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 principally an independent petroleum refiner that produces high-value light products such as gasoline, diesel fuel, jet fuel, specialty lubricant products and specialty and modified asphalt. As ofSeptember 30, 2020 , 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 "). As ofSeptember 30, 2020 , we owned a facility inCheyenne, Wyoming , which operated as a petroleum refinery until earlyAugust 2020 (the "Cheyenne 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. 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. This decision was primarily based on a positive outlook in the market for renewable diesel and the expectation that future free cash flow generation at ourCheyenne Refinery would be challenged due to lower gross margins resulting from the economic impact of the COVID-19 pandemic and compressed crude differentials due to dislocations in the crude oil market. Additional factors included uncompetitive operating and maintenance costs forecasted for ourCheyenne Refinery and the anticipated loss of theEnvironmental Protection Agency's ("EPA ") small refinery exemption. The renewable diesel units are expected to be completed in the first quarter of 2022 with an expected capital budget between$125-$175 million . During the second quarter of 2020, we recorded a long-lived asset impairment of$232.2 million related to ourCheyenne Refinery asset group. In connection with the cessation of petroleum refining operations at ourCheyenne Refinery , we recognized$12.3 million in decommissioning expense during the third quarter of 2020. In addition, during the three and nine months endedSeptember 30, 2020 , we recorded$2.4 million and$3.5 million , respectively, in employee severance costs related to the conversion of ourCheyenne Refinery to renewable diesel production. These decommissioning and severance costs were recognized in operating expenses and were reported in our Refining segment. During the second quarter of 2020, we also initiated and completed a corporate restructuring, which is expected to save approximately$30 million per year of ongoing cash expenses. As a result of this restructuring, we recorded$3.7 million in employee severance costs, which were recognized primarily as operating expenses in our Refining segment and selling, general and administrative expenses in our Corporate and Other segment. OnNovember 12, 2018 , we entered into an equity purchase agreement to acquire 100% of the issued and outstanding capital stock ofSonneborn US Holdings Inc. and 100% of the membership rights in Sonneborn Coöperatief U.A. (collectively, "Sonneborn"). The acquisition closed onFebruary 1, 2019 . Cash consideration paid was$662.7 million . Sonneborn is a producer of specialty hydrocarbon chemicals such as white oils, petrolatums and waxes with manufacturing facilities inthe United States andEurope . 36 -------------------------------------------------------------------------------- Table of Content For the three months endedSeptember 30, 2020 , net loss attributable toHollyFrontier stockholders was$(2.4) million compared to net income of$261.8 million for the three months endedSeptember 30, 2019 . For the nine months endedSeptember 30, 2020 , net loss attributable toHollyFrontier stockholders was$(483.7) million compared to net income of$711.8 million for the nine months endedSeptember 30, 2019 . Included in our financial results for the third quarter of 2020 was an inventory reserve adjustment that resulted in a benefit of$62.8 million and an$81.0 million gain recognized upon settlement of a business interruption insurance claim. Third quarter earnings reflect continued weak demand for transportation fuels across the industry, offset by an increase in global demand for finished lubricants and base oils. Gross refining margin per produced barrel sold in our Refining segment decreased 71% for the three months endedSeptember 30, 2020 over the same period of 2019. Pursuant to the 2007 Energy Independence and Security Act, theEPA 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$33.8 million for the three months endedSeptember 30, 2020 . 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. Over the course of the third quarter of 2020, demand for transportation fuels continued to be weak compared to the third quarter of 2019, but showed incremental improvement over the second quarter of 2020. In response to this level of demand, during the third quarter of 2020, we operated our Refining segment refineries at an average crude charge of 390,580 BPD. In our Lubricants and Specialty Products segment, the Rack Forward portion saw improvement in industrial and transportation-related end markets, which drove higher demand and unit margins during the third quarter of 2020. Within the Rack Back portion, demand for base oils increased to fourth quarter 2019 levels while supply was limited due to a number of factors, which drove higher margins and utilization at our facilities in the third quarter. The stabilization of demand drove a broad increase in commodity prices, resulting in values for our inventories held atSeptember 30, 2020 above the costs of these inventories using the last-in, first-out ("LIFO") method and in a lower of cost or market valuation gain of$62.8 million for the three months endedSeptember 30, 2020 . Our standalone (excluding HEP) liquidity was approximately$2.9 billion atSeptember 30, 2020 , consisting of cash and cash equivalents of$1,506.8 million and an undrawn$1.35 billion credit facility maturing in 2022. Our standalone (excluding HEP) long-term debt was$1.75 billion as ofSeptember 30, 2020 , which consists of$350.0 million in 2.625% senior notes due in 2023,$1.0 billion of 5.875% senior notes due in 2026 and$400.0 million in 4.500% senior notes due in 2030. OUTLOOK The impact of the COVID-19 pandemic on the global macroeconomy has 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. While we have seen continued improvement in demand during the third quarter and expect to see a recovery in demand for all of these essential products in the long term, there is limited visibility on the timing or level of the recovery in the near term. In response to the COVID-19 pandemic, and with the health and safety of our employees as a top priority, we have continued several initiatives, including limiting onsite staff at all of our facilities, implementing a work-from-home policy for certain employees and restricting travel unless approved by senior leadership. We will continue to monitor COVID-19 developments and the dynamic environment to properly address these policies going forward. Within our Refining segment, for the fourth quarter of 2020, we expect to run between 360,000-380,000 barrels per day of crude oil based on market demand for transportation fuels. Currently, the primary determinants of demand are the various government orders and guidance restricting or discouraging travel. We expect to adjust refinery production levels commensurate with market demand. 37 -------------------------------------------------------------------------------- Table of Content Within our Lubricants and Specialty Products segment, while we have withdrawn formal 2020 guidance, we expect the improved market conditions and increased demand that we experienced in the third quarter of 2020 to continue up until the normal seasonal decline in demand at year-end. Similar to our Refining segment, we expect to adjust production levels commensurate with market demand. At HEP, we continued to see incremental improvement in demand for transportation and terminal services during the third quarter of 2020, particularly in HEP's assets around theSalt Lake City area, and we expect this trend to continue through the fourth quarter of 2020. HEP maintained its quarterly distribution to$0.35 per unit, representative of a distribution policy focused on funding all capital expenditures and distributions within its 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. During the third quarter of 2020, we increased our liquidity by$750.0 million with the issuance of$350.0 million in 2.625% senior notes due in 2023 and$400.0 million in 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 commodity prices and demand for our products normalize. 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 includes 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, 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, 2019 and in our Quarterly Report on Form 10-Q for the quarter endedJune 30, 2020 . 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, 2020 and 2019 is presented in the following sections. 38
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RESULTS OF OPERATIONS
Financial Data
Three Months Ended
September 30, Change from 2019
2020 2019 Change Percent
(In thousands, except per share data)
Sales and other revenues $ 2,819,400 $ 4,424,828 $ (1,605,428) (36) %
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) 2,377,238 3,403,767 (1,026,529) (30)
Lower of cost or market inventory valuation
adjustment (62,849) 34,062 (96,911) (285)
2,314,389 3,437,829 (1,123,440) (33)
Operating expenses (exclusive of depreciation and
amortization) 332,496 345,578 (13,082) (4)
Selling, general and administrative expenses
(exclusive of depreciation and amortization) 74,453 87,626 (13,173) (15)
Depreciation and amortization 125,280 127,016 (1,736) (1)
Total operating costs and expenses 2,846,618 3,998,049 (1,151,431) (29)
Income (loss) from operations (27,218) 426,779 (453,997) (106)
Other income (expense):
Earnings of equity method investments 1,316 1,334 (18) (1)
Interest income 1,011 6,164 (5,153) (84)
Interest expense (30,589) (36,027) 5,438 (15)
Gain on business interruption insurance settlement 81,000 - 81,000 -
Gain on foreign currency transactions 1,030 395 635 161
Other, net 1,368 2,356 (988) (42)
55,136 (25,778) 80,914 (314)
Income before income taxes 27,918 401,001 (373,083) (93)
Income tax expense 4,573 103,021 (98,448) (96)
Net income 23,345 297,980 (274,635) (92)
Less net income attributable to noncontrolling
interest 25,746 36,167 (10,421) (29)
Net income (loss) attributable to HollyFrontier
stockholders $ (2,401) $ 261,813 $ (264,214) (101) %
Earnings (loss) per share attributable to
HollyFrontier stockholders:
Basic $ (0.01) $ 1.60 $ (1.61) (101) %
Diluted $ (0.01) $ 1.58 $ (1.59) (101) %
Cash dividends declared per common share $ 0.35 $ 0.33 $ 0.02 6 %
Average number of common shares outstanding:
Basic 162,015 163,676 (1,661) (1) %
Diluted 162,015 165,011 (2,996) (2) %
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Nine Months Ended
September 30, Change from 2019
2020 2019 Change Percent
(In thousands, except per share data)
Sales and other revenues $ 8,282,875 $ 13,104,690 $ (4,821,815) (37) %
Operating costs and expenses:
Cost of products sold (exclusive of depreciation and
amortization):
Cost of products sold (exclusive of lower of cost or
market inventory valuation adjustment) 6,647,960 10,307,856 (3,659,896) (36)
Lower of cost or market inventory valuation
adjustment 227,711 (150,483) 378,194 (251)
6,875,671 10,157,373 (3,281,702) (32)
Operating expenses (exclusive of depreciation and
amortization) 964,200 1,010,422 (46,222) (5)
Selling, general and administrative expenses
(exclusive of depreciation and amortization) 237,559 260,977 (23,418) (9)
Depreciation and amortization 396,033 375,345 20,688 6
Long-lived asset and goodwill impairments 436,908 152,712 284,196 186
Total operating costs and expenses 8,910,371 11,956,829 (3,046,458) (25)
Income (loss) from operations (627,496) 1,147,861 (1,775,357) (155)
Other income (expense):
Earnings of equity method investments 5,186 5,217 (31) (1)
Interest income 6,590 17,127 (10,537) (62)
Interest expense (85,923) (106,938) 21,015 (20)
Gain on business interruption insurance settlement 81,000 - 81,000 -
Gain on sales-type leases 33,834 - 33,834 -
Loss on early extinguishment of debt (25,915) - (25,915) -
Gain (loss) on foreign currency transactions (918) 4,873 (5,791) (119)
Other, net 4,790 3,005 1,785 59
18,644 (76,716) 95,360 (124)
Income (loss) before income taxes (608,852) 1,071,145 (1,679,997) (157)
Income tax expense (benefit) (188,504) 279,862 (468,366) (167)
Net income (loss) (420,348) 791,283 (1,211,631) (153)
Less net income attributable to noncontrolling
interest 63,353 79,500 (16,147) (20)
Net income (loss) attributable to HollyFrontier
stockholders $ (483,701) $ 711,783 $ (1,195,484) (168) %
Earnings (loss) per share attributable to
HollyFrontier stockholders:
Basic $ (2.99) $ 4.23 $ (7.22) (171) %
Diluted $ (2.99) $ 4.20 $ (7.19) (171) %
Cash dividends declared per common share $ 1.05 $ 0.99 $ 0.06 6 %
Average number of common shares outstanding:
Basic 161,927 167,935 (6,008) (4) %
Diluted 161,927 169,125 (7,198) (4) %
Balance Sheet Data
September 30, 2020 December 31, 2019
(Unaudited)
(In thousands)
Cash and cash equivalents $ 1,524,888 $ 885,162
Working capital $ 2,081,978 $ 1,620,261
Total assets $ 11,579,741 $ 12,164,841
Long-term debt $ 3,176,349 $ 2,455,640
Total equity $ 5,876,569 $ 6,509,426
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Other Financial Data
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(In thousands)
Net cash provided by operating activities $ 81,748
$ (81,985) $ (74,455) $ (213,651) $ (856,764) Net cash provided by (used for) financing activities$ 618,726 $ (299,473) $ 463,207 $ (729,337) Capital expenditures $ 83,272$ 74,588 $ 213,008 $ 195,057 EBITDA (1)$ 157,030 $ 521,713 $ (196,839) $ 1,456,801 (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, 2020 , our refinery operations included theEl Dorado ,Tulsa , Navajo and Woods Cross Refineries. In earlyAugust 2020 , theCheyenne Refinery permanently ceased petroleum refining operations thus, the refining operating data for the three and nine months endedSeptember 30, 2020 included theCheyenne Refinery for the portion of the period it was in operation. 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 long-lived asset impairment charges, 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, 2020 2019 2020 2019
244,200 294,380 234,550 257,590
Refinery throughput (BPD) (2) 257,280 307,720 249,430 272,440
Sales of produced refined products
(BPD) (3) 243,830 290,930 239,800 260,780
Refinery utilization (4) 93.9 % 113.2 % 90.2 % 99.1 %
Average per produced barrel (5)
Refinery gross margin $ 3.21 $ 14.61 $ 6.41 $ 14.55
Refinery operating expenses (6) 5.47 5.05 5.47 5.48
Net operating margin $ (2.26) $ 9.56 $ 0.94 $ 9.07
Refinery operating expenses per
throughput barrel (7) $ 5.19 $ 4.77 $ 5.26 $ 5.25
Feedstocks:
Sweet crude oil 62 % 59 % 58 % 56 %
Sour crude oil 18 % 21 % 19 % 23 %
Heavy sour crude oil 15 % 16 % 17 % 16 %
Other feedstocks and blends 5 % 4 % 6 % 5 %
Total 100 % 100 % 100 % 100 %
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Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Mid-Continent Region (El Dorado and Tulsa
Refineries)
Sales of produced refined products:
Gasolines 53 % 49 % 52 % 51 %
Diesel fuels 35 % 34 % 34 % 32 %
Jet fuels 3 % 6 % 4 % 7 %
Fuel oil 1 % 1 % 1 % 1 %
Asphalt 2 % 4 % 3 % 3 %
Base oils 4 % 4 % 4 % 4 %
LPG and other 2 % 2 % 2 % 2 %
Total 100 % 100 % 100 % 100 %
Southwest Region (Navajo Refinery )
(8)
Crude charge (BPD) (1) 96,660 106,860 94,320 107,330
Refinery throughput (BPD) (2) 106,780 117,250 104,570 117,660
Sales of produced refined products
(BPD) (3) 106,350 116,890 107,270 120,760
Refinery utilization (4) 96.7 % 106.9 % 94.3 % 107.3 %
Average per produced barrel (5)
Refinery gross margin $ 9.70 $ 18.61 $ 11.16 $ 19.35
Refinery operating expenses (6) 5.07 5.25 5.17 4.90
Net operating margin $ 4.63 $
13.36
Refinery operating expenses per throughput barrel (7)$ 5.05 $ 5.23 $ 5.31 $ 5.03 Feedstocks: Sweet crude oil 25 % 22 % 24 % 21 % Sour crude oil 66 % 69 % 66 % 70 % Other feedstocks and blends 9 % 9 % 10 % 9 % Total 100 % 100 % 100 % 100 % Sales of produced refined products: Gasolines 55 % 50 % 54 % 51 % Diesel fuels 34 % 40 % 36 % 39 % Fuel oil 2 % 3 % 2 % 3 % Asphalt 8 % 5 % 6 % 5 % LPG and other 1 % 2 % 2 % 2 % Total 100 % 100 % 100 % 100 %Rocky Mountain Region (Cheyenne and Woods Cross Refineries) (8) Crude charge (BPD) (1) 49,720 74,790 63,300 78,530 Refinery throughput (BPD) (2) 57,040 81,830 69,370 85,300 Sales of produced refined products (BPD) (3) 57,110 77,680 67,070 77,890 Refinery utilization (4) 51.3 % 77.1 % 65.3 % 81.0 % Average per produced barrel (5) Refinery gross margin$ 3.39 $ 24.97 $ 10.63 $ 19.73 Refinery operating expenses (6) 15.94 11.95 13.25 11.39 Net operating margin$ (12.55) $
13.02
Refinery operating expenses per throughput barrel (7)$ 15.96 $ 11.34 $ 12.81 $ 10.40 42
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Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Rocky Mountain Region (Cheyenne and Woods Cross Refineries)
(8)
Feedstocks:
Sweet crude oil 38 % 38 % 36 % 36 %
Heavy sour crude oil 19 % 30 % 33 % 33 %
Black wax crude oil 30 % 23 % 22 % 23 %
Other feedstocks and blends 13 % 9 % 9 % 8 %
Total 100 % 100 % 100 % 100 %
Sales of produced refined products:
Gasolines 57 % 54 % 56 % 53 %
Diesel fuels 31 % 32 % 33 % 34 %
Fuel oil 3 % 4 % 3 % 4 %
Asphalt 5 % 5 % 5 % 5 %
LPG and other 4 % 5 % 3 % 4 %
Total 100 % 100 % 100 % 100 %
Consolidated
Crude charge (BPD) (1) 390,580 476,030 392,170 443,450
Refinery throughput (BPD) (2) 421,100 506,800 423,370 475,400
Sales of produced refined products
(BPD) (3) 407,280 485,500 414,140 459,440
Refinery utilization (4) 85.5 % 104.2 % 85.8 % 97.0 %
Average per produced barrel (5)
Refinery gross margin $ 4.93 $ 17.23 $ 8.33 $ 16.69
Refinery operating expenses (6) 6.83 6.20 6.65 6.33
Net operating margin $ (1.90) $
11.03
Refinery operating expenses per throughput barrel (7)$ 6.61 $ 5.94 $ 6.50 $ 6.12 Feedstocks: Sweet crude oil 50 % 47 % 46 % 44 % Sour crude oil 27 % 29 % 27 % 30 % Heavy sour crude oil 12 % 14 % 16 % 15 % Black wax crude oil 4 % 4 % 4 % 4 % Other feedstocks and blends 7 % 6 % 7 % 7 % Total 100 % 100 % 100 % 100 % Sales of produced refined products: Gasolines 54 % 50 % 54 % 51 % Diesel fuels 34 % 35 % 34 % 35 % Jet fuels 2 % 4 % 2 % 4 % Fuel oil 1 % 2 % 1 % 2 % Asphalt 4 % 4 % 4 % 4 % Base oils 3 % 2 % 2 % 2 % LPG and other 2 % 3 % 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 457,000 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, 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. 43 -------------------------------------------------------------------------------- Table of Content (8)As previously disclosed, ourCheyenne Refinery ceased petroleum refining operations in the third quarter of 2020. Beginning with the fourth quarter of 2020, activities associated with the conversion of ourCheyenne Refinery to renewable diesel production will be reported in the Corporate and Other segment, and the disaggregation of our refining geographic operating data will be presented in two regions, Mid-Continent and West, to best reflect the economic drivers of our refining operations. The Mid-Continent region will continue to be comprised of ourEl Dorado and Tulsa Refineries, and the new West region will be comprised of our Navajo and Woods Cross Refineries.
Lubricants and Specialty Products Operating Data
The following table sets forth information about our lubricants and specialty products operations. For the nine months endedSeptember 30, 2019 , our lubricants and specialty products operating results reflect the operations of our Sonneborn business for the periodFebruary 1, 2019 (date of acquisition) throughSeptember 30, 2019 . Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Lubricants and Specialty Products Throughput (BPD) 19,020 23,190 19,050 19,920 Sales of produced refined products (BPD) 33,560 36,160 32,460 34,740 Sales of produced refined products: Finished products 50 % 50 % 51 % 50 % Base oils 27 % 24 % 24 % 27 % Other 23 % 26 % 25 % 23 % 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, 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
Three months ended September 30, 2019
Sales and other revenues $ 196,355 $ 477,261 $ (135,898) $ 537,718
Cost of products sold $ 175,976 $ 357,848 $ (135,898) $ 397,926
Operating expenses $ 27,825 $ 30,149 $ - $ 57,974
Selling, general and administrative
expenses $ 5,862 $ 38,013 $ - $ 43,875
Depreciation and amortization $ 11,390 $ 11,310 $ - $ 22,700
Income (loss) from operations $ (24,698) $ 39,941 $ - $ 15,243
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Total Lubricants
and Specialty
Rack Back (1) Rack Forward (2) Eliminations (3) Products
(In thousands)
Nine months ended September 30, 2020
Sales and other revenues $ 361,638 $ 1,241,402 $ (264,108) $ 1,338,932
Cost of products sold $ 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 $ - $ (155,579)
Nine months ended September 30, 2019
Sales and other revenues $ 486,035 $ 1,428,786 $ (338,423) $ 1,576,398
Cost of products sold $ 453,519 $ 1,087,200 $ (338,423) $ 1,202,296
Operating expenses $ 87,970 $ 82,685 $ - $ 170,655
Selling, general and administrative
expenses $ 25,707 $ 99,974 $ - $ 125,681
Depreciation and amortization $ 32,991 $ 32,900 $ - $ 65,891
Goodwill impairment (4) $ 152,712 $ - $ - $ 152,712
Income (loss) from operations $ (266,864) $ 126,027 $ - $ (140,837)
(1) Rack back consists of our PCLI base oil production activities, by-product
sales to third parties and intra-segment base oil sales to rack forward.
(2) Rack forward activities include the purchase of base oils from rack back and
the blending, packaging, marketing and distribution and sales of finished
lubricants and specialty products to third parties.
(3) Intra-segment sales of rack back produced base oils to rack forward are
eliminated under the "Eliminations" column.
(4) During the three months ended June 30, 2019 , a goodwill impairment charge of
$152.7 million was recorded in the PCLI reporting unit within the Lubricants and
Specialty Products segment. We separately allocated this goodwill impairment
charge for purposes of management's discussion and analysis presentation of Rack
Back and Rack Forward results entirely to Rack Back .
Results of Operations - Three Months Ended
Summary
Net loss attributable toHollyFrontier stockholders for the three months endedSeptember 30, 2020 was$(2.4) million ($(0.01) per basic and diluted share), a$264.2 million decrease compared to net income of$261.8 million ($1.60 per basic and$1.58 per diluted share) for the three months endedSeptember 30, 2019 . Net income decreased due principally to lower gross refining margins and lower refining segment sales volumes. For the three months endedSeptember 30, 2020 , lower of cost or market inventory reserve adjustments increased pre-tax earnings by$62.8 million compared to a decrease to pre-tax earnings of$34.1 million for the three months endedSeptember 30, 2019 . Refinery gross margins for the three months endedSeptember 30, 2020 decreased to$4.93 per barrel sold from$17.23 for the three months endedSeptember 30, 2019 . The three months endedSeptember 30, 2020 included an$81.0 million gain recognized upon the settlement of a business interruption insurance claim. During the three months endedSeptember 30, 2019 , ourCheyenne Refinery andWoods Cross Refinery were each granted a one-year small refinery exemption from theEPA for the 2018 calendar year, at which time we recorded a total$36.6 million reduction to cost of products sold. Sales and Other Revenues Sales and other revenues decreased 36% from$4,424.8 million for the three months endedSeptember 30, 2019 to$2,819.4 million for the three months endedSeptember 30, 2020 due to a year-over-year decrease in third quarter sales prices and lower refined product sales volumes. Sales and other revenues for the three months endedSeptember 30, 2020 and 2019 included$26.7 million and$29.9 million , respectively, in HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties. Additionally, sales and other revenues included$452.9 million and$529.6 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the three months endedSeptember 30, 2020 and 2019, respectively. 45 -------------------------------------------------------------------------------- Table of Content Cost of Products Sold Total cost of products sold decreased 33% from$3,437.8 million for the three months endedSeptember 30, 2019 to$2,314.4 million for the three months endedSeptember 30, 2020 due principally to lower crude oil costs and lower refined product sales volumes. Additionally, during the third quarter of 2020, we recognized a lower of cost or market inventory valuation adjustment benefit of$62.8 million compared to a charge of$34.1 million for the same period of 2019, resulting in a new$468.1 million inventory lower of cost or market reserve atSeptember 30, 2020 . The lower of cost or market reserve atSeptember 30, 2020 is based on market conditions and prices at that time. During the third quarter of 2019, we recorded a$36.6 million RINs cost reduction as a result of ourCheyenne Refinery andWoods Cross Refinery small refinery exemptions. Gross Refinery MarginsGross refinery margin per barrel sold decreased 71% from$17.23 for the three months endedSeptember 30, 2019 to$4.93 for the three months endedSeptember 30, 2020 . This was due to the effects of a decrease in the average per barrel sold sales price during the third quarter of 2020, partially offset by decreased 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, decreased 4% from$345.6 million for the three months endedSeptember 30, 2019 to$332.5 million for the three months endedSeptember 30, 2020 due principally to lower repair and maintenance costs compared to the third quarter of 2019, partially offset by decommissioning costs for ourCheyenne Refinery recorded in the three months endedSeptember 30, 2020 . Selling, General and Administrative Expenses Selling, general and administrative expenses decreased 15% from$87.6 million for the three months endedSeptember 30, 2019 to$74.5 million for the three months endedSeptember 30, 2020 due principally to lower incentive compensation costs and employee travel-related expenses. We incurred$0.1 million and$3.9 million in direct acquisition and integration costs for our Sonneborn business during the three months endedSeptember 30, 2020 and 2019, respectively. Depreciation and Amortization Expenses Depreciation and amortization decreased 1% from$127.0 million for the three months endedSeptember 30, 2019 to$125.3 million for the three months endedSeptember 30, 2020 . This decrease was due principally to lower depreciation expense resulting from the assets impaired in the second quarter of 2020, offset by depreciation and amortization attributable to capitalized improvement projects and capitalized refinery turnaround costs. Interest Income Interest income for the three months endedSeptember 30, 2020 was$1.0 million compared to$6.2 million for the three months endedSeptember 30, 2019 . This decrease was primarily due to lower interest rates on cash investments during the current year quarter. Interest Expense Interest expense was$30.6 million for the three months endedSeptember 30, 2020 compared to$36.0 million for the three months endedSeptember 30, 2019 . This decrease was primarily due to lower market interest rates on HEP's credit facility and HEP's refinancing of its 6.0% senior notes due 2024, partially offset by an unrealized loss on the mark-to-market change of the fair value of the embedded derivative in our catalyst financing arrangements during the current year quarter. For the three months endedSeptember 30, 2020 and 2019, interest expense included$12.5 million and$18.8 million , respectively, in interest costs attributable to HEP operations. 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. 46 -------------------------------------------------------------------------------- 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 net gains of$1.0 million and$0.4 million for the three months endedSeptember 30, 2020 and 2019, respectively. For the three months endedSeptember 30, 2020 and 2019, gain on foreign currency transactions included a loss of$8.2 million and a gain of$5.7 million , respectively, on foreign exchange forward contracts (utilized as an economic hedge). Income Taxes For the three months endedSeptember 30, 2020 , we recorded an income tax expense of$4.6 million compared to$103.0 million for the three months endedSeptember 30, 2019 . This decrease was due principally to the decrease in pre-tax earnings during the three months endedSeptember 30, 2020 compared to pre-tax earnings in the same period of 2019. Our effective tax rates were 16.4% and 25.7% for the three months endedSeptember 30, 2020 and 2019, respectively. The year-over-year decrease in the effective tax rate is due principally to the relationship between the pre-tax results and the earnings attributable to the noncontrolling interest that is not included in income for tax purposes.
Results of Operations - Nine Months Ended
Summary
Net loss attributable toHollyFrontier stockholders for the nine months endedSeptember 30, 2020 was$(483.7) million ($(2.99) per basic and diluted share), a$1,195.5 million decrease compared to net income of$711.8 million ($4.23 per basic and$4.20 per diluted share) for the nine months endedSeptember 30, 2019 . Net income decreased due principally to long-lived asset impairment charges of$436.9 million , lower gross refining margins and lower refining segment sales volumes. For the nine months endedSeptember 30, 2020 , lower of cost or market inventory reserve adjustments decreased pre-tax earnings by$227.7 million compared to an increase to pre-tax earnings of$150.5 million for the nine months endedSeptember 30, 2019 . Refinery gross margins for the nine months endedSeptember 30, 2020 decreased to$8.33 per barrel sold from$16.69 for the nine months endedSeptember 30, 2019 . The nine months endedSeptember 30, 2020 included an$81.0 million gain recognized upon the settlement of a business interruption insurance claim. The nine months endedSeptember 30, 2019 included a goodwill impairment charge of$152.7 million . Also, during the nine months endedSeptember 30, 2019 , ourCheyenne Refinery andWoods Cross Refinery were each granted a one-year small refinery exemption from theEPA for the 2018 calendar year, at which time we recorded a total$36.6 million reduction to cost of products sold. Sales and Other Revenues Sales and other revenues decreased 37% from$13,104.7 million for the nine months endedSeptember 30, 2019 to$8,282.9 million for the nine months endedSeptember 30, 2020 due to a year-over-year decrease in sales prices and lower refined product sales volumes. Sales and other revenues for the nine months endedSeptember 30, 2020 and 2019 include$72.4 million and$89.4 million , respectively, in HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties. Additionally, sales and other revenues included$1,330.0 million and$1,568.2 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the nine months endedSeptember 30, 2020 and 2019, respectively. Cost of Products Sold Total cost of products sold decreased 32% from$10,157.4 million for the nine months endedSeptember 30, 2019 to$6,875.7 million for the nine months endedSeptember 30, 2020 due principally to lower crude oil costs and lower refined product sales volumes. Additionally, we recognized a lower of cost or market inventory valuation charge of$227.7 million for the nine months endedSeptember 30, 2020 compared to a benefit of$150.5 million for the same period of 2019, resulting in a new$468.1 million lower of cost or market reserve atSeptember 30, 2020 . The lower of cost or market reserve atSeptember 30, 2020 is based on market conditions and prices at that time. During the nine months endedSeptember 30, 2019 , we recorded a$36.6 million RINs cost reduction as a result of ourCheyenne Refinery andWoods Cross Refinery small refinery exemptions. Gross Refinery MarginsGross refinery margin per barrel sold decreased 50% from$16.69 for the nine months endedSeptember 30, 2019 to$8.33 for the nine months endedSeptember 30, 2020 . This was due to the effects of a decrease in the average per barrel sold sales price during the current year-to-date period, partially offset by decreased 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. 47 -------------------------------------------------------------------------------- Table of Content Operating Expenses Operating expenses, exclusive of depreciation and amortization, decreased 5% from$1,010.4 million for the nine months endedSeptember 30, 2019 to$964.2 million for the nine months endedSeptember 30, 2020 due principally to lower repair and maintenance costs compared to nine months endedSeptember 30, 2019 , partially offset by decommissioning costs for ourCheyenne Refinery recorded in the nine months endedSeptember 30, 2020 . Prior year period operating expenses included higher repair and maintenance costs related to aFebruary 2019 fire in an FCC unit at ourEl Dorado Refinery . Selling, General and Administrative Expenses Selling, general and administrative expenses decreased 9% from$261.0 million for the nine months endedSeptember 30, 2019 to$237.6 million for the nine months endedSeptember 30, 2020 due principally to lower incentive compensation costs and employee travel-related expenses. We incurred$2.0 million and$20.1 million in direct acquisition and integration costs for our Sonneborn business during the nine months endedSeptember 30, 2020 and 2019, respectively. Depreciation and Amortization Expenses Depreciation and amortization increased 6% from$375.3 million for the nine months endedSeptember 30, 2019 to$396.0 million for the nine months endedSeptember 30, 2020 . This increase was due principally to depreciation and amortization attributable to capitalized improvement projects and capitalized refinery turnaround costs, partially offset by lower depreciation expense resulting from the assets impaired in the current year-to-date period. Long-lived Asset and Goodwill Impairments 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. During the nine months endedSeptember 30, 2019 , we recorded a goodwill impairment charge of$152.7 million that 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 Income Interest income for the nine months endedSeptember 30, 2020 was$6.6 million compared to$17.1 million for the nine months endedSeptember 30, 2019 . This decrease was primarily due to lower average cash balances and lower interest rates on cash investments. Interest Expense Interest expense was$85.9 million for the nine months endedSeptember 30, 2020 compared to$106.9 million for the nine months endedSeptember 30, 2019 . This decrease was primarily due to lower market interest rates on HEP's credit facility and HEP's refinancing of its 6.0% senior notes due 2024. Additionally, we recorded an unrealized gain on the mark-to-market change in the fair value of the embedded derivative in our catalyst financing arrangements of$2.5 million for the nine months endedSeptember 30, 2020 compared to an unrealized loss of$3.0 million for the same period in 2019. For the nine months endedSeptember 30, 2020 and 2019, interest expense included$40.7 million and$57.1 million , respectively, in interest costs attributable to HEP operations. 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 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 meet 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 at a redemption cost of$522.5 million . 48 -------------------------------------------------------------------------------- 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 loss of$0.9 million for the nine months endedSeptember 30, 2020 compared to a net gain of$4.9 million for the nine months endedSeptember 30, 2019 . For the nine months endedSeptember 30, 2020 and 2019, gain / loss on foreign currency transactions included a net gain of$11.0 million and a net loss of$9.0 million , respectively, on foreign exchange forward contracts (utilized as an economic hedge). Income Taxes For the nine months endedSeptember 30, 2020 , we recorded an income tax benefit of$188.5 million compared to income tax expense of$279.9 million for the nine months endedSeptember 30, 2019 . This decrease was due principally to a pre-tax loss during the nine months endedSeptember 30, 2020 compared to pre-tax earnings in the same period of 2019. Our effective tax rates were 31.0% and 26.1% for the nine months endedSeptember 30, 2020 and 2019, respectively. The year-over-year increase in the effective tax rate is due principally 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
HollyFrontier Credit Agreement We have a$1.35 billion senior unsecured revolving credit facility maturing inFebruary 2022 (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, 2020 , we were in compliance with all covenants, had no outstanding borrowings and had outstanding letters of credit totaling$5.7 million under the HollyFrontier Credit Agreement.HollyFrontier Senior Notes OnSeptember 28, 2020 , we completed a public offering of$350.0 million in aggregate principal amount of 2.625% senior notes maturingOctober 2023 and$400.0 million in aggregate principal amount of 4.500% senior notes maturingOctober 2030 . We intend to use the net proceeds for general corporate purposes, which may include capital expenditures. These senior notes are unsecured and unsubordinated obligations of ours and rank equally with all our other existing and future unsecured and unsubordinated indebtedness. HollyFrontier Financing Arrangements InDecember 2018 , 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 total cash received of$32.5 million . 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 leases mature onFebruary 1, 2021 . Upon maturity, we must either satisfy the obligation at fair market value or refinance to extend the maturity. HEP Credit Agreement HEP has a$1.4 billion senior secured revolving credit facility maturing inJuly 2022 (the "HEP Credit Agreement") and is available to fund capital expenditures, investments, acquisitions, distribution payments, working capital and for general partnership purposes. It is also available to fund letters of credit up to a$50 million sub-limit and has a$300 million accordion. During the nine months endedSeptember 30, 2020 , HEP received advances totaling$219.5 million and repaid$237.0 million under the HEP Credit Agreement. AtSeptember 30, 2020 , HEP was in compliance with all of its covenants, had outstanding borrowings of$948.0 million and no outstanding letters of credit under the HEP Credit Agreement. HEP Senior Notes OnFebruary 4, 2020 , HEP closed a private placement of$500.0 million in aggregate principal amount of 5.0% HEP senior unsecured notes maturingFebruary 2028 . OnFebruary 5, 2020 , HEP redeemed its existing$500.0 million aggregate principal amount of 6.0% senior notes maturingAugust 2024 at a redemption cost of$522.5 million . HEP recognized a$25.9 million early extinguishment loss consisting of a$22.5 million debt redemption premium and unamortized discount and financing costs of$3.4 million . HEP funded the$522.5 million redemption with proceeds from the issuance of its 5.0% senior notes and borrowings under the HEP Credit Agreement.
See Note 9 "Debt" in the Notes to Consolidated Financial Statements for additional information on our debt instruments.
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HEP Common Unit Continuous Offering Program InMay 2016 , HEP established a continuous offering program under which HEP may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of$200 million . During the nine months endedSeptember 30, 2020 , HEP did not issue any common units under this program. As ofSeptember 30, 2020 , HEP has issued 2,413,153 units under this program, providing$82.3 million in gross proceeds.
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, subject to our current cash conservation strategies as discussed above in "Outlook," components of our 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. We also expect to use cash for payment of cash dividends, which are at the discretion of our Board of Directors, and, once commodity prices and demand for products normalize, for the repurchases of our 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. Cash equivalents are stated at cost, which approximates market value. 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. 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, 2020 , 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. In order to preserve liquidity, we do not intend to repurchase common stock under our$1.0 billion share repurchase program until commodity prices and demand for products normalize. Cash and cash equivalents increased$639.7 million for the nine months endedSeptember 30, 2020 . Net cash provided by operating and financing activities of$391.1 million and$463.2 million , respectively, exceeded net cash used by investing activities of$213.7 million . Cash Flows - Operating Activities Nine Months EndedSeptember 30, 2020 Compared to Nine Months EndedSeptember 30, 2019 Net cash flows provided by operating activities were$391.1 million for the nine months endedSeptember 30, 2020 compared to$1,411.4 million for the nine months endedSeptember 30, 2019 , a decrease of$1,020.4 million . Net loss for the nine months endedSeptember 30, 2020 of$(420.3) million was a decrease of$1,211.6 million compared to net income of$791.3 million for the nine months endedSeptember 30, 2019 . Non-cash adjustments to net income consisting of depreciation and amortization, long-lived asset and goodwill impairments, lower of cost or market inventory valuation adjustment, earnings of equity method investments, inclusive of distributions, loss on early extinguishment of debt, gain on sales-type leases, gain / loss on sale of assets, deferred income taxes, equity-based compensation expense and fair value changes to derivative instruments totaled$923.4 million for the nine months endedSeptember 30, 2020 compared to$531.5 million for the same period in 2019. Adjusted for non-cash items, changes in working capital decreased operating cash flows by$50.0 million and increased operating cash flows by$244.3 million , for the nine months endedSeptember 30, 2020 and 2019, respectively. Additionally, for the nine months endedSeptember 30, 2020 , turnaround expenditures decreased to$73.8 million from$152.4 million for the same period of 2019. 50 -------------------------------------------------------------------------------- Table of Content Cash Flows - Investing Activities and Planned Capital Expenditures Nine Months EndedSeptember 30, 2020 Compared to Nine Months EndedSeptember 30, 2019 Net cash flows used for investing activities were$213.7 million for the nine months endedSeptember 30, 2020 compared to$856.8 million for the nine months endedSeptember 30, 2019 , a decrease of$643.1 million . Cash expenditures for properties, plants and equipment for the first nine months of 2020 increased to$213.0 million from$195.1 million for the same period in 2019. These include HEP capital expenditures of$38.6 million and$23.8 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Additionally, HEP invested$2.4 million in theCushing Connect Pipeline & Terminal LLC joint venture. Prior year investing activities reflected a net cash outflow of$662.7 million upon the acquisition of Sonneborn. Planned Capital ExpendituresHollyFrontier 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 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. HEP expects the majority of the expansion capital budget in 2020 to be invested in the Cushing Connect joint venture. 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. 51 -------------------------------------------------------------------------------- Table of Content Due to the COVID-19 pandemic and resulting decline inU.S. and global economic activities, we have reduced our 2020 expected total consolidated capital expenditures by approximately 25% from our approved annual capital budget. Expected capital and turnaround cash spending for 2020 is as follows: Expected Cash Spending
Range
(In millions)
HollyFrontier Capital Expenditures
Refining $ 187.0 $ 212.0
Renewable Diesel Unit 130.0 145.0
Lubricants and Specialty Products 30.0 35.0
Turnarounds and catalyst 85.0 100.0
Total HollyFrontier 432.0 492.0
HEP
Maintenance 8.0 12.0
Expansion and joint venture investment 35.0 45.0
Refining unit turnarounds - 1.0
Total HEP 43.0 58.0
Total $ 475.0 $ 550.0 Cash Flows - Financing Activities
Nine Months EndedSeptember 30, 2020 Compared to Nine Months EndedSeptember 30, 2019 Net cash flows provided by financing activities were$463.2 million for the nine months endedSeptember 30, 2020 compared to net cash flows used for financing activities of$729.3 million for the nine months endedSeptember 30, 2019 , an increase of$1,192.5 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 this 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 . During the nine months endedSeptember 30, 2019 , we purchased$472.0 million of treasury stock and paid$168.0 million in dividends. Also during this period, HEP received$269.5 million and repaid$257.0 million under the HEP Credit Agreement and paid distributions of$100.1 million to noncontrolling interests.
Contractual Obligations and Commitments
In
There were no other significant changes to our long-term contractual obligations
during the nine months ended
HEP
InFebruary 2020 , HEP issued$500.0 million in aggregate principal amount of 5.0% HEP senior notes maturingFebruary 2028 and redeemed its existing$500.0 million 6.0% senior notes maturingAugust 2024 .
During the nine months ended
There were no other significant changes to HEP's long-term contractual obligations during this period.
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CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States . The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities as of the date of the financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in "Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies" in our Annual Report on Form 10-K for
the year ended December 31, 2019 . 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.
At September 30, 2020 , our lower of cost or market inventory valuation reserve
was $468.1 million . This amount, or a portion thereof, is subject to reversal as
a reduction to cost of products sold in subsequent periods as inventories giving
rise to the reserve are sold, and a new reserve is established.
Inventories consisting of process chemicals, materials and maintenance supplies
and RINs are stated at the lower of weighted-average cost or net realizable
value. Inventories of our Petro-Canada Lubricants and Sonneborn businesses are
stated at the lower of cost, using the FIFO method, or net realizable value.
Goodwill and Long-lived Assets: As of September 30, 2020 , our goodwill balance
was $2.4 billion , with goodwill assigned to our Refining, Lubricants and
Specialty Products and HEP segments of $1,733.5 million , $328.6 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 fair value of the reporting unit is greater than its
carrying amount, 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 have grouped 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.
Goodwill and long-lived asset impairments
Due to the economic slowdown caused by the COVID-19 pandemic, we determined that
indicators of potential long-lived asset impairments were present in the second
quarter of 2020. As a result of our long-lived asset impairment testing, we
determined that the carrying value of the long-lived assets of our Cheyenne
Refinery and PCLI asset groups were not recoverable, and thus recorded
long-lived asset impairment charges of $232.2 million and $204.7 million ,
respectively, in the second quarter of 2020. Our testing did not result in any
other impairments of long-lived assets in the second quarter. There were no
additional indicators of long-lived asset impairment present in the third
quarter of 2020.
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Due to the economic slowdown caused by the COVID-19 pandemic and a decrease in
our market capitalization, we determined that indicators of potential goodwill
impairment for our Refining and Lubricants and Specialty Products reporting
units were present in the second quarter of 2020. As such, we performed an
interim test for goodwill impairment as of May 31, 2020 . Our interim goodwill
impairment testing indicated that there was no impairment of goodwill at our
Refining and Lubricants and Specialty Products reporting units as of May 31,
2020 .
We performed our annual goodwill impairment testing quantitatively as of July 1,
2020 and determined there was no impairment of goodwill attributable to our
reporting units. The excess of the fair values of the reporting units over their
respective carrying values ranged from 10% to 229%. 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 interim or annual goodwill impairment testing.
In performing our impairment tests of goodwill and long-lived assets we
developed cash flow forecasts for each of our reporting units and asset groups.
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 or an asset group 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. Assumptions about the effects of the COVID-19 pandemic on
future demand and market conditions are inherently subjective and difficult to
forecast. Our fair value estimates are based on projected cash flows, which we
believe to be reasonable.
A reasonable expectation exists that further deterioration in our operating
results or overall economic conditions could result in an impairment of goodwill
and / or additional 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 and foreign exchange swap contracts to mitigate the exposure associated with fluctuations on intercompany notes with our foreign subsidiaries that are not denominated in theU.S. dollar. 54 -------------------------------------------------------------------------------- Table of Content As ofSeptember 30, 2020 , 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 2020 2021 Unit of Measure Natural gas price swaps - long 2,250,000 450,000 1,800,000 MMBTU Crude oil price swaps (basis spread) - long 1,564,000 1,564,000 - Barrels WTI and gasoline crack spread swaps - short 100,000 100,000 - Barrels NYMEX futures (WTI) - short 1,045,000 830,000 215,000 Barrels Forward gasoline and diesel contracts - long 200,000 200,000 - Barrels Foreign currency forward contracts 419,278,042 106,910,645 312,367,397 U.S. dollar Forward commodity contracts (platinum) (1) 40,867 - 40,867 Troy ounces
(1) Represents an embedded derivative within our catalyst financing arrangements, which may be refinanced or require repayment under certain conditions. See Note 9 "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 positions hedged under our derivative contracts:
Estimated Change in Fair Value at September
30,
Commodity-based Derivative Contracts 2020 2019
(In thousands)
Hypothetical 10% change in underlying commodity prices $ 3,659
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 rateHollyFrontier 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, 2020 is presented below: Estimated Outstanding Estimated Change in Principal Fair Value Fair Value (In thousands) HollyFrontier Senior Notes$ 1,750,000 $ 1,835,996 $ 38,225 HEP Senior Notes$ 500,000 $ 490,155 $ 16,094 For the variable rate HEP Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. AtSeptember 30, 2020 , outstanding borrowings under the HEP Credit Agreement were$948.0 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 hazards of petroleum processing operations, including fire, explosion and weather-related perils. We maintain various insurance coverages, including business interruption insurance, subject to certain deductibles. 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. 55 -------------------------------------------------------------------------------- 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. 56
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