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. We own and operate 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. OnMay 4, 2021 ,HollyFrontier Puget Sound Refining LLC (the "Purchaser"), a wholly-owned subsidiary ofHollyFrontier Corporation , entered into a sale and purchase agreement withEquilon Enterprises LLC d/b/aShell Oil Products US (the "Seller") to acquire Seller's refinery and related assets, including the on-site cogeneration facility and related logistics assets (the "Puget Sound Refinery "), for a base cash purchase price of$350 million plus hydrocarbon inventory to be valued at closing with an estimated current value in the range of$150 million to$180 million (the "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 and Alaskan 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. The Acquisition is expected to close in the fourth quarter of 2021, subject to regulatory clearance and other customary closing conditions. We expect to fund the Acquisition with a one-year suspension of our regular quarterly dividend and cash on hand. 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$8.3 million in decommissioning expense and$0.5 million in employee severance costs for the three months endedMarch 31, 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 three months endedMarch 31, 2021 , which were recognized primarily as selling, general and administrative expenses in our Lubricants and Specialty Products segment. For the three months endedMarch 31, 2021 , net income attributable toHollyFrontier stockholders was$148.2 million compared to net loss of$304.6 million for the three months endedMarch 31, 2020 . Included in our financial results for the first quarter of 2021 was an inventory reserve adjustment that resulted in a benefit of$200.0 million and a$51.5 million gain recognized upon settlement of a tariff rate case. Gross refining margin per produced barrel sold in our Refining segment decreased 28% for the three months endedMarch 31, 2021 over the same period of 2020. 32 -------------------------------------------------------------------------------- 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$69.4 million for the three months endedMarch 31, 2021 . AtMarch 31, 2021 , our open RINs credit obligations were$43.3 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. Following a rebound in the late second and third quarters of 2020, demand for transportation fuels improved slightly through the first quarter of 2021, but continued to be weak compared to 2019 levels. In response to this level of demand as well as both planned and unplanned maintenance, we operated our Refining segment refineries at an average crude charge of 348,170 BPD during the first quarter of 2021. 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 beginning in the second half of 2020, which continued through the first quarter of 2021. Within the Rack Back portion, a combination of strong demand compared to prior periods as well as limited supply due to a number of factors, drove higher margins and earnings in our Lubricants and Specialty Products segment during the first quarter of 2021. The small but steady improvement in demand drove a broad increase in commodity prices, resulting in values for our inventories held atMarch 31, 2021 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$200.0 million for the three months endedMarch 31, 2021 . Our standalone (excluding HEP) liquidity was approximately$2.5 billion atMarch 31, 2021 , consisting of cash and cash equivalents of$1.2 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 ofMarch 31, 2021 , 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 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 in the second quarter of 2020 that continued through the first quarter of 2021, and with the increasing availability of vaccines, we believe there is a path to a fulsome recovery in demand in 2021. With the increasing availability of vaccines, more of our employees have started to return to work at our locations, and we have maintained our safety protocols such as the use of masks and social distancing. 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 second quarter of 2021, we expect to run between 400,000-420,000 barrels per day of crude oil. We expect to adjust refinery production levels commensurate with market demand.
Within our Lubricants and Specialty Products segment, for the full year 2021, we expect to earn between$180 million to$220 million in income from operations and$230 million to$270 million of EBITDA in the Rack Forward portion of the segment. Within the Rack Back portion, for the second quarter of 2021, we expect base oil margins to fall from spot market levels, but remain higher than the past three years. Similar to our Refining segment, we expect to adjust production levels commensurate with market demand. 33 -------------------------------------------------------------------------------- Table of Content At HEP, we expect to see demand for transportation and terminal services grow with underlying demand for transportation fuels and crude oil. In 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. 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 demand for our products normalize. In addition, we announced the Acquisition, which is expected to close in the fourth quarter of 2021, subject to regulatory clearance and other customary closing conditions. We expect to fund the 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, 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 this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 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
months ended
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RESULTS OF OPERATIONS
Financial Data
Three Months Ended
March 31, Change from 2020
2021 2020 Change Percent
(In thousands, except per share data)
Sales and other revenues $ 3,504,293 $ 3,400,545 $ 103,748 3 %
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) 2,960,305 2,693,726 266,579 10
Lower of cost or market inventory valuation
adjustment (200,037) 560,464 (760,501) (136)
2,760,268 3,254,190 (493,922) (15)
Operating expenses (exclusive of depreciation and
amortization) 399,909 328,345 71,564 22
Selling, general and administrative expenses
(exclusive of depreciation and amortization) 81,975 87,737 (5,762) (7)
Depreciation and amortization 124,079 140,575 (16,496) (12)
Total operating costs and expenses 3,366,231 3,810,847 (444,616) (12)
Income (loss) from operations 138,062 (410,302) 548,364 (134)
Other income (expense):
Earnings of equity method investments 1,763 1,714 49 3
Interest income 1,031 4,073 (3,042) (75)
Interest expense (38,386) (22,639) (15,747) 70
Gain on tariff settlement 51,500 - 51,500 -
Loss on early extinguishment of debt - (25,915) 25,915 (100)
Loss on foreign currency transactions (1,317) (4,233) 2,916 (69)
Other, net 1,890 1,850 40 2
16,481 (45,150) 61,631 (137)
Income (loss) before income taxes 154,543 (455,452) 609,995 (134)
Income tax benefit (28,307) (162,166) 133,859 (83)
Net income (loss) 182,850 (293,286) 476,136 (162)
Less net income attributable to noncontrolling
interest 34,633 11,337 23,296 205
Net income (loss) attributable to HollyFrontier
stockholders $ 148,217 $ (304,623) $ 452,840 (149) %
Earnings (loss) per share:
Basic $ 0.90 $ (1.88) $ 2.78 (148) %
Diluted $ 0.90 $ (1.88) $ 2.78 (148) %
Cash dividends declared per common share $ 0.35 $ 0.35 $ - - %
Average number of common shares outstanding:
Basic 162,479 161,873 606 - %
Diluted 162,479 161,873 606 - %
Balance Sheet Data
March 31, 2021 December 31, 2020
(Unaudited)
(In thousands)
Cash and cash equivalents $ 1,193,428 $ 1,368,318
Working capital $ 1,942,968 $ 1,935,605
Total assets $ 11,934,817 $ 11,506,864
Long-term debt $ 3,126,091 $ 3,142,718
Total equity $ 5,838,046 $ 5,722,203
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Other Financial Data
Three Months Ended March 31,
2021 2020
(In thousands)
Net cash provided by operating activities $ 62,326 $ 190,098
Net cash used for investing activities $ (147,064) $ (86,094)
Net cash used for financing activities $ (89,561) $ (71,457)
Capital expenditures $ 149,961 $ 83,749
EBITDA (1) $ 281,344 $ (307,648)
(1)Earnings before interest, taxes, depreciation and amortization, which we
refer to as "EBITDA," is calculated as net income (loss) attributable to
HollyFrontier 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 14 "Segment Information" in
the Notes to Consolidated Financial Statements for additional information on our
reportable segments.
Refining Segment Operating Data
Our refinery operations include theEl Dorado ,Tulsa , Navajo andWoods 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 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. 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 months endedMarch 31, 2020 has been retrospectively adjusted to reflect the revised regional groupings. 36
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Three Months Ended March 31,
2021 2020
216,290 252,380
Refinery throughput (BPD) (2) 229,560 270,920
Sales of produced refined products (BPD) (3) 210,680 259,240
Refinery utilization (4) 83.2 % 97.1 %
Average per produced barrel (5)
Refinery gross margin $ 6.45 $ 9.54
Refinery operating expenses (6) 9.91 5.30
Net operating margin $
(3.46)
Refinery operating expenses per throughput barrel (7) $ 9.09$ 5.07 Feedstocks: Sweet crude oil 59 % 52 % Sour crude oil 13 % 22 % Heavy sour crude oil 22 % 19 % Other feedstocks and blends 6 % 7 % Total 100 % 100 % Sales of produced refined products: Gasolines 51 % 51 % Diesel fuels 34 % 32 % Jet fuels 5 % 7 % Fuel oil 1 % 1 % Asphalt 3 % 3 % Base oils 4 % 4 % LPG and other 2 % 2 % Total 100 % 100 %West Region (Navajo and Woods Cross Refineries) Crude charge (BPD) (1) 131,880
140,250
Refinery throughput (BPD) (2) 144,600
154,340
Sales of produced refined products (BPD) (3) 144,260
150,610
Refinery utilization (4) 91.0 %
96.7 %
Average per produced barrel (5) Refinery gross margin$ 10.26 $ 13.68 Refinery operating expenses (6) 8.09
6.91
Net operating margin$ 2.17
Refinery operating expenses per throughput barrel (7)$ 8.07 $ 6.74 Feedstocks: Sweet crude oil 24 % 27 % Sour crude oil 59 % 52 % Black wax crude oil 8 % 12 % Other feedstocks and blends 9 % 9 % Total 100 % 100 % Sales of produced refined products: Gasolines 55 % 56 % Diesel fuels 36 % 36 % Fuel oil 2 % 3 % Asphalt 4 % 2 % LPG and other 3 % 3 % Total 100 % 100 % 37
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Three Months Ended March 31,
2021 2020
Consolidated
Crude charge (BPD) (1) 348,170 392,630
Refinery throughput (BPD) (2) 374,160 425,260
Sales of produced refined products (BPD) (3) 354,940 409,850
Refinery utilization (4) 86.0 % 96.9 %
Average per produced barrel (5)
Refinery gross margin $ 8.00 $ 11.06
Refinery operating expenses (6) 9.17 5.89
Net operating margin $
(1.17)
Refinery operating expenses per throughput barrel (7)$ 8.70 $ 5.68 Consolidated Feedstocks: Sweet crude oil 45 % 43 % Sour crude oil 31 % 32 % Heavy sour crude oil 14 % 12 % Black wax crude oil 3 % 5 % Other feedstocks and blends 7 % 8 % Total 100 % 100 % Sales of produced refined products: Gasolines 54 % 53 % Diesel fuels 35 % 33 % Jet fuels 3 % 4 % Fuel oil 1 % 1 % Asphalt 3 % 3 % Base oils 2 % 3 % LPG and other 2 % 3 % Total 100 % 100 % (1)Crude charge represents the barrels per day of crude oil processed at our refineries. (2)Refinery throughput represents the barrels per day of crude and other refinery feedstocks input to the crude units and other conversion units at our refineries. (3)Represents barrels sold of refined products produced at our refineries (including HFC Asphalt) and does not include volumes of refined products purchased for resale or volumes of excess crude oil sold. (4)Represents crude charge divided by total crude capacity (BPSD). 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 andCheyenne 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 andCheyenne Refinery operating expenses, divided by refinery throughput. 38
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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 March 31,
2021 2020Lubricants and Specialty Products
Throughput (BPD) 20,410
21,750
Sales of produced refined products (BPD) 32,570
36,800
Sales of produced refined products:
Finished products 52 % 47 % Base oils 26 % 26 % Other 22 % 27 % Total 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 March 31, 2021
Sales and other revenues $ 173,442 $ 483,246 $ (132,125) $ 524,563
Cost of products sold $ 132,532 $ 331,116 $ (132,125) $ 331,523
Operating expenses $ 28,621 $ 32,132 $ - $ 60,753
Selling, general and administrative
expenses $ 6,739 $ 38,814 $ - $ 45,553
Depreciation and amortization $ 7,305 $ 12,816 $ - $ 20,121
Income (loss) from operations $ (1,755) $ 68,368 $ - $ 66,613
Three months ended March 31, 2020
Sales and other revenues $ 164,829 $ 474,057 $ (112,283) $ 526,603
Cost of products sold $ 180,600 $ 323,063 $ (112,283) $ 391,380
Operating expenses $ 23,269 $ 30,862 $ - $ 54,131
Selling, general and administrative
expenses $ 5,363 $ 43,599 $ - $ 48,962
Depreciation and amortization $ 10,867 $ 11,182 $ - $ 22,049
Income (loss) from operations $ (55,270) $ 65,351 $ - $ 10,081
(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.
Results of Operations - Three Months Ended
Summary
Net income attributable toHollyFrontier stockholders for the three months endedMarch 31, 2021 was$148.2 million ($0.90 per basic and diluted share), a$452.8 million increase from a net loss of$304.6 million ($(1.88) per basic and diluted share) for the three months endedMarch 31, 2020 . The increase in net income was principally due to lower of cost or market inventory reserve adjustments that increased pre-tax earnings by$200.0 million for the three months endedMarch 31, 2021 and decreased pre-tax earnings by$560.5 million for the three months endedMarch 31, 2020 . Net income for the three months endedMarch 31, 2021 was also impacted by winter storm Uri, which increased natural gas costs by approximately$65 million across our refining system. Refinery gross margins for the three months endedMarch 31, 2021 decreased to$8.00 per produced barrel sold from$11.06 for the three months endedMarch 31, 2020 . 39 -------------------------------------------------------------------------------- Table of Content Sales and Other Revenues Sales and other revenues increased 3% from$3,400.5 million for the three months endedMarch 31, 2020 to$3,504.3 million for the three months endedMarch 31, 2021 due to the increase in average per barrel sold sales prices, partially offset by lower refined product sales volumes. Sales and other revenues for the three months endedMarch 31, 2021 and 2020 included$25.3 million and$26.4 million , respectively, of HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties. Additionally, sales and other revenues included$522.0 million and$523.5 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the three months endedMarch 31, 2021 and 2020, respectively. Cost of Products Sold Total cost of products sold decreased 15% from$3,254.2 million for the three months endedMarch 31, 2020 to$2,760.3 million for the three months endedMarch 31, 2021 . During the first quarter of 2021, we recognized a lower of cost or market inventory valuation adjustment benefit of$200.0 million compared to a charge of$560.5 million for the same period in 2020, resulting in a new$118.8 million inventory lower of cost or market reserve atMarch 31, 2021 . The lower of cost or market reserve atMarch 31, 2021 was based on market conditions and prices at that time. This decrease in cost of products sold was partially offset by an increase in crude oil and feedstock prices. Gross Refinery MarginsGross refinery margin per produced barrel sold decreased 28% from$11.06 for the three months endedMarch 31, 2020 to$8.00 for the three months endedMarch 31, 2021 . The decrease was driven by the impacts of planned maintenance and winter storm Uri on our operations and lower realized margins along with higher laid-in crude costs. 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 22% from$328.3 million for the three months endedMarch 31, 2020 to$399.9 million for the three months endedMarch 31, 2021 primarily due to a temporary increase in natural gas prices during winter storm Uri and higher planned and unplanned repair and maintenance costs compared to the three months endedMarch 31, 2020 . Selling, General and Administrative Expenses Selling, general and administrative expenses decreased 7% from$87.7 million for the three months endedMarch 31, 2020 to$82.0 million for the three months endedMarch 31, 2021 primarily due to lower professional services and travel expenses, partially offset by an increase in employee-related expenses as a result of the restructuring we initiated within our Lubricants and Specialty Products segment during the first quarter of 2021. Depreciation and Amortization Expenses Depreciation and amortization decreased 12% from$140.6 million for the three months endedMarch 31, 2020 to$124.1 million for the three months endedMarch 31, 2021 . This decrease was primarily due to lower capitalized refinery turnaround costs during 2020 and lower depreciation expense resulting from the assets impaired in the second quarter of 2020. Interest Expense Interest expense was$38.4 million for the three months endedMarch 31, 2021 compared to$22.6 million for the three months endedMarch 31, 2020 . This increase was primarily due to interest expense on our senior notes issued inSeptember 2020 and net losses related to our catalyst financing arrangements during the three months endedMarch 31, 2021 as compared to net gains during the three months endedMarch 31, 2020 . The increase was partially offset by lower weighted average balance and lower market interest rates on HEP's credit facility. For the three months endedMarch 31, 2021 and 2020, interest expense included$13.2 million and$16.1 million , respectively, in interest costs attributable to HEP. Gain on Tariff Settlement For the three months endedMarch 31, 2021 , we recorded a gain of$51.5 million upon the settlement of a tariff rate case. See Note 13 "Contingencies" in the Notes to Consolidated Financial Statements for additional information on this case and settlement. Loss on Early Extinguishment of Debt For the three months endedMarch 31, 2020 , HEP recorded a$25.9 million loss on the redemption of its$500 million aggregate principal amount of 6% senior notes maturingAugust 2024 for$522.5 million . 40 -------------------------------------------------------------------------------- Table of Content Loss on Foreign Currency Transactions Remeasurement adjustments resulting from the foreign currency conversion of the intercompany financing notes payable byPetro-Canada Lubricants Inc. ("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$1.3 million and$4.2 million for the three months endedMarch 31, 2021 and 2020, respectively. For the three months endedMarch 31, 2021 and 2020, loss on foreign currency transactions included a loss of$6.7 million and a gain of$33.5 million , respectively, on foreign exchange forward contracts (utilized as an economic hedge). Income Taxes For the three months endedMarch 31, 2021 , we recorded an income tax benefit of$28.3 million compared to$162.2 million for the three months endedMarch 31, 2020 . This decrease in income tax benefit was due principally to pre-tax income during the three months endedMarch 31, 2021 compared to a pre-tax loss in the same period of 2020. Our effective tax rates were (18.3)% and 35.6% for the three months endedMarch 31, 2021 and 2020, respectively. The 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.
LIQUIDITY AND CAPITAL RESOURCES
HollyFrontier Credit Agreement AtMarch 31, 2021 , we had a$1.35 billion senior unsecured revolving credit facility maturing inFebruary 2022 (the "HollyFrontier Credit Agreement"). OnApril 30, 2021 , we amended the HollyFrontier Credit Agreement to extend the maturity date toApril 30, 2026 (the "Amended HollyFrontier Credit Agreement"). The Amended 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. AtMarch 31, 2021 , 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 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. HEP Credit Agreement AtMarch 31, 2021 , HEP had a$1.4 billion senior secured revolving credit facility maturing inJuly 2022 (the "HEP Credit Agreement"). OnApril 30, 2021 , the HEP Credit Agreement was amended, decreasing the commitments under the facility to$1.2 billion and extending the maturity toJuly 27, 2025 (the "Amended HEP Credit Agreement"). The Amended 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 Amended HEP Credit Agreement up to a maximum amount of$1.7 billion . During the three months endedMarch 31, 2021 , HEP received advances totaling$73.0 million and repaid$90.5 million under the HEP Credit Agreement. AtMarch 31, 2021 , HEP was in compliance with all of its covenants, had outstanding borrowings of$896.0 million and no outstanding letters of credit under the HEP Credit Agreement.
See Note 9 "Debt" in the Notes to Consolidated Financial Statements for additional information on our debt instruments.
HEP Common Unit Continuous Offering Program HEP has 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 three months endedMarch 31, 2021 , HEP did not issue any common units under this program. As ofMarch 31, 2021 , HEP has issued 2,413,153 units since the inception of this program, providing$82.3 million in gross proceeds. 41 -------------------------------------------------------------------------------- Table of Content 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 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 acquisition of thePuget Sound Refinery , 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 ofMarch 31, 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 Three Months EndedMarch 31, 2021 Compared to Three Months EndedMarch 31, 2020 Net cash flows provided by operating activities were$62.3 million for the three months endedMarch 31, 2021 compared to$190.1 million for the three months endedMarch 31, 2020 , a decrease of$127.8 million . The decrease in operating cash flows was primarily due to lower gross refinery margins and higher operating expenses, partially offset by timing of turnaround expenditures and$51.5 million received upon settlement of a tariff rate case. For the three months endedMarch 31, 2021 , turnaround expenditures decreased to$24.8 million from$38.7 million for the same period of 2020. Changes in working capital increased operating cash flows by$14.1 million and decreased operating cash flows by$65.4 million , for the three months endedMarch 31, 2021 and 2020, respectively. Changes in working capital items adjust for the timing of receipts and payments of actual cash.
Cash Flows - Investing Activities and Planned Capital Expenditures
Three Months EndedMarch 31, 2021 Compared to Three Months EndedMarch 31, 2020 Net cash flows used for investing activities were$147.1 million for the three months endedMarch 31, 2021 compared to$86.1 million for the three months endedMarch 31, 2020 , an increase of$61.0 million . Cash expenditures for properties, plants and equipment for the first three months of 2021 increased to$150.0 million from$83.7 million for the same period in 2020, primarily due to expenditures related to our renewable diesel units that are expected to be completed in early 2022. Cash expenditures for properties, plants and equipment include HEP capital expenditures of$33.2 million and$18.9 million for the three months endedMarch 31, 2021 and 2020, respectively. For the three months endedMarch 31, 2020 , HEP also invested$2.3 million in theCushing Connect Pipeline & Terminal LLC joint venture. 42 -------------------------------------------------------------------------------- Table of ContentHollyFrontier 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:
Expected Cash Spending Range
(In millions)
HollyFrontier Capital Expenditures
Refining $ 190.0 $ 220.0
Renewables 625.0 675.0
Lubricants and Specialty Products 40.0 50.0
Turnarounds and catalyst 320.0 350.0
Total HollyFrontier 1,175.0 1,295.0
HEP
Maintenance 14.0 18.0
Expansion and joint venture investment 30.0 35.0
Refining unit turnarounds 5.0 8.0
Total HEP 49.0 61.0
Total $ 1,224.0 $ 1,356.0
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Cash Flows - Financing Activities
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
For the three months ended March 31, 2021 , our net cash flows used for financing
activities were $89.6 million . During the three months ended March 31, 2021 , we
paid $57.7 million in dividends. Also during this period, HEP had net repayments
of $17.5 million under the HEP Credit Agreement and paid distributions of $20.0
million to noncontrolling interests. For the three months ended March 31, 2021 ,
HEP received contributions from noncontrolling interests of $6.3 million .
For the three months ended March 31, 2020 , our net cash flows used for financing
activities were $71.5 million . During the three months ended March 31, 2020 , we
paid $57.2 million in dividends. Also during this period, HEP received $112.0
million and repaid $67.0 million under the HEP Credit Agreement, paid $522.5
million upon the redemption of HEP's 6.0% senior notes and received
$491.5 million in net proceeds from the issuance of HEP 5.0% senior notes and
paid distributions of $33.9 million to noncontrolling interests.
Contractual Obligations and Commitments
There were no significant changes to our long-term contractual obligations
during the three months ended
HEP
During the three 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. AtMarch 31, 2021 , our lower of cost or market inventory valuation reserve was$118.8 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. Such a reduction to cost of products sold could be significant if inventory values return to historical cost price levels. Additionally, further decreases in overall inventory values could result in additional charges to cost of products sold should the lower of cost or market inventory valuation reserve be increased. 44 -------------------------------------------------------------------------------- Table of Content 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 ofMarch 31, 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 ,$247.1 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 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. 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 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. 45 -------------------------------------------------------------------------------- Table of Content As ofMarch 31, 2021 , 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 2021 2022 Unit of Measure Natural gas price swaps - long 1,350,000 1,350,000 - MMBTU NYMEX futures (WTI) - short 805,000 805,000 - Barrels Forward gasoline and diesel contracts - long 315,000 315,000 - Barrels Forward gasoline contracts - short 400,000 400,000 - Barrels Foreign currency forward contracts 421,800,661 311,887,682 109,912,979 U.S. dollar Forward commodity contracts (platinum) (1) 40,767 - 40,767 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 hedged under our derivative contracts:
Estimated Change in Fair Value at March
31,
Commodity-based Derivative Contracts 2021 2020
(In thousands) Hypothetical 10% change in underlying commodity prices $ 4,420 $ 319
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 ofMarch 31, 2021 is presented below: Estimated Outstanding Estimated Change in Principal Fair Value Fair Value (In thousands) HollyFrontier Senior Notes$ 1,750,000 $ 1,908,586 $ 28,997 HEP Senior Notes$ 500,000 $ 504,960 $ 14,201 For the variable rate HEP Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. AtMarch 31, 2021 , outstanding borrowings under the HEP Credit Agreement were$896.0 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 but not limited to fire, explosion and weather-related perils. We maintain various insurance coverages, including property damage and business interruption 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. 46
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