agrees to divest certainWoods Cross Refinery assets and the sales price for such assets does not exceed a threshold provided in the Business Combination Agreement. Additionally, onAugust 2, 2021 , HEP, Sinclair andSinclair Transportation Company , a wholly owned subsidiary of Sinclair ("STC"), entered into a contribution agreement (the "Contribution Agreement") pursuant to which HEP will acquire all of the outstanding shares of STC in exchange for 21 million newly issued common limited partner units of HEP and cash consideration equal to$325 million (the "HEP Transactions", and together with the HFC Transactions, the "Sinclair Transactions"), subject to downward adjustment if, as a condition to obtaining antitrust clearance for the Sinclair Transactions, HEP agrees to divest a portion of its equity interest inUNEV Pipeline, LLC and the sales price for such interests does not exceed the threshold provided in the Contribution Agreement. 39 -------------------------------------------------------------------------------- Table of Content The Sinclair Transactions are expected to close in mid-2022, subject to customary closing conditions and regulatory clearance, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act") and the receipt of required approvals of HFC's stockholders. OnAugust 23, 2021 , each ofHollyFrontier and Sinclair filed its respective premerger notification and report regarding the Sinclair Transactions with theU.S. Department of Justice and theU.S. Federal Trade Commission (the "FTC") under the HSR Act. OnSeptember 22, 2021 ,HollyFrontier and Sinclair each received a request for additional information and documentary material ("Second Request") from theFTC in connection with theFTC's review of the Sinclair Transactions. Issuance of the Second Request extends the waiting period under the HSR Act until 30 days after bothHollyFrontier and Sinclair have substantially complied with the Second Request, unless the waiting period is terminated earlier by theFTC or the parties otherwise commit not to close the Sinclair Transactions for some additional period of time.HollyFrontier and Sinclair are cooperating with theFTC staff in its review. In addition, the HFC Transactions and the HEP Transactions are cross-conditioned on each other. See Note 2 "Acquisitions" in the Notes to Consolidated Financial Statements for additional information. OnMay 4, 2021 , our wholly owned subsidiary,HollyFrontier Puget Sound Refining LLC , entered into a sale and purchase agreement withEquilon Enterprises LLC d/b/aShell Oil Products US ("Shell") to acquire Shell's refinery and related assets, including the on-site cogeneration facility and related logistics assets (the "Puget Sound Refinery "). The acquisition closed onNovember 1, 2021 for aggregate cash consideration of$613.6 million , which consists of a base cash purchase price of$350 million , hydrocarbon inventory with an estimated closing value of$266.2 million and other closing adjustments and accrued liabilities of$2.6 million (the "Puget Sound Acquisition").The Puget Sound Refinery is strategically located on approximately 850 acres inAnacortes, Washington , approximately 80 miles north ofSeattle and 90 miles south ofVancouver . The 149,000 barrel per day facility is a large, high quality and complex refinery with catalytic cracking and delayed coking units and is well positioned geographically and logistically to source advantaged Canadian andAlaskan North Slope crudes. In addition to refining assets and an on-site cogeneration facility, the transaction includes a deep-water marine dock, a light product loading rack, a rail terminal, and storage tanks with approximately 5.8 million barrels of crude, product and other hydrocarbon storage capacity. OnApril 27, 2021 , our wholly owned subsidiary, 7037619Canada Inc. , entered into a contract for sale of real property inMississauga, Ontario for base consideration of$98.8 million , orCAD 125 million . The transaction closed onSeptember 15, 2021 , and we recorded a gain on sale of assets totaling$86.0 million for the three months endedSeptember 30, 2021 , which was recognized in "Gain on sale of assets and other" in our consolidated statements of operations. In the third quarter of 2020, we permanently ceased petroleum refining operations at our facility inCheyenne, Wyoming (the "Cheyenne Refinery ") and subsequently began converting certain assets at ourCheyenne Refinery to renewable diesel production. In connection with the cessation of petroleum refining operations at ourCheyenne Refinery , we recognized$6.7 million and$23.1 million , respectively, in decommissioning expense and$0.2 million and$0.9 million , respectively, in employee severance costs for the three and nine months endedSeptember 30, 2021 which were recognized in operating expenses in our Corporate and Other segment. During the first quarter of 2021, we initiated a restructuring within our Lubricants and Specialty Products segment, which is expected to save approximately$15 million per year of ongoing cash expenses. We recorded$7.8 million in employee severance costs for the nine months endedSeptember 30, 2021 , which were recognized primarily as selling, general and administrative expenses in our Lubricants and Specialty Products segment. For the three months endedSeptember 30, 2021 , net income attributable toHollyFrontier stockholders was$280.8 million compared to net loss of$2.4 million for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , net income attributable toHollyFrontier stockholders was$597.9 million compared to net loss of$483.7 million for the nine months endedSeptember 30, 2020 . Included in our financial results for the third quarter of 2021 was a gain on sale of assets totaling$86.0 million related to sale of real property inMississauga, Ontario . Gross refining margin per produced barrel sold in our Refining segment increased 140% for the three months endedSeptember 30, 2021 over the same period of 2020. Included in the three months endedSeptember 30, 2020 was an$81.0 million gain recognized upon settlement of a business interruption insurance claim. 40 -------------------------------------------------------------------------------- Table of Content 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$143.5 million for the three months endedSeptember 30, 2021 . AtSeptember 30, 2021 , our open RINs credit obligations were$119.6 million . We will continue to monitor and adjust our RINs position commensurate with our production levels, market conditions and RFS regulations. Impact of COVID-19 on Our Business The COVID-19 pandemic caused a decline inU.S. and global economic activity starting in the first quarter of 2020. This decrease reduced both volumes and unit margins across our businesses, resulting in lower gross margins and earnings. Global demand for transportation fuels began to improve beginning late in the second quarter of 2020, but remains below pre-pandemic levels as of the third quarter of 2021. In response to this demand and margin environment, as well as both planned and unplanned maintenance, we operated our Refining segment refineries at an average crude charge of 416,430 BPD during the third quarter of 2021. In our Lubricants and Specialty Products segment, the Rack Back portion continues to see a combination of strong demand as well as limited supply due to a number of factors, which are driving strong margins and earnings. In the Rack Forward portion, despite strong sales volumes and price increases, the continued rise in base oil prices through the quarter compressed margins in the third quarter of 2021. Our standalone (excluding HEP) liquidity was approximately$2.8 billion atSeptember 30, 2021 , consisting of cash and cash equivalents of$1.5 billion and an undrawn$1.35 billion credit facility maturing in 2026. Our standalone (excluding HEP) principal amount of long-term debt was$1.75 billion as ofSeptember 30, 2021 , which consists of$350.0 million in aggregate principal amount of 2.625% senior notes due in 2023,$1.0 billion in aggregate principal amount of 5.875% senior notes due in 2026 and$400.0 million in aggregate principal amount of 4.500% senior notes due in 2030.
OUTLOOK
The impact of the COVID-19 pandemic on the global macroeconomy created an unprecedented reduction in demand, as well as a lack of forward visibility, for many of the transportation fuels, lubricants and specialty products and the associated transportation and terminal services we provide. Since the declines in demand at the beginning of the COVID-19 pandemic, we began to see improvement in demand for these products and services beginning late in the second quarter of 2020 and demand has largely recovered in the markets we serve but remains below pre-pandemic levels. With increasing vaccination rates, most of our employees have returned to work at our locations, and we continue to followCenters for Disease Control and local government guidance. We will continue to monitor developments in the COVID-19 pandemic and the dynamic environment it has created to properly address these policies going forward. Within our Refining segment, for the fourth quarter of 2021, we expect to run between 450,000-470,000 barrels per day of crude oil, which includes expected volumes from thePuget Sound Refinery in November and December. We expect to adjust refinery production levels commensurate with market demand and planned turnarounds at ourTulsa and Navajo refineries. Within our Lubricants and Specialty Products segment, for the full year 2021, we expect to earn between$65 million to$85 million in income from operations and$115 million to$135 million of EBITDA, which excludes estimated annual depreciation of$50 million , in the Rack Forward portion of the segment. Within the Rack Back portion, for the fourth quarter of 2021, we expect base oil margins to remain relatively stable compared to the second and third quarters due to record strength in base oil prices, which is driving strong margins and earnings. Similar to our Refining segment, we expect to adjust production levels commensurate with market demand. In the fourth quarter of 2021, 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 improving distributable cash flow coverage to 1.3x or greater with the goal of reducing leverage to 3.0-3.5x. 41 -------------------------------------------------------------------------------- Table of Content During the third quarter of 2020, we increased our liquidity by$750.0 million with the issuance of$350.0 million in aggregate principal amount of 2.625% senior notes due in 2023 and$400.0 million in aggregate principal amount of 4.500% senior notes due in 2030. This additional liquidity may be used for general corporate purposes and is expected to support the planned growth of our renewables business and the unexpected economic impact of COVID-19, as needed. We do not intend to repurchase common stock under our$1.0 billion share repurchase program until completion of our ongoing renewables capital projects at the earliest. In addition, we announced the Puget Sound Acquisition, which closed onNovember 1, 2021 . We funded the Puget Sound Acquisition with a one-year suspension of our regular quarterly dividend and cash on hand. Our Board of Directors approved the one-year suspension of the regular quarterly dividend effective with the dividend to be declared for the first quarter of 2021 and is expected to resume the dividend after such time. 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. The extent to which our future results are affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic, the effects of any new variant strains of the underlying virus, additional actions by businesses and governments in response to the pandemic and the speed and effectiveness of responses to combat the virus. The COVID-19 pandemic, and the volatile regional and global economic conditions stemming from it, could also exacerbate the risk factors identified in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , in our Quarterly Report on Form 10-Q for the quarters endedMarch 31, 2021 andJune 30, 2021 and in this Form 10-Q. The COVID-19 pandemic may also materially adversely affect our results in a manner that is either not currently known or that we do not currently consider to be a significant risk to our business. A more detailed discussion of our financial and operating results for the three and nine months endedSeptember 30, 2021 and 2020 is presented in the following sections. 42
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RESULTS OF OPERATIONS
Financial Data
Three Months Ended
September 30, Change from 2020
2021 2020 Change Percent
(In thousands, except per share data)
Sales and other revenues $ 4,685,059 $ 2,819,400 $ 1,865,659 66 %
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) 3,822,858 2,377,238 1,445,620 61
Lower of cost or market inventory valuation
adjustment - (62,849) 62,849 (100)
3,822,858 2,314,389 1,508,469 65
Operating expenses (exclusive of depreciation and
amortization) 352,520 332,496 20,024 6
Selling, general and administrative expenses
(exclusive of depreciation and amortization) 91,056 74,453 16,603 22
Depreciation and amortization 121,220 125,280 (4,060) (3)
Total operating costs and expenses 4,387,654 2,846,618 1,541,036 54
Income (loss) from operations 297,405 (27,218) 324,623 (1,193)
Other income (expense):
Earnings of equity method investments 3,689 1,316 2,373 180
Interest income 1,018 1,011 7 1
Interest expense (26,892) (30,589) 3,697 (12)
Gain on business interruption insurance settlement - 81,000 (81,000) (100)
Gain (loss) on foreign currency transactions (3,492) 1,030 (4,522) (439)
Gain on sale of assets and other 85,779 1,368 84,411 6,170
60,102 55,136 4,966 9
Income before income taxes 357,507 27,918 329,589 1,181
Income tax expense 54,766 4,573 50,193 1,098
Net income 302,741 23,345 279,396 1,197
Less net income attributable to noncontrolling
interest 21,954 25,746 (3,792) (15)
Net income (loss) attributable to HollyFrontier
stockholders $ 280,787 $ (2,401) $ 283,188 (11,795) %
Earnings (loss) per share attributable to
HollyFrontier stockholders:
Basic $ 1.71 $ (0.01) $ 1.72 (17,200) %
Diluted $ 1.71 $ (0.01) $ 1.72 (17,200) %
Cash dividends declared per common share $ - $ 0.35 $ (0.35) (100) %
Average number of common shares outstanding:
Basic 162,551 162,015 536 - %
Diluted 162,551 162,015 536 - %
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Nine Months Ended
September 30, Change from 2020
2021 2020 Change Percent
(In thousands, except per share data)
Sales and other revenues $ 12,766,475 $ 8,282,875 4,483,600 54 %
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) 10,608,892 6,647,960 3,960,932 60
Lower of cost or market inventory valuation
adjustment (318,862) 227,711 (546,573) (240)
10,290,030 6,875,671 3,414,359 50
Operating expenses (exclusive of depreciation and
amortization) 1,086,620 964,200 122,420 13
Selling, general and administrative expenses
(exclusive of depreciation and amortization) 250,785 237,559 13,226 6
Depreciation and amortization 369,341 396,033 (26,692) (7)
Long-lived asset impairment - 436,908 (436,908) (100)
Total operating costs and expenses 11,996,776 8,910,371 3,086,405 35
Income (loss) from operations 769,699 (627,496) 1,397,195 (223)
Other income (expense):
Earnings of equity method investments 8,875 5,186 3,689 71
Interest income 3,078 6,590 (3,512) (53)
Interest expense (94,220) (85,923) (8,297) 10
Gain on business interruption insurance settlement - 81,000 (81,000) (100)
Gain on tariff settlement 51,500 - 51,500 -
Gain on sales-type leases - 33,834 (33,834) (100)
Loss on early extinguishment of debt - (25,915) 25,915 (100)
Loss on foreign currency transactions (4,226) (918) (3,308) 360
Gain on sale of assets and other 95,596 4,790 90,806 1,896
60,603 18,644 41,959 225
Income (loss) before income taxes 830,302 (608,852) 1,439,154 (236)
Income tax expense (benefit) 149,944 (188,504) 338,448 (180)
Net income (loss) 680,358 (420,348) 1,100,706 (262)
Less net income attributable to noncontrolling
interest 82,504 63,353 19,151 30
Net income (loss) attributable to HollyFrontier
stockholders $ 597,854 $ (483,701) $ 1,081,555 (224) %
Earnings (loss) per share attributable to
HollyFrontier stockholders:
Basic $ 3.63 $ (2.99) $ 6.62 (221) %
Diluted $ 3.63 $ (2.99) $ 6.62 (221) %
Cash dividends declared per common share $ 0.35 $ 1.05 $ (0.70) (67) %
Average number of common shares outstanding:
Basic 162,518 161,927 591 - %
Diluted 162,518 161,927 591 - %
Balance Sheet Data
September 30, 2021 December 31, 2020
(Unaudited)
(In thousands)
Cash and cash equivalents $ 1,481,562 $ 1,368,318
Working capital $ 2,310,815 $ 1,935,605
Total assets $ 12,897,181 $ 11,506,864
Long-term debt $ 3,072,352 $ 3,142,718
Total equity $ 6,329,539 $ 5,722,203
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Other Financial Data
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(In thousands)
Net cash provided by operating activities
$ (116,164) $ (81,985) $ (438,476) $ (213,651) Net cash provided by (used for) financing activities$ (45,691) $ 618,726 $ (184,169) $ 463,207 Capital expenditures$ 215,504 $ 83,272 $ 548,345$ 213,008 EBITDA (1)$ 482,647 $ 157,030 $ 1,208,281 $ (196,839) (1)Earnings before interest, taxes, depreciation and amortization, which we refer to as "EBITDA," is calculated as net income (loss) attributable toHollyFrontier stockholders plus (i) interest expense, net of interest income, (ii) income tax provision, and (iii) depreciation and amortization. EBITDA is not a calculation provided for under GAAP; however, the amounts included in the EBITDA calculation are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies. EBITDA is presented here because it is a widely used financial indicator used by investors and analysts to measure performance. EBITDA is also used by our management for internal analysis and as a basis for financial covenants. EBITDA presented above is reconciled to net income under "Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles" following Item 3 of Part I of this Form 10-Q. Segment Operating Data Our operations are organized into three reportable segments, Refining, Lubricants and Specialty Products and HEP. See Note 15 "Segment Information" in the Notes to Consolidated Financial Statements for additional information on our reportable segments.
Refining Segment Operating Data
As ofSeptember 30, 2021 , our refinery operations include theEl Dorado ,Tulsa , Navajo and Woods Cross Refineries. The following tables set forth information, including non-GAAP performance measures, about our consolidated refinery operations. The cost of products and refinery gross and net operating margins do not include the non-cash effects of lower of cost or market inventory valuation adjustments, depreciation and amortization and long-lived asset impairments. Reconciliations to amounts reported under GAAP are provided under "Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles" following Item 3 of Part I of this Form 10-Q. In the third quarter of 2020, we permanently ceased petroleum refining operations at ourCheyenne Refinery and subsequently began converting certain assets at ourCheyenne Refinery to renewable diesel production. The disaggregation of our refining geographic operating data is presented in two regions, Mid-Continent and West, to best reflect the economic drivers of our refining operations. The Mid-Continent region continues to be comprised of theEl Dorado and Tulsa Refineries, and the new West region is comprised of the Navajo and Woods Cross Refineries. Refining segment operating data for the three and nine months endedSeptember 30, 2020 have been retrospectively adjusted to reflect the revised regional groupings. 45
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Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
280,220 244,200 258,530 234,550
Refinery throughput (BPD) (2) 294,970 257,280 272,770 249,430
Sales of produced refined products
(BPD) (3) 277,310 243,830 258,800 239,800
Refinery utilization (4) 107.8 % 93.9 % 99.4 % 90.2 %
Average per produced barrel (5)
Refinery gross margin $ 13.59 $ 3.21 $ 10.65 $ 6.41
Refinery operating expenses (6) 5.72 5.47 6.68 5.47
Net operating margin $ 7.87 $ (2.26) $ 3.97 $ 0.94
Refinery operating expenses per
throughput barrel (7) $ 5.37 $ 5.19 $ 6.33 $ 5.26
Feedstocks:
Sweet crude oil 66 % 62 % 63 % 58 %
Sour crude oil 13 % 18 % 14 % 19 %
Heavy sour crude oil 16 % 15 % 18 % 17 %
Other feedstocks and blends 5 % 5 % 5 % 6 %
Total 100 % 100 % 100 % 100 %
Sales of produced refined products:
Gasolines 52 % 53 % 51 % 52 %
Diesel fuels 32 % 35 % 33 % 34 %
Jet fuels 5 % 3 % 5 % 4 %
Fuel oil 1 % 1 % 1 % 1 %
Asphalt 4 % 2 % 3 % 3 %
Base oils 4 % 4 % 4 % 4 %
LPG and other 2 % 2 % 3 % 2 %
Total 100 % 100 % 100 % 100 %
West Region (Navajo and Woods Cross
Refineries)
Crude charge (BPD) (1) 136,210 131,680 135,370 125,710
Refinery throughput (BPD) (2) 149,760 146,860 148,700 139,710
Sales of produced refined products
(BPD) (3) 144,710 144,970 148,410 142,740
Refinery utilization (4) 93.9 % 90.8 % 93.4 % 86.7 %
Average per produced barrel (5)
Refinery gross margin $ 17.33 $ 11.24 $ 13.67 $ 12.01
Refinery operating expenses (6) 7.70 6.88 7.43 7.01
Net operating margin $ 9.63 $
4.36
Refinery operating expenses per throughput barrel (7)$ 7.44 $ 6.79 $ 7.41 $ 7.16 Feedstocks: Sweet crude oil 22 % 30 % 22 % 30 % Sour crude oil 58 % 48 % 59 % 49 % Black wax crude oil 11 % 12 % 10 % 11 % Other feedstocks and blends 9 % 10 % 9 % 10 % Total 100 % 100 % 100 % 100 % Sales of produced refined products: Gasolines 51 % 57 % 52 % 56 % Diesel fuels 39 % 34 % 38 % 35 % Fuel oil 3 % 2 % 3 % 2 % Asphalt 5 % 6 % 4 % 5 % LPG and other 2 % 1 % 3 % 2 % Total 100 % 100 % 100 % 100 % 46
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Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Consolidated
Crude charge (BPD) (1) 416,430 375,880 393,900 360,260
Refinery throughput (BPD) (2) 444,730 404,140 421,470 389,140
Sales of produced refined products
(BPD) (3) 422,020 388,800 407,210 382,540
Refinery utilization (4) 102.8 % 92.8 % 97.3 % 89.0 %
Average per produced barrel (5)
Refinery gross margin $ 14.87 $ 6.20 $ 11.75 $ 8.50
Refinery operating expenses (6) 6.40 6.00 6.95 6.04
Net operating margin $ 8.47 $ 0.20 $ 4.80 $ 2.46
Refinery operating expenses per
throughput barrel (7) $ 6.07 $ 5.77 $ 6.71 $ 5.94
Feedstocks:
Sweet crude oil 51 % 51 % 49 % 48 %
Sour crude oil 28 % 28 % 29 % 30 %
Heavy sour crude oil 11 % 10 % 12 % 11 %
Black wax crude oil 4 % 4 % 4 % 4 %
Other feedstocks and blends 6 % 7 % 6 % 7 %
Total 100 % 100 % 100 % 100 %
Sales of produced refined products:
Gasolines 51 % 54 % 52 % 54 %
Diesel fuels 35 % 35 % 35 % 34 %
Jet fuels 3 % 2 % 3 % 2 %
Fuel oil 2 % 1 % 1 % 1 %
Asphalt 4 % 4 % 4 % 4 %
Base oils 3 % 2 % 2 % 3 %
LPG and other 2 % 2 % 3 % 2 %
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 does not include volumes of refined products
purchased for resale or volumes of excess crude oil sold.
(4)Represents crude charge divided by total crude capacity (BPSD). Our
consolidated crude capacity is 405,000 BPSD.
(5)Represents average amount per produced barrel sold, which is a non-GAAP
measure. Reconciliations to amounts reported under GAAP are provided under
"Reconciliations to Amounts Reported Under Generally Accepted Accounting
Principles" following Item 3 of Part I of this Form 10-Q.
(6)Represents total refining segment operating expenses, exclusive of
depreciation and amortization and Cheyenne Refinery operating expenses, divided
by sales volumes of refined products produced at our refineries.
(7)Represents total refining segment operating expenses, exclusive of
depreciation and amortization and Cheyenne Refinery operating expenses, divided
by refinery throughput.
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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,
2021 2020 2021 2020
Lubricants and Specialty Products
Throughput (BPD) 18,260 19,020 29,140 19,050
Sales of produced refined products
(BPD) 31,700 33,560 33,640 32,460
Sales of produced refined products:
Finished products 53 % 50 % 52 % 51 %
Base oils 28 % 27 % 28 % 24 %
Other 19 % 23 % 20 % 25 %
Total 100 % 100 % 100 % 100 %
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, 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
Three months ended September 30, 2020
Sales and other revenues $ 110,952 $ 423,418 $ (79,328) $ 455,042
Cost of products sold $ 98,033 $ 283,998 $ (79,328) $ 302,703
Operating expenses $ 25,400 $ 29,088 $ - $ 54,488
Selling, general and administrative
expenses $ 5,616 $ 31,157 $ - $ 36,773
Depreciation and amortization $ 5,419 $ 12,013 $ - $ 17,432
Income (loss) from operations $ (23,516) $ 67,162 $ - $ 43,646
Nine months ended September 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 Nine months endedSeptember 30, 2020 Sales and other revenues$ 361,638 $
1,241,402
$ 345,843 $ 870,695 $ (264,108) $ 952,430 Operating expenses$ 69,703 $ 86,756 $ -$ 156,459 Selling, general and administrative expenses$ 16,596 $ 105,058 $ -$ 121,654 Depreciation and amortization$ 22,163 $ 37,097 $ -$ 59,260 Long-lived asset impairment$ 167,017 $ 37,691 $ -$ 204,708 Income (loss) from operations$ (259,684) $
104,105 $ -
(1)Rack Back consists of our 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. 48
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Results of Operations - Three Months Ended
Summary
Net income attributable toHollyFrontier stockholders for the three months endedSeptember 30, 2021 was$280.8 million ($1.71 per basic and diluted share), a$283.2 million increase from a net loss of$2.4 million ($(0.01) per basic and diluted share) for the three months endedSeptember 30, 2020 . The increase in net income was principally driven by stronger product demand, which resulted in an increase in refinery gross margins and higher refined product sales volumes. Refinery gross margins for the three months endedSeptember 30, 2021 increased to$14.87 per produced barrel sold from$6.20 for the three months endedSeptember 30, 2020 . This increase was partially offset by the lower of cost or market inventory reserve adjustment that increased pre-tax earnings by$62.8 million for the three months endedSeptember 30, 2020 . Sales and Other Revenues Sales and other revenues increased 66% from$2,819.4 million for the three months endedSeptember 30, 2020 to$4,685.1 million for the three months endedSeptember 30, 2021 principally due to the increase in sales prices and higher refined product sales volumes. Sales and other revenues for the three months endedSeptember 30, 2021 and 2020 included$25.5 million and$26.7 million , respectively, of HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties. Additionally, sales and other revenues included$666.0 million and$452.9 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the three months endedSeptember 30, 2021 and 2020, respectively. Cost of Products Sold Total cost of products sold increased 65% from$2,314.4 million for the three months endedSeptember 30, 2020 to$3,822.9 million for the three months endedSeptember 30, 2021 principally due to higher crude oil costs and higher refined product sales volumes. During the third quarter of 2020, we recognized a lower of cost or market inventory valuation adjustment benefit of$62.8 million . Gross Refinery MarginsGross refinery margin per produced barrel sold increased 140% from$6.20 for the three months endedSeptember 30, 2020 to$14.87 for the three months endedSeptember 30, 2021 . 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 6% from$332.5 million for the three months endedSeptember 30, 2020 to$352.5 million for the three months endedSeptember 30, 2021 primarily due to an increase in natural gas prices. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 22% from$74.5 million for the three months endedSeptember 30, 2020 to$91.1 million for the three months endedSeptember 30, 2021 primarily due to higher professional services and legal costs incurred in connection with the recently announced acquisitions, including$4.3 million in pre-close acquisition integration costs related to the Puget Sound Acquisition during the three months endedSeptember 30, 2021 . See Note 2 "Acquisitions" in the Notes to Consolidated Financial Statements for additional information on these acquisitions. Depreciation and Amortization Expenses Depreciation and amortization decreased 3% from$125.3 million for the three months endedSeptember 30, 2020 to$121.2 million for the three months endedSeptember 30, 2021 . This decrease was primarily due to lower capitalized refinery turnaround costs during 2020. 49 -------------------------------------------------------------------------------- Table of Content Interest Expense Interest expense was$26.9 million for the three months endedSeptember 30, 2021 compared to$30.6 million for the three months endedSeptember 30, 2020 . This decrease was primarily due to net gains related to our catalyst financing arrangement during the three months endedSeptember 30, 2021 as compared to net losses during the same period in the prior year and higher capitalized interest during the three months endedSeptember 30, 2021 due to the capital expenditures related to the construction of our renewable diesel units. This decrease was partially offset by interest expense on our senior notes issued inSeptember 2020 .
For the three months ended
Gain on Business Interruption Insurance Settlement During the third quarter of 2020, we recorded a gain of$81.0 million upon the settlement of our business interruption claim with our insurance carrier related to a loss at ourWoods Cross Refinery that occurred in the first quarter of 2018. 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$3.5 million and a net gain of$1.0 million for the three months endedSeptember 30, 2021 and 2020, respectively. For the three months endedSeptember 30, 2021 and 2020, gain (loss) on foreign currency transactions included a gain of$9.7 million and a loss of$8.2 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, 2021 , we recorded an income tax expense of$54.8 million compared to$4.6 million for the three months endedSeptember 30, 2020 . This increase was principally due to higher pre-tax income during the three months endedSeptember 30, 2021 compared to the same period of 2020. Our effective tax rates were 15.3% and 16.4% for the three months endedSeptember 30, 2021 and 2020, 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. The difference in theU.S. federal statutory rate and the effective tax rate for the three months endedSeptember 30, 2021 was primarily due to the net operating loss carryback provisions of the CARES Act and federal tax credits.
Results of Operations - Nine Months Ended
Summary
Net income attributable toHollyFrontier stockholders for the nine months endedSeptember 30, 2021 was$597.9 million ($3.63 per basic and diluted share), a$1,081.6 million increase compared to a net loss of$483.7 million ($(2.99) per basic and diluted share) for the nine months endedSeptember 30, 2020 . The increase in net income was principally driven by stronger product demand, which resulted in an increase in refinery gross margins and higher refined product sales volumes. Net income also increased due to lower of cost or market inventory reserve adjustments that increased pre-tax earnings by$318.9 million for the nine months endedSeptember 30, 2021 and decreased pre-tax earnings by$227.7 million for the nine months endedSeptember 30, 2020 . In addition, we recorded long-lived asset impairment charges of$436.9 million for the nine months endedSeptember 30, 2020 . The increase in net income for the nine months endedSeptember 30, 2021 was partially offset by the impact of winter storm Uri, which increased natural gas costs by approximately$65 million across our refining system. Refinery gross margins for the nine months endedSeptember 30, 2021 increased to$11.75 per barrel sold from$8.50 for the nine months endedSeptember 30, 2020 . 50 -------------------------------------------------------------------------------- Table of Content Sales and Other Revenues Sales and other revenues increased 54% from$8,282.9 million for the nine months endedSeptember 30, 2020 to$12,766.5 million for the nine months endedSeptember 30, 2021 due to a year-over-year increase in sales prices and higher refined product sales volumes. Sales and other revenues for the nine months endedSeptember 30, 2021 and 2020 include$77.8 million and$72.4 million , respectively, in HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties. Additionally, sales and other revenues included$1,850.8 million and$1,330.0 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the nine months endedSeptember 30, 2021 and 2020, respectively. Cost of Products Sold Total cost of products sold increased 50% from$6,875.7 million for the nine months endedSeptember 30, 2020 to$10,290.0 million for the nine months endedSeptember 30, 2021 principally due to the increase in crude oil and feedstock prices and refined product sales volumes. We recognized a lower of cost or market inventory valuation benefit of$318.9 million for the nine months endedSeptember 30, 2021 compared to a charge of$227.7 million for the same period of 2020, resulting in no lower of cost or market reserve atSeptember 30, 2021 . Gross Refinery MarginsGross refinery margin per barrel sold increased 38% from$8.50 for the nine months endedSeptember 30, 2020 to$11.75 for the nine months endedSeptember 30, 2021 principally due to the increase in the average per barrel sold sales prices, 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 13% from$964.2 million for the nine months endedSeptember 30, 2020 to$1,086.6 million for the nine months endedSeptember 30, 2021 primarily due to the increase in natural gas prices and higher planned and unplanned repair and maintenance costs. The increase in natural gas prices was due in part to winter storm Uri during the first quarter of 2021. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 6% from$237.6 million for the nine months endedSeptember 30, 2020 to$250.8 million for the nine months endedSeptember 30, 2021 primarily due to higher professional services and legal costs incurred in connection with the recently announced acquisitions, including$5.0 million in pre-close acquisition integration costs related to the Puget Sound Acquisition during the nine months endedSeptember 30, 2021 . See Note 2 "Acquisitions" in the Notes to Consolidated Financial Statements for additional information on these acquisitions. Depreciation and Amortization Expenses Depreciation and amortization decreased 7% from$396.0 million for the nine months endedSeptember 30, 2020 to$369.3 million for the nine months endedSeptember 30, 2021 . This decrease was principally due to lower capitalized refinery turnaround costs during 2020 and lower depreciation expense resulting from the assets impaired in the second quarter of 2020. Long-lived Asset Impairment During the nine months endedSeptember 30, 2020 , we recorded long-lived asset impairment charges of$232.2 million that related to ourCheyenne Refinery and$204.7 million related to PCLI. See Note 1 "Description of Business and Presentation of Financial Statements" in the Notes to Consolidated Financial Statements for additional information on these impairments. Interest Expense Interest expense was$94.2 million for the nine months endedSeptember 30, 2021 compared to$85.9 million for the nine months endedSeptember 30, 2020 . This increase was primarily due to interest expense on our senior notes issued inSeptember 2020 . This increase was partially offset by higher capitalized interest during the nine months endedSeptember 30, 2020 due to the capital expenditures related to the construction of our renewable diesel units and lower weighted average balance on HEP's credit facility during the nine months endedSeptember 30, 2021 .
For the nine months ended
Gain on Business Interruption Insurance Settlement During the third quarter of 2020, we recorded a gain of$81.0 million upon the settlement of our business interruption claim with our insurance carrier related to a loss at ourWoods Cross Refinery that occurred in the first quarter of 2018. 51
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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. Gain on Sales-type Leases During the second quarter of 2020,HEP and Delek US Holdings, Inc. renewed the original throughput agreement on specific HEP assets. Portions of the new throughput agreement met the definition of sales-type leases, which resulted in an accounting gain of$33.8 million upon the initial recognition of the sales-type lease during the nine months endedSeptember 30, 2020 . Loss on Early Extinguishment of Debt For the nine months endedSeptember 30, 2020 , HEP recorded a$25.9 million loss on the redemption of its$500 million aggregate principal amount of 6.0% senior notes maturingAugust 2024 for$522.5 million . 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$4.2 million and$0.9 million for the nine months endedSeptember 30, 2021 and 2020, respectively. For the nine months endedSeptember 30, 2021 and 2020, loss on foreign currency transactions included a net loss of$3.2 million and a gain of$11.0 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, 2021 , we recorded an income tax expense of$149.9 million compared to a benefit of$188.5 million for the nine months endedSeptember 30, 2020 . This change to income tax expense in 2021 from income tax benefit in 2020 was principally due to pre-tax income during the nine months endedSeptember 30, 2021 as compared to a pre-tax loss in the same period of 2020. Our effective tax rates were 18.1% and 31.0% for the nine months endedSeptember 30, 2021 and 2020, respectively. The year-over-year 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. The difference in theU.S. federal statutory rate and the effective tax rate for the nine months endedSeptember 30, 2021 was primarily due to the net operating loss carryback provisions of the CARES Act and federal tax credits.
LIQUIDITY AND CAPITAL RESOURCES
HollyFrontier Credit Agreement OnApril 30, 2021 , we amended our$1.35 billion senior unsecured revolving credit facility to extend the maturity date toApril 30, 2026 (the "HollyFrontier Credit Agreement"). The HollyFrontier Credit Agreement may be used for revolving credit loans and letters of credit from time to time and is available to fund general corporate purposes. AtSeptember 30, 2021 , we were in compliance with all covenants, had no outstanding borrowings and had outstanding letters of credit totaling$2.3 million under the HollyFrontier Credit Agreement. HollyFrontier 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 onFebruary 1, 2022 . Upon maturity, we must either satisfy the obligation at fair market value or refinance to extend the maturity. 52 -------------------------------------------------------------------------------- Table of Content HEP Credit Agreement OnApril 30, 2021 , HEP amended its$1.4 billion senior secured revolving credit facility decreasing the commitments under the facility to$1.2 billion and extending the maturity toJuly 27, 2025 (the "HEP Credit Agreement"). 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 continues to provide for 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, 2021 , HEP received advances totaling$210.5 million and repaid$283.5 million under the HEP Credit Agreement. AtSeptember 30, 2021 , HEP was in compliance with all of its covenants, had outstanding borrowings of$840.5 million and no outstanding letters of credit 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 expansion of existing units at our facilities and selective acquisition of complementary assets for our refining operations intended to increase earnings and cash flow. In connection with the Puget Sound Acquisition, our Board of Directors approved a one-year suspension of the regular quarterly dividend effective with the dividend to be declared for the first quarter of 2021 and is expected to resume the dividend after such time.
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. The timing and amount of stock repurchases will depend on market conditions and corporate, regulatory and other relevant considerations. This program may be discontinued at any time by the Board of Directors. As ofSeptember 30, 2021 , we had not repurchased common stock under this stock repurchase program. In addition, we are authorized by our Board of Directors to repurchase shares in an amount sufficient to offset shares issued under our compensation programs. We do not intend to repurchase common stock under our$1.0 billion share repurchase program until completion of our ongoing renewables capital projects at the earliest. Cash Flows - Operating Activities Nine Months EndedSeptember 30, 2021 Compared to Nine Months EndedSeptember 30, 2020 Net cash flows provided by operating activities were$739.5 million for the nine months endedSeptember 30, 2021 compared to$391.1 million for the nine months endedSeptember 30, 2020 , an increase of$348.4 million . The increase in operating cash flows was primarily due to the increase in gross refinery margins and$51.5 million received upon settlement of a tariff rate case, partially offset by higher operating expenses.
Changes in working capital increased operating cash flows by
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Cash Flows - Investing Activities and Planned Capital Expenditures
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020
Net cash flows used for investing activities were $438.5 million for the nine
months ended September 30, 2021 compared to $213.7 million for the nine months
ended September 30, 2020 , an increase of $224.8 million . Cash expenditures for
properties, plants and equipment for the nine months of 2021 increased to $548.3
million from $213.0 million for the same period in 2020, primarily due to
expenditures related to our renewable diesel units that are expected to be
completed in the first half of 2022. Cash expenditures for properties, plants
and equipment include HEP capital expenditures of $76.9 million and $38.6
million for the nine months ended September 30, 2021 and 2020, respectively. For
the nine months ended September 30, 2020 , HEP also invested $2.4 million in the
Cushing Connect Pipeline & Terminal LLC joint venture.
HollyFrontier Corporation
Each year our Board of Directors approves our annual capital budget which
includes specific projects that management is authorized to undertake.
Additionally, when conditions warrant or as new opportunities arise, additional
projects may be approved. The funds appropriated for a particular capital
project may be expended over a period of several years, depending on the time
required to complete the project. Therefore, our planned capital expenditures
for a given year consist of expenditures appropriated in that year's capital
budget plus expenditures for projects appropriated in prior years which have not
yet been completed. Refinery turnaround spending is amortized over the useful
life of the turnaround.
The refining industry is capital intensive and requires on-going investments to
sustain our refining operations. This includes replacement of, or rebuilding,
refinery units and components that extend the useful life. We also invest in
projects that improve operational reliability and profitability via enhancements
that improve refinery processing capabilities as well as production yield and
flexibility. Our capital expenditures also include projects related to renewable
diesel, environmental, health and safety compliance and include initiatives as a
result of federal and state mandates.
Our refinery operations and related emissions are highly regulated at both
federal and state levels, and we invest in our facilities as needed to remain in
compliance with these standards. Additionally, when faced with new emissions or
fuels standards, we seek to execute projects that facilitate compliance and also
improve the operating costs and / or yields of associated refining processes.
HEP
Each year 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. Expected capital and turnaround cash spending for 2021 is as follows and primarily reflects a change in the timing of spend between 2021 and 2022 on the renewable diesel units. Expected Cash Spending Range (In millions) HollyFrontier Capital Expenditures Refining $ 190.0$ 220.0 Renewables 550.0 600.0 Lubricants and Specialty Products 40.0 50.0 Turnarounds and catalyst 290.0 320.0 Total HollyFrontier 1,070.0 1,190.0 HEP Maintenance 15.0 20.0 Expansion and joint venture investment 40.0 45.0 Refining unit turnarounds 2.0 4.0 Total HEP 57.0 69.0 Total$ 1,127.0 $ 1,259.0 54 -------------------------------------------------------------------------------- Table of Content Cash Flows - Financing Activities Nine Months EndedSeptember 30, 2021 Compared to Nine Months EndedSeptember 30, 2020 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, HEP paid distributions of$57.2 million to noncontrolling interests and received contributions from noncontrolling interests of$21.3 million . For the nine months endedSeptember 30, 2020 , our net cash flows provided by financing activities were$463.2 million . During the nine months endedSeptember 30, 2020 , we received$744.1 million in net proceeds from the issuance of HFC's 2.625% and 4.500% senior notes, purchased$3.4 million of treasury stock and paid$171.6 million in dividends. Also during the period, HEP received$219.5 million and repaid$237.0 million under the HEP Credit Agreement, paid$522.5 million upon the redemption of HEP's 6.0% senior notes and received$491.3 million in net proceeds from the issuance of HEP 5.0% senior notes, paid distributions of$70.9 million to noncontrolling interests and received contributions from noncontrolling interests of$15.4 million .
Contractual Obligations and Commitments
InApril 2021 , we renewed a contract for terminal and storage services with a third party for an additional 15-year term. The agreement provides for storage capacity of 200,000 barrels per month for a total commitment of$9.4 million over the 15 year term. In addition, the agreement provides a throughput volume commitment of 225,000 barrels per day of crude oil for a total commitment of$92.4 million over the 15-year term. We also had certain lease renewals that increased our lease liabilities on our consolidated balance sheets during the nine months endedSeptember 30, 2021 . There were no other significant changes to our long-term contractual obligations during the nine months endedSeptember 30, 2021 . HEP
During the nine months ended
There were no other significant changes to HEP's long-term contractual obligations during this period.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted 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 Policies" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Certain critical accounting policies that materially affect the amounts recorded in our consolidated financial statements include the use of the last-in, first-out ("LIFO") method of valuing certain inventories, assessing the possible impairment of certain long-lived assets and goodwill, and assessing contingent liabilities for probable losses. Inventory Valuation: Inventories related to our refining operations are stated at the lower of cost, using the LIFO method for crude oil and unfinished and finished refined products, or market. In periods of rapidly declining prices, LIFO inventories may have to be written down to market value due to the higher costs assigned to LIFO layers in prior periods. In addition, the use of the LIFO inventory method may result in increases or decreases to cost of sales in years that inventory volumes decline as the result of charging cost of sales with LIFO inventory costs generated in prior periods. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels at that time. Accordingly, interim LIFO calculations are based on management's estimates of expected year-end inventory levels and are subject to the final year-end LIFO inventory valuation. 55 -------------------------------------------------------------------------------- Table of Content AtSeptember 30, 2021 , the LIFO value of inventory was equal to cost. Future decreases in overall inventory values could result in an establishment of a lower of cost or market inventory valuation reserve and additional charges to cost of products sold. 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 FIFO method, or net realizable value.Goodwill and Long-lived Assets: As ofSeptember 30, 2021 , our goodwill balance was$2.3 billion , with goodwill assigned to our Refining, Lubricants and Specialty Products and HEP segments of$1,733.5 million ,$247.0 million and$312.9 million , respectively.Goodwill represents the excess of the cost of an acquired entity over the fair value of the assets acquired and liabilities assumed.Goodwill is not subject to amortization and is tested annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our goodwill impairment testing first entails either a quantitative assessment or an optional qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that based on the qualitative factors that it is more likely than not that the 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. For purposes of long-lived asset impairment evaluation, we group our long-lived assets as follows: (i) our refinery asset groups, which include certain HEP logistics assets, (ii) our Lubricants and Specialty Products asset groups and (iii) our HEP asset groups, which comprises HEP assets not included in our refinery asset groups. These asset groups represent the lowest level for which independent cash flows can be identified. Our long-lived assets are evaluated for impairment by identifying whether indicators of impairment exist and if so, assessing whether the long-lived assets are recoverable from estimated future undiscounted cash flows. The actual amount of impairment loss measured, if any, is equal to the amount by which the asset group's carrying value exceeds its fair value. We performed our annual goodwill impairment testing quantitatively as ofJuly 1, 2021 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 12% to 162%. 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.
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RISK MANAGEMENT
We use certain strategies to reduce some commodity price and operational risks.
We do not attempt to eliminate all market risk exposures when we believe that
the exposure relating to such risk would not be significant to our future
earnings, financial position, capital resources or liquidity or that the cost of
eliminating the exposure would outweigh the benefit.
Commodity Price Risk Management
Our primary market risk is commodity price risk. We are exposed to market risks
related to the volatility in crude oil and refined products, as well as
volatility in the price of natural gas used in our refining operations. We
periodically enter into derivative contracts in the form of commodity price
swaps, forward purchase and sales and futures contracts to mitigate price
exposure with respect to our inventory positions, natural gas purchases, sales
prices of refined products and crude oil costs.
Foreign Currency Risk Management
We are exposed to market risk related to the volatility in foreign currency
exchange rates. We periodically enter into derivative contracts in the form of
foreign exchange forward and foreign exchange swap contracts to mitigate the
exposure associated with fluctuations on intercompany notes with our foreign
subsidiaries that are not denominated in the U.S. dollar.
As of
Notional Contract Volumes by Year of Maturity
Derivative Instrument Total Outstanding Notional 2021 2022 Unit of Measure
Natural gas price swaps - long 450,000 450,000 - MMBTU
WTI and gasoline crack spread swaps -
short 150,000 150,000 - Barrels
NYMEX futures (WTI) - short 1,880,000 1,440,000 440,000 Barrels
Forward gasoline and diesel contracts
- long 165,000 165,000 - Barrels
Foreign currency forward contracts 443,112,746 105,825,135 337,287,611 U.S. dollar
Forward commodity contracts (platinum)
(1) 38,723 - 38,723 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 2021 2020
(In thousands)
Hypothetical 10% change in underlying commodity prices $ 13,569
Interest Rate Risk Management
The market risk inherent in our fixed-rate debt is the potential change arising
from increases or decreases in interest rates as discussed below.
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For the fixed rate HollyFrontier Senior Notes and HEP Senior Notes, changes in
interest rates will generally affect fair value of the debt, but not earnings or
cash flows. The outstanding principal, estimated fair value and estimated change
in fair value (assuming a hypothetical 10% change in the yield-to-maturity
rates) for this debt as of September 30, 2021 is presented below:
Estimated
Outstanding Estimated Change in
Principal Fair Value Fair Value
(In thousands)
HollyFrontier Senior Notes $ 1,750,000 $ 1,946,420 $ 22,243
HEP Senior Notes $ 500,000 $ 506,770 $ 13,123
For the variable rate HEP Credit Agreement, changes in interest rates would
affect cash flows, but not the fair value. At September 30, 2021 , outstanding
borrowings under the HEP Credit Agreement were $840.5 million . A hypothetical
10% change in interest rates applicable to the HEP Credit Agreement would not
materially affect cash flows.
Our operations are subject to hazards of petroleum processing operations,
including but not limited to fire, explosion, cyberattacks and weather-related
perils. We maintain various insurance coverages, including property damage,
business interruption and cyber insurance, subject to certain deductibles and
insurance policy terms and conditions. We are not fully insured against certain
risks because such risks are not fully insurable, coverage is unavailable, or
premium costs, in our judgment, do not justify such expenditures.
Financial information is reviewed on the counterparties in order to review and
monitor their financial stability and assess their ongoing ability to honor
their commitments under the derivative contracts. We have not experienced, nor
do we expect to experience, any difficulty in the counterparties honoring their
commitments.
We have a risk management oversight committee consisting of members from our
senior management. This committee oversees our risk enterprise program, monitors
our risk environment and provides direction for activities to mitigate
identified risks that may adversely affect the achievement of our goals.
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