HF Sinclair Corp 10-Q for FY2023 Q1
HF Sinclair Corp (DINO)
10-Q
2023-05-05
For: 2023-03-31
View Original
Added on
April 11, 2026
About this 10-Q
HF Sinclair Corp filed this 10-Q on May 5, 2023, covering the quarter ended March 31, 2023 (FY2023 Q1).
Headline figures
Quarter ended March 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $7.57B
- up 1.4% from $7.46B a year earlier
- Net income
- $353.27M
- up 120.8% from net income of $159.97M a year earlier
- Diluted EPS
- $1.79
- up 98.9% from $0.90 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________
FORM 10-Q
_________________________________________________________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from __________ to ____________
Commission File Number 001-41325
_________________________________________________________________
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(214 ) 871-3555
(Registrant’s telephone number, including area code)
_________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
| Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: | ||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
HF SINCLAIR CORPORATION
INDEX
| Page | |||||
| PART I. FINANCIAL INFORMATION | |||||
March 31, 2023 (Unaudited) and December 31, 2022 | |||||
Three Months Ended March 31, 2023 and 2022 | |||||
Three Months Ended March 31, 2023 and 2022 | |||||
Three Months Ended March 31, 2023 and 2022 | |||||
Three Months Ended March 31, 2023 and 2022 | |||||
Signatures | |||||
2
FORWARD-LOOKING STATEMENTS
On March 14, 2022 (the “Closing Date”), HollyFrontier Corporation (“HollyFrontier”) and Holly Energy Partners, L.P. (“HEP”) announced the establishment of HF Sinclair Corporation, a Delaware corporation (“HF Sinclair”), as the new parent holding company of HollyFrontier and HEP and their subsidiaries, and the completion of their respective acquisitions (the “Sinclair Transactions”) of Sinclair Oil Corporation (now known as Sinclair Oil LLC, “Sinclair Oil”) and Sinclair Transportation Company LLC (“STC”) from The Sinclair Companies (now known as REH Company and referred to herein as “REH Company”).
References herein to HF Sinclair, “we,” “our,” “ours,” and “us” with respect to time periods prior to March 14, 2022 refer to HollyFrontier and its consolidated subsidiaries and do not include Sinclair Holding LLC, STC or their respective consolidated subsidiaries (collectively, the “Acquired Sinclair Businesses”). References herein to HF Sinclair, “we,” “our,” “ours,” and “us” with respect to time periods from and after March 14, 2022 include the operations of the Acquired Sinclair Businesses. Unless otherwise specified, the financial statements included herein include financial information for HF Sinclair, which for the time period from March 14, 2022 to March 31, 2023 includes the combined business operations of HollyFrontier and its consolidated subsidiaries and the Acquired Sinclair Businesses.
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact included in this Form 10-Q, including, but not limited to, those under “Results of Operations,” “Liquidity and Capital Resources” and “Risk Management” in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and those in Part II, Item 1 “Legal Proceedings” are forward-looking statements. Forward-looking statements use words such as “anticipate,” “project,” “will,” “expect,” “plan,” “goal,” “forecast,” “strategy,” “intend,” “should,” “would,” “could,” “believe,” “may,” and similar expressions and statements regarding our plans and objectives for future operations. These statements are based on management’s beliefs and assumptions using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks and uncertainties. Unless specifically noted, all statements concerning our expectations for future results of operations are based on forecasts for our existing operations and do not include the potential impact of any future acquisitions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that our expectations will prove to be correct. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in these statements. Any differences could be caused by a number of factors including, but not limited to:
•the negotiation and execution, and the terms and conditions, of a definitive agreement relating to the Proposed HEP Transaction (defined below) and the ability of HF Sinclair or HEP to enter into or consummate such agreement;
•the risk that the Proposed HEP Transaction does not occur;
•negative effects from the pendency of the Proposed HEP Transaction;
•failure to obtain the required approvals for the Proposed HEP Transaction;
•the time required to consummate the Proposed HEP Transaction;
•the focus of management time and attention on the Proposed HEP Transaction and other disruptions arising from the Proposed HEP Transaction;
•limitations on our ability to effectuate share repurchases due to market conditions and corporate, tax, regulatory and other considerations;
•our and HEP’s ability to successfully integrate the Acquired Sinclair Businesses with our existing operations and fully realize the expected synergies of the Sinclair Transactions or on the expected timeline;
•our ability to successfully integrate the operation of the Puget Sound refinery with our existing operations;
•the demand for and supply of crude oil and refined products, including uncertainty regarding the effects of the continuing coronavirus (“COVID-19”) pandemic on future demand and increasing societal expectations that companies address climate change;
•risks and uncertainties with respect to the actions of actual or potential competitive suppliers and transporters of refined petroleum products or lubricant and specialty products in our markets;
•the spread between market prices for refined products and market prices for crude oil;
•the possibility of constraints on the transportation of refined products or lubricant and specialty products;
3
•the possibility of inefficiencies, curtailments or shutdowns in refinery operations or pipelines, whether due to reductions in demand, accidents, unexpected leaks or spills, unscheduled shutdowns, infection in the workforce, weather events, civil unrest, expropriation of assets, and other economic, diplomatic, legislative, or political events or developments, terrorism, cyberattacks, or other catastrophes or disruptions affecting our operations, production facilities, machinery, pipelines and other logistics assets, equipment, or information systems, or any of the foregoing of our suppliers, customers, or third-party providers, and any potential asset impairments resulting from, or the failure to have adequate insurance coverage for or receive insurance recoveries from, such actions;
•the effects of current and/or future governmental and environmental regulations and policies, including the effects of current and/or future restrictions on various commercial and economic activities in response to the COVID-19 pandemic and increases in interest rates;
•the availability and cost of our financing;
•the effectiveness of our capital investments and marketing strategies;
•our and HEP’s efficiency in carrying out and consummating construction projects, including our ability to complete announced capital projects on time and within capital guidance;
•our and HEP’s ability to timely obtain or maintain permits, including those necessary for operations or capital projects;
•our ability to acquire refined or lubricant product operations or pipeline and terminal operations on acceptable terms and to integrate any existing or future acquired operations;
•the possibility of terrorist or cyberattacks and the consequences of any such attacks;
•uncertainty regarding the effects and duration of global hostilities, including the Russia-Ukraine war, and any associated military campaigns which may disrupt crude oil supplies and markets for our refined products and create instability in the financial markets that could restrict our ability to raise capital;
•general economic conditions, including economic slowdowns caused by a local or national recession or other adverse economic condition, such as periods of increased or prolonged inflation, and
•other financial, operational and legal risks and uncertainties detailed from time to time in our and HEP’s Securities Exchange Commission filings.
Cautionary statements identifying important factors that could cause actual results to differ materially from our expectations are set forth in this Form 10-Q, including without limitation the forward-looking statements that are referred to above. You should not put any undue reliance on any forward-looking statements. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth under the heading “Risk Factors” included in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2022 and in conjunction with the discussion in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Outlook” and “Liquidity and Capital Resources.” All forward-looking statements included in this Form 10-Q and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
4
DEFINITIONS
Within this report, the following terms have these specific meanings:
“BPD” means the number of barrels per calendar day of crude oil or petroleum products.
“BPSD” means the number of barrels per stream day (barrels of capacity in a 24 hour period) of crude oil or petroleum products.
“Base oil” is a lubricant grade oil initially produced from refining crude oil or through chemical synthesis that is used in producing lubricant products such as lubricating greases, motor oil and metal processing fluids.
“Black wax crude oil” is a low sulfur, low gravity crude oil produced in the Uintah Basin in Eastern Utah that has certain characteristics that require specific facilities to transport, store and refine into transportation fuels.
“Cracking” means the process of breaking down larger, heavier and more complex hydrocarbon molecules into simpler and lighter molecules.
“Crude oil distillation” means the process of distilling vapor from liquid crudes, usually by heating, and condensing the vapor slightly above atmospheric pressure turning it back to liquid in order to purify, fractionate or form the desired products.
“FCC,” or fluid catalytic cracking, means a refinery process that breaks down large complex hydrocarbon molecules into smaller more useful ones using a circulating bed of catalyst at relatively high temperatures.
“LPG” means liquid petroleum gases.
“Lubricant” or “lube” means a solvent neutral paraffinic product used in commercial heavy duty engine oils, passenger car oils and specialty products for industrial applications such as heat transfer, metalworking, rubber and other general process oil.
“MMBTU” means one million British thermal units.
“Refinery gross margin” means the difference between average net sales price and average cost per barrel sold. This does not include the associated depreciation and amortization costs.
“Renewable diesel” means a diesel fuel derived from renewable feedstock such as vegetable oil or animal fats that is produced through various processes, most commonly through hydrotreating, reacting the feedstock with hydrogen under temperatures and pressure in the presence of a catalyst.
“RINs” means renewable identification numbers and refers to serial numbers assigned to credits generated from renewable fuel production under the Environmental Protection Agency’s Renewable Fuel Standard (“RFS”) regulations, which require blending renewable fuels into the nation’s fuel supply. In lieu of blending, refiners may purchase these transferable credits in order to comply with the regulations.
“Sour crude oil” means crude oil containing quantities of sulfur greater than 0.4 percent by weight, while “sweet crude oil” means crude oil containing quantities of sulfur equal to or less than 0.4 percent by weight.
“Vacuum distillation” means the process of distilling vapor from liquid crudes, usually by heating, and condensing the vapor below atmospheric pressure turning it back to a liquid in order to purify, fractionate or form the desired products.
“White oil” is an extremely pure, highly-refined petroleum product that has a wide variety of applications ranging from pharmaceutical to cosmetic products.
“WTI” means West Texas Intermediate and is a grade of crude oil used as a common benchmark in oil pricing. WTI is a sweet crude oil and has a relatively low density.
5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HF SINCLAIR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| March 31, 2023 | December 31, 2022 | |||||||||||||
| (Unaudited) | ||||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
Cash and cash equivalents (HEP:$ | $ | $ | ||||||||||||
Accounts receivable: Product, transportation and other (HEP: $ | ||||||||||||||
Crude oil resales | ||||||||||||||
| Inventories: Crude oil and refined products | ||||||||||||||
Materials, supplies and other (HEP: $ | ||||||||||||||
| Income taxes receivable | ||||||||||||||
Prepayments and other (HEP: $ | ||||||||||||||
| Total current assets | ||||||||||||||
Properties, plants and equipment, at cost (HEP: $ | ||||||||||||||
Less accumulated depreciation (HEP: $( | ( | ( | ||||||||||||
Operating lease right-of-use assets (HEP: $ | ||||||||||||||
Other assets: Turnaround costs | ||||||||||||||
Goodwill (HEP: $ | ||||||||||||||
Intangibles and other (HEP: $ | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
Accounts payable (HEP: $ | $ | $ | ||||||||||||
| Income taxes payable | ||||||||||||||
Operating lease liabilities (HEP: $ | ||||||||||||||
| Current debt | ||||||||||||||
Accrued liabilities (HEP: $ | ||||||||||||||
| Total current liabilities | ||||||||||||||
Long-term debt (HEP: $ | ||||||||||||||
Noncurrent operating lease liabilities (HEP: $ | ||||||||||||||
Deferred income taxes (HEP: $ | ||||||||||||||
Other long-term liabilities (HEP: $ | ||||||||||||||
| Equity: | ||||||||||||||
| HF Sinclair stockholders’ equity: | ||||||||||||||
Preferred stock, $ | ||||||||||||||
Common stock $ | ||||||||||||||
| Additional capital | ||||||||||||||
| Retained earnings | ||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
Common stock held in treasury, at cost – | ( | ( | ||||||||||||
| Total HF Sinclair stockholders’ equity | ||||||||||||||
| Noncontrolling interest | ||||||||||||||
| Total equity | ||||||||||||||
| Total liabilities and equity | $ | $ | ||||||||||||
Parenthetical amounts represent asset and liability balances attributable to Holly Energy Partners, L.P. (“HEP”) as of March 31, 2023 and December 31, 2022. HEP is a variable interest entity.
See accompanying notes.
6
HF SINCLAIR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| Sales and other revenues | $ | $ | ||||||||||||||||||||||||
| 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) | ||||||||||||||||||||||||||
Lower of cost or market inventory valuation adjustment | ( | |||||||||||||||||||||||||
Operating expenses (exclusive of depreciation and amortization) | ||||||||||||||||||||||||||
Selling, general and administrative expenses (exclusive of depreciation and amortization) | ||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Total operating costs and expenses | ||||||||||||||||||||||||||
| Income from operations | ||||||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Earnings of equity method investments | ||||||||||||||||||||||||||
| Interest income | ||||||||||||||||||||||||||
| Interest expense | ( | ( | ||||||||||||||||||||||||
| Gain on foreign currency transactions | ||||||||||||||||||||||||||
| Gain on sale of assets and other | ||||||||||||||||||||||||||
| ( | ( | |||||||||||||||||||||||||
| Income before income taxes | ||||||||||||||||||||||||||
| Income tax expense (benefit): | ||||||||||||||||||||||||||
| Current | ||||||||||||||||||||||||||
| Deferred | ( | |||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||
| Less net income attributable to noncontrolling interest | ||||||||||||||||||||||||||
| Net income attributable to HF Sinclair stockholders | $ | $ | ||||||||||||||||||||||||
| Earnings per share: | ||||||||||||||||||||||||||
| Basic | $ | $ | ||||||||||||||||||||||||
| Diluted | $ | $ | ||||||||||||||||||||||||
| Average number of common shares outstanding: | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
See accompanying notes.
7
HF SINCLAIR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| Net income | $ | $ | ||||||||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | ||||||||||||||||||||||||||
| Hedging instruments: | ||||||||||||||||||||||||||
Change in fair value of cash flow hedging instruments | ( | |||||||||||||||||||||||||
| Reclassification adjustments to net income on settlement of cash flow hedging instruments | ||||||||||||||||||||||||||
| Net unrealized gain on hedging instruments | ||||||||||||||||||||||||||
| Pension and other post-retirement benefit obligations: | ||||||||||||||||||||||||||
| Pension plans gain reclassified to net income | ( | ( | ||||||||||||||||||||||||
| Post-retirement healthcare plans gain reclassified to net income | ( | ( | ||||||||||||||||||||||||
| Retirement restoration plan loss reclassified to net income | ||||||||||||||||||||||||||
| Net change in pension and other post-retirement benefit obligations | ( | ( | ||||||||||||||||||||||||
| Other comprehensive income before income taxes | ||||||||||||||||||||||||||
| Income tax expense | ||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||
| Total comprehensive income | ||||||||||||||||||||||||||
| Less noncontrolling interest in comprehensive income | ||||||||||||||||||||||||||
| Comprehensive income attributable to HF Sinclair stockholders | $ | $ | ||||||||||||||||||||||||
See accompanying notes.
8
HF SINCLAIR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Three Months Ended March 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Lower of cost or market inventory valuation adjustment | ( | |||||||||||||
| Earnings of equity method investments, inclusive of distributions | ( | ( | ||||||||||||
| Gain on sale of assets | ( | ( | ||||||||||||
| Deferred income taxes | ( | |||||||||||||
| Equity-based compensation expense | ||||||||||||||
| Change in fair value – derivative instruments | ( | |||||||||||||
| (Increase) decrease in current assets: | ||||||||||||||
| Accounts receivable | ( | |||||||||||||
| Inventories | ( | ( | ||||||||||||
| Income taxes receivable | ( | |||||||||||||
| Prepayments and other | ( | |||||||||||||
| Increase (decrease) in current liabilities: | ||||||||||||||
| Accounts payable | ( | |||||||||||||
| Income taxes payable | ||||||||||||||
| Accrued liabilities | ||||||||||||||
| Turnaround expenditures | ( | ( | ||||||||||||
| Other, net | ( | ( | ||||||||||||
| Net cash provided by operating activities | ||||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Additions to properties, plants and equipment | ( | ( | ||||||||||||
| Additions to properties, plants and equipment – HEP | ( | ( | ||||||||||||
| Acquisitions, net of cash acquired | ( | |||||||||||||
| Proceeds from sale of assets | ||||||||||||||
| HEP investment in Osage Pipe Line Company LLC | ( | |||||||||||||
| Distributions from equity method investments in excess of equity earnings | ||||||||||||||
| Net cash used for investing activities | ( | ( | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Borrowings under credit agreements | ||||||||||||||
| Repayments under credit agreements | ( | ( | ||||||||||||
| Purchase of treasury stock | ( | ( | ||||||||||||
| Dividends | ( | |||||||||||||
| Distributions to noncontrolling interests | ( | ( | ||||||||||||
| Payments on finance leases | ( | ( | ||||||||||||
| Other, net | ( | |||||||||||||
| Net cash provided by (used for) financing activities | ( | |||||||||||||
| Effect of exchange rate on cash flow | ||||||||||||||
| Cash and cash equivalents: | ||||||||||||||
| Increase (decrease) for the period | ( | |||||||||||||
| Beginning of period | ||||||||||||||
| End of period | $ | $ | ||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||
| Cash paid during the period for: | ||||||||||||||
| Interest | $ | ( | $ | ( | ||||||||||
| Income taxes, net | $ | ( | $ | ( | ||||||||||
| Increase (decrease) in accrued and unpaid capital expenditures | $ | ( | $ | ( | ||||||||||
See accompanying notes.
9
HF SINCLAIR CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands except per share data)
| Three Months Ended March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Non-controlling Interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends ($ | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares under incentive compensation plans | — | — | ( | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock, inclusive of excise tax | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest holders | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive Income | Treasury Stock | Non-controlling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for HFC Transactions | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares under incentive compensation plans | — | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Retirement of treasury stock | ( | ( | — | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest holders | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Purchase of HEP units for equity grants | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Equity attributable to HEP common unit issuance, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of remaining UNEV interests | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes.
10
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1:Description of Business and Presentation of Financial Statements
On March 14, 2022 (the “Closing Date”), HollyFrontier Corporation (“HollyFrontier”) and Holly Energy Partners, L.P. (“HEP”) announced the establishment of HF Sinclair Corporation, a Delaware corporation (“HF Sinclair”), as the new parent holding company of HollyFrontier and HEP and their subsidiaries, and the completion of their respective acquisitions of Sinclair Oil Corporation (now known as Sinclair Oil LLC, “Sinclair Oil”) and Sinclair Transportation Company LLC (“STC”) from The Sinclair Companies (now known as REH Company and referred to herein as “REH Company”). On the Closing Date, pursuant to that certain Business Combination Agreement, dated as of August 2, 2021 (as amended on March 14, 2022, the “Business Combination Agreement”), by and among HollyFrontier, HF Sinclair, Hippo Merger Sub, Inc., a wholly owned subsidiary of HF Sinclair (“Parent Merger Sub”), REH Company, and Hippo Holding LLC (now known as Sinclair Holding LLC), a wholly owned subsidiary of REH Company (the “Target Company”), HF Sinclair completed its previously announced acquisition of the Target Company by effecting (a) a holding company merger in accordance with Section 251(g) of the Delaware General Corporation Law whereby HollyFrontier merged with and into Parent Merger Sub, with HollyFrontier surviving such merger as a direct wholly owned subsidiary of HF Sinclair (the “HFC Merger”) and (b) immediately following the HFC Merger, a contribution whereby REH Company contributed all of the equity interests of the Target Company to HF Sinclair in exchange for 60,230,036 shares of HF Sinclair common stock, resulting in the Target Company becoming a direct wholly owned subsidiary of HF Sinclair (the “HFC Transactions”). At the effective time of the HFC Merger, HollyFrontier became a wholly owned subsidiary of HF Sinclair, and all of HollyFrontier’s outstanding shares were automatically converted into equivalent corresponding shares of HF Sinclair. Pursuant to the HFC Merger, HF Sinclair became the successor issuer to HollyFrontier pursuant to Rule 12g-3(a) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and replaced HollyFrontier as the public company trading on the New York Stock Exchange (“NYSE”) under the symbol “DINO.” See Note 2 and Note 4 for additional information.
References herein to HF Sinclair, “we,” “our,” “ours,” and “us” with respect to time periods prior to March 14, 2022 refer to HollyFrontier and its consolidated subsidiaries and do not include Sinclair Holding LLC, STC or their respective consolidated subsidiaries (collectively, the “Acquired Sinclair Businesses”). References herein to HF Sinclair, “we,” “our,” “ours,” and “us” with respect to time periods from and after March 14, 2022 include the operations of the Acquired Sinclair Businesses. Unless otherwise specified, the financial statements included herein include financial information for HF Sinclair, which for the time period from March 14, 2022 to March 31, 2023 includes the combined business operations of HollyFrontier and the Acquired Sinclair Businesses.
In these financial statements, the words “we,” “our,” “ours” and “us” refer only to HF Sinclair and its consolidated subsidiaries or to HF Sinclair or an individual subsidiary and not to any other person, with certain exceptions. Generally, the words “we,” “our,” “ours” and “us” include HEP and its subsidiaries as consolidated subsidiaries of HF Sinclair, unless when used in disclosures of transactions or obligations between HEP and HF Sinclair or its other subsidiaries. These financial statements contain certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of HF Sinclair. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.
We are an independent energy company that produces and markets high-value light products such as gasoline, diesel fuel, jet fuel, renewable diesel and other specialty products. We own and operate refineries located in Kansas, Oklahoma, New Mexico, Wyoming, Washington and Utah and market our refined products principally in the Southwest United States, the Rocky Mountains extending into the Pacific Northwest and in other neighboring Plains states. We supply high-quality fuels to more than 1,500 branded stations and license the use of the Sinclair brand at more than 300 additional locations throughout the country. In addition, our subsidiaries produce and market base oils and other specialized lubricants in the United States, Canada and the Netherlands, and export products to more than 80 countries. Through our subsidiaries, we produce renewable diesel at two of our facilities in Wyoming and our facility in New Mexico. At March 31, 2023, we owned a 47 % limited partner interest and a non-economic general partner interest in HEP, a variable interest entity (“VIE”). HEP owns and operates logistic assets consisting of petroleum product and crude oil pipelines, terminals, tankage, loading rack facilities and refinery processing units that principally support our refining and marketing operations in the Mid-Continent, Southwest and Rocky Mountains geographic regions of the United States.
11
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Inventories: Inventories related to our refining operations are stated at the lower of cost, using the last-in, first-out (“LIFO”) method for crude oil and unfinished and finished refined products, or market. Inventories related to our renewables business are stated at the lower of cost, using the LIFO method for feedstock and unfinished and finished renewable 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.
Inventories of our Petro-Canada Lubricants and Sonneborn businesses are stated at the lower of cost, using the first-in, first-out (“FIFO”) method, or net realizable value.
Inventories consisting of process chemicals, materials and maintenance supplies and RINs are stated at the lower of weighted-average cost or net realizable value.
Leases: At inception, we determine if an arrangement is or contains a lease. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our payment obligation under the leasing arrangement. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We use our estimated incremental borrowing rate (“IBR”) to determine the present value of lease payments as most of our leases do not contain an implicit rate. Our IBR represents the interest rate which we would pay to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term in a similar economic environment. We use the implicit rate when readily determinable.
Operating leases are recorded in “Operating lease right-of-use assets” and current and noncurrent “Operating lease liabilities” on our consolidated balance sheet. Finance leases are included in “Properties, plants and equipment, at cost” and “Accrued liabilities” and “Other long-term liabilities” on our consolidated balance sheet.
Our lease term includes an option to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less are not recorded on our balance sheet. For certain equipment leases, we apply a portfolio approach for the operating lease ROU assets and liabilities. Also, as a lessee, we separate non-lease components that are identifiable and exclude them from the determination of net present value of lease payment obligations. In addition, HEP, as a lessor, does not separate the non-lease (service) component for operating leases in contracts in which the lease component is the dominant component. HEP treats these combined components as a lease. HEP bifurcates the consideration received for sales-type lease contracts between lease and service revenue, with the service component accounted for within the scope of Accounting Standards Codification 606.
12
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Revenue Recognition: Revenues on refined product, branded fuel sales, renewable diesel, and excess crude oil sales are recognized when delivered (via pipeline, in-tank or rack) and the customer obtains control of such inventory, which is typically when title passes and the customer is billed. All revenues are reported inclusive of shipping and handling costs billed and exclusive of any taxes billed to customers. Shipping and handling costs incurred are reported as cost of products sold.
Our lubricants and specialty products business has sales agreements with marketers and distributors that provide certain rights of return or provisions for the repurchase of products previously sold to them. Under these agreements, revenues and cost of revenues are deferred until the products have been sold to end customers. Our lubricants and specialty products business also has agreements that create an obligation to deliver products at a future date for which consideration has already been received and recorded as deferred revenue. This revenue is recognized when the products are delivered to the customer.
HEP recognizes revenues as products are shipped through its pipelines and terminals and as other services are rendered. Additionally, HEP has certain throughput agreements that specify minimum volume requirements, whereby HEP bills a customer for a minimum level of shipments in the event a customer ships below their contractual requirements. If there are no future performance obligations, HEP recognizes these deficiency payments as revenue. In certain of these throughput agreements, a customer may later utilize such shortfall billings as credit towards future volume shipments in excess of its minimum levels within its respective contractual shortfall make-up period. Such amounts represent an obligation to perform future services, which may be initially deferred and later recognized as revenue based on estimated future shipping levels, including the likelihood of a customer’s ability to utilize such amounts prior to the end of the contractual shortfall make-up period. HEP recognizes the service portion of these deficiency payments as revenue when HEP does not expect it will be required to satisfy these performance obligations in the future based on the pattern of rights exercised by the customer.
Payment terms under our contracts with customers are consistent with industry norms and are typically payable within 30 days of the date of invoice.
Foreign Currency Translation: Assets and liabilities recorded in foreign currencies are translated into U.S. dollars using exchange rates in effect as of the balance sheet date. Revenue and expense accounts are translated using the weighted-average exchange rates during the period presented. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income.
We have intercompany notes that were issued to fund certain of our foreign businesses. Remeasurement adjustments resulting from the conversion of intercompany financing amounts to functional currencies are recorded as gains and losses as a component of other income (expense) in the consolidated statements of operations. Such adjustments are not recorded to the Lubricants and Specialty Products segment operations, but to Corporate and Other. See Note 15 for additional information on our segments.
Income Taxes: Provisions for income taxes include deferred taxes resulting from temporary differences in income for financial and tax purposes, using the liability method of accounting for income taxes. The liability method requires the effect of tax rate changes on deferred income taxes to be reflected in the period in which the rate change was enacted. The liability method also requires that deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized. We account for U.S. tax on global intangible low-taxed income in the period in which it is incurred.
Potential interest and penalties related to income tax matters are recognized in income tax expense. We believe we have appropriate support for the income tax positions taken and to be taken on our income tax returns and that our accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.
For the three months ended March 31, 2023, we recorded an income tax expense of $99.7 million compared to $21.3 million for the three months ended March 31, 2022. This increase was principally due to higher pre-tax income during the three months ended March 31, 2023 compared to the same period of 2022. Our effective tax rates were 20.6 % and 10.3 % for the three months ended March 31, 2023 and 2022, respectively. The difference between the U.S. federal statutory rate and the effective tax rate for the three months ended March 31, 2023 is primarily due to the impact of federal tax credits and the relationship between pre-tax results and the earnings attributable to the noncontrolling interest that is not included in income for tax purposes. The difference in the U.S. federal statutory rate and the effective tax rate for the three months ended March 31, 2022 was primarily due to the impact of federal tax credits and the decrease in the state tax rate applied to our deferred tax assets and liabilities as a result of the Sinclair Transaction.
13
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 2:Acquisitions
On March 14, 2022, pursuant to the Business Combination Agreement, HF Sinclair completed its acquisition of the Target Company by effecting (a) the HFC Merger and (b) immediately following the HFC Merger, a contribution whereby REH Company contributed all of the equity interests of the Target Company to HF Sinclair in exchange for shares of HF Sinclair, resulting in the Target Company becoming a direct wholly owned subsidiary of HF Sinclair.
In connection with the closing of the HFC Transactions, HF Sinclair issued 60,230,036 shares of HF Sinclair common stock, par value $0.01 per share, to REH Company, representing 27 % of the pro forma equity of HF Sinclair with a value of approximately $2,149 million based on HollyFrontier’s fully diluted shares of common stock outstanding and closing stock price on March 11, 2022. Pursuant to the Business Combination Agreement, REH Company made a $77.5 million cash payment to HF Sinclair, inclusive of final working capital adjustments, which reduced the aggregate transaction value to approximately $2,072 million. Of the 60,230,036 shares of HF Sinclair common stock, 2,570,000 shares are currently held in escrow to secure REH Company’s renewable identification numbers (“RINs”) credit obligations under Section 6.22 of the Business Combination Agreement. Additionally, on the Closing Date, and immediately prior to the consummation of the HFC Transactions, HEP completed its acquisition of STC, REH Company’s integrated crude and refined products midstream business, and issued 21,000,000 common limited partner units and paid cash consideration of $329.0 million, inclusive of final working capital adjustments, to REH Company in exchange for all the outstanding equity interests of STC (the “HEP Transaction” and together with the HFC Transactions, the “Sinclair Transactions”). Of these 21,000,000 common limited partner units, 5,290,000
The Sinclair Transactions were accounted for as a business combination using the acquisition method of accounting, with the assets acquired and liabilities assumed at their respective acquisition date fair values at the effective date, with the excess consideration recorded as goodwill.
The following tables present the purchase consideration and final purchase price allocation of the assets acquired and liabilities assumed on March 14, 2022:
| Purchase Consideration (in thousands except for per share amounts) | ||||||||
| Shares of HF Sinclair common stock issued | ||||||||
Closing price per share of HFC common stock (1) | $ | |||||||
| Purchase consideration paid in HF Sinclair common stock | ||||||||
| Shares of HEP common units issued to Sinclair | ||||||||
Closing price per share of HEP common units (2) | $ | |||||||
| Purchase consideration paid in HEP common units | ||||||||
| Total equity consideration | ||||||||
| Cash consideration paid by HEP | ||||||||
| Cash consideration received by HFC | ( | |||||||
| Total cash consideration | ||||||||
| Total purchase consideration | $ | |||||||
(1)Based on the HollyFrontier closing stock price on March 11, 2022.
(2)Based on the HEP closing unit price on March 11, 2022.
14
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
| (In thousands) | ||||||||
| Assets Acquired | ||||||||
| Accounts receivable | $ | |||||||
| Inventories: Crude oil and refined products | ||||||||
| Inventories: Materials, supplies and other | ||||||||
| Properties, plants and equipment | ||||||||
| Operating lease right-of-use assets | ||||||||
| Other assets: Intangibles and other | ||||||||
| Total assets acquired | $ | |||||||
| Liabilities Assumed | ||||||||
| Accounts payable | $ | |||||||
| Operating lease liabilities | ||||||||
| Accrued liabilities | ||||||||
| Noncurrent operating lease liabilities | ||||||||
| Deferred income taxes | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities assumed | $ | |||||||
| Net assets acquired | $ | |||||||
| Goodwill | $ | |||||||
The final purchase price allocation resulted in the recognition of $685.9 million in goodwill. Our Refining, Renewables, Marketing and HEP segments recognized $244.0 million, $159.0 million, $163.8 million and $119.1 million of goodwill, respectively. The goodwill recognized is primarily attributable to operating and administrative synergies and net deferred tax liabilities arising from the differences between the estimated fair values of assets and liabilities and the tax basis of these assets and liabilities. There are qualitative assumptions of long-term factors that this acquisition creates for our stockholders, including increased scale and diversification that is expected to drive growth through the expanded refining and renewables businesses and the addition of an integrated branded wholesale distribution network. This goodwill is not deductible for income tax purposes.
The fair value measurements for properties, plants and equipment were based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements.
The fair value of properties, plants and equipment was based on the combination of the cost and market approaches. Key assumptions in the cost approach include determining the replacement cost by evaluating recent published data and adjusting replacement cost for physical deterioration, functional, and economic obsolescence. We used the market approach to measure the value of certain assets through an analysis of recent sales or offerings of comparable properties. The fair value of crude oil and refined products inventory was based on market prices as of the acquisition date.
Intangibles include the Sinclair trade name, fuel agreements and customer relationships totaling $221.4 million that are being amortized on a straight-line basis over a range of to twenty-year period. The intangible assets were valued using the income approach.
The fair value of equity method investments totaled $234.3 million and was based on a combination of valuation methods including discounted cash flows and the guideline public company method.
Accrued liabilities include $70.6 million of RINs credit obligations, including 2022 obligations through the Closing Date, which were valued based on market prices for RINs at the effective date, a Level 2 input. REH Company is financially responsible for satisfaction of RINs credit obligations for all periods prior to the closing. This receivable totaled $68.4 million and was valued based on market prices for RINs at the effective date.
15
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
During the three months ended March 31, 2023, we sold $15.7 million of RINs to REH Company based on applicable market prices.
All other fair values discussed above were based on significant inputs that are not observable in the market and, therefore, represent Level 3 measurements.
The fair values of all other current receivable and payables were equivalent to their carrying values due to their short-term nature.
During the three months ended March 31, 2023 and 2022, we incurred $3.9 million and $25.0 million in incremental direct acquisition and integration costs that principally relate to legal, advisory and other professional fees and are presented as selling, general and administrative expenses in our statements of operations.
The following unaudited pro forma combined condensed financial data for the three months ended March 31, 2022 was derived from our historical financial statements giving effect to the Sinclair Transactions as if they had occurred on January 1, 2021. The below information reflects pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including the depreciation of the fair-valued properties, plants and equipment acquired in the Sinclair Transactions and the estimated tax impacts of the pro forma adjustments.
Additionally, pro forma earnings include certain non-recurring charges, the substantial majority of which consist of transaction costs related to financial advisors, legal advisors and professional accounting services.
The pro forma results of operations do not include any cost savings or other synergies that may result from the Sinclair Transactions. The pro forma combined condensed financial data has been included for comparative purposes only and is not necessarily indicative of the results that might have occurred had the Sinclair Transactions taken place on January 1, 2021 and is not intended to be a projection of future results.
| Three Months Ended March 31, 2022 | ||||||||
| (in thousands) | ||||||||
| Sales and other revenues | $ | |||||||
| Net income attributable to HF Sinclair stockholders | $ | |||||||
NOTE 3:Holly Energy Partners
HEP is a publicly held master limited partnership that owns and / or operates logistic and refinery assets consisting of petroleum product and crude oil pipelines, terminals, tankage, loading rack facilities and refinery processing units that principally support our refining and marketing operations, as well as other third-party refineries, in the Mid-Continent, Southwest and Rocky Mountains geographic regions of the United States. Additionally, as of March 31, 2023, HEP owned a 50 25.06 % ownership interest in Saddle Butte Pipeline III, LLC, the owner of a pipeline from the Powder River Basin to Casper, Wyoming (the “Saddle Butte Pipeline”); and a 49.995 % ownership interest in Pioneer Investments Corp., the owner of a pipeline from Sinclair, Wyoming to the North Salt Lake City, Utah Terminal (the “Pioneer Pipeline”).
At March 31, 2023, we owned a 47 % limited partner interest and a non-economic general partner interest in HEP. As the general partner of HEP, we have the sole ability to direct the activities that most significantly impact HEP’s financial performance, and therefore as HEP's primary beneficiary, we consolidate HEP.
16
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
HEP generates revenues by charging tariffs for transporting petroleum products and crude oil through its pipelines, by charging fees for terminalling refined products and other hydrocarbons, and by storing and providing other services at its storage tanks and terminals. Under our long-term transportation agreements with HEP (discussed further below), we accounted for 82 % of HEP’s total revenues for the three months ended March 31, 2023. We do not provide financial or equity support through any liquidity arrangements and / or debt guarantees to HEP.
HEP has outstanding debt under its senior secured revolving credit agreement and its senior notes. HEP’s creditors have no recourse to our assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries. See Note 10 for a description of HEP’s debt obligations.
HEP has risk associated with its operations. If a major customer of HEP were to terminate its contracts or fail to meet desired shipping or throughput levels for an extended period of time, revenue would be reduced and HEP could suffer substantial losses to the extent that a new customer is not found. In the event that HEP incurs a loss, our operating results will reflect HEP’s loss, net of intercompany eliminations, to the extent of our ownership interest in HEP at that point in time.
Sinclair Transportation Company Acquisition
On August 2, 2021, HEP, REH Company and STC, a wholly owned subsidiary of REH Company, entered into a contribution agreement (as amended on March 14, 2022, the “Contribution Agreement”), which closed on March 14, 2022. Pursuant to the Contribution Agreement, HEP acquired all of the outstanding equity interests of STC in exchange for 21,000,000 newly issued common limited partner units of HEP with a value of approximately $349.0 million based on HEP’s fully diluted common limited partner units outstanding and HEP’s closing unit price on March 11, 2022, and cash consideration equal to $329.0 million, inclusive of final working capital adjustments pursuant to the Contribution Agreement for an aggregate transaction value of $678.0 million.
As a result of this common unit issuance and our resulting HEP ownership change, we adjusted additional capital and equity attributable to HEP’s noncontrolling interest holders to reallocate HEP’s equity among its unitholders.
As part of HEP’s acquisition of STC, HEP acquired the 25.0 % non-operated interest of UNEV Pipeline, LLC (“UNEV”) not already owned by HEP and as such, UNEV, the owner of a pipeline running from Woods Cross, Utah to Las Vegas, Nevada and associated product terminals, became a wholly owned subsidiary of HEP.
Transportation Agreements
HEP serves our refineries under long-term pipeline, terminal and tankage throughput agreements and refinery processing tolling agreements expiring from 2024 through 2037. Under these agreements, we pay HEP fees to transport, store and process throughput volumes of refined products, crude oil and feedstocks on HEP's pipelines, terminals, tankage, loading rack facilities and refinery processing units that result in minimum annual payments to HEP. Under these agreements, the agreed upon tariff rates are subject to annual tariff rate adjustments on July 1 at a rate based upon the percentage change in Producer Price Index or Federal Energy Regulatory Commission index. As of March 31, 2023, these agreements require minimum annualized payments to HEP of $456.6 million.
Our transactions with HEP and fees paid under our transportation agreements with HEP are eliminated and have no impact on our consolidated financial statements.
Lessor Accounting
Our consolidated statements of operations reflect lease revenue recognized by HEP for contracts with third parties in which HEP is the lessor.
17
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Lease income recognized was as follows:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Operating lease revenues | $ | $ | ||||||||||||||||||||||||
| Sales-type lease interest income | $ | $ | ||||||||||||||||||||||||
| Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable | $ | $ | ||||||||||||||||||||||||
NOTE 4:Revenues
Substantially all revenue-generating activities relate to sales of refined product, branded fuel, renewable diesel and excess crude oil inventories sold at market prices (variable consideration) under contracts with customers. Additionally, we have revenues attributable to HEP logistics services provided under petroleum product and crude oil pipeline transportation, processing, storage and terminalling agreements with third parties.
Disaggregated revenues were as follows:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Revenues by type | ||||||||||||||||||||||||||
| Refined product revenues | ||||||||||||||||||||||||||
Transportation fuels (1) | $ | $ | ||||||||||||||||||||||||
Specialty lubricant products (2) | ||||||||||||||||||||||||||
Asphalt, fuel oil and other products (3) | ||||||||||||||||||||||||||
| Total refined product revenues | ||||||||||||||||||||||||||
Excess crude oil revenues (4) | ||||||||||||||||||||||||||
Renewable diesel revenues (5) | ||||||||||||||||||||||||||
| Transportation and logistic services | ||||||||||||||||||||||||||
Marketing revenues (6) | ||||||||||||||||||||||||||
Other revenues (7) | ||||||||||||||||||||||||||
| Total sales and other revenues | $ | $ | ||||||||||||||||||||||||
18
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Refined product revenues by market | ||||||||||||||||||||||||||
| United States | ||||||||||||||||||||||||||
| Mid-Continent | $ | $ | ||||||||||||||||||||||||
| Southwest | ||||||||||||||||||||||||||
| Rocky Mountains | ||||||||||||||||||||||||||
| Northeast | ||||||||||||||||||||||||||
| Canada | ||||||||||||||||||||||||||
| Europe, Asia and Latin America | ||||||||||||||||||||||||||
| Total refined product revenues | $ | $ | ||||||||||||||||||||||||
(1)Transportation fuels revenues are attributable to our Refining segment wholesale marketing of gasoline, diesel and jet fuel.
(2)Specialty lubricant products consist of base oil, waxes, finished lubricants and other specialty fluids.
(3)Asphalt, fuel oil and other products revenues include revenues attributable to our Refining and Lubricants and Specialty Products segments of $386.8 million and $53.6 million, respectively, for the three months ended March 31, 2023, and $367.6 million and $71.6 million, respectively, for the three months ended March 31, 2022.
(4)Excess crude oil revenues represent sales of purchased crude oil inventory that at times exceeds the supply needs of our refineries.
(5)Renewable diesel revenues are attributable to our Renewables segment.
(6)Marketing revenues consist primarily of branded gasoline and diesel fuel sales.
(7)Other revenues are principally attributable to our Refining segment.
Our consolidated balance sheets reflect contract liabilities related to unearned revenues attributable to future service obligations under HEP’s third-party transportation agreements and production agreements from our Sonneborn operations. The following table present s changes to our contract liabilities:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Balance at January 1 | $ | $ | ||||||||||||||||||||||||
| Increase | ||||||||||||||||||||||||||
| Recognized as revenue | ( | ( | ||||||||||||||||||||||||
| Balance at March 31 | $ | $ | ||||||||||||||||||||||||
As of March 31, 2023, we have long-term contracts with customers that specify minimum volumes of gasoline, diesel, lubricants and specialty products to be sold ratably at market prices through 2032. Future prices are subject to market fluctuations and therefore, we have elected the exemption to exclude variable consideration under these contracts under Accounting Standards Codification 606-10-50-14A. Aggregate minimum volumes expected to be sold (future performance obligations) under our long-term product sales contracts with customers are as follows:
| Remainder of 2023 | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
Refined product sales volumes (barrels) | ||||||||||||||||||||||||||||||||
19
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Additionally, HEP has long-term contracts with third-party customers that specify minimum volumes of product to be transported through its pipelines and terminals that result in fixed-minimum annual revenues through 2033. Annual minimum revenues attributable to HEP’s third-party contracts as of March 31, 2023 are presented below:
| Remainder of 2023 | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
HEP contractual minimum revenues | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
NOTE 5:Fair Value Measurements
Our financial instruments measured at fair value on a recurring basis consist of derivative instruments and RINs receivable and credit obligations.
Fair value measurements are derived using inputs (assumptions that market participants would use in pricing an asset or liability, including assumptions about risk). GAAP categorizes inputs used in fair value measurements into three broad levels as follows:
•(Level 1) Quoted prices in active markets for identical assets or liabilities.
•(Level 2) Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, similar assets and liabilities in markets that are not active or can be corroborated by observable market data.
•(Level 3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes valuation techniques that involve significant unobservable inputs.
The carrying amounts of derivative instruments and RINs receivable and credit obligations at March 31, 2023 and December 31, 2022 were as follows:
| Fair Value by Input Level | ||||||||||||||||||||||||||
| Carrying Amount | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Commodity price swaps | $ | $ | $ | $ | ||||||||||||||||||||||
| Commodity forward contracts | ||||||||||||||||||||||||||
RINs receivable (1) | ||||||||||||||||||||||||||
| Foreign currency forward contracts | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| NYMEX futures contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| Commodity collar contracts | ||||||||||||||||||||||||||
| Commodity forward contracts | ||||||||||||||||||||||||||
| Foreign currency forward contracts | ||||||||||||||||||||||||||
RINs credit obligations (1) | ||||||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
20
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
| Fair Value by Input Level | ||||||||||||||||||||||||||
| Carrying Amount | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Commodity price swaps | $ | $ | $ | $ | ||||||||||||||||||||||
| Commodity forward contracts | ||||||||||||||||||||||||||
RINs receivable (1) | ||||||||||||||||||||||||||
| Foreign currency forward contracts | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| NYMEX futures contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| Commodity collar contracts | ||||||||||||||||||||||||||
| Commodity forward contracts | ||||||||||||||||||||||||||
RINs credit obligations (1) | ||||||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
(1)REH Company is financially responsible for satisfaction of RINs credit obligations for all periods prior to the closing of the Sinclair Transactions. See Note 2 for additional information on RINs credit obligations assumed in the Sinclair Transactions.
Level 1 Instruments
Our NYMEX futures contracts are exchange traded and are measured and recorded at fair value using quoted market prices, a Level 1 input.
Level 2 Financial Instruments
Derivative instruments consisting of foreign currency forward contracts, commodity price swaps, commodity collar contracts and forward sales and purchase contracts are measured and recorded at fair value using Level 2 inputs. The fair value of the commodity price swap contracts is based on the net present value of expected future cash flows related to both variable and fixed rate legs of the respective swap agreements. The measurements are computed using market-based observable input and quoted forward commodity prices with respect to our commodity price swaps. The fair value of the commodity collar contracts is based on forward natural gas prices. The fair value of the forward sales and purchase contracts are computed using quoted forward commodity prices. The fair value of foreign currency forward contracts are based on values provided by a third party, which were derived using market quotes for similar type instruments, a Level 2 input. RINs credit obligations are valued based on current market RINs prices.
Nonrecurring Fair Value Measurements
During the three months ended March 31, 2023, we recognized assets and liabilities based on fair value measurements for the Sinclair Transactions (see Note 2). The fair value measurements were based on a combination of valuation methods including discounted cash flows, the guideline public company and guideline transaction methods and obsolescence adjusted replacement costs, all of which are Level 3 inputs.
21
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 6:Earnings Per Share
Basic earnings per share is calculated as net income attributable to HF Sinclair stockholders, adjusted for participating securities’ share in earnings divided by the average number of shares of common stock outstanding. Diluted earnings per share includes the incremental shares resulting from certain share-based awards. The following is a reconciliation of the denominators of the basic and diluted per share computations for net income attributable to HF Sinclair stockholders:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||||||||
| Net income attributable to HF Sinclair stockholders | $ | $ | ||||||||||||||||||||||||
Participating securities’ share in earnings (1) | ||||||||||||||||||||||||||
| Net income attributable to common shares | $ | $ | ||||||||||||||||||||||||
Average number of shares of common stock outstanding | ||||||||||||||||||||||||||
Average number of shares of common stock outstanding assuming dilution | ||||||||||||||||||||||||||
| Basic earnings per share | $ | $ | ||||||||||||||||||||||||
| Diluted earnings per share | $ | $ | ||||||||||||||||||||||||
(1)Unvested restricted stock unit awards and unvested performance share units that settle in HF Sinclair common stock represent participating securities because they participate in nonforfeitable dividends or distributions with the common stockholders of HF Sinclair. Participating earnings represent the distributed and undistributed earnings of HF Sinclair attributable to the participating securities. Unvested restricted stock unit awards and performance share units do not participate in undistributed net losses as they are not contractually obligated to do so.
NOTE 7:Stock-Based Compensation
We have a principal share-based compensation plan (the HF Sinclair Corporation Amended and Restated 2020 Long Term Incentive Plan, the “2020 Plan”). The 2020 Plan provides for the grant of unrestricted and restricted stock, restricted stock units, other stock based awards, stock options, performance awards, substitute awards, cash awards and stock appreciation rights. The restricted stock unit awards generally vest over a period of to three years . Upon vesting, restrictions on the restricted stock units lapse at which time they convert to common shares or cash. The performance share units generally vest over a period of three years and are payable in stock or cash upon meeting certain financial and performance criteria. The number of shares ultimately issued or cash paid for the performance share units can range from zero to 200 % of target award amounts. The holders of unvested restricted stock units and performance share units have the right to receive dividends. We also have a stock compensation deferral plan which allows non-employee directors to defer settlement of vested stock granted under our share-based compensation plan.
The compensation cost for these plans was $3.3 million and $8.9 million for the three months ended March 31, 2023 and 2022, respectively.
Additionally, HEP maintains an equity-based compensation plan for Holly Logistic Services, L.L.C.’s non-employee directors and certain executives and employees. Compensation cost attributable to HEP’s equity-based compensation plan was $0.4 million and $0.6 million for the three months ended March 31, 2023 and 2022.
22
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
A summary of restricted stock unit and performance share unit activity during the three months ended March 31, 2023 is presented below:
| Restricted Stock Units | Performance Share Units | ||||||||||||||||||||||
| Outstanding at January 1, 2023 | |||||||||||||||||||||||
Granted (1) | |||||||||||||||||||||||
| Vested | ( | ||||||||||||||||||||||
| Forfeited | ( | ( | |||||||||||||||||||||
| Performance share units converted to restricted stock units | ( | ||||||||||||||||||||||
| Outstanding at March 31, 2023 | |||||||||||||||||||||||
| (1) Weighted average grant date fair value per unit | $ | $ | |||||||||||||||||||||
NOTE 8:Inventories
Inventories consist of the following components:
| March 31, 2023 | December 31, 2022 | |||||||||||||
| (In thousands) | ||||||||||||||
| Crude oil | $ | $ | ||||||||||||
Other raw materials and unfinished products (1) | ||||||||||||||
Finished products (2) | ||||||||||||||
| Lower of cost or market reserve | ( | ( | ||||||||||||
Process chemicals (3) | ||||||||||||||
Repair and maintenance supplies and other (4) | ||||||||||||||
| Total inventory | $ | $ | ||||||||||||
(1)Other raw materials and unfinished products include feedstocks and blendstocks, other than crude.
(2)Finished products include gasolines, jet fuels, diesels, renewable diesels, lubricants, asphalts, LPG’s and residual fuels.
(3)Process chemicals include additives and other chemicals.
(4)Includes RINs.
Our renewables inventories that are valued at the lower of LIFO cost or market reflect a valuation reserve of $108.7 million and $61.2 million at March 31, 2023 and December 31, 2022, respectively. A new market reserve of $108.7 million as of March 31, 2023 was based on market conditions and prices at that time. The effect of the change in the lower of cost or market reserve was an increase to cost of products sold totaling $47.6 million for the three months ended March 31, 2023 and a decrease to cost of products sold of $8.6 million for the three months ended March 31, 2022.
NOTE 9:Environmental
23
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 10:Debt
HF Sinclair Credit Agreement
We have a $1.65 billion senior unsecured revolving credit facility maturing in April 2026 (the “HF Sinclair Credit Agreement”). The HF Sinclair Credit Agreement may be used for revolving credit loans and letters of credit from time to time and is available to fund general corporate purposes. At March 31, 2023, we were in compliance with all covenants, had no outstanding borrowings and had outstanding letters of credit totaling $2.3 million under the HF Sinclair Credit Agreement.
Indebtedness under the HF Sinclair Credit Agreement bears interest, at our option, based on the currency of such indebtedness at either (a) a base rate equal to the highest of the Federal Funds Effective Rate (as defined in the HF Sinclair Credit Agreement) plus half of 1%, Spread Adjusted Term SOFR (as defined in the HF Sinclair Credit Agreement) for a one-month interest period plus 1 % and the prime rate (as publicly announced from time to time by the administrative agent), as applicable, plus an applicable margin (ranging from 0.25 % to 1.125 %), (b) the CDOR Rate (as defined in the HF Sinclair Credit Agreement) plus an applicable margin (ranging from 1.25 % to 2.125 %) (c) the Spread Adjusted Term SOFR (as defined in the HF Sinclair Credit Agreement) plus an applicable margin (ranging from 1.25 % to 2.125 %) or (d) the Daily Simple RFR (as defined in the HF Sinclair Credit Agreement) plus an applicable margin (ranging from 1.25 % to 2.125 %). In each case, the applicable margin is based on HF Sinclair’s debt rating assigned by Standard & Poor’s Financial Services LLC and Moody’s Investors Service, Inc.
HEP Credit Agreement
HEP has a $1.2 billion senior secured revolving credit facility maturing in July 2025 (the “HEP Credit Agreement”). The HEP Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments, working capital and for general partnership purposes. It is also available to fund letters of credit up to a $50 million sub-limit and has an accordion feature that allows HEP to increase the commitments under the HEP Credit Agreement up to a maximum amount of $1.7 billion. At March 31, 2023, HEP was in compliance with all of its covenants, had outstanding borrowings of $651.5 million and no outstanding letters of credit under the HEP Credit Agreement.
Prior to the Investment Grade Date (as defined in the HEP Credit Agreement), indebtedness under the HEP Credit Agreement bears interest, at HEP’s option, at either (a) the Alternate Base Rate (as defined in the HEP Credit Agreement) plus an applicable margin (ranging from 0.75 % to 1.75 %) or (b) Adjusted Term SOFR (as defined in the HEP Credit Agreement) plus an applicable margin (ranging from 1.75 % to 2.75 %). In each case, the applicable margin is based upon HEP’s Total Leverage Ratio (as defined in the HEP Credit Agreement). The weighted average interest rate in effect under the HEP Credit Agreement on HEP’s borrowings was 6.88 % as of March 31, 2023.
HEP’s obligations under the HEP Credit Agreement are collateralized by substantially all of HEP’s assets and are guaranteed by HEP’s material wholly owned subsidiaries. Any recourse to the general partner would be limited to the extent of HEP Logistics Holdings, L.P.’s assets, which other than its investment in HEP are not significant. HEP’s creditors have no recourse to our other assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries.
24
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
HollyFrontier and HF Sinclair Senior Notes
At March 31, 2023, our senior notes consisted of the following:
•$59.637 million in aggregate principal amount of 2.625 % senior notes maturing October 2023 (the “HollyFrontier 2.625 % Senior Notes”);
•$202.9 million in aggregate principal amount of 5.875 % senior notes maturing April 2026 (the “HollyFrontier 5.875 % Senior Notes”), and
•$74.966 million in aggregate principal amount of 4.500 % senior notes maturing October 2030 (the “HollyFrontier 4.500 % Senior Notes” and, collectively, the “HollyFrontier Senior Notes”).
•$248.190 million in aggregate principal amount of 2.625 % senior notes maturing October 2023 (the “HF Sinclair 2.625 % Senior Notes”);
•$797.1 million in aggregate principal amount of 5.875 % senior notes maturing April 2026 (the “HF Sinclair 5.875 % Senior Notes”), and
•$325.034 million in aggregate principal amount of 4.500 % senior notes maturing October 2030 (the “HF Sinclair 4.500 % Senior Notes” and, collectively, the “HF Sinclair Senior Notes”).
The HollyFrontier Senior Notes and HF Sinclair Senior Notes are unsecured and unsubordinated obligations of ours and rank equally with all future unsecured and unsubordinated indebtedness.
Further, we may from time to time seek to retire some or all of our outstanding debt or debt agreements through cash purchases, and/or exchanges, open market purchases, privately negotiated transactions, tender offers or otherwise. Such transactions, if any, may be material and will depend on prevailing market conditions, our liquidity requirements and other factors.
HF Sinclair Financing Arrangements
Certain of our wholly owned subsidiaries entered into financing arrangements whereby such subsidiaries sold a portion of their precious metals catalyst to a financial institution and then leased back the precious metals catalyst in exchange for cash. The volume of the precious metals catalyst and the lease rate are fixed over the term of each lease, and the lease payments are recorded as interest expense. The current leases mature in one year or less. Upon maturity, we must either satisfy the obligation at fair market value or refinance to extend the maturity. These financing arrangements are recorded at a Level 2 fair value totaling $37.4 million and $39.8 million at March 31, 2023 and December 31, 2022, respectively, and are included in “Accrued liabilities” on our consolidated balance sheets. See Note 5 for additional information on Level 2 inputs.
HEP Senior Notes
At March 31, 2023, HEP’s senior notes consisted of the following:
•$400.0 million in aggregate principal amount of 6.375 % senior notes maturing April 2027 (the “HEP 6.375 % Senior Notes”), and
•$500.0 million in aggregate principal amount of 5.0 % HEP senior notes maturing February 2028 (the “HEP 5.0 % Senior Notes”).
These HEP senior notes (collectively, the “HEP Senior Notes”) are unsecured and impose certain restrictive covenants, including limitations on HEP’s ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. HEP was in compliance with the restrictive covenants for the HEP Senior Notes as of March 31, 2023. At any time when the HEP Senior Notes are rated investment grade by either Moody’s Investors Service, Inc. or S&P Global Ratings and no default or event of default exists, HEP will not be subject to many of the foregoing covenants. Additionally, HEP has certain redemption rights at varying premiums over face value under the HEP Senior Notes.
Indebtedness under the HEP Senior Notes is guaranteed by certain of HEP’s wholly owned subsidiaries. HEP’s creditors have no recourse to our assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries.
25
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
The carrying amounts of long-term debt are as follows:
| March 31, 2023 | December 31, 2022 | |||||||||||||
| (In thousands) | ||||||||||||||
| HollyFrontier | ||||||||||||||
| $ | $ | |||||||||||||
| HF Sinclair | ||||||||||||||
Less current debt (1) | ( | ( | ||||||||||||
Unamortized discount and debt issuance costs (1) | ( | ( | ||||||||||||
| Total HF Sinclair long-term debt | ||||||||||||||
| HEP Credit Agreement | ||||||||||||||
| HEP | ||||||||||||||
| Unamortized discount and debt issuance costs | ( | ( | ||||||||||||
| Total HEP long-term debt | ||||||||||||||
| Total long-term debt | $ | $ | ||||||||||||
(1)The HollyFrontier 2.625 % Senior Notes and HF Sinclair 2.625 % Senior Notes, inclusive of unamortized discount and debt issuance costs of $0.6 million and $0.9 million at March 31, 2023 and December 31, 2022, respectively, are due October 2023 and were classified as current debt on our consolidated balance sheets.
The fair values of the senior notes are as follows:
| March 31, 2023 | December 31, 2022 | |||||||||||||
| (In thousands) | ||||||||||||||
| HollyFrontier and HF Sinclair Senior Notes | $ | $ | ||||||||||||
| HEP Senior Notes | $ | $ | ||||||||||||
These fair values are based on a Level 2 input. See Note 5 for additional information on Level 2 inputs.
We capitalized $1.2 million and $3.7 million for the three months ended March 31, 2023 and 2022, respectively, of interest attributable to construction projects.
26
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 11:Derivative Instruments and Hedging Activities
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, collar contracts, forward purchase and sales and futures contracts to mitigate price exposure with respect to our inventory positions, natural gas purchases, sales prices of refined products and crude oil costs.
Foreign Currency Risk Management
We are exposed to market risk related to the volatility in foreign currency exchange rates. We periodically enter into derivative contracts in the form of foreign exchange forward contracts to mitigate the exposure associated with fluctuations on intercompany notes with our foreign subsidiaries that are not denominated in the U.S. dollar.
Accounting Hedges
We periodically have forward sales contracts that lock in the prices of future sales of crude oil and refined product. These contracts have been designated as accounting hedges and are measured at fair value with offsetting adjustments (gains/losses) recorded directly to other comprehensive income (loss). These fair value adjustments are later reclassified to earnings as the hedging instruments mature.
The following table presents the pre-tax effect on other comprehensive income (“OCI”) and earnings due to fair value adjustments and maturities of hedging instruments under hedge accounting:
| Net Unrealized Gain Recognized in OCI | Loss Reclassified into Earnings | |||||||||||||||||||||||||||||||
| Derivatives Designated as Cash Flow Hedging Instruments | Three Months Ended March 31, | Income Statement Location | Three Months Ended March 31, | |||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Commodity contracts | $ | $ | Sales and other revenues | $ | ( | $ | ( | |||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||
Economic Hedges
We have commodity contracts including NYMEX futures contracts to lock in prices on forecasted purchases and sales of inventory, collar contracts and basis swap contracts to mitigate exposure to natural gas price volatility and forward purchase and sell contracts of refined products that serve as economic hedges (derivatives used for risk management, but not designated as accounting hedges). We also have forward currency contracts to fix the rate of foreign currency. In addition, our catalyst financing arrangements discussed in Note 10 could require repayment under certain conditions based on the future pricing of platinum, which is an embedded derivative. These contracts are measured at fair value with offsetting adjustments (gains/losses) recorded directly to earnings.
The following table presents the pre-tax effect on income due to maturities and fair value adjustments of our economic hedges:
| Gain (Loss) Recognized in Earnings | ||||||||||||||||||||||||||||||||
| Derivatives Not Designated as Hedging Instruments | Income Statement Location | Three Months Ended March 31, | ||||||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Commodity contracts | Cost of products sold | $ | $ | ( | ||||||||||||||||||||||||||||
| Operating expenses | ( | |||||||||||||||||||||||||||||||
| Interest expense | ( | |||||||||||||||||||||||||||||||
| Foreign currency contracts | Gain on foreign currency transactions | ( | ||||||||||||||||||||||||||||||
| Total | $ | ( | $ | ( | ||||||||||||||||||||||||||||
27
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
As of March 31, 2023, we have the following notional contract volumes related to outstanding derivative instruments:
| Notional Contract Volumes by Year of Maturity | ||||||||||||||||||||||||||||||||||||||
| Total Outstanding Notional | 2023 | 2024 | Unit of Measure | |||||||||||||||||||||||||||||||||||
| Derivatives Designated as Hedging Instruments | ||||||||||||||||||||||||||||||||||||||
| Forward diesel contracts - short | Barrels | |||||||||||||||||||||||||||||||||||||
Derivatives Not Designated as Hedging Instruments | ||||||||||||||||||||||||||||||||||||||
| NYMEX futures (WTI) - short | Barrels | |||||||||||||||||||||||||||||||||||||
| Forward gasoline and diesel contracts - long | Barrels | |||||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | U.S. dollar | |||||||||||||||||||||||||||||||||||||
| Forward commodity contracts (platinum) | Troy ounces | |||||||||||||||||||||||||||||||||||||
| Natural gas price swaps (basis spread) - long | MMBTU | |||||||||||||||||||||||||||||||||||||
| Natural gas collar contracts | MMBTU | |||||||||||||||||||||||||||||||||||||
The following table presents the fair value and balance sheet locations of our outstanding derivative instruments. These amounts are presented on a gross basis with offsetting balances that reconcile to a net asset or liability position in our consolidated balance sheets. We present on a net basis to reflect the net settlement of these positions in accordance with provisions of our master netting arrangements.
| Derivatives in Net Asset Position | Derivatives in Net Liability Position | |||||||||||||||||||||||||||||||||||||
| Gross Assets | Gross Liabilities Offset in Balance Sheet | Net Assets Recognized in Balance Sheet | Gross Liabilities | Gross Assets Offset in Balance Sheet | Net Liabilities Recognized in Balance Sheet | |||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||||||||||||||
| Derivatives designated as cash flow hedging instruments: | ||||||||||||||||||||||||||||||||||||||
Commodity forward contracts | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Derivatives not designated as cash flow hedging instruments: | ||||||||||||||||||||||||||||||||||||||
NYMEX futures contracts | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
Commodity price swap contracts | ||||||||||||||||||||||||||||||||||||||
| Commodity collar contracts | ||||||||||||||||||||||||||||||||||||||
Commodity forward contracts | ||||||||||||||||||||||||||||||||||||||
Foreign currency forward contracts | ( | |||||||||||||||||||||||||||||||||||||
| $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Total net balance | $ | $ | ||||||||||||||||||||||||||||||||||||
| Balance sheet classification: | $ | $ | ||||||||||||||||||||||||||||||||||||
28
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
| Derivatives in Net Asset Position | Derivatives in Net Liability Position | |||||||||||||||||||||||||||||||||||||
| Gross Assets | Gross Liabilities Offset in Balance Sheet | Net Assets Recognized in Balance Sheet | Gross Liabilities | Gross Assets Offset in Balance Sheet | Net Liabilities Recognized in Balance Sheet | |||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Derivatives not designated as cash flow hedging instruments: | ||||||||||||||||||||||||||||||||||||||
NYMEX futures contracts | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
Commodity price swap contracts | ||||||||||||||||||||||||||||||||||||||
| Commodity collar contracts | ||||||||||||||||||||||||||||||||||||||
Commodity forward contracts | ||||||||||||||||||||||||||||||||||||||
Foreign currency forward contracts | ||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Total net balance | $ | $ | ||||||||||||||||||||||||||||||||||||
| Balance sheet classification: | $ | $ | ||||||||||||||||||||||||||||||||||||
At March 31, 2023, we had a pre-tax net unrealized gain of $0.3 million classified in accumulated other comprehensive income that relates to all accounting hedges having contractual maturities through 2023, which assuming commodity prices remain unchanged, will be effectively transferred from accumulated other comprehensive loss into the statement of operations as the hedging instruments contractually mature over the next three-month period.
NOTE 12:Equity
In September 2022, 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. Privately negotiated repurchases from REH Company are also authorized under this share repurchase program, subject to REH Company’s interest in selling its shares and other limitations. The timing and amount of share repurchases, including those from REH Company, will depend on market conditions and corporate, tax, regulatory and other relevant considerations. This program may be discontinued at any time by our Board of Directors. In addition, we are authorized by our Board of Directors to repurchase shares in an amount sufficient to offset shares issued under our compensation programs.
During the three months ended March 31, 2023, we made open market and privately negotiated purchases of 4,793,857 shares for $240.3 million under our share repurchase program, of which 1,969,279 shares were repurchased for $100.0 million pursuant to privately negotiated repurchases from REH Company. As of March 31, 2023, we had remaining authorization to repurchase up to $419.8 million under this share repurchase program. We did not repurchase any shares in April 2023.
During the three months ended March 31, 2023 and 2022, we withheld 16,200 and 1,764 shares, respectively, of our common stock under the terms of stock-based compensation agreements to provide funds for the payment of payroll and income taxes due at the vesting of share-based awards.
On May 3, 2023, our Board of Directors declared a regular quarterly dividend in the amount of $0.45 per share, payable on June 1, 2023 to holders of record of common stock on May 18, 2023.
29
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 13:Other Comprehensive Income
The components and allocated tax effects of other comprehensive income are as follows:
| Before-Tax | Tax Expense (Benefit) | After-Tax | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Three Months Ended March 31, 2023 | ||||||||||||||||||||
| Net change in foreign currency translation adjustment | $ | $ | $ | |||||||||||||||||
| Net unrealized gain on hedging instruments | ||||||||||||||||||||
| Net change in pension and other post-retirement benefit obligations | ( | ( | ( | |||||||||||||||||
| Other comprehensive income attributable to HF Sinclair stockholders | $ | $ | $ | |||||||||||||||||
| Three Months Ended March 31, 2022 | ||||||||||||||||||||
| Net change in foreign currency translation adjustment | $ | $ | $ | |||||||||||||||||
| Net unrealized gain on hedging instruments | ||||||||||||||||||||
| Net change in pension and other post-retirement benefit obligations | ( | ( | ( | |||||||||||||||||
| Other comprehensive income attributable to HF Sinclair stockholders | $ | $ | $ | |||||||||||||||||
The following table presents the statements of operations line item effects for reclassifications out of accumulated other comprehensive income (loss) (“AOCI”):
| AOCI Component | Gain (Loss) Reclassified From AOCI | Statement of Operations Line Item | ||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Hedging instruments: | ||||||||||||||||||||
| Commodity price swaps | $ | ( | $ | ( | Sales and other revenues | |||||||||||||||
| ( | Income tax benefit | |||||||||||||||||||
| ( | ( | Net of tax | ||||||||||||||||||
Other post-retirement benefit obligations: | ||||||||||||||||||||
| Pension obligations | Gain on sale of assets and other | |||||||||||||||||||
| Income tax expense | ||||||||||||||||||||
| Net of tax | ||||||||||||||||||||
| Post-retirement healthcare obligations | Gain on sale of assets and other | |||||||||||||||||||
| Income tax expense | ||||||||||||||||||||
| Net of tax | ||||||||||||||||||||
| Retirement restoration plan | ( | ( | Gain on sale of assets and other | |||||||||||||||||
| ( | ( | Income tax benefit | ||||||||||||||||||
| ( | ( | Net of tax | ||||||||||||||||||
| Total reclassifications for the period | $ | $ | ( | |||||||||||||||||
30
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Accumulated other comprehensive loss in the equity section of our consolidated balance sheets includes:
| March 31, 2023 | December 31, 2022 | |||||||||||||
| (In thousands) | ||||||||||||||
| Foreign currency translation adjustment | $ | ( | $ | ( | ||||||||||
| Unrealized loss on pension obligations | ( | ( | ||||||||||||
| Unrealized gain on post-retirement benefit obligations | ||||||||||||||
| Unrealized gain on hedging instruments | ||||||||||||||
| Accumulated other comprehensive loss | $ | ( | $ | ( | ||||||||||
NOTE 14:Contingencies
We are a party to various litigation and legal proceedings which we believe, based on advice of counsel, will not either individually or in the aggregate have a materially adverse effect on our financial condition, results of operations or cash flows.
Pursuant to the Business Combination Agreement, all pre-closing RINs obligations of REH Company’s subsidiaries (which are now subsidiaries of HF Sinclair as a result of the HFC Transactions) remain with REH Company. REH Company is required to transfer to HF Sinclair the number of each applicable type of RIN required for REH Company to demonstrate compliance for any pre-closing obligations it retained by the deadlines set forth in the Business Combination Agreement. If REH Company does not deliver all the required RINs by the applicable deadline, then, within five days following the delivery of an invoice therefor, REH Company is required to pay to HF Sinclair the amount of all out-of-pocket costs and expenses incurred by HF Sinclair to comply with REH Company’s pre-closing obligations prior to such deadline, including the price of any RINs purchased by HF Sinclair. In relation to this, 2,570,000 shares of HF Sinclair common stock, out of the purchase consideration paid to REH Company, are held in escrow to secure REH Company’s RINs credit obligations under Section 6.22 of the Business Combination Agreement. The 5,290,000
During 2017, 2018 and 2019, the EPA granted the Cheyenne, Wyoming refinery (the “Cheyenne Refinery”) and the refinery in Woods Cross, Utah (the “Woods Cross Refinery”) each a one-year small refinery exemption from the Renewable Fuel Standard (“RFS”) program requirements for the 2016, 2017 and 2018, respectively, calendar years. As a result, the Cheyenne Refinery’s and Woods Cross Refinery’s gasoline and diesel production are not subject to the Renewable Volume Obligation for the respective years. Upon each exemption granted, we increased our inventory of RINs and reduced our cost of products sold.
On April 7, 2022, the EPA issued a decision reversing the grant of small refinery exemptions for our Woods Cross and Cheyenne refineries for the 2018 compliance year. On June 3, 2022, the EPA issued a decision reversing the grant of small refinery exemptions for our Woods Cross and Cheyenne refineries for the 2016 compliance year and denying small refinery exemption petitions for our Woods Cross and Cheyenne refineries for the 2019 and 2020 compliance years. Various subsidiaries of HollyFrontier are currently pursuing legal challenges to the EPA’s decisions to reverse its grant of small refinery exemptions for the 2016 and 2018 compliance years. The first lawsuit, filed against the EPA on May 6, 2022 and currently pending before the U.S. Court of Appeals for the DC Circuit, seeks to have the EPA’s reversal of our 2018 small refinery exemption petitions overturned. The second lawsuit, filed against the EPA on August 5, 2022 and currently pending before the U.S. Court of Appeals for the DC Circuit, seeks to have the EPA’s reversal of our 2016 small refinery exemption petitions overturned and to have the EPA’s denial of our 2019 and 2020 small refinery exemption petitions reversed. In addition, for both the 2016 and 2018 compliance years, pursuant to the June 2022 and April 2022 decisions, respectively, the EPA established an alternative compliance demonstration for small refineries pursuant to which the EPA is not imposing any obligations for the small refineries whose exemptions were reversed. On June 24, 2022, Growth Energy filed two lawsuits in the U.S. Court of Appeals for the DC Circuit against the EPA challenging the alternative compliance demonstration for the 2016 and 2018 compliance years. On July 25, 2022, various subsidiaries of HollyFrontier intervened on behalf of the EPA to aid the defense of the EPA’s alternative compliance demonstration decision. It is too early to predict the outcome of these matters. We are unable to estimate the costs we may incur, if any, at this time.
31
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 15:Segment Information
Our operations are organized into five reportable segments, Refining, Renewables, Marketing, Lubricants and Specialty Products and HEP. Our operations that are not included in one of these five reportable segments are included in Corporate and Other. Intersegment transactions are eliminated in our consolidated financial statements and are included in Eliminations. Corporate and Other and Eliminations are aggregated and presented under the Corporate, Other and Eliminations column.
The Refining segment represents the operations of our El Dorado, Tulsa, Navajo, Woods Cross and Puget Sound refineries and HF Sinclair Asphalt Company LLC (“Asphalt”). Effective with our acquisition that closed on March 14, 2022, the Refining segment includes our Parco and Casper refineries. Refining activities involve the purchase and refining of crude oil and wholesale marketing of refined products, such as gasoline, diesel fuel and jet fuel. These petroleum products are primarily marketed in the Mid-Continent, Southwest and Rocky Mountains extending into the Pacific Northwest geographic regions of the United States. Asphalt operates various asphalt terminals in Arizona, New Mexico and Oklahoma.
The Renewables segment represents the operations of our Cheyenne renewable diesel unit (“RDU”), which was mechanically complete in the fourth quarter of 2021 and operational in the first quarter of 2022, the pre-treatment unit at our Artesia, New Mexico facility, which was completed and operational in the first quarter of 2022 and the Artesia RDU, which was completed and operational in the second quarter of 2022. Also, effective with our acquisition that closed on March 14, 2022, the Renewables segment includes the Sinclair RDU.
Effective with our acquisition that closed on March 14, 2022, the Marketing segment represents branded fuel sales to Sinclair branded sites in the United States and licensing fees for the use of the Sinclair brand at additional locations throughout the country. The Marketing segment also includes branded fuel sales to non-Sinclair branded sites from legacy HollyFrontier agreements and revenues from other marketing activities. Our branded sites are located in several states across the United States with the highest concentration of the sites located in our West and Mid-Continent regions.
The Lubricants and Specialty Products segment represents Petro-Canada Lubricants Inc.’s production operations, located in Mississauga, Ontario, that includes lubricant products such as base oils, white oils, specialty products and finished lubricants, and the operations of our Petro-Canada Lubricants business that includes the marketing of products to both retail and wholesale outlets through a global sales network with locations in Canada, the United States, Europe and China. Additionally, the Lubricants and Specialty Products segment includes specialty lubricant products produced at our Tulsa refineries that are marketed throughout North America and are distributed in Central and South America and the operations of Red Giant Oil Company LLC, one of the largest suppliers of locomotive engine oil in North America. Also, the Lubricants and Specialty Products segment includes Sonneborn, a producer of specialty hydrocarbon chemicals such as white oils, petrolatums and waxes with manufacturing facilities in the United States and Europe.
The HEP segment includes all of the operations of HEP, which owns and operates logistics and refinery assets consisting of petroleum product and crude oil pipelines, terminals, tankage, loading rack facilities and refinery processing units in the Mid-Continent, Southwest and Rocky Mountains geographic regions of the United States. The HEP segment also includes 50 25.06 % ownership interest in the Saddle Butte Pipeline and a 49.995 % ownership interest in the Pioneer Pipeline. Revenues from the HEP segment are earned through transactions with unaffiliated parties for pipeline transportation, rental and terminalling operations as well as revenues relating to pipeline transportation services provided for our refining operations. Due to certain basis differences, our reported amounts for the HEP segment may not agree to amounts reported in HEP’s periodic public filings.
The accounting policies for our segments are the same as those described in the summary of significant accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2022.
32
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
| Refining | Renewables | Marketing | Lubricants and Specialty Products | HEP | Corporate, Other and Eliminations | Consolidated Total | ||||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| Sales and other revenues: | ||||||||||||||||||||||||||||||||||||||||||||
| Revenues from external customers | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Intersegment revenues | ( | — | ||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Cost of products sold (exclusive of lower of cost or market inventory) | $ | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Lower of cost or market inventory valuation adjustment | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Operating expenses | $ | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | $ | $ | ( | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||
| Earnings of equity method investments | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Capital expenditures | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Sales and other revenues: | ||||||||||||||||||||||||||||||||||||||||||||
| Revenues from external customers | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Intersegment revenues | ( | — | ||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Cost of products sold (exclusive of lower of cost or market inventory) | $ | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Lower of cost or market inventory valuation adjustment | $ | $ | ( | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||||||||||||
| Operating expenses | $ | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | $ | $ | ( | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||
| Earnings of equity method investments | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Capital expenditures | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
33
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 16:Subsequent Event
34
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 to HF Sinclair Corporation (“HF Sinclair”) and its consolidated subsidiaries or to HF Sinclair or an individual subsidiary and not to any other person with certain exceptions. Generally, the words “we,” “our,” “ours” and “us” include Holly Energy Partners, L.P. (“HEP”) and its subsidiaries as consolidated subsidiaries of HF Sinclair, unless when used in disclosures of transactions or obligations between HEP and HF Sinclair or its other subsidiaries. This document contains certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of HF Sinclair. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries. References herein to HF Sinclair “we,” “our,” “ours,” and “us” with respect to time periods prior to March 14, 2022 refer to HollyFrontier Corporation (“HollyFrontier”) and its consolidated subsidiaries and do not include Hippo Holding LLC (now known as Sinclair Holding LLC), the parent company of Sinclair Oil LLC, Sinclair Transportation Company LLC or their respective consolidated subsidiaries (collectively, the “Acquired Sinclair Businesses”). References herein to HF Sinclair “we,” “our,” “ours,” and “us” with respect to time periods from and after March 14, 2022 include the operations of the Acquired Sinclair Businesses. Unless otherwise specified, the financial statements included herein include financial information for HF Sinclair, which for the time period from March 14, 2022 to March 31, 2023 includes the combined business operations of HollyFrontier and the Acquired Sinclair Businesses.
OVERVIEW
We are an independent energy company that produces and markets high-value light products such as gasoline, diesel fuel, jet fuel, renewable diesel and other specialty products. We own and operate refineries located in Kansas, Oklahoma, New Mexico, Washington, Utah and Wyoming. We market our refined products principally in the Southwest United States, the Rocky Mountains extending into the Pacific Northwest and in other neighboring Plains states. We supply high-quality fuels to more than 1,500 branded stations and license the use of the Sinclair brand at more than 300 additional locations throughout the country. In addition, our subsidiaries produce and market base oils and other specialized lubricants in the United States, Canada and the Netherlands, and export products to more than 80 countries. Through our subsidiaries, we produce renewable diesel at two of our facilities in Wyoming and our facility in New Mexico. We also own a 47% limited partner interest and a non-economic general partner interest in HEP, a master limited partnership that provides petroleum product and crude oil transportation, terminalling, storage and throughput services to the petroleum industry, including HF Sinclair subsidiaries.
For the three months ended March 31, 2023, net income attributable to HF Sinclair stockholders was $353.3 million compared to $160.0 million for the three months ended March 31, 2022..Our results for the first quarter of 2023 were favorably impacted by healthy demand for transportation fuels, lubricants and transportation and terminal services, favorable crude spreads and constrained refined product supply due to global supply disruption. We continue to adjust our operational plans to the evolving market conditions. The extent to which our future results are affected by volatile regional and global economic conditions or the COVID-19 pandemic will depend on various factors and consequences beyond our control.
In the Refining segment, we saw healthy refining margins in both the West and Mid-continent regions as a result of steady demand, tight supply and favorable crude spreads. The first quarter of 2023 was a heavy quarter for turnarounds; with turnarounds completed at our Puget Sound, El Dorado and Woods Cross Refineries, which also provided us the opportunity to execute maintenance strategies focused on improving operational reliability.
In the Renewables segment, we continued to optimize the operation of our assets and reliability.
In the Marketing segment, we continued to see strong value in the Sinclair brand as the marketing business provides a consistent sales channel with margin uplift for our produced fuels.
In the Lubricants segment, effective the first quarter of 2023, management views the Lubricants and Specialty Products segment as an integrated business of processing feedstocks into base oils and processing base oils into finished lubricant products along with the packaging, distribution and sales to customers. We saw strong performance (excluding FIFO) driven by product mix optimization
35
HEP Proposal
On May 3, 2023, we submitted a non-binding proposal to acquire all of the outstanding common units (“Common Units”) of HEP not beneficially owned by us or our affiliates in exchange for common stock, par value $0.01 per share (“Common Stock”), of HF Sinclair. Under the proposal, HEP unitholders would receive newly issued shares of Common Stock at a fixed exchange ratio of 0.3714 per each publicly held Common Unit, which was derived using the 30-day volume weighted average prices for each security as of market close on May 3, 2023 (the “Proposed HEP Transaction”). The proposal has been made to the board of directors of the ultimate general partner of HEP. The Proposed HEP Transaction is subject to the negotiation and execution of a definitive agreement. There can be no assurance that a definitive agreement will be executed or that any transaction will be approved or consummated.
Sinclair Acquisition
On March 14, 2022, HollyFrontier and HEP announced the establishment of HF Sinclair as the new parent holding company of HollyFrontier and HEP and their subsidiaries, and the completion of their respective acquisitions (the “Sinclair Transactions”) of Sinclair Oil Corporation (now known as Sinclair Oil LLC, “Sinclair Oil”) and Sinclair Transportation Company LLC (“STC”) from The Sinclair Companies (now known as REH Company and referred to herein as “REH Company”). See Note 2 “Acquisitions” and Note 3 “Holly Energy Partners” in the Notes to Consolidated Financial Statements for additional information.
Renewable Fuel Standard Regulations
Pursuant to the 2007 Energy Independence and Security Act, the Environmental 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 $157.5 million for the three months ended March 31, 2023. At March 31, 2023, our open RINs credit obligations were $75.7 million. See Note 2 “Acquisitions” in the Notes to Consolidated Financial Statements for additional information on RINs credit obligations assumed in the Sinclair Transactions.
Recent U.S. Tax Legislation
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the "Inflation Reduction Act") into law. As part of this Inflation Reduction Act, an excise tax of 1% tax was imposed on the fair market value of net stock repurchases made after December 31, 2022, which has been reflected in our financials.
OUTLOOK
Within our Refining segment, for the second quarter of 2023, we expect to run between 550,000 – 580,000 barrels per day of crude oil. This guidance reflects planned maintenance activities at our Navajo and Parco refineries during the period. Refined product margins are expected to remain healthy driven by constrained refined product supply in the markets we serve, coupled with seasonal demand from the upcoming driving season.
Within our Renewables segment, for the second quarter of 2023, we expect to continue to increase throughputs by optimizing our operations, and we expect to achieve normalized run rates in the second half of the year.
Within our Marketing segment, we expect to see 5% or more annual growth in the number of sites.
Within our Lubricants and Specialty Products segment, we expect favorable product mix, seasonal improvement for transportation lubricants demand, offset by softness in certain finished products into the second quarter of 2023. We continue to look for ways to optimize the business.
Subject to the final negotiated terms of a definitive agreement on the Proposed HEP Transaction and the discretion of the board of directors of the ultimate general partner of HEP to declare distributions, HEP expects its future cash distribution will continue as long as it remains a public company.
In September 2022, our Board of Directors authorized a new $1.0 billion share repurchase program. The timing and amount of share repurchases, including those from REH Company, will depend on market conditions and corporate, tax, regulatory and other relevant considerations. On May 3, 2023, our Board of Directors also declared a regular quarterly dividend in the amount of $0.45 per share. The dividend is payable on June 1, 2023 to holders of record of common stock on May 18, 2023.
36
A more detailed discussion of our financial and operating results for the three months ended March 31, 2023 and 2022 is presented in the following sections.
37
RESULTS OF OPERATIONS
Financial Data
| Three Months Ended March 31, | Change from 2022 | |||||||||||||||||||||||||
| 2023 | 2022 | Change | Percent | |||||||||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||||||||
| Sales and other revenues | $ | 7,565,142 | $ | 7,458,750 | $ | 106,392 | 1 | % | ||||||||||||||||||
| 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) | 6,104,057 | 6,502,012 | (397,955) | (6) | ||||||||||||||||||||||
| Lower of cost or market inventory valuation adjustment | 47,597 | (8,551) | 56,148 | (657) | ||||||||||||||||||||||
| 6,151,654 | 6,493,461 | (341,807) | (5) | |||||||||||||||||||||||
| Operating expenses (exclusive of depreciation and amortization) | 639,383 | 477,434 | 161,949 | 34 | ||||||||||||||||||||||
Selling, general and administrative expenses (exclusive of depreciation and amortization) | 95,913 | 110,422 | (14,509) | (13) | ||||||||||||||||||||||
| Depreciation and amortization | 173,983 | 144,601 | 29,382 | 20 | ||||||||||||||||||||||
| Total operating costs and expenses | 7,060,933 | 7,225,918 | (164,985) | (2) | ||||||||||||||||||||||
| Income from operations | 504,209 | 232,832 | 271,377 | 117 | ||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Earnings of equity method investments | 3,882 | 3,626 | 256 | 7 | ||||||||||||||||||||||
| Interest income | 19,935 | 997 | 18,938 | 1,899 | ||||||||||||||||||||||
| Interest expense | (45,822) | (34,859) | (10,963) | 31 | ||||||||||||||||||||||
| Gain on foreign currency transactions | 870 | 139 | 731 | 526 | ||||||||||||||||||||||
| Gain on sale of assets and other | 1,631 | 3,895 | (2,264) | (58) | ||||||||||||||||||||||
| (19,504) | (26,202) | 6,698 | (26) | |||||||||||||||||||||||
| Income before income taxes | 484,705 | 206,630 | 278,075 | 135 | ||||||||||||||||||||||
| Income tax expense | 99,700 | 21,329 | 78,371 | 367 | ||||||||||||||||||||||
| Net income | 385,005 | 185,301 | 199,704 | 108 | ||||||||||||||||||||||
| Less net income attributable to noncontrolling interest | 31,739 | 25,327 | 6,412 | 25 | ||||||||||||||||||||||
| Net income attributable to HF Sinclair stockholders | $ | 353,266 | $ | 159,974 | $ | 193,292 | 121 | % | ||||||||||||||||||
| Earnings per share attributable to HF Sinclair stockholders: | ||||||||||||||||||||||||||
| Basic | $ | 1.79 | $ | 0.90 | $ | 0.89 | 99 | % | ||||||||||||||||||
| Diluted | $ | 1.79 | $ | 0.90 | $ | 0.89 | 99 | % | ||||||||||||||||||
| Cash dividends declared per common share | $ | 0.45 | $ | — | $ | 0.45 | 100 | % | ||||||||||||||||||
| Average number of common shares outstanding: | ||||||||||||||||||||||||||
| Basic | 195,445 | 175,081 | 20,364 | 12 | % | |||||||||||||||||||||
| Diluted | 195,445 | 175,081 | 20,364 | 12 | % | |||||||||||||||||||||
Balance Sheet Data
| March 31, 2023 | December 31, 2022 | |||||||||||||
| (Unaudited) | ||||||||||||||
| (In thousands) | ||||||||||||||
| Cash and cash equivalents | $ | 1,364,930 | $ | 1,665,066 | ||||||||||
| Working capital | $ | 3,440,795 | $ | 3,502,790 | ||||||||||
| Total assets | $ | 18,006,008 | $ | 18,125,483 | ||||||||||
| Total debt | $ | 3,240,245 | $ | 3,255,472 | ||||||||||
| Total equity | $ | 10,050,527 | $ | 10,017,572 | ||||||||||
38
Other Financial Data
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 177,705 | $ | 461,036 | ||||||||||||||||||||||
| Net cash used for investing activities | $ | (100,237) | $ | (385,176) | ||||||||||||||||||||||
| Net cash provided by (used for) financing activities | $ | (379,110) | $ | 281,386 | ||||||||||||||||||||||
| Capital expenditures | $ | 100,069 | $ | 158,296 | ||||||||||||||||||||||
EBITDA (1) | $ | 652,836 | $ | 359,766 | ||||||||||||||||||||||
(1)Earnings before interest, taxes, depreciation and amortization, which we refer to as “EBITDA,” is calculated as net income attributable to HF Sinclair stockholders plus (i) interest expense, net of interest income, (ii) income tax provision, and (iii) depreciation and amortization. EBITDA is not a calculation provided for under GAAP; however, the amounts included in the EBITDA calculation are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies. EBITDA is presented here because it is a widely used financial indicator used by investors and analysts to measure performance. EBITDA is also used by our management for internal analysis and as a basis for financial covenants. EBITDA presented above is reconciled to net income under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.
Segment Operating Data
Our operations are organized into five reportable segments, Refining, Renewables, Marketing, Lubricants and Specialty Products and HEP. See Note 15 “Segment Information” in the Notes to Consolidated Financial Statements for additional information on our reportable segments.
Refining Segment Operating Data
The disaggregation of our refining geographic operating data is presented in two regions, Mid-Continent and West, to best reflect the economic drivers of our refining operations. The Mid-Continent region is comprised of the El Dorado and Tulsa refineries. The West region is comprised of the Puget Sound, Navajo, Woods Cross, Parco and Casper refineries. The refinery operations of the Parco and Casper refineries are included for the period March 14, 2022 (date of acquisition) through March 31, 2023. The following tables set forth information, including non-GAAP performance measures, about our consolidated refinery operations. The refinery gross and net operating margins do not include the non-cash effects of lower of cost or market inventory valuation adjustments and depreciation and amortization. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 (8) | |||||||||||||||||||||||||
| Mid-Continent Region | ||||||||||||||||||||||||||
Crude charge (BPD) (1) | 211,390 | 290,200 | ||||||||||||||||||||||||
Refinery throughput (BPD) (2) | 231,260 | 305,390 | ||||||||||||||||||||||||
Sales of produced refined products (BPD) (3) | 205,010 | 280,260 | ||||||||||||||||||||||||
Refinery utilization (4) | 81.3 | % | 111.6 | % | ||||||||||||||||||||||
Average per produced barrel (5) | ||||||||||||||||||||||||||
| Refinery gross margin | $ | 20.34 | $ | 9.32 | ||||||||||||||||||||||
Refinery operating expenses (6) | 9.37 | 6.02 | ||||||||||||||||||||||||
| Net operating margin | $ | 10.97 | $ | 3.30 | ||||||||||||||||||||||
Refinery operating expenses per throughput barrel (7) | $ | 8.31 | $ | 5.53 | ||||||||||||||||||||||
39
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 (8) | |||||||||||||||||||||||||
| Mid-Continent Region | ||||||||||||||||||||||||||
| Feedstocks: | ||||||||||||||||||||||||||
| Sweet crude oil | 65 | % | 63 | % | ||||||||||||||||||||||
| Sour crude oil | 15 | % | 14 | % | ||||||||||||||||||||||
| Heavy sour crude oil | 11 | % | 18 | % | ||||||||||||||||||||||
| Other feedstocks and blends | 9 | % | 5 | % | ||||||||||||||||||||||
| Total | 100 | % | 100 | % | ||||||||||||||||||||||
| Sales of produced refined products: | ||||||||||||||||||||||||||
| Gasolines | 49 | % | 50 | % | ||||||||||||||||||||||
| Diesel fuels | 29 | % | 33 | % | ||||||||||||||||||||||
| Jet fuels | 8 | % | 7 | % | ||||||||||||||||||||||
| Fuel oil | 1 | % | 1 | % | ||||||||||||||||||||||
| Asphalt | 4 | % | 3 | % | ||||||||||||||||||||||
| Base oils | 5 | % | 4 | % | ||||||||||||||||||||||
| LPG and other | 4 | % | 2 | % | ||||||||||||||||||||||
| Total | 100 | % | 100 | % | ||||||||||||||||||||||
| West Region | ||||||||||||||||||||||||||
Crude charge (BPD) (1) | 287,110 | 234,880 | ||||||||||||||||||||||||
Refinery throughput (BPD) (2) | 326,870 | 259,340 | ||||||||||||||||||||||||
Sales of produced refined products (BPD) (3) | 310,950 | 241,910 | ||||||||||||||||||||||||
Refinery utilization (4) | 68.7 | % | 70.6 | % | ||||||||||||||||||||||
Average per produced barrel (5) | ||||||||||||||||||||||||||
| Refinery gross margin | $ | 25.92 | $ | 16.61 | ||||||||||||||||||||||
Refinery operating expenses (6) | 12.32 | 9.33 | ||||||||||||||||||||||||
| Net operating margin | $ | 13.60 | $ | 7.28 | ||||||||||||||||||||||
Refinery operating expenses per throughput barrel (7) | $ | 11.72 | $ | 8.70 | ||||||||||||||||||||||
| Feedstocks: | ||||||||||||||||||||||||||
| Sweet crude oil | 32 | % | 23 | % | ||||||||||||||||||||||
| Sour crude oil | 40 | % | 55 | % | ||||||||||||||||||||||
| Heavy sour crude oil | 11 | % | 7 | % | ||||||||||||||||||||||
| Black wax crude oil | 5 | % | 6 | % | ||||||||||||||||||||||
| Other feedstocks and blends | 12 | % | 9 | % | ||||||||||||||||||||||
| Total | 100 | % | 100 | % | ||||||||||||||||||||||
| Sales of produced refined products: | ||||||||||||||||||||||||||
| Gasolines | 57 | % | 52 | % | ||||||||||||||||||||||
| Diesel fuels | 31 | % | 27 | % | ||||||||||||||||||||||
| Jet fuels | 4 | % | 6 | % | ||||||||||||||||||||||
| Fuel oil | 2 | % | 10 | % | ||||||||||||||||||||||
| Asphalt | 2 | % | 2 | % | ||||||||||||||||||||||
| LPG and other | 4 | % | 3 | % | ||||||||||||||||||||||
| Total | 100 | % | 100 | % | ||||||||||||||||||||||
40
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 (8) | |||||||||||||||||||||||||
| Consolidated | ||||||||||||||||||||||||||
Crude charge (BPD) (1) | 498,500 | 525,080 | ||||||||||||||||||||||||
Refinery throughput (BPD) (2) | 558,130 | 564,730 | ||||||||||||||||||||||||
Sales of produced refined products (BPD) (3) | 515,960 | 522,170 | ||||||||||||||||||||||||
Refinery utilization (4) | 73.5 | % | 88.6 | % | ||||||||||||||||||||||
Average per produced barrel (5) | ||||||||||||||||||||||||||
| Refinery gross margin | $ | 23.70 | $ | 12.69 | ||||||||||||||||||||||
Refinery operating expenses (6) | 11.15 | 7.55 | ||||||||||||||||||||||||
| Net operating margin | $ | 12.55 | $ | 5.14 | ||||||||||||||||||||||
Refinery operating expenses per throughput barrel (7) | $ | 10.31 | $ | 6.98 | ||||||||||||||||||||||
| Feedstocks: | ||||||||||||||||||||||||||
| Sweet crude oil | 46 | % | 45 | % | ||||||||||||||||||||||
| Sour crude oil | 30 | % | 32 | % | ||||||||||||||||||||||
| Heavy sour crude oil | 10 | % | 13 | % | ||||||||||||||||||||||
| Black wax crude oil | 3 | % | 3 | % | ||||||||||||||||||||||
| Other feedstocks and blends | 11 | % | 7 | % | ||||||||||||||||||||||
| Total | 100 | % | 100 | % | ||||||||||||||||||||||
| Sales of produced refined products: | ||||||||||||||||||||||||||
| Gasolines | 54 | % | 51 | % | ||||||||||||||||||||||
| Diesel fuels | 30 | % | 31 | % | ||||||||||||||||||||||
| Jet fuels | 6 | % | 6 | % | ||||||||||||||||||||||
| Fuel oil | 1 | % | 5 | % | ||||||||||||||||||||||
| Asphalt | 3 | % | 2 | % | ||||||||||||||||||||||
| Base oils | 2 | % | 2 | % | ||||||||||||||||||||||
| LPG and other | 4 | % | 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 Asphalt and inter-segment sales) and does not include volumes of refined products purchased for resale or volumes of excess crude oil sold.
(4)Represents crude charge divided by total crude capacity (BPSD). Our consolidated crude capacity is 678,000 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.
(8)We acquired the Parco and Casper refineries on March 14, 2022. Refining operating data for the three months ended March 31, 2022 includes crude oil and feedstocks processed and refined products sold at our Parco and Casper refineries for the period March 14, 2022 through March 31, 2022 only, averaged over the 90 days in the three months ended March 31, 2022.
41
Renewables Segment Operating Data
The following table sets forth information about our renewables operations and includes our Sinclair RDU for the period March 14, 2022 (the date of acquisition) through March 31, 2023.
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| Renewables | ||||||||||||||||||||||||||
| Sales volumes (in thousand gallons) | 46,012 | 4,943 | ||||||||||||||||||||||||
Average per produced gallon (1) | ||||||||||||||||||||||||||
| Renewables gross margin | $ | 0.77 | $ | 0.63 | ||||||||||||||||||||||
Renewables operating expenses (2) | 0.68 | 5.48 | ||||||||||||||||||||||||
| Net operating margin | $ | 0.09 | $ | (4.85) | ||||||||||||||||||||||
(1)Represents average amount per produced gallon sold, which is a non-GAAP measure. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.
(2)Represents total Renewables segment operating expenses, exclusive of depreciation and amortization, divided by sales volumes of renewable diesel produced at our renewable diesel units.
Marketing Segment Operating Data
The following table sets forth information about our marketing operations and includes our Sinclair branded fuel business for the period March 14, 2022 (the date of acquisition) through March 31, 2023.
| Three Months Ended March 31, | ||||||||||||||||||||||||||
2023 (1) | 2022 | |||||||||||||||||||||||||
| Marketing | ||||||||||||||||||||||||||
| Number of branded sites at period end | 1,511 | 1,323 | ||||||||||||||||||||||||
| Sales volumes (in thousand gallons) | 328,407 | 84,913 | ||||||||||||||||||||||||
Margin per gallon of sales (2) | $ | 0.04 | $ | 0.07 | ||||||||||||||||||||||
(1)Includes non-Sinclair branded sites from legacy HollyFrontier agreements.
(2)Represents average amount per gallon sold, which is a non-GAAP measure. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.
Lubricants and Specialty Products Segment Operating Data
The following table sets forth information about our lubricants and specialty products operations.
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| Lubricants and Specialty Products | ||||||||||||||||||||||||||
| Sales of produced refined products (BPD) | 31,790 | 35,010 | ||||||||||||||||||||||||
| Sales of produced refined products: | ||||||||||||||||||||||||||
| Finished products | 50 | % | 51 | % | ||||||||||||||||||||||
| Base oils | 29 | % | 30 | % | ||||||||||||||||||||||
| Other | 21 | % | 19 | % | ||||||||||||||||||||||
| Total | 100 | % | 100 | % | ||||||||||||||||||||||
Effective the first quarter of 2023, management views the Lubricants and Specialty Products segment as an integrated business of processing feedstocks into base oils and processing base oils into finished lubricant products along with the packaging, distribution and sales to customers.
42
Results of Operations – Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Summary
Net income attributable to HF Sinclair stockholders for the three months ended March 31, 2023 was $353.3 million ($1.79 per basic and diluted share), a $193.3 million increase compared to net income of $160.0 million ($0.90 per basic and diluted share) for the three months ended March 31, 2022. The increase in net income was principally driven by higher refinery gross margins. Lower of cost or market inventory reserve adjustments related to our renewables inventories decreased pre-tax earnings by $47.6 million for the three months ended March 31, 2023. Refinery gross margins for the three months ended March 31, 2023 increased to $23.70 per produced barrel sold from $12.69 for the three months ended March 31, 2022.
Sales and Other Revenues
Sales and other revenues increased 1% from $7,458.8 million for the three months ended March 31, 2022 to $7,565.1 million for the three months ended March 31, 2023 principally due to increased sales prices, partially offset by lower refined product sales volumes. Sales and other revenues included $937.4 million, $733.7 million and $202.4 million in unaffiliated revenues related to our Marketing, Lubricants and Specialty Products and Renewables segments, respectively, for the three months ended March 31, 2023. Sales and other revenues included $277.0 million, $753.6 million and $28.3 million in unaffiliated revenues related to our Marketing, Lubricants and Specialty Products and Renewables segments, respectively, for the three months ended March 31, 2022.
Cost of Products Sold
Total cost of products sold decreased 5% from $6,493.5 million for the three months ended March 31, 2022 to $6,151.7 million for the three months ended March 31, 2023 principally due to lower crude oil costs and lower refined product sales volumes. During the first quarter of 2023, we recognized a lower of cost or market inventory valuation adjustment charge related to our renewables inventories of $47.6 million as compared to a benefit of $8.6 million for the three months ended March 31, 2022. Within our Lubricants and Specialty Products segment, FIFO impact was a charge of $13.9 million for the three months ended March 31, 2023 and a benefit of $58.4 million for the three months ended March 31, 2022.
Gross Refinery Margins
Gross refinery margin per produced barrel sold increased 87% from $12.69 for the three months ended March 31, 2022 to $23.70 for the three months ended March 31, 2023. The increase was due to higher average per barrel sold sales prices and lower crude oil and feedstock prices during the three months ended March 31, 2023. 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 34% from $477.4 million for the three months ended March 31, 2022 to $639.4 million for the three months ended March 31, 2023 primarily due to our acquisition of the Acquired Sinclair Businesses and higher purchased fuel costs in the current period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 13% from $110.4 million for the three months ended March 31, 2022 to $95.9 million for the three months ended March 31, 2023 primarily due to lower professional services and legal costs as compared to the prior period. We incurred $3.9 million and $25.0 million in acquisition integration and regulatory costs during the three months ended March 31, 2023 and 2022, respectively.
Depreciation and Amortization Expenses
Depreciation and amortization increased 20% from $144.6 million for the three months ended March 31, 2022 to $174.0 million for the three months ended March 31, 2023. This increase was due principally to depreciation and amortization attributable to the Acquired Sinclair Businesses and newly capitalized projects related to our renewable diesel units.
Interest Income
Interest income was $19.9 million for the three months ended March 31, 2023 compared to $1.0 million for the three months ended March 31, 2022. The increase in interest income was primarily due to the increase in the average cash balance and higher interest rates on cash investments.
43
Interest Expense
Interest expense was $45.8 million for the three months ended March 31, 2023 compared to $34.9 million for the three months ended March 31, 2022. This increase was primarily due to the April 2022 issuance of $400 million in aggregate principal amount of HEP’s 6.375% senior notes maturing in April 2027 and higher market interest rates on HEP’s revolving credit facility during the three months ended March 31, 2023.
For the three months ended March 31, 2023 and 2022, interest expense attributable to our HEP segment was $26.0 million and $13.6 million, respectively.
Gain on Foreign Currency Transactions
Remeasurement adjustments resulting from the foreign currency conversion of the intercompany financing notes payable by Petro-Canada Lubricants Inc. net of mark-to-market valuations on foreign exchange forward contracts with banks which hedge the foreign currency exposure on these intercompany notes was a net gain of $0.9 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively. For the three months ended March 31, 2023 and 2022, gain on foreign currency transactions included a gain of $0.1 million and a loss of $6.4 million, respectively, on foreign exchange forward contracts (utilized as an economic hedge).
Income Taxes
For the three months ended March 31, 2023, we recorded an income tax expense of $99.7 million compared to $21.3 million for the three months ended March 31, 2022. This increase was principally due to higher pre-tax income during the three months ended March 31, 2023 compared to the same period of 2022. Our effective tax rates were 20.6% and 10.3% for the three months ended March 31, 2023 and 2022, respectively. The difference between the U.S. federal statutory rate and the effective tax rate for the three months ended March 31, 2023 is primarily due to the impact of federal tax credits and the relationship between pre-tax results and the earnings attributable to the noncontrolling interest that is not included in income for tax purposes. The difference in the U.S. federal statutory rate and the effective tax rate for the three months ended March 31, 2022 was primarily due to the impact of federal tax credits and the decrease in the state tax rate applied to our deferred tax assets and liabilities as a result of the Sinclair Transaction.
LIQUIDITY AND CAPITAL RESOURCES
HF Sinclair Credit Agreement
We have a $1.65 billion senior unsecured revolving credit facility maturing in April 2026 (the “HF Sinclair Credit Agreement”). The HF Sinclair Credit Agreement may be used for revolving credit loans and letters of credit from time to time and is available to fund general corporate purposes. At March 31, 2023, we were in compliance with all covenants, had no outstanding borrowings and had outstanding letters of credit totaling $2.3 million under the HF Sinclair Credit Agreement.
HF Sinclair Financing Arrangements
Certain of our wholly owned subsidiaries entered into financing arrangements whereby such subsidiaries sold a portion of their precious metals catalyst to a financial institution and then leased back the precious metals catalyst in exchange for cash. The volume of the precious metals catalyst and the lease rate are fixed over the term of each lease, and the lease payments are recorded as interest expense. The current leases mature in one year or less. Upon maturity, we must either satisfy the obligation at fair market value or refinance to extend the maturity.
HEP Credit Agreement
HEP has a $1.2 billion senior secured revolving credit facility maturing in July 2025 (the “HEP Credit Agreement”). The HEP Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments, working capital and for general partnership purposes. It is also available to fund letters of credit up to a $50 million sub-limit and has an accordion feature that allows HEP to increase the commitments under the HEP Credit Agreement up to a maximum amount of $1.7 billion. During the three months ended March 31, 2023, HEP had net repayments of $16.5 million under the HEP Credit Agreement. At March 31, 2023, HEP was in compliance with all of its covenants, had outstanding borrowings of $651.5 million and no outstanding letters of credit under the HEP Credit Agreement.
See Note 10 “Debt” in the Notes to Consolidated Financial Statements for additional information on our debt instruments.
44
Liquidity
We believe our current cash and cash equivalents, along with future internally generated cash flow and funds available under our credit facilities, will provide sufficient resources to fund currently planned capital projects and our liquidity needs for the foreseeable future. We expect that, to the extent necessary, we can raise additional funds from time to time through equity or debt financings in the public and private capital markets. Further, we may from time to time seek to retire some or all of our outstanding debt or debt agreements through cash purchases, and/or exchanges, open market purchases, privately negotiated transactions, tender offers or otherwise. Such transactions, if any, may be material and will depend on prevailing market conditions, our liquidity requirements and other factors. In addition, components of our long-term growth strategy include the optimization of existing units at our facilities and selective acquisition of complementary assets for our operations intended to increase earnings and cash flow. We also expect to use cash for payment of cash dividends, which are at the discretion of our Board of Directors, and for the repurchase of common stock under our share repurchase program.
Our standalone (excluding HEP) liquidity was approximately $3.01 billion at March 31, 2023, consisting of cash and cash equivalents of $1.36 billion and an undrawn $1.65 billion credit facility.
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.
In September 2022, 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. Privately negotiated repurchases from REH Company are also authorized under this share repurchase program, subject to REH Company’s interest in selling its shares and other limitations. The timing and amount of share repurchases, including those from REH Company, will depend on market conditions and corporate, tax, regulatory and other relevant considerations. This program may be discontinued at any time by our Board of Directors.
During the three months ended March 31, 2023, we made open market and privately negotiated purchases of 4,793,857 shares for $240.3 million under our share repurchase program, of which 1,969,279 shares were repurchased for $100.0 million pursuant to privately negotiated repurchases from REH Company. As of March 31, 2023, we had remaining authorization to repurchase up to $419.8 million under this share repurchase program. We did not repurchase any shares in April 2023.
Cash Flows – Operating Activities
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Net cash flows provided by operating activities were $177.7 million for the three months ended March 31, 2023 compared to $461.0 million for the three months ended March 31, 2022, a decrease of $283.3 million driven by higher turnaround spend in the quarter. Changes in working capital decreased operating cash flows by $291.3 million for the three months ended March 31, 2023 and increased operating cash flows by $213.7 million for the three months ended March 31, 2022. Additionally, for the three months ended March 31, 2023, turnaround expenditures were $163.7 million compared to $45.2 million for the three months ended March 31, 2022.
Cash Flows – Investing Activities and Planned Capital Expenditures
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
For the three months ended March 31, 2023, our net cash flows used for investing activities were $100.2 million. Cash expenditures for properties, plants and equipment for the three months ended March 31, 2023 were $100.1 million, which include HEP capital expenditures of $7.6 million for the three months ended March 31, 2023.
For the three months ended March 31, 2022, our net cash flows used for investing activities were $385.2 million. On March 14, 2022, we closed the Sinclair Transactions and paid cash of $231.2 million. The remainder of the purchase consideration was funded with the issuance of HF Sinclair common stock and HEP common units. See Note 2 “Acquisitions” in the Notes to Consolidated Financial Statements for additional information on the Sinclair Transactions. Cash expenditures for properties, plants and equipment for the three months of ended March 31, 2022 were $158.3 million primarily due to expenditures related to our renewable diesel units. Cash expenditures for properties, plants and equipment include HEP capital expenditures of $14.1 million for the three months ended March 31, 2022.
45
HF Sinclair Corporation
Each year our Board of Directors approves our annual capital budget which includes specific projects that management is authorized to undertake. When conditions warrant or as new opportunities arise, additional projects may be approved. The funds appropriated for a particular capital project may be expended over a period of several years, depending on the time required to complete the project. Therefore, our planned capital expenditures for a given year consist of expenditures appropriated in that year’s capital budget plus expenditures for projects appropriated in prior years which have not yet been completed. Refinery turnaround spending is amortized over the useful life of the turnaround.
The refining industry is capital intensive and requires on-going investments to sustain our refining operations. This includes replacement of, or rebuilding, refinery units and components that extend the useful life. We also invest in projects that improve operational reliability and profitability via enhancements that improve refinery processing capabilities as well as production yield and flexibility. Our capital expenditures also include projects related to renewable diesel, environmental, health and safety compliance and include initiatives as a result of federal and state mandates.
Our refinery operations and related emissions are highly regulated at both federal and state levels, and we invest in our facilities as needed to remain in compliance with these standards. Additionally, when faced with new emissions or fuels standards, we seek to execute projects that facilitate compliance and also improve the operating costs and / or yields of associated refining processes.
HEP
Each year the Holly 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 2023 is as follows.
| Expected Cash Spending Range | |||||||||||
| (In millions) | |||||||||||
| HF Sinclair Capital Expenditures | |||||||||||
| Refining | $ | 250.0 | $ | 280.0 | |||||||
| Renewables | 25.0 | 35.0 | |||||||||
| Lubricants and Specialty Products | 35.0 | 50.0 | |||||||||
| Marketing | 20.0 | 30.0 | |||||||||
| Corporate | 50.0 | 80.0 | |||||||||
| Turnarounds and catalyst | 530.0 | 630.0 | |||||||||
| Total HF Sinclair | 910.0 | 1,105.0 | |||||||||
| HEP | |||||||||||
| Maintenance | 25.0 | 35.0 | |||||||||
| Expansion and joint venture investment | 5.0 | 10.0 | |||||||||
| Total HEP | 30.0 | 45.0 | |||||||||
| Total | $ | 940.0 | $ | 1,150.0 | |||||||
Cash Flows – Financing Activities
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
For the three months ended March 31, 2023, our net cash flows used for financing activities were $379.1 million. During the three months ended March 31, 2023, we repurchased $245.6 million of our common stock and paid $88.0 million in dividends. During the three months ended March 31, 2023, HEP had net repayments of $16.5 million under the HEP Credit Agreement and paid distributions of $26.0 million to noncontrolling interests.
For the three months ended March 31, 2022, our net cash flows provided by financing activities were $281.4 million. During the three months ended March 31, 2022, HEP had net borrowings of $301.5 million under the HEP Credit Agreement and paid distributions of $17.0 million to noncontrolling interests.
46
Contractual Obligations and Commitments
HF Sinclair Corporation
There were no significant changes to our long-term contractual obligations during the three months ended March 31, 2023.
HEP
During the three months ended March 31, 2023, HEP had net repayments of $16.5 million resulting in $651.5 million of outstanding borrowings under the HEP Credit Agreement at March 31, 2023.
There were no other significant changes to HEP’s long-term contractual obligations during this period.
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted 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 and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022. Certain critical accounting policies that materially affect the amounts recorded in our consolidated financial statements include the use of the last-in, first-out (“LIFO”) method of valuing certain inventories, assessing the possible impairment of certain long-lived assets and goodwill, and assessing contingent liabilities for probable losses.
Inventory Valuation
Inventories related to our refining operations are stated at the lower of cost, using the LIFO method for crude oil and unfinished and finished refined products, or market. In periods of rapidly declining prices, LIFO inventories may have to be written down to market value due to the higher costs assigned to LIFO layers in prior periods. In addition, the use of the LIFO inventory method may result in increases or decreases to cost of sales in years that inventory volumes decline as the result of charging cost of sales with LIFO inventory costs generated in prior periods. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final year-end LIFO inventory valuation.
Our renewables inventories that are valued at the lower of LIFO cost or market reflect a valuation reserve of $108.7 million and $61.2 million at March 31, 2023 and December 31, 2022, respectively. A new market reserve of $108.7 million as of March 31, 2023 was based on market conditions and prices at that time. The effect of the change in the lower of cost or market reserve was an increase to cost of products sold totaling $47.6 million for the three months ended March 31, 2023.
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 first-in, first-out method, or net realizable value.
At March 31, 2023, the LIFO value of our refining inventories was equal to cost.
47
Valuation of Business Combinations
We recognize and measure the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date. Any excess or surplus of the purchase consideration when compared to the fair value of the net tangible assets acquired, if any, is recorded as goodwill or gain from a bargain purchase. The fair value of assets and liabilities as of the acquisition date are often estimated using a combination of approaches, including the income approach, which requires us to project future cash flows and apply an appropriate discount rate; the cost approach, which requires estimates of replacement costs and depreciation and obsolescence estimates; and the market approach which uses market data and adjusts for entity-specific differences. We use all available information to make these fair value determinations and engage third-party consultants for valuation assistance. The estimates used in determining fair values are based on assumptions believed to be reasonable but which are inherently uncertain. Accordingly, actual results may differ materially from the projected results used to determine fair value.
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, collar contracts, forward purchase and sales and futures contracts to mitigate price exposure with respect to our inventory positions, natural gas purchases, sales prices of refined products and crude oil costs.
Foreign Currency Risk Management
We are exposed to market risk related to the volatility in foreign currency exchange rates. We periodically enter into derivative contracts in the form of foreign exchange forward contracts to mitigate the exposure associated with fluctuations on intercompany notes with our foreign subsidiaries that are not denominated in the U.S. dollar.
As of March 31, 2023, 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 | 2023 | 2024 | Unit of Measure | ||||||||||||||||||||||||||||||||||
| NYMEX futures (WTI) - short | 1,790,000 | 1,790,000 | — | Barrels | ||||||||||||||||||||||||||||||||||
| Forward gasoline and diesel contracts - long | 145,000 | 145,000 | — | Barrels | ||||||||||||||||||||||||||||||||||
| Forward diesel contracts - short | 100,000 | 100,000 | — | Barrels | ||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | 428,211,705 | 322,227,146 | 105,984,559 | U.S. dollar | ||||||||||||||||||||||||||||||||||
Forward commodity contracts (platinum) (1) | 36,969 | 14,550 | 22,419 | Troy ounces | ||||||||||||||||||||||||||||||||||
| Natural gas price swaps (basis spread) - long | 3,850,000 | 3,850,000 | — | MMBTU | ||||||||||||||||||||||||||||||||||
| Natural gas collar contracts | 22,000,000 | 22,000,000 | — | MMBTU | ||||||||||||||||||||||||||||||||||
(1)Represents an embedded derivative within our catalyst financing arrangements, which may be refinanced or require repayment under certain conditions. See Note 10 “Debt” in the Notes to Consolidated Financial Statements for additional information on these financing arrangements.
48
The following sensitivity analysis provides the hypothetical effects of market price fluctuations to the commodity hedged under our derivative contracts:
Derivative Fair Value Gain (Loss) at March 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| (In thousands) | ||||||||||||||
| 10% increase in underlying commodity prices | $ | (10,696) | $ | (20,849) | ||||||||||
| 10% decrease in underlying commodity prices | $ | 10,290 | $ | 20,849 | ||||||||||
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 rate HF Sinclair Senior Notes, HollyFrontier Senior Notes and HEP Senior Notes, changes in interest rates will generally affect fair value of the debt, but not earnings or cash flows. The outstanding principal, estimated fair value and estimated change in fair value (assuming a hypothetical 10% change in the yield-to-maturity rates) for this debt as of March 31, 2023 is presented below:
| Outstanding Principal | Estimated Fair Value | Estimated Change in Fair Value | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| HollyFrontier and HF Sinclair Senior Notes | $ | 1,707,827 | $ | 1,677,864 | $ | 29,993 | ||||||||||||||
| HEP Senior Notes | $ | 900,000 | $ | 866,860 | $ | 22,254 | ||||||||||||||
For the variable rate HEP Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. At March 31, 2023, outstanding borrowings under the HEP Credit Agreement were $651.5 million. A hypothetical 10% change in interest rates applicable to the HEP Credit Agreement would not materially affect cash flows.
Our operations are subject to catastrophic losses, operational hazards and unforeseen interruptions, including but not limited to fire, explosion, releases or spills, cyberattacks, weather-related perils, vandalism, power failures, mechanical failures and other events beyond our control. We maintain various insurance coverages, including general liability, property damage, business interruption and cyber insurance, subject to certain deductibles and insurance policy terms and conditions. We are not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do not justify such expenditures.
Financial information is reviewed on the counterparties in order to review and monitor their financial stability and assess their ongoing ability to honor their commitments under the derivative contracts. We have not experienced, nor do we expect to experience, any difficulty in the counterparties honoring their commitments.
We have a risk management oversight committee consisting of members from our senior management. This committee oversees our risk enterprise program, monitors our risk environment and provides direction for activities to mitigate identified risks that may adversely affect the achievement of our goals.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
See “Risk Management” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
49
Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles
Reconciliations of earnings before interest, taxes, depreciation and amortization (“EBITDA”) to amounts reported under generally accepted accounting principles in financial statements.
Earnings before interest, taxes, depreciation and amortization, which we refer to as EBITDA, is calculated as net income attributable to HF Sinclair stockholders plus (i) interest expense, net of interest income, (ii) income tax provision, and (iii) depreciation and amortization. EBITDA is not a calculation provided for under GAAP; however, the amounts included in the EBITDA calculation are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies. EBITDA is presented here because it is a widely used financial indicator used by investors and analysts to measure performance. EBITDA is also used by our management for internal analysis and as a basis for financial covenants.
Set forth below is our calculation of EBITDA.
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Net income attributable to HF Sinclair stockholders | $ | 353,266 | $ | 159,974 | ||||||||||||||||||||||
| Add interest expense | 45,822 | 34,859 | ||||||||||||||||||||||||
| Subtract interest income | (19,935) | (997) | ||||||||||||||||||||||||
| Add income tax expense | 99,700 | 21,329 | ||||||||||||||||||||||||
| Add depreciation and amortization | 173,983 | 144,601 | ||||||||||||||||||||||||
| EBITDA | 652,836 | 359,766 | ||||||||||||||||||||||||
Reconciliations of refinery operating information (non-GAAP performance measures) to amounts reported under generally accepted accounting principles in financial statements.
Refinery gross margin and net operating margin are non-GAAP performance measures that are used by our management and others to compare our refining performance to that of other companies in our industry. We believe these margin measures are helpful to investors in evaluating our refining performance on a relative and absolute basis. Refinery gross margin per produced barrel sold is total Refining segment revenues less total Refining segment cost of products sold, exclusive of lower of cost or market inventory valuation adjustments, divided by sales volumes of produced refined products sold. Net operating margin per barrel sold is the difference between refinery gross margin and refinery operating expenses per produced barrel sold. These two margins do not include the non-cash effects of lower of cost or market inventory valuation adjustments and depreciation and amortization. Each of these component performance measures can be reconciled directly to our consolidated statements of operations. Other companies in our industry may not calculate these performance measures in the same manner.
Below are reconciliations to our consolidated statements of operations for refinery net operating and gross margin and operating expenses, in each case averaged per produced barrel sold. Due to rounding of reported numbers, some amounts may not calculate exactly.
50
Reconciliation of average refining net operating margin per produced barrel sold to refinery gross margin to refining sales
and other revenues
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (Dollars in thousands, except per barrel amounts) | ||||||||||||||||||||||||||
| Consolidated | ||||||||||||||||||||||||||
| Refining segment sales and other revenues | $ | 6,718,615 | $ | 6,506,167 | ||||||||||||||||||||||
| Refining segment cost of products sold (exclusive of lower of cost or market inventory adjustment) | 5,617,911 | 5,909,610 | ||||||||||||||||||||||||
| Refining segment gross margin | $ | 1,100,704 | $ | 596,557 | ||||||||||||||||||||||
| Refining segment operating expenses | $ | 517,820 | $ | 354,972 | ||||||||||||||||||||||
| Produced barrels sold (BPD) | 515,960 | 522,170 | ||||||||||||||||||||||||
| Refinery gross margin per produced barrel sold | $ | 23.70 | $ | 12.69 | ||||||||||||||||||||||
| Less average refinery operating expenses per produced barrel sold | 11.15 | 7.55 | ||||||||||||||||||||||||
| Net operating margin per produced barrel sold | $ | 12.55 | $ | 5.14 | ||||||||||||||||||||||
Reconciliation of renewables operating information (non-GAAP performance measures) to amounts reported under generally accepted accounting principles in financial statements.
Renewables gross margin and net operating margin are non-GAAP performance measures that are used by our management and others to compare our renewables performance to that of other companies in our industry. We believe these margin measures are helpful to investors in evaluating our renewables performance on a relative and absolute basis. Renewables gross margin per produced gallon sold is total Renewables segment revenues less total Renewables segment cost of products sold, exclusive of lower of cost or market inventory valuation adjustments, divided by sales volumes of produced renewables products sold. Net operating margin per produced gallon sold is the difference between renewables gross margin and renewables operating expenses per produced gallon sold. These two margins do not include the non-cash effects of lower of cost or market inventory valuation adjustments and depreciation and amortization. Each of these component performance measures can be reconciled directly to our consolidated statements of operations. Other companies in our industry may not calculate these performance measures in the same manner.
Reconciliation of renewables gross margin and operating expenses to gross margin per produced gallon sold and net operating margin per produced gallon sold
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (In thousands, except for per gallon amounts) | ||||||||||||||||||||||||||
| Renewables segment sales and other revenues | $ | 298,016 | $ | 47,367 | ||||||||||||||||||||||
| Renewables segment cost of products sold | 262,738 | 44,271 | ||||||||||||||||||||||||
| Lower of cost or market inventory adjustment | 47,597 | (8,551) | ||||||||||||||||||||||||
| (12,319) | 11,647 | |||||||||||||||||||||||||
| Add (subtract) lower of cost or market inventory adjustment | 47,597 | (8,551) | ||||||||||||||||||||||||
| Renewables gross margin | $ | 35,278 | $ | 3,096 | ||||||||||||||||||||||
| Renewables operating expense | $ | 31,371 | $ | 27,096 | ||||||||||||||||||||||
| Produced gallons sold (in thousand gallons) | 46,012 | 4,943 | ||||||||||||||||||||||||
| Renewables gross margin per produced gallon sold | $ | 0.77 | $ | 0.63 | ||||||||||||||||||||||
| Less operating expense per produced gallon sold | 0.68 | 5.48 | ||||||||||||||||||||||||
| Net operating margin per produced gallon sold | $ | 0.09 | $ | (4.85) | ||||||||||||||||||||||
51
Reconciliation of marketing operating information (non-GAAP performance measures) to amounts reported under generally accepted accounting principles in financial statements.
Marketing gross margin is a non-GAAP performance measure that is used by our management and others to compare our marketing performance to that of other companies in our industry. We believe this margin measure is helpful to investors in evaluating our marketing performance on a relative and absolute basis. Marketing gross margin per gallon sold is total Marketing segment revenues less total Marketing segment cost of products sold divided by sales volumes of marketing products sold. This margin does not include the non-cash effects of depreciation and amortization. This component performance measure can be reconciled directly to our consolidated statements of operations. Other companies in our industry may not calculate these performance measures in the same manner.
Reconciliation of marketing gross margin to gross margin per gallon sold
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (In thousands, except for per gallon amounts) | ||||||||||||||||||||||||||
| Marketing segment sales and other revenues | $ | 937,385 | $ | 277,041 | ||||||||||||||||||||||
| Marketing segment cost of products sold | 924,049 | 271,131 | ||||||||||||||||||||||||
| Marketing gross margin | $ | 13,336 | $ | 5,910 | ||||||||||||||||||||||
| Sales volumes (in thousand gallons) | 328,407 | 84,913 | ||||||||||||||||||||||||
| Marketing segment gross margin per gallon sold | $ | 0.04 | $ | 0.07 | ||||||||||||||||||||||
52
Item 4.Controls and Procedures
Evaluation of disclosure controls and procedures. Our principal executive officer and principal financial officer have evaluated, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2023.
Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
53
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
Commitment and Contingency Reserves
In the ordinary course of business, we may become party to legal, regulatory or administrative proceedings or governmental investigations, including environmental and other matters. Damages or penalties may be sought from us in some matters and certain matters may require years to resolve. While the outcome and impact of these proceedings and investigations on us cannot be predicted with certainty, based on advice of counsel and information currently available to us, management believes that the resolution of these proceedings and investigations through settlement or adverse judgment will not either individually or in the aggregate have a material adverse effect on our financial condition, results of operations or cash flows.
The environmental proceedings are reported to comply with SEC regulations which require us to disclose proceedings arising under provisions regulating the discharge of materials into the environment or protecting the environment when a governmental authority is party to the proceedings and such proceedings involve potential monetary sanctions that we reasonably believe could exceed $300,000 or more.
Environmental Matters
Navajo
HollyFrontier Navajo Refining LLC (now known as HF Sinclair Navajo Refining LLC (“HFS Navajo”)) has been engaged in discussions with, and has responded to document requests from, the EPA, the DOJ and the New Mexico Environment Department (“NMED”) (collectively, the “Agencies”) regarding HFS Navajo’s compliance with the Clean Air Act (“CAA”) and underlying regulations, and similar New Mexico laws and regulations, at its Artesia and Lovington, New Mexico refineries. The discussions have included the following topics: (a) alleged noncompliance with CAA’s National Emission Standards for Hazardous Air Pollutants (“NESHAP”) and New Source Performance Standards (“NSPS”) at the Artesia refinery, which were set forth in a Notice of Violation (“May 2020 NOV”) issued by the EPA in May 2020; (b) a Post Inspection Notice issued in June 2020 by the NMED, alleging noncompliance issues similar to those alleged by the EPA in its May 2020 NOV as well as alleged noncompliance with the State Implementation Plan (“SIP”) and the Title V permit operating programs; (c) an information request issued in September 2020 by the EPA, pursuant to CAA Section 114, related to benzene fenceline monitoring, flare fuel gas, leak detection and repair, storage vessels and tanks, and other information regarding the Artesia refinery; (d) an information request issued by the EPA in May 2021, pursuant to CAA Section 114, requesting additional information and testing related to certain tanks at the Artesia refinery; and (e) informal information requests related to, among other things, the Artesia refinery’s wastewater treatment plant, oil water separators and heat exchangers. In April 2022, the EPA alleged additional CAA noncompliance at the Artesia refinery beyond the allegations in the May 2020 NOV, including alleged noncompliance with NESHAP, NSPS, SIP, Title V and other requirements.
Beginning in the spring of 2021, HFS Navajo and the Agencies began monthly meetings to discuss potential injunctive relief measures to address the alleged noncompliance at the Artesia refinery. In September 2021, the EPA presented to HFS Navajo potential claims for stipulated penalties for alleged noncompliance with a 2002 consent decree.
HFS Navajo continues to work with the Agencies to resolve these issues. At this time, no penalties have been demanded, and it is too early to predict the outcome of this matter.
Port of Seattle
In October 2017, Sinclair Oil received a Notice of Claim from the Port of Seattle alleging Sinclair Oil’s responsibility for the clean-up of 12.5 million gallons of bunker fuel improperly disposed of at a facility in the Port of Seattle from 1977 to 1980. Sinclair Oil responded that it did sell bunker fuel for use as a fuel for ships at the Port of Seattle during this time frame but not for disposal as is being alleged. In late 2018, Sinclair Oil received a demand letter from the Port of Seattle. Sinclair Oil and the Port of Seattle entered into a tolling agreement in mid-2019. The parties have exchanged offers, and Sinclair Oil is awaiting a response to its last offer made in August 2020. It is too early to predict the outcome of this matter.
Renewable Fuel Standard
On April 7, 2022, the EPA issued a decision reversing the grant of small refinery exemptions for our Woods Cross and Cheyenne refineries for the 2018 compliance year. On June 3, 2022, the EPA issued a decision reversing the grant of small refinery exemptions for our Woods Cross and Cheyenne refineries for the 2016 compliance year and denying small refinery exemption petitions for our Woods Cross and Cheyenne refineries for the 2019 and 2020 compliance years.
54
Various subsidiaries of HollyFrontier are currently pursuing legal challenges to the EPA’s decisions to reverse its grant of small refinery exemptions for the 2016 and 2018 compliance years. The first lawsuit, filed against the EPA on May 6, 2022 and currently pending before the U.S. Court of Appeals for the DC Circuit, seeks to have the EPA’s reversal of our 2018 small refinery exemption petitions overturned. The second lawsuit, filed against the EPA on August 5, 2022 and currently pending before the U.S. Court of Appeals for the DC Circuit, seeks to have the EPA’s reversal of our 2016 small refinery exemption petitions overturned and to have the EPA’s denial of our 2019 and 2020 small refinery exemption petitions reversed.
In addition, for both the 2016 and 2018 compliance years, pursuant to the June 2022 and April 2022 decisions, respectively, the EPA established an alternative compliance demonstration for small refineries pursuant to which the EPA is not imposing any obligations for the small refineries whose exemptions were reversed. On June 24, 2022, Growth Energy filed two lawsuits in the U.S. Court of Appeals for the DC Circuit against the EPA challenging the alternative compliance demonstration for the 2016 and 2018 compliance years. On July 25, 2022, various subsidiaries of HollyFrontier intervened on behalf of the EPA to aid the defense of the EPA’s alternative compliance demonstration decision.
It is too early to predict the outcome of these matters.
Other
We are a party to various other litigation and proceedings that we believe, based on advice of counsel, will not either individually or in the aggregate have a materially adverse impact on our financial condition, results of operations or cash flows.
Item 1A.Risk Factors
Except as described below, there have been no material changes in our risk factors as previously disclosed in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. You should carefully consider the risk factors discussed in our 2022 Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
There can be no assurances that we will enter into a definitive agreement with HEP related to our proposal to acquire all of HEP’s common units that we or our affiliates do not already own, or that we will complete any transactions contemplated by such an agreement.
On May 3, 2023, we submitted a non-binding proposal to acquire all of the outstanding common units (“Common Units”) of HEP not beneficially owned by us or our affiliates in exchange for common stock, par value $0.01 per share (“Common Stock”), of HF Sinclair. Under the proposal, HEP unitholders would receive newly issued shares of Common Stock at a fixed exchange ratio of 0.3714 per each publicly held Common Unit, which was derived using the 30-day volume weighted average prices for each security as of market close on May 3, 2023 (the “Proposed HEP Transaction”). The proposal has been made to the board of directors of the ultimate general partner of HEP. The Proposed HEP Transaction is subject to the negotiation and execution of a definitive agreement. There can be no assurance that a definitive agreement will be executed or that any transaction will be approved or consummated.
55
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
(c) Common Stock Repurchases Made in the Quarter
The following table discloses purchases of shares of our common stock made by us during the first quarter of 2023.
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||||||||||||
| January 2023 | 511,716 | $ | 51.60 | 511,716 | $ | 635,369,482 | ||||||||||||||||||||
| February 2023 | 692,357 | $ | 53.10 | 692,357 | $ | 598,235,301 | ||||||||||||||||||||
| March 2023 | 3,589,784 | $ | 49.35 | 3,589,784 | $ | 419,766,383 | ||||||||||||||||||||
| Total for January to March 2023 | 4,793,857 | 4,793,857 | ||||||||||||||||||||||||
(1) In September 2022, 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. Privately negotiated repurchases from REH Company are also authorized under the share repurchase program, subject to REH Company’s interest in selling its shares and other limitations. The timing and amount of share repurchases, including those from REH Company, will depend on market conditions and corporate, tax, regulatory and other relevant considerations. This program may be discontinued at any time by our Board of Directors.
56
Item 6.Exhibits
| Exhibit Number | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 10.1 | ||||||||
| 10.2† | ||||||||
| 10.3 | ||||||||
| 10.4* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
| 32.2** | ||||||||
| 101++ | The following financial information from HF Sinclair Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted as inline XBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, and (v) Notes to the Consolidated Financial Statements. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | |||||||
| 104++ | Cover page Interactive Data File (formatted as inline XBRL and contained in exhibit 101). | |||||||
* Filed herewith.
** Furnished herewith.
+ Constitutes management contracts or compensatory plans or arrangements.
++ Filed electronically herewith.
† Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant agrees to furnish supplementally a copy of the omitted schedules and exhibits to the SEC upon request.
57
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HF SINCLAIR CORPORATION | |||||||||||
| (Registrant) | |||||||||||
| Date: May 5, 2023 | /s/ Atanas H. Atanasov | ||||||||||
| Atanas H. Atanasov | |||||||||||
| Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||||||||
| Date: May 5, 2023 | /s/ Indira Agarwal | ||||||||||
| Indira Agarwal | |||||||||||
| Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer) | |||||||||||
58
Exhibit 10.4
Execution Version
THIRD AMENDMENT
TO
AMENDED AND RESTATED MASTER TOLLING AGREEMENT
(Operating Assets)
THIS THIRD AMENDMENT TO AMENDED AND RESTATED MASTER TOLLING AGREEMENT (Operating Assets) (this “Amendment”) is entered into as of April 28, 2023 and effective as of January 1, 2023, by and among the Persons set forth on Exhibit A (each hereinafter sometimes referred to as a “Party” and sometimes collectively referred to as the “Parties”).
RECITALS:
A.Effective as of October 1, 2016, the Parties entered into a certain Amended and Restated Master Tolling Agreement (Operating Assets) (as amended by the Amendment to Amended and Restated Master Tolling Agreement, dated January 1, 2017, and the Second Amendment to Amended and Restated Master Tolling Agreement dated October 29, 2018 the “Amended and Restated Master Tolling Agreement”). Capitalized terms used but not otherwise defined in this Amendment have the meanings ascribed to such terms in the Amended and Restated Master Tolling Agreement.
B.Exhibit C-2 to the Amended and Restated Master Tolling Agreement provides for the adjustment of the Tolling Fee based on the aggregate Turnaround Costs actually incurred after the first turnaround on the Applicable Asset.
C.The Parties desire to, among other things, adjust the Tolling Fee for the El Dorado Assets and the Woods Cross Assets as provided in Exhibit C-2 attached to the Amended and Restated Master Tolling Agreement, on the terms and conditions set forth herein.
AGREEMENT:
NOW, THEREFORE, in consideration of the premises and the covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby amend the Amended and Restated Master Tolling Agreement as follows:
1.Incorporation of Recitals. The recitals for this Amendment are fully incorporated herein by the reference thereto with the same force and effect as though recited herein.
2.Amendments to Articles 6, 7 and 10.
a.Section 6.2 of the Amended and Restated Master Tolling Agreement is hereby amended by removing the reference to HollyFrontier and replacing it with “HF Sinclair”.
b.Article 7 of the Amended and Restated Master Tolling Agreement is hereby amended by removing the reference to HollyFrontier and replacing it with “HF Sinclair”.
c.Article 10 of the Amended and Restated Master Tolling Agreement is hereby amended by removing all references to HollyFrontier and replacing them with “HF Sinclair”.
d.Article 10 of the Amended and Restated Master Tolling Agreement is hereby amended by adding a new Section 10.8 as follows:
“10.8 Termination of HollyFrontier Guarantee. HF Sinclair, HEP Operating, the Partnership, HF Sinclair El Dorado and HF Sinclair Woods Cross acknowledge and agree that all obligations of HollyFrontier, pursuant to this Article 10 are hereby terminated, and HollyFrontier shall no longer be a party to this Agreement nor have any obligations hereunder.”
3.Amendment to Exhibit A.
DB1/ 137458606.2 | ||
a.Exhibit A of the Amended and Restated Master Tolling Agreement is hereby deleted and replaced, in its entirety, with Exhibit A attached to this Amendment.
4.Amendment to Exhibit B.
a.Exhibit B of the Amended and Restated Master Tolling Agreement is hereby amended by removing the reference to HollyFrontier Woods Cross and replacing it with “HF Sinclair Woods Cross”.
5.Amendment to Exhibit C. Effective as of 12:01 a.m. Central Time on January 1, 2023 Exhibit C-2 attached to the Amended and Restated Master Tolling Agreement is hereby deleted and replaced, in its entirety, with Exhibit C-2 attached to this Amendment.
6.Amendments to Exhibit D.
a.Exhibit D of the Amended and Restated Master Tolling Agreement is hereby amended by removing the definition of “Applicable Refinery Owner” and replacing it as follows:
““Applicable Refinery Owner” means, with respect to the El Dorado Refinery, HF Sinclair El Dorado, and with respect to the Woods Cross Refinery, HF Sinclair Woods Cross.”
b.Exhibit D of the Amended and Restated Master Tolling Agreement is hereby amended by adding the definition of “HF Sinclair” as follows:
““HF Sinclair” means HF Sinclair Corporation, a Delaware corporation.”
c.Exhibit D of the Amended and Restated Master Tolling Agreement is hereby amended by adding the definition of “HF Sinclair El Dorado” as follows:
““HF Sinclair El Dorado” means HF Sinclair El Dorado Refining LLC (f/k/a HollyFrontier El Dorado Refining LLC), a Delaware limited liability company.”
d.Exhibit D of the Amended and Restated Master Tolling Agreement is hereby amended by removing the definition of “El Dorado Refinery Complex” and replacing it as follows:
““El Dorado Refinery Complex” means the refinery complex owned by HF Sinclair El Dorado, commonly known as the El Dorado Refinery, and located in the City of El Dorado, Butler County, Kansas.”
e.Exhibit D of the Amended and Restated Master Tolling Agreement is hereby amended by removing the definition of “HollyFrontier El Dorado”.
f.Exhibit D of the Amended and Restated Master Tolling Agreement is hereby amended by adding the definition of “HF Sinclair Woods Cross” as follows:
““HF Sinclair Woods Cross” means HF Sinclair Woods Cross Refining LLC (f/k/a HollyFrontier Woods Cross Refining LLC), a Delaware limited liability company.”
g.Exhibit D of the Amended and Restated Master Tolling Agreement is hereby amended by removing the definition of “HollyFrontier Woods Cross”.
h.Exhibit D of the Amended and Restated Master Tolling Agreement is hereby amended by removing the definition of “Woods Cross Refinery Complex” and replacing it as follows:
““Woods Cross Refinery Complex” means the refinery complex owned by HF Sinclair Woods Cross, commonly known as the Woods Cross Refinery, and located in the City of West Bountiful, Davis County, Utah.”
2
DB1/ 137458606.2 | ||
7.Counterparts. This Amendment may be executed in counterparts each of which shall be deemed an original. An executed counterpart of this Amendment transmitted by facsimile shall be equally as effective as a manually executed counterpart.
8.Successors and Assigns. This Amendment shall inure for the benefit of and shall be binding on each of the Parties and their respective successors and/or assigns.
9.Entire Agreement. This Amendment contains the entire agreement between the Parties as to the subject matter hereof and, except as provided for in this Amendment, the terms and provisions of the Amended and Restated Master Tolling Agreement shall remain in full force and effect.
[Signature page follows]
3
DB1/ 137458606.2 | ||
IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their duly authorized officers to be effective as of the date first set forth above.
| HEP OPERATING: | ||||||||
| Holly Energy Partners-Operating, L.P. | ||||||||
| By: /s/ | Michael C. Jennings | |||||||
| Michael C. Jennings | ||||||||
| Chief Executive Officer and President | ||||||||
| APPLICABLE REFINERY OWNER: | ||||||||
| HF Sinclair El Dorado Refining LLC | ||||||||
| (f/k/a HollyFrontier El Dorado Refining LLC) | ||||||||
| HF Sinclair Woods Cross Refining LLC | ||||||||
| (f/k/a HollyFrontier Woods Cross Refining LLC) | ||||||||
| By: /s/ | Tim Go | |||||||
| Tim Go | ||||||||
| President and Chief Operating Officer | ||||||||
4
DB1/ 137458606.2 | ||
Exhibit A
to
Amended and Restated Master Tolling Agreement
Parties:
HF Sinclair El Dorado and HEP Operating, as to the El Dorado Assets.
HF Sinclair Woods Cross and HEP Operating, as to the Woods Cross Assets.
Exhibit A-1
DB1/ 137458606.2 | ||
Exhibit C-2
to
Amended and Restated Master Tolling Agreement
Applicable Assets; Minimum Throughput Commitment; Tolling Fees and Adjustments; Applicable Term
| Appli-cable Assets | Type of Applicable Asset | Products | Minimum Throughput Commit-ment (on a BPD basis) | Tolling Fee* | Tolling Fee Adjustment | PPI Adjust-ment Minimum/ Cap | Fee Adjustment Commence-ment Date | Purchase Price | Accrued Turn-around Cost | Assumed Fuel Gas Cost | Initial Term (all times are Dallas, TX time) | Extension Term (all times are Dallas, TX time) | ||||||||||||||||||||||||||
El Dorado Assets | Naphtha Fractiona-tion Unit | Isopentane1 ISOM Feed Int. Naphtha Reformer Feed | 48,750 BPD | $0.4410/BBL2 | PPI/DINO Merit Comp Adjustment3 Turnaround Surcharge4 Fuel Gas Surcharge5 | Subject to 1% Minimum/ 3% Cap3 | July 1, 2017 | $25,936,371 | $1.6M4 | $73,6105 | 12:01 a.m. on November 1, 2015 (the “Effective Time”) to 12:00 mid-night on October 31, 2030 | The Applicable Refinery Owner shall have the option to extend the Applicable Term beyond the Initial Term for one additional five (5) year period beginning at 12:01 am on November 1, 2030 and ending at 12:00 midnight on October 31, 2035 on the same terms and conditions as in existence for the Initial Term. | ||||||||||||||||||||||||||
Exhibit C2-1
DB1/ 137458606.2 | ||
| Woods Cross Assets | Crude Unit 2 | Naphtha Diesel tower bottoms | 14,625 BPD6 | $3.0527/ BBL8 | PPI/WX Union Annual Increase7 Turn-around Surcharge4 Fuel Gas Surcharge (excluding Polymeri-zation Unit)5 | None | July 1, 2017 | $64.75M | $8.7M4 | $11,871 | 12:01 a.m. on October 1, 2016 (the “Effective Time”) to 12:00 midnight on September 30, 2031 | The Applicable Refinery Owner shall have the option to extend the Applicable Term beyond the Initial Term for one additional five (5) year period beginning at 12:01 am on October 1, 2031 and ending at 12:00 midnight on September 30, 2036 on the same terms and conditions as in existence for the Initial Term. | ||||||||||||||||||||||||||
| FCC Unit 2 | Gasoline Light Cycle Oil Olefins Slurry | 7,600 BPD6 | $15.6251/BBL8 | $176.25M | $7.8M4 | $11,566 | ||||||||||||||||||||||||||||||||
| Polymeriza-tion Unit | Gasoline Butane Propane | 2,438 BPD6 | $10.8512/ BBL8 | $37.0M | $3.2M4 | - | ||||||||||||||||||||||||||||||||
* As of January 1, 2023.
1. The “Feedstock” for the El Dorado Assets is light naphtha and heavy naphtha. The “Feedstock” for the Woods Cross Assets is as follows: Crude Unit 2 – crude oil; FCC Unit 2 – crude tower bottoms and outside gas oil; Poly Unit – olefins.
2. El Dorado Only: The Tolling Fee shall never be less than $0.36 per BBL of Feedstock. If as a result of a reduction to the Tolling Fee or Minimum Throughput Commitment for a Contract Quarter pursuant to Section 2.2(d) of the Agreement, the Applicable Refinery Owner has overpaid its Tolling Fees for a Contract Quarter, the Applicable Refinery Owner shall receive a credit against its Tolling Fees due for the following Contract Quarter in the amount of such overpayment.
3. El Dorado Only: The Tolling Fee, as previously adjusted on a cumulative basis, shall be adjusted on July 1 of each calendar year, commencing July 1, 2017, by an amount equal to a percentage calculated as follows: (A) 0.75 x the change in the PPI as described below, plus (B) 0.25 x the annual HF Sinclair Merit Compensation Adjustment (positive or negative) for such calendar year. The change in the PPI is the upper change in the annual change rounded to four decimal places of the Producers Price Index-Commodities-Finished Goods, (PPI), et al. (“PPI”), produced by the U.S. Department of Labor, Bureaus of Labor Statistics. The series ID is WPUFD49207– located at http://www.bls.gov/data/. The change in PPI for each year shall be calculated as follows: annual PPI index (most current year) less annual PPI index (most current year minus 1) divided by annual PPI index (most current year minus 1); provided that the change in PPI in any year shall not be less than one percent (1%) or more than three percent (3%). For the avoidance of doubt, if the change in PPI in any year is less than one percent (1%) (including if the change in the PPI is negative) it will be rounded up to one percent (1%) and if the change in PPI in any year is greater than three percent (3%) it will be rounded down to three percent (3%). If either index is no longer published, the Parties shall negotiate in good faith to agree on a new index (as applicable) that gives comparable protection against inflation or deflation, and the same method of adjustment for increases or decreases in the new index shall be used to calculate increases or decreases in the Tolling Fee. If the Parties are unable to agree on a new index, a new index will be determined in accordance with the dispute resolution provisions set forth in the Article VIII of Omnibus Agreement, and the same method of adjustment for increases or decreases in the new index shall be used to calculate increases or decreases in the Tolling Fee. The annual HF Sinclair Merit Compensation Adjustment is the company-wide increase (or decrease) in salary for the year in which the adjustment occurs as determined by the HF Sinclair Chief Executive Officer and Chief Human Resources Officer (excluding merit compensation adjustments for executive officers that are determined by the HF Sinclair Board of Directors (or a committee thereof) and excluding any annual increases for union employees). Examples of the annual Tolling Fee adjustment under various scenarios are as follows:
Exhibit C2-2
DB1/ 137458606.2 | ||
(1)if the change in PPI is 0% and the DINO Merit Compensation Adjustment is 3.5%, the Tolling Fee adjustment would be (0.75 x 1%) + (0.25 x 3.5%) = 1.625%
(2)if the change in PPI is 2% and the DINO Merit Compensation Adjustment is 2%, the Tolling Fee adjustment would be (0.75 x 2%) + (0.25 x 2%) = 2%
(3)if the change in PPI is 5% and the DINO Merit Compensation Adjustment is 2%, the Tolling Fee adjustment would be (0.75 x 3%) + (0.25 x 2%) = 2.75%
(4)if the change in PPI is 0% and the DINO Merit Compensation Adjustment is -2%, the Tolling Fee adjustment would be (0.75 x 1%) + (0.25 x (-2%)) = 0.25%
4. After the first turnaround on the Applicable Asset during the Applicable Term, HEP Operating will calculate its aggregate Turnaround Costs incurred in connection therewith. In the event such aggregate Turnaround Costs for the Applicable Asset exceeds the Accrued Turnaround Cost set forth above then (A) a turnaround surcharge (the “Turnaround Surcharge”) will be added to the Tolling Fee based on each BBL of Feedstock (using the Minimum Throughput Commitment) in order to allow HEP Operating to recover (i) such Turnaround Costs in excess of the Accrued Turnaround Cost plus (ii) a ten percent (10%) return on such excess (the aggregate amount specified in clauses (i) and (ii), the “Turnaround Payment”). Such Turnaround Surcharge shall be paid by the Applicable Refinery Owner to HEP Operating on each BBL of Feedstock processed through the Applicable Asset until the earlier to occur of (i) the expiration of the Applicable Term or (ii) the recovery by HEP Operating of the Turnaround Payment. In addition, the Tolling Fee will be adjusted by the amount necessary to recover the new estimated turnaround expense for the remainder of the Applicable Term (based on the Minimum Throughput Commitment).
The aggregate Turnaround Costs incurred though December 31, 2022 for the Woods Cross FCC Unit 2 exceeded the Accrued Turnaround Costs set forth above. Therefore, effective January 1, 2023, the tolling fee above has been increased by the amount necessary to recover the new estimated turnaround expense for the remainder of the Applicable Term. At the Woods Cross Refinery, the Turnaround Costs adjustment only applies to the FCC Unit 2 as the other two Applicable Assets at the Woods Cross Refinery did not exceed the Accrued Turnaround costs set forth in the chart above.
In addition, HEP Operating will add a $0.7161/BBL Turnaround Surcharge to the FCC Unit 2 tolling fee to recover the Turnaround Payment. This Turnaround Surcharge should be applied to each BBL of Feedstock until the earlier of (i) the expiration of the Applicable Term or (ii) the aggregate Turnaround Surcharge billings reach $17,170,646 (23.978,000 barrels x $0.7161). The Turnaround Surcharge is not subject to the annual fee adjustment.
5. If at the end of any calendar month during the Applicable Term the aggregate cost of gas incurred by HEP Operating in connection with the operation of the Applicable Assets exceeds the Assumed Fuel Gas Cost, the Applicable Refinery Owner shall promptly pay to HEP Operating an amount equal to the positive difference, if any, of (i) the aggregate cost of fuel gas incurred by HEP Operating in connection with the operation of the Applicable Assets during such calendar month less (ii) the Assumed Fuel Gas Cost.
6. Determined on a Contract Quarter basis.
7. Woods Cross Only: The Tolling Fee, as previously adjusted on a cumulative basis, shall be adjusted on July 1 of each calendar year, commencing July 1, 2017, by an amount equal to a percentage calculated as follows: (A) 0.5 x the change in the PPI as described below, plus (B) 0.5 x the annual increase under the then current Woods Cross union contract. The change in the PPI is the upper change in the annual change rounded to four decimal places of the Producers Price Index-Commodities-Finished Goods, (PPI), et al. (“PPI”), produced by the U.S. Department of Labor, Bureaus of Labor Statistics. The series ID is WPUFD49207– located at http://www.bls.gov/data/. The change in PPI for each year shall be calculated as follows: annual PPI index (most current year) less annual PPI index (most current year minus 1) divided by annual PPI index (most current year minus 1). If either index is no longer published, the Parties shall negotiate in good faith to agree on a new index (as applicable) that gives comparable protection against inflation or deflation, and the same method of adjustment for increases or decreases in the new index shall be used to calculate increases or decreases in the Tolling Fee. If the Parties are unable to agree on a new index, a new index will be determined in accordance with the dispute resolution provisions set forth in the Article VIII of Omnibus Agreement, and the same method of adjustment for increases or decreases in the new index shall be used to calculate increases or decreases in the Tolling Fee. The annual increase under the then current Woods Cross union contract is the annual base pay increase given to union employees at Woods Cross, currently on or about February 1 of each year. Examples of the annual Tolling Fee adjustment under various scenarios are as follows:
Exhibit C2-3
DB1/ 137458606.2 | ||
(1) if the change in PPI is 0% and the annual increase under the then current Woods Cross union contract is 3.5%, the Tolling Fee adjustment would be (0.5 x 0%) + (0.5 x 3.5%) = 1.75%
(2) if the change in PPI is 2% and the annual increase under the then current Woods Cross union contract is 2%, the Tolling Fee adjustment would be (0.5 x 2%) + (0.5 x 2%) = 2%
(3) if the change in PPI is 5% and the annual increase under the then current Woods Cross union contract is 2%, the Tolling Fee adjustment would be (0.5 x 5%) + (0.5 x 2%) = 3.5%10.
(4) if the change in PPI is -1% and the annual increase under the then current Woods Cross union contract is 2%, the Tolling Fee adjustment would be (0.5 x -1%) + (0.5 x 2%) = 0.5%.
8. Woods Cross Only: If the Applicable Refinery Owner has overpaid its monthly Tolling Fees after adjustments to Tolling Fees or Minimum Throughput Commitments for a Contract Quarter pursuant to Section 2.2(d) of the Agreement, the Applicable Refinery Owner shall be entitled to apply any such overpayment as a credit against Tolling Fees within the succeeding twelve months for volumes of Feedstock delivered to HEP Operating in excess of the Minimum Throughput Commitment for any of the Applicable Assets. If any such overpayment has not been credited within twelve months of the overpayment, such overpayment shall be credited against Tolling Fees due with respect to any Minimum Throughput Commitment for any of the Applicable Assets, or if there are no such Tolling Fees due, such overpayment shall be credited against any other obligations owed by the Applicable Refinery Owner, or its Affiliates, to HEP Operating.
Exhibit C2-4
DB1/ 137458606.2 | ||
Exhibit 31.1
CERTIFICATION
I, Michael C. Jennings, certify that:
1.I have reviewed this quarterly report on Form 10-Q of HF Sinclair Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting
| May 5, 2023 | /s/ Michael C. Jennings | |||||||
| Michael C. Jennings | ||||||||
| Chief Executive Officer | ||||||||
Exhibit 31.2
CERTIFICATION
I, Atanas H. Atanasov, certify that:
1.I have reviewed this quarterly report on Form 10-Q of HF Sinclair Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: May 5, 2023 | /s/ Atanas H. Atanasov | |||||||
| Atanas H. Atanasov | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE
OFFICER UNDER SECTION 906 OF THE
SARBANES OXLEY ACT OF 2002, 18 U.S.C. § 1350
In connection with the accompanying report on Form 10-Q for the quarterly period ended March 31, 2023 and filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael C. Jennings, Chief Executive Officer of HF Sinclair Corporation (the “Company”) hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: May 5, 2023 | /s/ Michael C. Jennings | |||||||
| Michael C. Jennings | ||||||||
| Chief Executive Officer | ||||||||
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL
OFFICER UNDER SECTION 906 OF THE
SARBANES OXLEY ACT OF 2002, 18 U.S.C. § 1350
In connection with the accompanying report on Form 10-Q for the quarterly period ended March 31, 2023 and filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Atanas H. Atanasov, Chief Financial Officer of HF Sinclair Corporation (the “Company”) hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: May 5, 2023 | /s/ Atanas H. Atanasov | |||||||
| Atanas H. Atanasov | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||