Form 10-Q HF Sinclair Corp For: Jun 30
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E-mail 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 June 30, 2022
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 | |||||
June 30, 2022 (Unaudited) and December 31, 2021 | |||||
Three and Six Months Ended June 30, 2022 and 2021 | |||||
Three and Six Months Ended June 30, 2022 and 2021 | |||||
Six Months Ended June 30, 2022 and 2021 | |||||
Three and Six Months Ended June 30, 2022 and 2021 | |||||
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 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 “Sinclair HoldCo”). 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”), Sinclair HoldCo, and Hippo Holding LLC, a wholly owned subsidiary of Sinclair HoldCo (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 Sinclair HoldCo 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 (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.”
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 Sinclair HoldCo, 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. On the Closing Date, Sinclair HoldCo made a $90.2 million cash payment to HF Sinclair related to estimated working capital adjustments pursuant to the Business Combination Agreement, which reduced the aggregate transaction value to approximately $2,059 million. Of the 60,230,036 shares of HF Sinclair common stock, 2,570,000 shares are currently held in escrow to secure Sinclair HoldCo’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, Sinclair HoldCo’s integrated crude and refined products midstream business, and issued 21,000,000 common limited partner units and paid cash consideration of $321.4 million, inclusive of working capital adjustments, to Sinclair HoldCo 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 units are currently held in escrow to secure Sinclair HoldCo’s RINs credit obligations to HF Sinclair under Section 6.22 of the Business Combination Agreement. HF Sinclair, and not HEP, would be entitled to the HEP common units held in escrow in the event of Sinclair HoldCo’s breach of its RINs credit obligations under the Business Combination Agreement.
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 the Target Company, 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 June 30, 2022 includes the combined business operations of HollyFrontier and its consolidated subsidiaries and the Acquired Sinclair Businesses.
In this document, 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. 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.
3
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:
•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;
•the possibility of inefficiencies, curtailments or shutdowns in refinery operations or pipelines, whether due to infection in the workforce or in response to reductions in demand, accidents, unexpected leaks or spills, unscheduled shutdowns, 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;
•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 uncertainty regarding the timing, pace and extent of an economic recovery in the United States;
•a prolonged economic slowdown due to the COVID-19 pandemic, inflation and labor costs, which could result in an impairment of goodwill and/or long-lived asset impairments; and
•other financial, operational and legal risks and uncertainties detailed from time to time in our and HEP’s Securities Exchange Commission filings.
4
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 HollyFrontier’s Annual Report on Form 10-K for the year ended December 31, 2021 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.
5
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.
“Rack back” represents the portion of our Lubricants and Specialty Products business operations that entails the processing of feedstocks into base oils.
“Rack forward” represents the portion of our Lubricants and Specialty Products business operations that entails the processing of base oils into finished lubricants and the packaging, distribution and sale to customers.
“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.
6
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HF SINCLAIR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| June 30, 2022 | December 31, 2021 | |||||||||||||
| (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: $ | ||||||||||||||
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 income (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 June 30, 2022 and December 31, 2021. HEP is a variable interest entity.
See accompanying notes.
7
HF SINCLAIR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| 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 tariff settlement | ||||||||||||||||||||||||||
| Gain (loss) 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.
8
HF SINCLAIR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||
| 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 (loss) before income taxes | ( | ( | ( | |||||||||||||||||||||||
| Income tax expense (benefit) | ( | ( | ( | |||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | ( | |||||||||||||||||||||||
| Total comprehensive income | ||||||||||||||||||||||||||
| Less noncontrolling interest in comprehensive income | ||||||||||||||||||||||||||
| Comprehensive income attributable to HF Sinclair stockholders | $ | $ | $ | $ | ||||||||||||||||||||||
See accompanying notes.
9
HF SINCLAIR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Six Months Ended June 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Adjustments to reconcile net income (loss) 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 | ||||||||||||||
| 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 | ( | ( | ||||||||||||
| Proceeds from issuance of senior notes - HEP | ||||||||||||||
| Purchase of treasury stock | ( | ( | ||||||||||||
| Dividends | ( | ( | ||||||||||||
| Distributions to noncontrolling interests | ( | ( | ||||||||||||
| Contributions from noncontrolling interests | ||||||||||||||
| Payments on finance leases | ( | ( | ||||||||||||
| Deferred financing costs | ( | ( | ||||||||||||
| 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) received during the period for: | ||||||||||||||
| Interest | $ | ( | $ | ( | ||||||||||
| Income taxes, net | $ | $ | ||||||||||||
| Increase (decrease) in accrued and unpaid capital expenditures | $ | ( | $ | |||||||||||
See accompanying notes.
10
HF SINCLAIR CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands except per share data)
| Three Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Non-controlling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
Dividends ($ | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares under incentive compensation plans | — | — | ( | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Purchase of HEP units for equity grants | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Equity attributable to HEP common unit issuance, net of tax | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of remaining UNEV interests | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive Income | Treasury Stock | Non-controlling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares under incentive compensation plans | — | — | ( | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Purchase of HEP units for restricted grants | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
11
| Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
Dividends ($ | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, 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 restricted grants | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Equity attributable to HEP common unit issuance, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of remaining UNEV interests | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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, 2020 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
Dividends ($ | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares under incentive compensation plans | — | — | ( | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Purchase of HEP units for equity grants | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes.
12
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 “Sinclair HoldCo”). 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”), Sinclair HoldCo, and Hippo Holding LLC, a wholly owned subsidiary of Sinclair HoldCo (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 Sinclair HoldCo 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 “Acquisitions” and Note 3 “Holly Energy Partners” in the Notes to Consolidated Financial Statements 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 the Target Company, 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 June 30, 2022 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 1,300 Sinclair branded stations and license the use of the Sinclair brand at more than 300 additional locations throughout the country. In addition, our subsidiaries produce and market base oils and other specialized lubricants 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 June 30, 2022, 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.
13
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
On May 4, 2021, HollyFrontier Puget Sound Refining LLC, a wholly owned subsidiary of HollyFrontier, entered into a sale and purchase agreement with Equilon Enterprises LLC d/b/a Shell Oil Products US (“Shell”) to acquire Shell’s Puget Sound refinery and related assets, including the on-site cogeneration facility and related logistics assets. The acquisition closed on November 1, 2021.
During the first quarter of 2021, we initiated a restructuring within our Lubricants and Specialty Products segment. As a result of this restructuring, we recorded $7.8 million in employee severance costs for the six months ended June 30, 2021, which were recognized primarily as selling, general and administrative expenses in our Lubricants and Specialty Products segment.
In the third quarter of 2020, we permanently ceased petroleum refining operations at our Cheyenne, Wyoming refinery (the “Cheyenne Refinery”) and subsequently began converting certain assets at the Cheyenne Refinery to renewable diesel production. In connection with the cessation of petroleum refining operations at the Cheyenne Refinery, we recognized $0.5 million and $1.5 million in decommissioning expense for the three and six months ended June 30, 2022, and $8.1 million and $16.3 million for the three and six months ended June 30, 2021, respectively. We also recognized $0.2 million and $0.7 million in employee severance costs for the three and six months ended June 30, 2021, respectively. These charges were all recognized in operating expenses in our Corporate and Other segment.
We have prepared these consolidated financial statements without audit. In management’s opinion, these consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of our consolidated financial position as of June 30, 2022, the consolidated results of operations, comprehensive income and statements of equity for the three and six months ended June 30, 2022 and 2021 and consolidated cash flows for the six months ended June 30, 2022 and 2021 in accordance with the rules and regulations of the SEC. Although certain notes and other information required by generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with HollyFrontier’s Annual Report on Form 10-K for the year ended December 31, 2021 that has been filed with the SEC.
Beginning March 14, 2022, our business operations reflect the Acquired Sinclair Businesses (see Note 2). Our results of operations for the six months ended June 30, 2022 are not necessarily indicative of the results of operations to be realized for the year ending December 31, 2022.
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.
14
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
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 in contracts in which the lease component is the dominant component. HEP treats these combined components as a lease.
Revenue Recognition: Revenues on refined product, including branded fuel sales and 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.
15
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
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 six months ended June 30, 2022, we recorded an income tax expense of $404.8 million compared to an expense of $95.2 million for the six months ended June 30, 2021. This increase was principally due to higher pre-tax income during the six months ended June 30, 2022 compared to the same period of 2021. Our effective tax rates were 22.0 % and 20.1 % for the six months ended June 30, 2022 and 2021, respectively. The increase in the effective tax rate is principally due to the relationship between the pre-tax results and the earnings attributable to the noncontrolling interest that is not included in income for tax purposes. The difference in the U.S. federal statutory rate and the effective tax rate for the six months ended June 30, 2022 was primarily due to the increase in state taxes due to increased pre-tax income during the period.
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 Sinclair HoldCo 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 Sinclair HoldCo, 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. On the Closing Date, Sinclair HoldCo made a $90.2 million cash payment to HF Sinclair related to estimated working capital adjustments pursuant to the Business Combination Agreement, which reduced the aggregate transaction value to approximately $2,059 million. Of the 60,230,036 shares of HF Sinclair common stock, 2,570,000 shares are currently held in escrow to secure Sinclair HoldCo’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, Sinclair HoldCo’s integrated crude and refined products midstream business, and issued 21,000,000 common limited partner units and paid cash consideration of $321.4 million, inclusive of working capital adjustments, to Sinclair HoldCo 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 units are currently held in escrow to secure Sinclair HoldCo’s RINs credit obligations to HF Sinclair under Section 6.22 of the Business Combination Agreement. HF Sinclair, and not HEP, would be entitled to the HEP common units held in escrow in the event of Sinclair HoldCo’s breach of its RINs credit obligations under the Business Combination Agreement.
16
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
HollyFrontier’s senior management team at the Closing Date will continue to operate the combined company. Pursuant to that certain stockholders agreement (the “Stockholders Agreement”) by and among HF Sinclair, Sinclair HoldCo and the stockholders of Sinclair HoldCo (together with Sinclair HoldCo and each of their permitted transferees, the “Sinclair Parties”), Sinclair HoldCo was granted the right to nominate, and has nominated, two directors to our Board of Directors at the Closing Date. The Sinclair HoldCo stockholders also agreed to certain customary lock up, voting and standstill restrictions, as well as customary registration rights, for the HF Sinclair common stock issued to the stockholders of Sinclair HoldCo. HF Sinclair is headquartered in Dallas, Texas, with combined business offices in Salt Lake City, Utah.
Under the terms of the Business Combination Agreement, HF Sinclair acquired Sinclair HoldCo’s refining, branded marketing, renewables, and midstream businesses. The branded marketing business supplies high-quality fuels to more than 1,300 Sinclair branded stations and licenses the use of the Sinclair brand at more than 300 additional locations throughout the United States. The renewables business includes the operation of a renewable diesel unit located in Sinclair, Wyoming. The refining business includes two Rocky Mountains-based refineries located in Casper, Wyoming and Sinclair, Wyoming. Under the terms of the Contribution Agreement (as defined in Note 3), HEP acquired STC, Sinclair HoldCo’s integrated crude and refined products pipelines and terminal assets, including approximately 1,200 miles of integrated crude and refined product pipeline supporting the Sinclair refineries and third parties, eight product terminals and two crude terminals with approximately 4.5 million barrels of operated storage. In addition, HEP acquired STC’s interests in three pipeline joint ventures for crude gathering and product offtake including: Saddle Butte Pipeline III, LLC (25.06 % non-operated interest); Pioneer Pipeline (49.995 % non-operated interest); and UNEV Pipeline (the 25 % non-operated interest not already owned by HEP, resulting in UNEV Pipeline, LLC (“UNEV”) becoming a wholly owned subsidiary of HEP). The addition of the Acquired Sinclair Businesses to the HollyFrontier business created a combined company with increased scale and ability to diversify and is expected to drive growth through the expanded refining and renewables business. In addition, the HFC Transactions added an integrated branded wholesale distribution network to our business.
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 preliminary purchase consideration and preliminary purchase price allocation of the assets acquired and liabilities assumed on March 14, 2022:
| Preliminary 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 units of HEP common units | ||||||||
| Total equity consideration | ||||||||
| Cash consideration paid by HEP | ||||||||
| Aggregate of estimated adjusted payments to be received by HFC and HEP | ( | |||||||
| 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.
17
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 preliminary purchase price allocation resulted in the recognition of $656.4 million in goodwill, of which $90.8 million was related to HEP. 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 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 $213.1 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. Sinclair HoldCo 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.
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.
18
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
These fair value estimates are preliminary and, therefore, the final fair values of assets acquired and liabilities assumed and the resulting effect on our financial position may change once all needed information has become available and working capital true-up is complete, and we finalize our valuations.
Our consolidated financial and operating results reflect the Acquired Sinclair Businesses operations beginning March 14, 2022. Our results of operations for the three months ended June 30, 2022 included revenue and income from operations of $1,910.3 million and $316.9 million, respectively, and revenue and income from operations of $2,433.6 million and $357.3 million for the period from March 14, 2022 through June 30, 2022, respectively, related to the Acquired Sinclair Businesses operations.
During the three and six months ended June 30, 2022, we incurred $12.5 million and $37.5 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 and six months ended June 30, 2022 and 2021 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 June 30, | Six Months Ended June 30, | |||||||||||||||||||
| 2021 | 2022 | 2021 | ||||||||||||||||||
| (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 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 June 30, 2022, HEP owned a 50 25.06 % ownership interest in Saddle Butte Pipeline III, LLC, the owner of a 220-mile crude oil 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 310-mile pipeline from Sinclair, Wyoming to the North Salt Lake City, Utah Terminal (the “Pioneer Pipeline”).
At June 30, 2022, 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.
19
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 79 % of HEP’s total revenues for the six months ended June 30, 2022. 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.
Cushing Connect Joint Venture
In October 2019, HEP Cushing LLC (“HEP Cushing”), a wholly owned subsidiary of HEP, and Plains Marketing, L.P., a wholly owned subsidiary of Plains All American Pipeline, L.P. (“Plains”), formed a 50/50 joint venture, Cushing Connect, for (i) the development, construction, ownership and operation of a new 160,000 barrel per day common carrier crude oil pipeline (the “Cushing Connect Pipeline”) that connects the Cushing, Oklahoma crude oil hub to our Tulsa Refineries and (ii) the ownership and operation of 1.5 million barrels of crude oil storage in Cushing, Oklahoma (the “Cushing Connect Terminal”). The Cushing Connect Terminal was fully in service beginning in April 2020, and the Cushing Connect Pipeline was placed in service during the third quarter of 2021. Long-term commercial agreements have been entered into to support the Cushing Connect assets.
Cushing Connect entered into a contract with an affiliate of HEP to manage the operation of the Cushing Connect Pipeline and with an affiliate of Plains to manage the operation of the Cushing Connect Terminal. The total investment in Cushing Connect will be shared proportionately among the partners. However, HEP is solely responsible for any Cushing Connect Pipeline construction costs that exceed the budget by more than 10 %. HEP’s share of the cost of the Cushing Connect Terminal contributed by Plains and Cushing Connect Pipeline construction costs are approximately $73 million.
Cushing Connect and its two subsidiaries, Cushing Connect Pipeline and Cushing Connect Terminal, are each VIE’s because they do not have sufficient equity at risk to finance their activities without additional financial support. HEP is the primary beneficiary of two of these entities as HEP constructed and operates the Cushing Connect Pipeline, and HEP has more ability to direct the activities that most significantly impact the financial performance of Cushing Connect and Cushing Connect Pipeline. Therefore, HEP consolidates these two entities. HEP is not the primary beneficiary of Cushing Connect Terminal, which HEP accounts for using the equity method of accounting.
Sinclair Transportation Company Acquisition
On August 2, 2021, HEP, Sinclair HoldCo and STC, a wholly owned subsidiary of Sinclair HoldCo, 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 $321.4 million, inclusive of estimated working capital adjustments pursuant to the Contribution Agreement for an aggregate transaction value of $670.4 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 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.
20
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
HEP’s existing senior management team continues to operate HEP. Pursuant to that certain unitholders agreement (the “Unitholders Agreement”) by and among HEP, Holly Logistic Services, L.L.C., Navajo Pipeline Co., L.P. and the Sinclair Parties, Sinclair HoldCo was granted the right to nominate, and has nominated, one director to the HEP Board of Directors at the Closing Date. Sinclair HoldCo’s stockholders have also agreed to certain customary lock up restrictions and registration rights for the HEP common limited partner units to be issued to the stockholders of Sinclair HoldCo. HEP will continue to be named Holly Energy Partners, L.P.
Contemporaneous with the closing of the Sinclair Transactions, HEP and HollyFrontier amended certain intercompany agreements, including the master throughput agreement, to include within the scope of such agreements certain of the assets acquired by HEP pursuant to the Contribution Agreement.
Transportation Agreements
HEP serves our refineries under long-term pipeline, terminal and tankage throughput agreements and refinery processing tolling agreements expiring from 2022 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 pipeline, 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. On March 14, 2022, HollyFrontier Refining & Marketing LLC, Sinclair Oil and Holly Energy Partners - Operating, L.P. entered into an amendment to the master throughput agreement. As of July 1, 2022, these agreements require minimum annualized payments to HEP of $445.9 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.
Lease income recognized was as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (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
21
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Disaggregated revenues were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (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 | $ | $ | $ | $ | ||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (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 $443.4 million and $95.1 million, respectively, for the three months ended June 30, 2022, $811.0 million and $166.7 million, respectively, for the six months ended June 30, 2022, $165.9 million and $55.8 million, respectively, for the three months ended June 30, 2021, $283.2 million and $97.1 million for the six months ended June 30, 2021.
(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.
(7)Other revenues are principally attributable to our Refining segment.
22
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Our consolidated balance sheet reflects 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 during the six months ended June 30, 2022 and 2021.
| Six Months Ended June 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| (In thousands) | ||||||||||||||
| Balance at January 1 | $ | $ | ||||||||||||
| Increase | ||||||||||||||
| Recognized as revenue | ( | ( | ||||||||||||
| Balance at June 30 | $ | $ | ||||||||||||
As of June 30, 2022, 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 2025. 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, which include branded sales volumes assumed upon our acquisition of the Acquired Sinclair Businesses:
| Remainder of 2022 | 2023 | 2024 | Thereafter | Total | ||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
Refined product sales volumes (barrels) | ||||||||||||||||||||||||||||||||
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 2025. Annual minimum revenues attributable to HEP’s third-party contracts as of June 30, 2022 are presented below:
| Remainder of 2022 | 2023 | 2024 | 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.
23
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
The carrying amounts of derivative instruments and RINs receivable and credit obligations at June 30, 2022 and December 31, 2021 were as follows:
| Fair Value by Input Level | ||||||||||||||||||||||||||
| Carrying Amount | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| June 30, 2022 | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| NYMEX futures contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| Commodity forward contracts | ||||||||||||||||||||||||||
RINs receivable (1) | ||||||||||||||||||||||||||
| Foreign currency forward contracts | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Commodity forward contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| Foreign currency forward contracts | ||||||||||||||||||||||||||
RINs credit obligations (1) (2) | ||||||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
| Fair Value by Input Level | ||||||||||||||||||||||||||
| Carrying Amount | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Commodity forward contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| Foreign currency forward contracts | ||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| NYMEX futures contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| Commodity forward contracts | ||||||||||||||||||||||||||
RINs credit obligations (2) | ||||||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
(1)Sinclair HoldCo 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.
(2)Represents obligations for RINs credits for which we did not have sufficient quantities at June 30, 2022 and December 31, 2021 to satisfy our Environmental Protection Agency (“EPA”) regulatory blending requirements. 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 Instruments
Derivative instruments consisting of forward sales and purchase contracts and foreign currency forward contracts are measured and recorded at fair value using Level 2 inputs. 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 receivable and RINs credit obligations are valued based on current market RINs prices.
24
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 June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (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
In connection with the Sinclair Transactions, we assumed all obligations of HollyFrontier under HollyFrontier’s existing stock-based compensation plans, which includes the HF Sinclair Corporation 2007 Long-Term Incentive Compensation Plan (previously known as the HollyFrontier Corporation Long-Term Incentive Compensation Plan, the “2007 Plan”) and the HF Sinclair Corporation Amended and Restated 2020 Long Term Incentive Plan (previously known as the HollyFrontier Corporation 2020 Long Term Incentive Plan, the “2020 Plan). Awards are no longer granted, but continue to remain outstanding, under the 2007 Plan. The 2007 Plan previously provided for, and the 2020 Plan currently 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 $8.4 million and $11.9 million for the three months ended June 30, 2022 and 2021, respectively, and $17.3 million and $22.8 million for the six months ended June 30, 2022 and 2021, 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 $0.6 million and $0.5 million for the three months ended June 30, 2022 and 2021, respectively, and $1.2
25
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
A summary of restricted stock unit and performance share unit activity during the six months ended June 30, 2022 is presented below:
| Restricted Stock Units | Performance Share Units | |||||||||||||
| Outstanding at January 1, 2022 | ||||||||||||||
Granted (1) | ||||||||||||||
| Vested | ( | |||||||||||||
| Forfeited | ( | ( | ||||||||||||
| Outstanding at June 30, 2022 | ||||||||||||||
| (1) Weighted average grant date fair value per unit | $ | $ | ||||||||||||
NOTE 8:Inventories
Inventories consist of the following components:
| June 30, 2022 | December 31, 2021 | |||||||||||||
| (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 $34.7 million and $8.7 million at June 30, 2022 and December 31, 2021, respectively. A new market reserve of $34.7 million as of June 30, 2022 was based on market conditions and prices at that time. The effect of the change in the lower of cost or market reserve was an increase to cost of products sold totaling $34.5 million and $26.0 million for the three and six months ended June 30, 2022, respectively.
NOTE 9:Environmental
26
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 10:Debt
HF Sinclair Credit Agreement
On April 27, 2022, after giving effect to the consummation of the exchange offers and the issuance of the HF Sinclair Senior Notes (as defined below), HF Sinclair entered into 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. The HF Sinclair Credit Agreement replaced the $1.35 billion senior unsecured credit facility of HollyFrontier, which was terminated on April 27, 2022. At June 30, 2022, 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 %).
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 June 30, 2022, HEP was in compliance with all of its covenants, had outstanding borrowings of $721.0 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 or (b) the Eurodollar Rate (as defined in the HEP Credit Agreement) plus an applicable margin. 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 3.57 % as of June 30, 2022.
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.
27
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
HollyFrontier Bond Exchange
On April 27, 2022, HF Sinclair completed its offers to exchange any and all outstanding HollyFrontier 2.625 % senior notes maturing October 2023 (the “HollyFrontier 2.625 % Senior Notes”), 5.875 % senior notes maturing April 2026 (the “HollyFrontier 5.875 % Senior Notes”) and 4.500 % senior notes maturing October 2030 (the “HollyFrontier 4.500 % Senior Notes”) (and, collectively, the “HollyFrontier Senior Notes”) for 2.625 % senior notes maturing October 2023 (the “HF Sinclair 2.625 % Senior Notes”), 5.875 % senior notes maturing April 2026 (the “HF Sinclair 5.875 % Senior Notes”) and 4.500 % senior notes maturing October 2030 (the “HF Sinclair 4.500 % Senior Notes”) (and, collectively, the “HF Sinclair Senior Notes”) to be issued by HF Sinclair and cash. Additionally, HF Sinclair solicited consents to adopt certain amendments to the indenture governing the HollyFrontier Senior Notes.
The HF Sinclair Senior Notes are unsecured and unsubordinated obligations of ours and rank equally with all our other existing and future unsecured and unsubordinated indebtedness. Each series of HF Sinclair Senior Notes has the same interest rate (including interest rate adjustment provisions, as applicable), interest payment dates, maturity date and redemption terms as the corresponding series of HollyFrontier Senior Notes. The HF Sinclair Senior Notes were issued in exchange for the HollyFrontier Senior Notes pursuant to a private exchange offer exempt from registration under the Securities Act of 1933, as amended.
In connection with the issuance of the HF Sinclair Senior Notes, HF Sinclair agreed to use its commercially reasonable efforts to file (and have declared effective) a registration statement with respect to a registered offer to exchange the HF Sinclair Senior Notes for substantially identical registered notes. HF Sinclair will be obligated to pay additional interest if it does not complete the exchange offer on or prior to April 27, 2023, or if a shelf registration statement with respect to the HF Sinclair Senior Notes (if required to be filed) is not declared effective by the dates indicated in the Registration Rights Agreement.
In connection with the exchange offers and consent solicitations, HollyFrontier amended the indenture governing the HollyFrontier Senior Notes to eliminate (i) substantially all of the restrictive covenants, (ii) certain of the events which may lead to an “Event of Default”, (iii) the SEC reporting covenant and (iv) with respect to the HollyFrontier 2.625 % Senior Notes and the HollyFrontier 4.500 % Senior Notes only, the offer to repurchase such senior notes upon certain change of control triggering events.
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 $34.8 million and $37.4 million at June 30, 2022 and December 31, 2021, 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
On April 8, 2022, HEP closed a private placement of $400 million in aggregate principal amount of 6.375 % senior notes maturing April 2027 (the “HEP 6.375 % Senior Notes”) at par for net proceeds of approximately $393 million, after deducting the initial purchasers’ discounts and commissions and estimated offering expenses. The net proceeds from the offering of the HEP 6.375 % Senior Notes were used to partially repay outstanding borrowings under the HEP Credit Agreement.
In addition, HEP has $500.0 million in aggregate principal amount of 5.0 % senior notes maturing February 2028 (the “HEP 5.0 % Senior Notes,” and together with the HEP 6.375 % Senior Notes, 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 June 30, 2022. 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.
28
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
The carrying amounts of long-term debt are as follows:
| June 30, 2022 | December 31, 2021 | |||||||||||||
| (In thousands) | ||||||||||||||
| HollyFrontier | ||||||||||||||
| $ | $ | |||||||||||||
| HF Sinclair | ||||||||||||||
| Unamortized discount and debt issuance costs | ( | ( | ||||||||||||
| 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 | $ | $ | ||||||||||||
The fair values of the senior notes are as follows:
| June 30, 2022 | December 31, 2021 | |||||||||||||
| (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 $2.8 million for the three months ended June 30, 2022 and 2021, respectively, and $4.9 million and $4.7 million for the six months ended June 30, 2022 and 2021, respectively, of interest attributable to construction projects.
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, 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.
29
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
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 had swap contracts serving as cash flow hedges against price risk on forecasted purchases of natural gas that matured as of December 31, 2021. We also 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 (loss) (“OCI”) and earnings due to fair value adjustments and maturities of hedging instruments under hedge accounting:
| Net Unrealized Gain (Loss) Recognized in OCI | Gain (Loss) Reclassified into Earnings | |||||||||||||||||||||||||||||||
| Derivatives Designated as Cash Flow Hedging Instruments | Three Months Ended June 30, | Income Statement Location | Three Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Commodity contracts | $ | $ | Sales and other revenues | $ | $ | ( | ||||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
| Derivatives Designated as Cash Flow Hedging Instruments | Six Months Ended June 30, | Income Statement Location | Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Commodity contracts | $ | $ | Sales and other revenues | $ | ( | $ | ( | |||||||||||||||||||||||||
| Operating expenses | ( | |||||||||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||
Economic Hedges
We have commodity contracts including NYMEX futures contracts to lock in prices on forecasted purchases and sales of inventory and forward purchase and sell contracts 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 June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Commodity contracts | Cost of products sold | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||||||||
| Foreign currency contracts | Gain (loss) on foreign currency transactions | ( | ( | |||||||||||||||||||||||||||||
| Total | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
30
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
As of June 30, 2022, we have the following notional contract volumes related to outstanding derivative instruments:
| Notional Contract Volumes by Year of Maturity | ||||||||||||||||||||||||||
| Total Outstanding Notional | 2022 | 2023 | Unit of Measure | |||||||||||||||||||||||
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 | |||||||||||||||||||||||||
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) | ||||||||||||||||||||||||||||||||||||||
| June 30, 2022 | ||||||||||||||||||||||||||||||||||||||
| Derivatives not designated as cash flow hedging instruments: | ||||||||||||||||||||||||||||||||||||||
NYMEX futures contracts | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
Commodity forward contracts | ||||||||||||||||||||||||||||||||||||||
Foreign currency forward contracts | ||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Total net balance | $ | $ | ||||||||||||||||||||||||||||||||||||
| Balance sheet classification: | Prepayment and other | $ | Accrued liabilities | $ | ||||||||||||||||||||||||||||||||||
| 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, 2021 | ||||||||||||||||||||||||||||||||||||||
| Derivatives designated as cash flow hedging instruments: | ||||||||||||||||||||||||||||||||||||||
| Commodity forward contracts | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Derivatives not designated as cash flow hedging instruments: | ||||||||||||||||||||||||||||||||||||||
NYMEX futures contracts | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
Commodity forward contracts | ||||||||||||||||||||||||||||||||||||||
Foreign currency forward contracts | ( | |||||||||||||||||||||||||||||||||||||
| $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Total net balance | $ | $ | ||||||||||||||||||||||||||||||||||||
| Balance sheet classification: | Prepayment and other | $ | Accrued liabilities | $ | ||||||||||||||||||||||||||||||||||
31
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 12:Equity
As a result of the HFC Transactions, discussed in Note 2, each share of HollyFrontier common stock issued and outstanding immediately prior to the closing of the HFC Transactions (other than treasury shares which were cancelled pursuant to the Business Combination Agreement) was automatically converted into one validly issued, fully paid and non-assessable share of HF Sinclair common stock, having the same designations, rights, powers and preferences and the qualifications, limitations and restrictions as a share of HollyFrontier common stock immediately prior to the closing of the HFC Transactions.
In November 2019, our Board of Directors approved a $1.0 billion share repurchase program, which replaced all existing share repurchase programs, authorizing us to repurchase common stock in the open market or through privately negotiated transactions. In June 2022, our Board of Directors determined that privately negotiated repurchases from REH Company (formerly known as The Sinclair Companies) are also authorized under the share repurchase program, subject to REH Company’s interest 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 the Board of Directors. During the three and six months ended June 30, 2022, we made open market purchases of 2,730,000 132.3 No 867.7 million under this share repurchase program. In addition, we are authorized by our Board of Directors to repurchase shares in an amount sufficient to offset shares issued under our compensation programs.
During the six months ended June 30, 2022 and 2021, we withheld 4,990 and 14,063 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.
Our Board of Directors declared a regular quarterly dividend in the amount of $0.40 per share, payable on September 1, 2022 to holders of record of common stock on August 18, 2022.
32
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 13:Other Comprehensive Income (Loss)
The components and allocated tax effects of other comprehensive income (loss) are as follows:
| Before-Tax | Tax Expense (Benefit) | After-Tax | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Three Months Ended June 30, 2022 | ||||||||||||||||||||
| Net change in foreign currency translation adjustment | $ | ( | $ | ( | $ | ( | ||||||||||||||
| Net change in pension and other post-retirement benefit obligations | ( | ( | ( | |||||||||||||||||
| Other comprehensive loss attributable to HF Sinclair stockholders | $ | ( | $ | ( | $ | ( | ||||||||||||||
| Three Months Ended June 30, 2021 | ||||||||||||||||||||
| 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 | $ | $ | $ | |||||||||||||||||
| Six Months Ended June 30, 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 loss attributable to HF Sinclair stockholders | $ | ( | $ | ( | $ | ( | ||||||||||||||
| Six Months Ended June 30, 2021 | ||||||||||||||||||||
| 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 loss attributable to HF Sinclair stockholders | $ | ( | $ | ( | $ | ( | ||||||||||||||
33
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
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 June 30, | ||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Hedging instruments: | ||||||||||||||||||||
| Commodity price swaps | $ | $ | ( | Sales and other revenues | ||||||||||||||||
| Operating expenses | ||||||||||||||||||||
| ( | ||||||||||||||||||||
| ( | 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 | $ | $ | ( | |||||||||||||||||
34
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
| AOCI Component | Gain (Loss) Reclassified From AOCI | Statement of Operations Line Item | ||||||||||||||||||
| Six Months Ended June 30, | ||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Hedging instruments: | ||||||||||||||||||||
| Commodity price swaps | $ | ( | $ | ( | Sales and other revenues | |||||||||||||||
| ( | Operating expenses | |||||||||||||||||||
| ( | ( | |||||||||||||||||||
| ( | ( | 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 | $ | ( | $ | ( | ||||||||||||||||
Accumulated other comprehensive income (loss) in the equity section of our consolidated balance sheets includes:
| June 30, 2022 | December 31, 2021 | |||||||||||||
| (In thousands) | ||||||||||||||
| Foreign currency translation adjustment | $ | ( | $ | ( | ||||||||||
| Unrealized gain on pension obligation | ||||||||||||||
| Unrealized gain on post-retirement benefit obligations | ||||||||||||||
| Unrealized loss on hedging instruments | ( | |||||||||||||
| Accumulated other comprehensive income (loss) | $ | ( | $ | |||||||||||
NOTE 14:Contingencies
35
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Pursuant to the Business Combination Agreement, all pre-closing RINs obligations of Sinclair HoldCo’s subsidiaries (which are now subsidiaries of HF Sinclair as a result of the HFC Transactions) remain with Sinclair HoldCo. Sinclair HoldCo is required to transfer to HF Sinclair the number of each applicable type of RIN required for Sinclair HoldCo to demonstrate compliance for any pre-closing obligations it retained by the deadlines set forth in the Business Combination Agreement. If Sinclair HoldCo does not deliver all the required RINs by the applicable deadline, then, within five days following the delivery of an invoice therefor, Sinclair HoldCo is required to pay to HF Sinclair the amount of all out-of-pocket costs and expenses incurred by HF Sinclair to comply with Sinclair HoldCo’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 and 5,290,000 HEP common units, in each case, out of the purchase consideration paid to Sinclair HoldCo, are held in escrow to secure Sinclair HoldCo’s RINs credit obligations under the Business Combination Agreement. HF Sinclair, and not HEP, would be entitled to the HEP common units held in escrow in the event of Sinclair HoldCo’s breach of its RINs credit obligations under the Business Combination Agreement.
During 2017, 2018 and 2019, the EPA granted 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.
We have been party to multiple proceedings before the Federal Energy Regulatory Commission (“FERC”) challenging the rates charged by SFPP, L.P. (“SFPP”) on its East Line pipeline facilities from El Paso, Texas to Phoenix, Arizona. In March 2018, FERC ruled that SFPP, as a master limited partnership, was prohibited from including an allowance for investor income taxes in the cost of service underlying its East Line rates. We reached a negotiated settlement with SFPP that provides for a payment to us of $51.5 million. FERC approved the settlement on December 31, 2020 subject to a rehearing period that resulted in a settlement effective date of February 2, 2021. Under the terms of the settlement agreement, SFPP made the $51.5 million payment to us on February 10, 2021 and we recorded a “Gain on tariff settlement” on our consolidated statements of operations for the six months ended June 30, 2021.
NOTE 15:Segment Information
36
HF SINCLAIR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
As a result of the Sinclair Transactions that closed on March 14, 2022, the operations of the Acquired Sinclair Businesses are reported in the Refining, Renewables, Marketing and HEP segments.
The Refining segment represents the operations of our El Dorado, Tulsa, Navajo and Woods Cross refineries and HollyFrontier Asphalt Company LLC (“HFC Asphalt”). Also, effective with our acquisition that closed on November 1, 2021, the Refining segment includes our Puget Sound refinery, and effective with our acquisition that closed on March 14, 2022, includes our Sinclair 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. HFC Asphalt operates various asphalt terminals in Arizona, New Mexico and Oklahoma.
The Renewables segment represents the operations of the Cheyenne renewable diesel unit (“RDU”), which was mechanically complete in the fourth quarter of 2021 and fully operational in the first quarter of 2022, the pre-treatment unit (“PTU”) at our Artesia, New Mexico facility, which was completed and fully operational in the first quarter of 2022 and the Artesia RDU, which was completed and fully 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. During the construction phase of our RDUs and PTU, operating expense and capital expenditures were reported in the Corporate and Other segment, and this financial information has been retrospectively adjusted to reflect our current segment presentation.
Effective with our acquisition that closed on March 14, 2022, the Marketing segment includes branded fuel sales through more than 300 distributors to more than 1,300 branded sites in the United States and licensing fees for the use of the Sinclair brand at more than 300 additional locations throughout the country.
The Lubricants and Specialty Products segment represents Petro-Canada Lubricants, Inc.’s (“PCLI”) 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 HollyFrontier’s Annual Report on Form 10-K for the year ended December 31, 2021.
As discussed above, we revised our reportable segments to align with certain changes in how our chief operating decision maker manages and allocates resources to our business. As a result of these changes, assets by segment are no longer a measure used to assess the performance of the segments by our chief operating decision maker and thus are not reported in our disclosures.
37
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 June 30, 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 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Refining | Renewables | Lubricants and Specialty Products | HEP | Corporate, Other and Eliminations | Consolidated Total | |||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
38
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) | ||||||||||||||||||||||||||||||||||||||||||||
| Six Months Ended June 30, 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 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Refining | Renewables | Lubricants and Specialty Products | HEP | Corporate, Other and Eliminations | Consolidated Total | |||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
39
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, 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 June 30, 2022 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 El Dorado, Kansas (the “El Dorado Refinery”); Tulsa, Oklahoma, which comprise two production facilities, the Tulsa West and Tulsa East facilities (collectively, the “Tulsa Refineries”); Anacortes, Washington (the “Puget Sound Refinery”); Artesia, New Mexico, which operates in conjunction with crude oil distillation, vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the “Navajo Refinery”); Woods Cross, Utah (the “Woods Cross Refinery”); Sinclair, Wyoming (the “Sinclair Refinery”) and Casper, Wyoming (the “Casper Refinery”). 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 1,300 Sinclair branded stations and license the use of the Sinclair brand at more than 300 additional locations throughout the country. In addition, our subsidiaries produce and market base oils and other specialized lubricants 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.
Market Developments
For the three months ended June 30, 2022, net income attributable to HF Sinclair stockholders was $1,221.3 million compared to $168.9 million for the three months ended June 30, 2021. For the six months ended June 30, 2022, net income attributable to HF Sinclair stockholders was $1,381.2 million compared to $317.1 million for the six months ended June 30, 2021. Gross refining margin per produced barrel sold in our Refining segment increased 211% for the three months ended June 30, 2022 over the same period of 2021.
Our results for the second quarter and first six months of 2022 were favorably impacted by continued strong global economic activity with global demand for transportation fuels, lubricants and the transportation and terminal services having returned to pre-pandemic levels. The rapid increases in crude oil prices and market crack spreads during the second quarter were driven by both sustained increases in demand and the global supply disruption related to actions taken in response to both the COVID-19 pandemic and sanctions imposed on Russia for its invasion of Ukraine. We continue to adjust our operational plans to the evolving market conditions. The extent to which our future results are affected by the COVID-19 pandemic or volatile regional and global economic conditions will depend on various factors and consequences beyond our control.
40
Sinclair Acquisition
On March 14, 2022 (the “Closing Date”), 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 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 “Sinclair HoldCo”). On the Closing Date, HF Sinclair completed its previously announced acquisition of Sinclair Oil by effecting (a) a holding company merger 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 Sinclair HoldCo contributed all of the equity interests of Hippo Holding LLC, the parent company of Sinclair Oil (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, all of HollyFrontier’s outstanding shares were automatically converted into equivalent corresponding shares of HF Sinclair, and 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.”
HF Sinclair acquired Sinclair HoldCo’s refining, branded marketing, renewables, and midstream businesses. The branded marketing business supplies high-quality fuels to more than 1,300 Sinclair branded stations and licenses the use of the Sinclair brand at more than 300 additional locations throughout the United States. The renewables business includes the operation of a renewable diesel unit located in Sinclair, Wyoming. The refining business includes two Rocky Mountains-based refineries located in Casper, Wyoming and Sinclair, Wyoming. Under the terms of the Contribution Agreement, HEP acquired STC, Sinclair HoldCo’s integrated crude and refined products pipelines and terminal assets, including approximately 1,200 miles of integrated crude and refined product pipeline supporting the Sinclair refineries and third parties, eight product terminals and two crude terminals with approximately 4.5 million barrels of operated storage. In addition, HEP acquired STC’s interests in three pipeline joint ventures for crude gathering and product offtake including: Saddle Butte Pipeline III, LLC (25.06% non-operated interest); Pioneer Pipeline (49.995% non-operated interest); and UNEV Pipeline, LLC (“UNEV”) (the 25% non-operated interest not already owned by HEP, resulting in UNEV becoming a wholly owned subsidiary of HEP). The addition of Sinclair Oil and STC to the HollyFrontier business created a combined company with increased scale and ability to diversify and is expected to drive growth through the expanded refining and renewables business. In addition, the HFC Transactions added an integrated branded wholesale distribution network to our business.
See Note 2 “Acquisitions” and Note 3 “Holly Energy Partners” in the Notes to Consolidated Financial Statements for additional information.
Puget Sound Refinery Acquisition
On May 4, 2021, HollyFrontier Puget Sound Refining LLC, a wholly owned subsidiary of HollyFrontier, entered into a sale and purchase agreement with Equilon Enterprises LLC d/b/a Shell Oil Products US (“Shell”) to acquire Shell’s Puget Sound refinery and related assets, including the on-site cogeneration facility and related logistics assets. The acquisition closed on November 1, 2021.
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 $210.5 million and $406.8 million for the three and six months ended June 30, 2022, respectively. At June 30, 2022, our open RINs credit obligations were $79.5 million. See Note 2 “Acquisitions” in the Notes to Consolidated Financial Statements for additional information on RINs credit obligations assumed in the Sinclair Transactions.
Under the RFS regulations, the EPA is required to set annual volume targets of renewable fuels that obligated parties, such as us, must blend into petroleum-based transportation fuels consumed in the United States. These volume requirements are used to determine an obligated party’s renewable volume obligation (“RVO”). The EPA released a final rule on June 3, 2022 that, among other things, reduced the volume targets for 2020 and established targets for 2021 and 2022. In 2020, we recognized the cost of the RVO using the 2020 volume targets set by the EPA at that time, and in 2021 and the three months ended March 31, 2022, we recognized the cost of the RVO using our estimates. As a result of the final rule released by the EPA on June 3, 2022 as noted above, we recognized a benefit of $72.0 million in the three and six months ended June 30, 2022 related to the modification of the 2020 and 2021 volume targets.
41
OUTLOOK
Within our Refining segment, for the third quarter of 2022, we expect to run between 630,000 – 650,000 barrels per day of crude oil. This guidance reflects the strong underlying demand trends in our markets, the reduction of refined product supply driven by the global reaction to Russia’s invasion of Ukraine and a full quarter’s operating results from the Sinclair and Casper refineries.
Within our Lubricants and Specialty Products segment, for the third quarter of 2022, we expect continued strength in earnings in our Rack Forward business as well as strong performance in our Rack Back business due to the reduction in base oil supply from Russia.
Within our Renewables business, we completed construction of the Artesia renewable diesel unit and commenced start up in the second quarter of 2022. The Sinclair and Cheyenne renewable diesel units and the Artesia pre-treatment unit are all on-line. For the third quarter of 2022, we will continue to ramp up production across these assets as we expect to reach full production levels by the end of the third quarter. We are suspending construction of the Sinclair pre-treatment unit until 2023 pending a review of project economics and other potential alternatives.
In the third quarter of 2022, HEP expects to hold the quarterly distribution constant at $0.35 per unit, or $1.40 on an annualized basis. HEP remains committed to its distribution strategy focused on funding all capital expenditures and distributions within operating cash flow and maintaining distributable cash flow coverage of 1.3x or greater with the goal of reducing leverage to 3.0-3.5x.
Our Board of Directors declared a regular quarterly dividend in the amount of $0.40 per share, payable on September 1, 2022 to holders of record of common stock on August 18, 2022. In the second quarter of 2022, we resumed the repurchase of our common stock under our existing $1.0 billion share repurchase program and expect to remain active throughout the second half of 2022.
On March 27, 2020, the U.S. government passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), an approximately $2 trillion stimulus package that included various provisions intended to provide relief to individuals and businesses in the form of tax changes, loans and grants, among others. At this time, we have not sought relief in the form of loans or grants from the CARES Act; however, we have benefited from certain tax deferrals in the CARES Act and may benefit from other tax provisions if we meet the requirements to do so. During the second quarter of 2022, we received $83 million in cash tax benefit in 2022 from the net operating loss carryback provisions under the CARES Act.
A more detailed discussion of our financial and operating results for the three and six months ended June 30, 2022 and 2021 is presented in the following sections.
42
RESULTS OF OPERATIONS
Financial Data
| Three Months Ended June 30, | Change from 2021 | |||||||||||||||||||||||||
| 2022 | 2021 | Change | Percent | |||||||||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||||||||
| Sales and other revenues | $ | 11,162,160 | $ | 4,577,123 | $ | 6,585,037 | 144 | % | ||||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||||||||||||
Cost of products sold (exclusive of depreciation and amortization): | ||||||||||||||||||||||||||
Cost of products sold (exclusive of lower of cost or market inventory valuation adjustment) | 8,579,915 | 3,825,729 | 4,754,186 | 124 | ||||||||||||||||||||||
| Lower of cost or market inventory valuation adjustment | 34,543 | (118,825) | 153,368 | (129) | ||||||||||||||||||||||
| 8,614,458 | 3,706,904 | 4,907,554 | 132 | |||||||||||||||||||||||
| Operating expenses (exclusive of depreciation and amortization) | 606,127 | 334,191 | 271,936 | 81 | ||||||||||||||||||||||
Selling, general and administrative expenses (exclusive of depreciation and amortization) | 110,875 | 77,754 | 33,121 | 43 | ||||||||||||||||||||||
| Depreciation and amortization | 164,044 | 124,042 | 40,002 | 32 | ||||||||||||||||||||||
| Total operating costs and expenses | 9,495,504 | 4,242,891 | 5,252,613 | 124 | ||||||||||||||||||||||
| Income from operations | 1,666,656 | 334,232 | 1,332,424 | 399 | ||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Earnings of equity method investments | 5,447 | 3,423 | 2,024 | 59 | ||||||||||||||||||||||
| Interest income | 1,844 | 1,029 | 815 | 79 | ||||||||||||||||||||||
| Interest expense | (38,961) | (28,942) | (10,019) | 35 | ||||||||||||||||||||||
| Gain (loss) on foreign currency transactions | (905) | 583 | (1,488) | (255) | ||||||||||||||||||||||
| Gain on sale of assets and other | 2,320 | 7,927 | (5,607) | (71) | ||||||||||||||||||||||
| (30,255) | (15,980) | (14,275) | 89 | |||||||||||||||||||||||
| Income before income taxes | 1,636,401 | 318,252 | 1,318,149 | 414 | ||||||||||||||||||||||
| Income tax expense | 383,493 | 123,485 | 260,008 | 211 | ||||||||||||||||||||||
| Net income | 1,252,908 | 194,767 | 1,058,141 | 543 | ||||||||||||||||||||||
| Less net income attributable to noncontrolling interest | 31,646 | 25,917 | 5,729 | 22 | ||||||||||||||||||||||
| Net income attributable to HF Sinclair stockholders | $ | 1,221,262 | $ | 168,850 | $ | 1,052,412 | 623 | % | ||||||||||||||||||
| Earnings per share attributable to HF Sinclair stockholders: | ||||||||||||||||||||||||||
| Basic | $ | 5.43 | $ | 1.03 | $ | 4.40 | 427 | % | ||||||||||||||||||
| Diluted | $ | 5.43 | $ | 1.03 | $ | 4.40 | 427 | % | ||||||||||||||||||
| Cash dividends declared per common share | $ | 0.40 | $ | — | $ | 0.40 | 100 | % | ||||||||||||||||||
| Average number of common shares outstanding: | ||||||||||||||||||||||||||
| Basic | 222,952 | 162,523 | 60,429 | 37 | % | |||||||||||||||||||||
| Diluted | 222,952 | 162,523 | 60,429 | 37 | % | |||||||||||||||||||||
43
| Six Months Ended June 30, | Change from 2021 | |||||||||||||||||||||||||
| 2022 | 2021 | Change | Percent | |||||||||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||||||||
| Sales and other revenues | $ | 18,620,910 | $ | 8,081,416 | 10,539,494 | 130 | % | |||||||||||||||||||
| 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) | 15,081,927 | 6,786,034 | 8,295,893 | 122 | ||||||||||||||||||||||
| Lower of cost or market inventory valuation adjustment | 25,992 | (318,862) | 344,854 | (108) | ||||||||||||||||||||||
| 15,107,919 | 6,467,172 | 8,640,747 | 134 | |||||||||||||||||||||||
| Operating expenses (exclusive of depreciation and amortization) | 1,083,561 | 734,100 | 349,461 | 48 | ||||||||||||||||||||||
Selling, general and administrative expenses (exclusive of depreciation and amortization) | 221,297 | 159,729 | 61,568 | 39 | ||||||||||||||||||||||
| Depreciation and amortization | 308,645 | 248,121 | 60,524 | 24 | ||||||||||||||||||||||
| Total operating costs and expenses | 16,721,422 | 7,609,122 | 9,112,300 | 120 | ||||||||||||||||||||||
| Income from operations | 1,899,488 | 472,294 | 1,427,194 | 302 | ||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Earnings of equity method investments | 9,073 | 5,186 | 3,887 | 75 | ||||||||||||||||||||||
| Interest income | 2,841 | 2,060 | 781 | 38 | ||||||||||||||||||||||
| Interest expense | (73,820) | (67,328) | (6,492) | 10 | ||||||||||||||||||||||
| Gain on tariff settlement | — | 51,500 | (51,500) | (100) | ||||||||||||||||||||||
| Loss on foreign currency transactions | (766) | (734) | (32) | 4 | ||||||||||||||||||||||
| Gain on sale of assets and other | 6,215 | 9,817 | (3,602) | (37) | ||||||||||||||||||||||
| (56,457) | 501 | (56,958) | (11,369) | |||||||||||||||||||||||
| Income before income taxes | 1,843,031 | 472,795 | 1,370,236 | 290 | ||||||||||||||||||||||
| Income tax expense | 404,822 | 95,178 | 309,644 | 325 | ||||||||||||||||||||||
| Net income | 1,438,209 | 377,617 | 1,060,592 | 281 | ||||||||||||||||||||||
| Less net income attributable to noncontrolling interest | 56,973 | 60,550 | (3,577) | (6) | ||||||||||||||||||||||
| Net income attributable to HF Sinclair stockholders | $ | 1,381,236 | $ | 317,067 | $ | 1,064,169 | 336 | % | ||||||||||||||||||
| Earnings (loss) per share attributable to HF Sinclair stockholders: | ||||||||||||||||||||||||||
| Basic | $ | 6.86 | $ | 1.92 | $ | 4.94 | 257 | % | ||||||||||||||||||
| Diluted | $ | 6.86 | $ | 1.92 | $ | 4.94 | 257 | % | ||||||||||||||||||
| Cash dividends declared per common share | $ | 0.40 | $ | 0.35 | $ | 0.05 | 14 | % | ||||||||||||||||||
| Average number of common shares outstanding: | ||||||||||||||||||||||||||
| Basic | 199,149 | 162,501 | 36,648 | 23 | % | |||||||||||||||||||||
| Diluted | 199,149 | 162,501 | 36,648 | 23 | % | |||||||||||||||||||||
Balance Sheet Data
| June 30, 2022 | December 31, 2021 | |||||||||||||
| (Unaudited) | ||||||||||||||
| (In thousands) | ||||||||||||||
| Cash and cash equivalents | $ | 1,702,286 | $ | 234,444 | ||||||||||
| Working capital | $ | 3,636,627 | $ | 1,696,990 | ||||||||||
| Total assets | $ | 19,177,854 | $ | 12,916,613 | ||||||||||
| Long-term debt | $ | 3,348,103 | $ | 3,072,737 | ||||||||||
| Total equity | $ | 9,874,910 | $ | 6,294,465 | ||||||||||
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Other Financial Data
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 1,528,356 | $ | 427,755 | $ | 1,989,392 | $ | 490,081 | ||||||||||||||||||
| Net cash used for investing activities | $ | (153,835) | $ | (175,248) | $ | (539,011) | $ | (322,312) | ||||||||||||||||||
| Net cash provided by (used for) financing activities | $ | (261,214) | $ | (48,917) | $ | 20,172 | $ | (138,478) | ||||||||||||||||||
| Capital expenditures | $ | 159,444 | $ | 182,880 | $ | 317,740 | $ | 332,841 | ||||||||||||||||||
EBITDA (1) | $ | 1,805,916 | $ | 444,290 | $ | 2,165,682 | $ | 725,634 | ||||||||||||||||||
(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, Sinclair and Casper Refineries. The Puget Sound Refinery was acquired November 1, 2021, and thus is included for the period January 1, 2022 to June 30, 2022. In addition, the refinery operations of the Sinclair and Casper Refineries are included for the period March 14, 2022 (date of acquisition) through June 30, 2022. The following tables set forth information, including non-GAAP performance measures, about our consolidated refinery operations. The cost of products and refinery gross and net operating margins do not include the non-cash effects of lower of cost or market inventory valuation adjustments and depreciation and amortization. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 (8) | 2021 | |||||||||||||||||||||||
| Mid-Continent Region | ||||||||||||||||||||||||||
Crude charge (BPD) (1) | 277,930 | 278,380 | 284,030 | 247,500 | ||||||||||||||||||||||
Refinery throughput (BPD) (2) | 292,570 | 293,050 | 298,950 | 257,030 | ||||||||||||||||||||||
Sales of produced refined products (BPD) (3) | 279,170 | 287,680 | 279,710 | 249,400 | ||||||||||||||||||||||
Refinery utilization (4) | 106.9 | % | 107.1 | % | 109.2 | % | 95.2 | % | ||||||||||||||||||
Average per produced barrel (5) | ||||||||||||||||||||||||||
| Refinery gross margin | $ | 32.53 | $ | 10.82 | $ | 20.96 | $ | 8.99 | ||||||||||||||||||
Refinery operating expenses (6) | 6.21 | 5.27 | 6.11 | 7.22 | ||||||||||||||||||||||
| Net operating margin | $ | 26.32 | $ | 5.55 | $ | 14.85 | $ | 1.77 | ||||||||||||||||||
Refinery operating expenses per throughput barrel (7) | $ | 5.92 | $ | 5.18 | $ | 5.72 | $ | 6.89 | ||||||||||||||||||
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| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 (8) | 2021 | |||||||||||||||||||||||
| Mid-Continent Region | ||||||||||||||||||||||||||
| Feedstocks: | ||||||||||||||||||||||||||
| Sweet crude oil | 54 | % | 64 | % | 58 | % | 62 | % | ||||||||||||||||||
| Sour crude oil | 22 | % | 14 | % | 18 | % | 14 | % | ||||||||||||||||||
| Heavy sour crude oil | 19 | % | 17 | % | 19 | % | 19 | % | ||||||||||||||||||
| Other feedstocks and blends | 5 | % | 5 | % | 5 | % | 5 | % | ||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||
| Sales of produced refined products: | ||||||||||||||||||||||||||
| Gasolines | 49 | % | 51 | % | 50 | % | 51 | % | ||||||||||||||||||
| Diesel fuels | 35 | % | 34 | % | 34 | % | 34 | % | ||||||||||||||||||
| Jet fuels | 5 | % | 4 | % | 6 | % | 5 | % | ||||||||||||||||||
| Fuel oil | 1 | % | 1 | % | 1 | % | 1 | % | ||||||||||||||||||
| Asphalt | 4 | % | 2 | % | 3 | % | 2 | % | ||||||||||||||||||
| Base oils | 4 | % | 4 | % | 4 | % | 4 | % | ||||||||||||||||||
| LPG and other | 2 | % | 4 | % | 2 | % | 3 | % | ||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||
| West Region | ||||||||||||||||||||||||||
Crude charge (BPD) (1) | 349,380 | 137,970 | 292,450 | 134,940 | ||||||||||||||||||||||
Refinery throughput (BPD) (2) | 370,740 | 151,680 | 315,350 | 148,160 | ||||||||||||||||||||||
Sales of produced refined products (BPD) (3) | 376,400 | 156,260 | 309,530 | 150,290 | ||||||||||||||||||||||
Refinery utilization (4) | 83.6 | % | 95.2 | % | 77.6 | % | 93.1 | % | ||||||||||||||||||
Average per produced barrel (5) | ||||||||||||||||||||||||||
| Refinery gross margin | $ | 39.21 | $ | 13.35 | $ | 30.42 | $ | 11.88 | ||||||||||||||||||
Refinery operating expenses (6) | 9.10 | 6.57 | 9.19 | 7.29 | ||||||||||||||||||||||
| Net operating margin | $ | 30.11 | $ | 6.78 | $ | 21.23 | $ | 4.59 | ||||||||||||||||||
Refinery operating expenses per throughput barrel (7) | $ | 9.24 | $ | 6.77 | $ | 9.02 | $ | 7.40 | ||||||||||||||||||
| Feedstocks: | ||||||||||||||||||||||||||
| Sweet crude oil | 33 | % | 22 | % | 29 | % | 23 | % | ||||||||||||||||||
| Sour crude oil | 46 | % | 59 | % | 50 | % | 59 | % | ||||||||||||||||||
| Heavy sour crude oil | 10 | % | — | % | 9 | % | — | % | ||||||||||||||||||
| Black wax crude oil | 5 | % | 10 | % | 5 | % | 9 | % | ||||||||||||||||||
| Other feedstocks and blends | 6 | % | 9 | % | 7 | % | 9 | % | ||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||
| Sales of produced refined products: | ||||||||||||||||||||||||||
| Gasolines | 53 | % | 52 | % | 53 | % | 53 | % | ||||||||||||||||||
| Diesel fuels | 33 | % | 37 | % | 31 | % | 37 | % | ||||||||||||||||||
| Jet fuels | 5 | % | — | % | 5 | % | — | % | ||||||||||||||||||
| Fuel oil | 2 | % | 3 | % | 5 | % | 3 | % | ||||||||||||||||||
| Asphalt | 3 | % | 5 | % | 2 | % | 4 | % | ||||||||||||||||||
| LPG and other | 4 | % | 3 | % | 4 | % | 3 | % | ||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||
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| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 (8) | 2021 | |||||||||||||||||||||||
| Consolidated | ||||||||||||||||||||||||||
Crude charge (BPD) (1) | 627,310 | 416,350 | 576,480 | 382,440 | ||||||||||||||||||||||
Refinery throughput (BPD) (2) | 663,310 | 444,730 | 614,300 | 405,190 | ||||||||||||||||||||||
Sales of produced refined products (BPD) (3) | 655,570 | 443,940 | 589,240 | 399,690 | ||||||||||||||||||||||
Refinery utilization (4) | 92.5 | % | 102.8 | % | 90.5 | % | 94.4 | % | ||||||||||||||||||
Average per produced barrel (5) | ||||||||||||||||||||||||||
| Refinery gross margin | $ | 36.36 | $ | 11.71 | $ | 25.93 | $ | 10.07 | ||||||||||||||||||
Refinery operating expenses (6) | 7.87 | 5.73 | 7.73 | 7.25 | ||||||||||||||||||||||
| Net operating margin | $ | 28.49 | $ | 5.98 | $ | 18.20 | $ | 2.82 | ||||||||||||||||||
Refinery operating expenses per throughput barrel (7) | $ | 7.77 | $ | 5.72 | $ | 8.25 | $ | 7.07 | ||||||||||||||||||
| Feedstocks: | ||||||||||||||||||||||||||
| Sweet crude oil | 42 | % | 50 | % | 43 | % | 48 | % | ||||||||||||||||||
| Sour crude oil | 36 | % | 30 | % | 34 | % | 30 | % | ||||||||||||||||||
| Heavy sour crude oil | 14 | % | 11 | % | 14 | % | 12 | % | ||||||||||||||||||
| Black wax crude oil | 3 | % | 3 | % | 3 | % | 3 | % | ||||||||||||||||||
| Other feedstocks and blends | 5 | % | 6 | % | 6 | % | 7 | % | ||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||
| Sales of produced refined products: | ||||||||||||||||||||||||||
| Gasolines | 51 | % | 51 | % | 51 | % | 52 | % | ||||||||||||||||||
| Diesel fuels | 34 | % | 35 | % | 32 | % | 35 | % | ||||||||||||||||||
| Jet fuels | 5 | % | 3 | % | 6 | % | 3 | % | ||||||||||||||||||
| Fuel oil | 2 | % | 1 | % | 3 | % | 1 | % | ||||||||||||||||||
| Asphalt | 3 | % | 3 | % | 3 | % | 3 | % | ||||||||||||||||||
| Base oils | 2 | % | 3 | % | 2 | % | 3 | % | ||||||||||||||||||
| LPG and other | 3 | % | 4 | % | 3 | % | 3 | % | ||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||
(1)Crude charge represents the barrels per day of crude oil processed at our refineries.
(2)Refinery throughput represents the barrels per day of crude and other refinery feedstocks input to the crude units and other conversion units at our refineries.
(3)Represents barrels sold of refined products produced at our refineries (including HFC Asphalt and inter-segment sales) and does not include volumes of refined products purchased for resale or volumes of excess crude oil sold.
(4)Represents crude charge divided by total crude capacity (BPSD). As a result of our acquisition of the Puget Sound Refinery on November 1, 2021, and the Sinclair and Casper Refineries on March 14, 2022, our consolidated crude capacity increased from 405,000 BPSD at June 30, 2021 to 678,000 BPSD at June 30, 2022.
(5)Represents average amount per produced barrel sold, which is a non-GAAP measure. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.
(6)Represents total Refining segment operating expenses, exclusive of depreciation and amortization, divided by sales volumes of refined products produced at our refineries.
(7)Represents total Refining segment operating expenses, exclusive of depreciation and amortization, divided by refinery throughput.
(8)We acquired the Sinclair and Casper Refineries on March 14, 2022. Refining operating data for the six months ended June 30, 2022 includes crude oil and feedstocks processed and refined products sold at our Sinclair and Casper Refineries for the period March 14, 2022 through June 30, 2022 only, averaged over the 181 days in the six months ended June 30, 2022.
47
Renewables Operating Data
The following table sets forth information about our renewables operations and includes our Sinclair businesses for the period March 14, 2022 (the date of acquisition) through June 30, 2022.
| Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||||||||||
| Renewables | ||||||||||||||
| Sales volumes (in thousand gallons) | 25,688 | 30,632 | ||||||||||||
Average per produced gallon (1) | ||||||||||||||
| Renewables gross margin | $ | 0.07 | $ | 0.16 | ||||||||||
Renewables operating expenses (2) | 1.14 | 1.84 | ||||||||||||
| Net operating margin | $ | (1.07) | $ | (1.68) | ||||||||||
(1)Represents average amount per produced gallon sold, which is a non-GAAP measure. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.
(2)Represents total Renewables segment operating expenses, exclusive of depreciation and amortization, divided by sales volumes of renewable diesel produced at our renewable diesel units.
Marketing Operating Data
The following table sets forth information about our Marketing operations and includes our Sinclair business for the period March 14, 2022 (the date of acquisition) through June 30, 2022.
| Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||||||||||
| Marketing | ||||||||||||||
| Number of branded sites at period end | 1,329 | 1,329 | ||||||||||||
| Sales volumes (in thousand gallons) | 335,106 | 420,019 | ||||||||||||
Margin per gallon of sales (1) | $ | 0.07 | $ | 0.07 | ||||||||||
(1)Represents average amount per gallon sold, which is a non-GAAP measure. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.
Lubricants and Specialty Products Operating Data
The following table sets forth information about our lubricants and specialty products operations.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Lubricants and Specialty Products | ||||||||||||||||||||||||||
| Throughput (BPD) | 20,260 | 19,310 | 19,800 | 19,860 | ||||||||||||||||||||||
| Sales of produced refined products (BPD) | 34,000 | 36,670 | 34,510 | 34,630 | ||||||||||||||||||||||
| Sales of produced refined products: | ||||||||||||||||||||||||||
| Finished products | 53 | % | 51 | % | 52 | % | 52 | % | ||||||||||||||||||
| Base oils | 27 | % | 29 | % | 29 | % | 27 | % | ||||||||||||||||||
| Other | 20 | % | 20 | % | 19 | % | 21 | % | ||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||
48
Supplemental financial data attributable to our Lubricants and Specialty Products segment is presented below.
Rack Back (1) | Rack Forward (2) | Eliminations (3) | Total Lubricants and Specialty Products | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Three months ended June 30, 2022 | ||||||||||||||||||||||||||
| Sales and other revenues | $ | 358,628 | $ | 754,442 | $ | (263,129) | $ | 849,941 | ||||||||||||||||||
| Cost of products sold | $ | 249,095 | $ | 590,462 | $ | (263,129) | $ | 576,428 | ||||||||||||||||||
| Operating expenses | $ | 38,073 | $ | 36,397 | $ | — | $ | 74,470 | ||||||||||||||||||
| Selling, general and administrative expenses | $ | 5,636 | $ | 37,919 | $ | — | $ | 43,555 | ||||||||||||||||||
| Depreciation and amortization | $ | 7,712 | $ | 12,893 | $ | — | $ | 20,605 | ||||||||||||||||||
| Income from operations | $ | 58,112 | $ | 76,771 | $ | — | $ | 134,883 | ||||||||||||||||||
| Three months ended June 30, 2021 | ||||||||||||||||||||||||||
| Sales and other revenues | $ | 254,485 | $ | 629,211 | $ | (214,507) | $ | 669,189 | ||||||||||||||||||
| Cost of products sold | $ | 163,280 | $ | 542,445 | $ | (214,507) | $ | 491,218 | ||||||||||||||||||
| Operating expenses | $ | 29,106 | $ | 32,204 | $ | — | $ | 61,310 | ||||||||||||||||||
| Selling, general and administrative expenses | $ | 5,914 | $ | 31,669 | $ | — | $ | 37,583 | ||||||||||||||||||
| Depreciation and amortization | $ | 6,230 | $ | 12,922 | $ | — | $ | 19,152 | ||||||||||||||||||
| Income from operations | $ | 49,955 | $ | 9,971 | $ | — | $ | 59,926 | ||||||||||||||||||
| Six months ended June 30, 2022 | ||||||||||||||||||||||||||
| Sales and other revenues | $ | 637,214 | $ | 1,442,389 | $ | (474,653) | $ | 1,604,950 | ||||||||||||||||||
| Cost of products sold | $ | 427,634 | $ | 1,128,024 | $ | (474,653) | $ | 1,081,005 | ||||||||||||||||||
| Operating expenses | $ | 68,887 | $ | 71,584 | $ | — | $ | 140,471 | ||||||||||||||||||
| Selling, general and administrative expenses | $ | 11,843 | $ | 73,461 | $ | — | $ | 85,304 | ||||||||||||||||||
| Depreciation and amortization | $ | 15,269 | $ | 25,930 | $ | — | $ | 41,199 | ||||||||||||||||||
| Income from operations | $ | 113,581 | $ | 143,390 | $ | — | $ | 256,971 | ||||||||||||||||||
| Six months ended June 30, 2021 | ||||||||||||||||||||||||||
| Sales and other revenues | $ | 427,927 | $ | 1,112,457 | $ | (346,632) | $ | 1,193,752 | ||||||||||||||||||
| Cost of products sold | $ | 295,812 | $ | 873,561 | $ | (346,632) | $ | 822,741 | ||||||||||||||||||
| Operating expenses | $ | 57,727 | $ | 64,336 | $ | — | $ | 122,063 | ||||||||||||||||||
| Selling, general and administrative expenses | $ | 12,653 | $ | 70,483 | $ | — | $ | 83,136 | ||||||||||||||||||
| Depreciation and amortization | $ | 13,535 | $ | 25,738 | $ | — | $ | 39,273 | ||||||||||||||||||
| Income from operations | $ | 48,200 | $ | 78,339 | $ | — | $ | 126,539 | ||||||||||||||||||
(1)Rack Back consists of our Petro-Canada Lubricants, Inc. (“PCLI”) base oil production activities, by-product sales to third parties and intra-segment base oil sales to Rack Forward.
(2)Rack Forward activities include the purchase of base oils from Rack Back and the blending, packaging, marketing and distribution and sales of finished lubricants and specialty products to third parties.
(3)Intra-segment sales of Rack Back produced base oils to Rack Forward are eliminated under the “Eliminations” column.
Results of Operations – Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
Summary
Net income attributable to HF Sinclair stockholders for the three months ended June 30, 2022 was $1,221.3 million ($5.43 per basic and diluted share), an $1,052.4 million increase from a net income of $168.9 million ($1.03 per basic and diluted share) for the three months ended June 30, 2021. The increase in net income was principally driven by stronger product demand and higher sales prices which resulted in an increase in refinery gross margins and higher refined product sales volumes. Lower of cost or market inventory reserve adjustments related to our renewables inventories decreased pre-tax earnings by $34.5 million for the three months ended June 30, 2022 and lower of cost or market inventory adjustments related to our refining inventories increased pre-tax earnings by $118.8 million for the three months ended June 30, 2021. Refinery gross margins for the three months ended June 30, 2022 increased to $36.36 per produced barrel sold from $11.71 for the three months ended June 30, 2021.
49
Sales and Other Revenues
Sales and other revenues increased 144% from $4,577.1 million for the three months ended June 30, 2021 to $11,162.2 million for the three months ended June 30, 2022 principally due to the increase in sales prices and higher refined product sales volumes, primarily due to the acquisition of the Puget Sound Refinery and the Acquired Sinclair Businesses. Sales and other revenues included $1,336.3 million, $845.0 million and $115.9 million in unaffiliated revenues related to our Marketing, Lubricants and Specialty Products and Renewables segments, respectively, for the three months ended June 30, 2022. Sales and other revenues included $662.8 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the three months ended June 30, 2021.
Cost of Products Sold
Total cost of products sold increased 132% from $3,706.9 million for the three months ended June 30, 2021 to $8,614.5 million for the three months ended June 30, 2022 principally due to higher crude oil costs and higher refined product sales volumes, primarily due to the acquisition of the Puget Sound Refinery and the Acquired Sinclair Businesses. During the second quarters of 2022 and 2021, we recognized a lower of cost or market inventory valuation adjustment charge related to our renewables inventories of $34.5 million and a benefit related to our refining inventories of $118.8 million, respectively.
Gross Refinery Margins
Gross refinery margin per produced barrel sold increased 211% from $11.71 for the three months ended June 30, 2021 to $36.36 for the three months ended June 30, 2022. The increase was due to the effects of an increase in the average per barrel sold sales price during the current year quarter, partially offset by increased crude oil and feedstock prices. Gross refinery margin per barrel does not include the non-cash effects of lower of cost or market inventory valuation adjustments or depreciation and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q for a reconciliation to the income statement of sale prices of products sold and cost of products purchased.
Operating Expenses
Operating expenses, exclusive of depreciation and amortization, increased 81% from $334.2 million for the three months ended June 30, 2021 to $606.1 million for the three months ended June 30, 2022 primarily due to the acquisition of the Puget Sound Refinery and the Acquired Sinclair Businesses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 43% from $77.8 million for the three months ended June 30, 2021 to $110.9 million for the three months ended June 30, 2022 primarily due to higher employee related expenses from recent acquisitions and professional services and legal costs incurred in connection with the Sinclair Transactions. See Note 2 “Acquisitions” in the Notes to Consolidated Financial Statements for additional information on this acquisition.
Depreciation and Amortization Expenses
Depreciation and amortization increased 32% from $124.0 million for the three months ended June 30, 2021 to $164.0 million for the three months ended June 30, 2022. This increase was due principally to depreciation and amortization attributable to the acquisition of the Puget Sound Refinery, the Acquired Sinclair Businesses and newly capitalized projects related to our renewable diesel units.
Interest Expense
Interest expense was $39.0 million for the three months ended June 30, 2022 compared to $28.9 million for the three months ended June 30, 2021. 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.
For the three months ended June 30, 2022 and 2021, interest expense attributable to our HEP segment was $20.4 million and $13.9 million, respectively.
Gain (Loss) on Foreign Currency Transactions
Remeasurement adjustments resulting from the foreign currency conversion of the intercompany financing notes payable by PCLI net of mark-to-market valuations on foreign exchange forward contracts with banks which hedge the foreign currency exposure on these intercompany notes was a net loss of $0.9 million and a net gain of $0.6 million for the three months ended June 30, 2022 and 2021, respectively. For the three months ended June 30, 2022 and 2021, gain (loss) on foreign currency transactions included a gain of $13.0 million and a loss of $6.1 million, respectively, on foreign exchange forward contracts (utilized as an economic hedge).
50
Income Taxes
For the three months ended June 30, 2022, we recorded an income tax expense of $383.5 million compared to $123.5 million for the three months ended June 30, 2021. This increase was principally due to higher pre-tax income during the three months ended June 30, 2022 compared to the same period of 2021. Our effective tax rates were 23.4% and 38.8% for the three months ended June 30, 2022 and 2021, respectively. The decrease in the effective tax rate is principally due to the relationship between the pre-tax results and the earnings attributable to the noncontrolling interest that is not included in income for tax purposes.
Results of Operations – Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
Summary
Net income attributable to HF Sinclair stockholders for the six months ended June 30, 2022 was $1,381.2 million ($6.86 per basic and diluted share), a $1,064.2 million increase compared to net income of $317.1 million ($1.92 per basic and diluted share) for the six months ended June 30, 2021. The increase in net income was principally driven by stronger product demand and higher sales prices which resulted in an increase in refinery gross margins and higher refined product sales volumes. Lower of cost or market inventory reserve adjustments related to our renewables inventories decreased pre-tax earnings by $26.0 million for the six months ended June 30, 2022 and lower of cost or market inventory adjustment related to our refining inventories increased pre-tax earnings by $318.9 million and for the six months ended June 30, 2021. Net income for the six months ended June 30, 2021 was impacted by winter storm Uri, which increased natural gas costs across our refining system. Refinery gross margins for the six months ended June 30, 2022 increased to $25.93 per barrel sold from $10.07 for the six months ended June 30, 2021.
Sales and Other Revenues
Sales and other revenues increased 130% from $8,081.4 million for the six months ended June 30, 2021 to $18,620.9 million for the six months ended June 30, 2022 principally due to the increase in sales prices and higher refined product sales volumes, in part due to the acquisition of the Puget Sound Refinery and the Acquired Sinclair Businesses. Sales and other revenues included $1,613.3 million, $1,598.6 million and $144.3 million in unaffiliated revenues related to our Marketing, Lubricants and Specialty Products and Renewables segments, respectively, for the six months ended June 30, 2022. Sales and other revenues included $1,184.8 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the six months ended June 30, 2021.
Cost of Products Sold
Total cost of products sold increased 134% from $6,467.2 million for the six months ended June 30, 2021 to $15,107.9 million for the six months ended June 30, 2022 principally due to higher crude oil costs and higher refined product sales volumes, in part due to the acquisition of the Puget Sound Refinery and the Acquired Sinclair Businesses. During the six months ended June 30, 2022 and 2021, we recognized a lower of cost or market inventory valuation adjustment charge related to our renewables inventories of $26.0 million and a benefit related to our refining inventories of $318.9 million, respectively.
Gross Refinery Margins
Gross refinery margin per barrel sold increased 157% from $10.07 for the six months ended June 30, 2021 to $25.93 for the six months ended June 30, 2022 principally due to the increase in the average per barrel sold sales prices during the current period, partially offset by the increase in crude oil and feedstock prices. Gross refinery margin per barrel does not include the non-cash effects of lower of cost or market inventory valuation adjustments or depreciation and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q for a reconciliation to the income statement of sales prices of products sold and cost of products purchased.
Operating Expenses
Operating expenses, exclusive of depreciation and amortization, increased 48% from $734.1 million for the six months ended June 30, 2021 to $1,083.6 million for the six months ended June 30, 2022 primarily due to the acquisition of the Puget Sound Refinery and the Acquired Sinclair Businesses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 39% from $159.7 million for the six months ended June 30, 2021 to $221.3 million for the six months ended June 30, 2022 primarily due to higher employee related expenses from recent acquisitions and professional services and legal costs incurred in connection with the Sinclair Transactions. See Note 2 “Acquisitions” in the Notes to Consolidated Financial Statements for additional information on these acquisitions.
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Depreciation and Amortization Expenses
Depreciation and amortization increased 24% from $248.1 million for the six months ended June 30, 2021 to $308.6 million for the six months ended June 30, 2022. This increase was due principally to depreciation and amortization attributable to the acquisition of the Puget Sound Refinery, the Acquired Sinclair Businesses and newly capitalized projects related to our renewable diesel units.
Interest Expense
Interest expense was $73.8 million for the six months ended June 30, 2022 compared to $67.3 million for the six months ended June 30, 2021. 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.
For the six months ended June 30, 2022 and 2021, interest expense attributable to our HEP Segment was $34.0 million and $27.2 million, respectively.
Gain on Tariff Settlement
For the six months ended June 30, 2021, we recorded a gain of $51.5 million upon the settlement of a tariff rate case. See Note 14 “Contingencies” in the Notes to Consolidated Financial Statements for additional information on this case and settlement.
Gain (Loss) on Foreign Currency Transactions
Remeasurement adjustments resulting from the foreign currency conversion of the intercompany financing notes payable by PCLI net of mark-to-market valuations on foreign exchange forward contracts with banks which hedge the foreign currency exposure on these intercompany notes were net losses of $0.8 million and $0.7 million for the six months ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022 and 2021, losses on foreign currency transactions included a net gain of $6.5 million and a loss of $12.8 million, respectively, on foreign exchange forward contracts (utilized as an economic hedge).
Income Taxes
For the six months ended June 30, 2022, we recorded an income tax expense of $404.8 million compared to $95.2 million for the six months ended June 30, 2021. This increase was principally due to higher pre-tax income during the six months ended June 30, 2022 compared to the same period of 2021. Our effective tax rates were 22.0% and 20.1% for the six months ended June 30, 2022 and 2021, respectively. The year-over-year increase in the effective tax rate is principally due to the relationship between the pre-tax results and the earnings attributable to the noncontrolling interest that is not included in income for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
HF Sinclair Credit Agreement
On April 27, 2022, after giving effect to the consummation of the exchange offers and the issuance of the HF Sinclair Senior Notes (as defined below), HF Sinclair entered into 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. The HF Sinclair Credit Agreement replaced the $1.35 billion senior unsecured revolving credit facility of HollyFrontier, which was terminated on April 27, 2022. At June 30, 2022, HF Sinclair was in compliance with all covenants, had no outstanding borrowings and had outstanding letters of credit totaling $2.3 million under the HF Sinclair Credit Agreement.
HollyFrontier Bond Exchange
On April 27, 2022, HF Sinclair completed its offers to exchange any and all outstanding HollyFrontier 2.625% senior notes maturing October 2023 (the “HollyFrontier 2.625% Senior Notes”), 5.875% senior notes maturing April 2026 (the “HollyFrontier 5.875% Senior Notes”) and 4.500% senior notes maturing October 2030 (the “HollyFrontier 4.500% Senior Notes”) (and, collectively, the “HollyFrontier Senior Notes”) for 2.625% senior notes maturing October 2023 (the “HF Sinclair 2.625% Senior Notes”), 5.875% senior notes maturing April 2026 (the “HF Sinclair 5.875% Senior Notes”) and 4.500% senior notes maturing October 2030 (the “HF Sinclair 4.500% Senior Notes”) (and, collectively, the “HF Sinclair Senior Notes”) to be issued by HF Sinclair and cash. Additionally, HF Sinclair solicited consents to adopt certain amendments to the indenture governing the HollyFrontier Senior Notes.
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Following the settlement of the exchange offers and consent solicitations, the aggregate principal amount of the HF Sinclair Senior Notes consisted of the following:
| Title of Series of HF Sinclair Senior Notes | June 30, 2022 | |||||||
| (In thousands) | ||||||||
2.625% HF Sinclair Senior Notes maturing 2023 | $ | 290,348 | ||||||
5.875% HF Sinclair Senior Notes maturing 2026 | $ | 797,100 | ||||||
4.500% HF Sinclair Senior Notes maturing 2030 | $ | 325,034 | ||||||
The HF Sinclair Senior Notes are unsecured and unsubordinated obligations of ours and rank equally with all our other existing and future unsecured and unsubordinated indebtedness. Each series of HF Sinclair Senior Notes has the same interest rate (including interest rate adjustment provisions, as applicable), interest payment dates, maturity date and redemption terms as the corresponding series of HollyFrontier Senior Notes. The HF Sinclair Senior Notes were issued in exchange for the HollyFrontier Senior Notes pursuant to a private exchange offer exempt from registration under the Securities Act of 1933, as amended.
In connection with the issuance of the HF Sinclair Senior Notes, HF Sinclair agreed to use its commercially reasonable efforts to file (and have declared effective) a registration statement with respect to a registered offer to exchange the HF Sinclair Senior Notes for substantially identical registered notes. HF Sinclair will be obligated to pay additional interest if it does not complete the exchange offer on or prior to April 27, 2023, or if a shelf registration statement with respect to the HF Sinclair Senior Notes (if required to be filed) is not declared effective by the dates indicated in the Registration Rights Agreement.
Following the settlement of the exchange offers and consent solicitations, the aggregate principal amount of the HollyFrontier Senior Notes that were not tendered and exchanged, and which remain outstanding, consisted of the following:
| Title of Series of HollyFrontier Senior Notes | June 30, 2022 | |||||||
| (In thousands) | ||||||||
2.625% HollyFrontier Senior Notes maturing 2023 | $ | 59,652 | ||||||
5.875% HollyFrontier Senior Notes maturing 2026 | $ | 202,900 | ||||||
4.500% HollyFrontier Senior Notes maturing 2030 | $ | 74,966 | ||||||
In connection with the exchange offers and consent solicitations, HollyFrontier amended the indenture governing the HollyFrontier Senior Notes to eliminate (i) substantially all of the restrictive covenants, (ii) certain of the events which may lead to an “Event of Default”, (iii) the SEC reporting covenant and (iv) with respect to the HollyFrontier 2.625% Senior Notes and the HollyFrontier 4.500% Senior Notes only, the offer to repurchase such senior notes upon certain change of control triggering events.
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”) and is available to fund capital expenditures, investments, acquisitions, distribution payments, working capital and for general partnership purposes. It is also available to fund letters of credit up to a $50 million sub-limit and has 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 six months ended June 30, 2022, HEP had net repayments of $119.0 million under the HEP Credit Agreement. At June 30, 2022, HEP was in compliance with all of its covenants, had outstanding borrowings of $721.0 million and no outstanding letters of credit under the HEP Credit Agreement.
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HEP Senior Notes
On April 8, 2022, HEP closed a private placement of $400 million in aggregate principal amount of 6.375% senior notes maturing April 2027 (the “HEP 6.375% Senior Notes”) at par for net proceeds of approximately $393 million, after deducting the initial purchasers’ discounts and commissions and estimated offering expenses. The HEP 6.375% Senior Notes are unsecured and impose certain restrictive covenants, including limitations on HEP’s ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates and enter into mergers. The net proceeds from the offering of the HEP 6.375% Senior Notes were used to partially repay outstanding borrowings under the HEP Credit Agreement.
See Note 10 “Debt” in the Notes to Consolidated Financial Statements for additional information on our debt instruments.
Liquidity
We believe our current cash and cash equivalents, along with future internally generated cash flow and funds available under our credit facilities, will provide sufficient resources to fund currently planned capital projects and our liquidity needs for the foreseeable future. We expect that, to the extent necessary, we can raise additional funds from time to time through equity or debt financings in the public and private capital markets. In addition, components of our long-term growth strategy include the optimization of existing units at our facilities and selective acquisition of complementary assets for our refining operations intended to increase earnings and cash flow. We also expect to use cash for payment of cash dividends, which are at the discretion of our Board of Directors, and for the repurchase of common stock under our share repurchase program.
Our standalone (excluding HEP) liquidity was approximately $3.34 billion at June 30, 2022, consisting of cash and cash equivalents of $1.69 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 November 2019, our Board of Directors approved a $1.0 billion share repurchase program, which replaced all existing share repurchase programs, authorizing us to repurchase common stock in the open market or through privately negotiated transactions. In June 2022, our Board of Directors determined that privately negotiated repurchases from REH Company (formerly known as The Sinclair Companies) are also authorized under the share repurchase program, subject to REH Company’s interest 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 second quarter of 2022, we repurchased 2,730,000 shares of common stock for $132.3 million in connection with our share repurchase program. As of June 30, 2022, we had remaining authorization to repurchase up to $867.7 million under this stock repurchase program, of which we repurchased 2,965,642 shares for $132.9 million in July 2022. 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.
Cash Flows – Operating Activities
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
Net cash flows provided by operating activities were $1,989.4 million for the six months ended June 30, 2022 compared to $490.1 million for the six months ended June 30, 2021, an increase of $1,499.3 million. The increase in operating cash flows was primarily due to the increase in gross refinery margins, partially offset by higher operating expenses. In addition, we received $83 million in cash tax benefit during the six months ended June 30, 2022 from the net operating loss carryback provisions under the CARES Act.
Changes in working capital increased operating cash flows by $246.3 million and $149.0 million for the six months ended June 30, 2022 and 2021, respectively. The increase for the current period is partially due to $83 million in cash tax benefit received during the six months ended June 30, 2022 from the net operating loss carryback provisions under the CARES Act.
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Cash Flows – Investing Activities and Planned Capital Expenditures
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
For the six months ended June 30, 2022, our net cash flows used for investing activities were $539.0 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 six months ended June 30, 2022 were $317.7 million, which include HEP capital expenditures of $23.2 million for the six months ended June 30, 2022.
For the six months ended June 30, 2021, our net cash flows used for investing activities were $322.3 million. Cash expenditures for properties, plants and equipment for the six months of ended June 30, 2021 were $332.8 million primarily due to expenditures related to our renewable diesel units. Cash expenditures for properties, plants and equipment include HEP capital expenditures of $57.7 million for the six months ended June 30, 2021.
HF Sinclair Corporation
Each year our Board of Directors approves our annual capital budget which includes specific projects that management is authorized to undertake. When conditions warrant or as new opportunities arise, additional projects may be approved. The funds appropriated for a particular capital project may be expended over a period of several years, depending on the time required to complete the project. Therefore, our planned capital expenditures for a given year consist of expenditures appropriated in that year’s capital budget plus expenditures for projects appropriated in prior years which have not yet been completed. Refinery turnaround spending is amortized over the useful life of the turnaround.
The refining industry is capital intensive and requires on-going investments to sustain our refining operations. This includes replacement of, or rebuilding, refinery units and components that extend the useful life. We also invest in projects that improve operational reliability and profitability via enhancements that improve refinery processing capabilities as well as production yield and flexibility. Our capital expenditures also include projects related to renewable diesel, environmental, health and safety compliance and include initiatives as a result of federal and state mandates.
Our refinery operations and related emissions are highly regulated at both federal and state levels, and we invest in our facilities as needed to remain in compliance with these standards. Additionally, when faced with new emissions or fuels standards, we seek to execute projects that facilitate compliance and also improve the operating costs and / or yields of associated refining processes.
HEP
Each year 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.
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Expected capital and turnaround cash spending for 2022 is as follows.
| Expected Cash Spending Range | |||||||||||
| (In millions) | |||||||||||
| HF Sinclair Capital Expenditures | |||||||||||
| Refining | $ | 225.0 | $ | 250.0 | |||||||
| Renewables | 250.0 | 300.0 | |||||||||
| Lubricants and Specialty Products | 45.0 | 60.0 | |||||||||
| Marketing | 15.0 | 25.0 | |||||||||
| Corporate | 90.0 | 110.0 | |||||||||
| Turnarounds and catalyst | 110.0 | 130.0 | |||||||||
| Total HollyFrontier | 735.0 | 875.0 | |||||||||
| HEP | |||||||||||
| Maintenance | 20.0 | 30.0 | |||||||||
| Expansion and joint venture investment | 5.0 | 10.0 | |||||||||
| Refining unit turnarounds | 25.0 | 35.0 | |||||||||
| Total HEP | 50.0 | 75.0 | |||||||||
| Total | $ | 785.0 | $ | 950.0 | |||||||
Cash Flows – Financing Activities
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
For the six months ended June 30, 2022, our net cash flows provided by financing activities were $20.2 million. During the six months ended June 30, 2022, we repurchased $110.8 million of our common stock and paid $90.2 million in dividends. During the six months ended June 30, 2022, HEP received $400.0 million in proceeds from the issuance of the HEP 6.375% Senior Notes, had net repayments of $119.0 million under the HEP Credit Agreement and paid distributions of $44.9 million to noncontrolling interests.
For the six months ended June 30, 2021, our net cash flows used for financing activities were $138.5 million. During the six months ended June 30, 2021, we paid $57.7 million in dividends and $7.9 million of deferred financing costs in connection with the amendment of the HollyFrontier Credit Agreement in April 2021. During the six months ended June 30, 2021, HEP had net repayments of $43.5 million under the HEP Credit Agreement and paid $6.6 million of deferred financing costs in connection with the amendment of the HEP Credit Agreement in April 2021. In addition, HEP paid distributions of $38.2 million to noncontrolling interests and received contributions from noncontrolling interests of $17.6 million.
Contractual Obligations and Commitments
HF Sinclair Corporation
There were no significant changes to our long-term contractual obligations during the six months ended June 30, 2022 except for certain contracts that were assumed in the Sinclair Transactions as shown below.
| Payments Due by Period | ||||||||||||||||||||||||||||||||
| Contractual Obligations and Commitments | Total | 2022 | 2023 & 2024 | 2025 & 2026 | Thereafter | |||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
Supply agreements (1) | $ | 319,990 | $ | 319,990 | $ | — | $ | — | $ | — | ||||||||||||||||||||||
Transportation agreements (2) | 437,092 | 21,355 | 85,418 | 85,418 | 244,901 | |||||||||||||||||||||||||||
| Total | $ | 757,082 | $ | 341,345 | $ | 85,418 | $ | 85,418 | $ | 244,901 | ||||||||||||||||||||||
(1)We have long-term supply agreements to secure certain quantities of crude oil used in the production process at market prices. We have estimated future payments under these fixed-quantity agreements expiring in 2022 using current market prices.
(2)Consists of contractual obligations under agreements with third parties for the transportation of crude oil to our refineries under contracts expiring between 2029 and 2034.
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HEP
During the six months ended June 30, 2022, HEP had net repayments of $119.0 million resulting in $721.0 million of outstanding borrowings under the HEP Credit Agreement at June 30, 2022.
In April 2022, HEP issued $400 million in aggregate principal amount of 6.375% senior notes maturing April 2027.
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 Estimates” in HollyFrontier’s Annual Report on Form 10-K for the year ended December 31, 2021. Certain critical accounting policies that materially affect the amounts recorded in our consolidated financial statements include the use of the last-in, first-out (“LIFO”) method of valuing certain inventories, assessing the possible impairment of certain long-lived assets and goodwill, and assessing contingent liabilities for probable losses.
Inventory Valuation: Inventories related to our refining operations are stated at the lower of cost, using the LIFO method for crude oil and unfinished and finished refined products, or market. In periods of rapidly declining prices, LIFO inventories may have to be written down to market value due to the higher costs assigned to LIFO layers in prior periods. In addition, the use of the LIFO inventory method may result in increases or decreases to cost of sales in years that inventory volumes decline as the result of charging cost of sales with LIFO inventory costs generated in prior periods. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final year-end LIFO inventory valuation.
Our renewables inventories that are valued at the lower of LIFO cost or market reflect a valuation reserve of $34.7 million and $8.7 million at June 30, 2022 and December 31, 2021, respectively. A new market reserve of $34.7 million as of June 30, 2022 was based on market conditions and prices at that time. The effect of the change in the lower of cost or market reserve was an increase to cost of products sold totaling $34.5 million and $26.0 million for the three and six months ended June 30, 2022, respectively.
Inventories consisting of process chemicals, materials and maintenance supplies and RINs are stated at the lower of weighted-average cost or net realizable value. Inventories of 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 June 30, 2022, the LIFO value of our refining inventories was equal to cost.
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.
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Contingencies
We are subject to proceedings, lawsuits and other claims related to environmental, labor, product and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.
RISK MANAGEMENT
We use certain strategies to reduce some commodity price and operational risks. We do not attempt to eliminate all market risk exposures when we believe that the exposure relating to such risk would not be significant to our future earnings, financial position, capital resources or liquidity or that the cost of eliminating the exposure would outweigh the benefit.
Commodity Price Risk Management
Our primary market risk is commodity price risk. We are exposed to market risks related to the volatility in crude oil and refined products, as well as volatility in the price of natural gas used in our refining operations. We periodically enter into derivative contracts in the form of commodity price swaps, forward purchase and sales and futures contracts to mitigate price exposure with respect to our inventory positions, natural gas purchases, sales prices of refined products and crude oil costs.
Foreign Currency Risk Management
We are exposed to market risk related to the volatility in foreign currency exchange rates. We periodically enter into derivative contracts in the form of foreign exchange forward contracts to mitigate the exposure associated with fluctuations on intercompany notes with our foreign subsidiaries that are not denominated in the U.S. dollar.
As of June 30, 2022, we have the following notional contract volumes related to all outstanding derivative instruments used to mitigate commodity price and foreign currency risk:
| Notional Contract Volumes by Year of Maturity | ||||||||||||||||||||||||||
| Derivative Instrument | Total Outstanding Notional | 2022 | 2023 | Unit of Measure | ||||||||||||||||||||||
| NYMEX futures (WTI) - short | 1,245,000 | 1,245,000 | — | Barrels | ||||||||||||||||||||||
| Forward gasoline and diesel contracts - long | 270,000 | 270,000 | — | Barrels | ||||||||||||||||||||||
| Foreign currency forward contracts | 445,568,948 | 226,327,761 | 219,241,187 | U.S. dollar | ||||||||||||||||||||||
Forward commodity contracts (platinum) (1) | 38,723 | 3,800 | 34,923 | Troy ounces | ||||||||||||||||||||||
(1)Represents an embedded derivative within our catalyst financing arrangements, which may be refinanced or require repayment under certain conditions. See Note 10 “Debt” in the Notes to Consolidated Financial Statements for additional information on these financing arrangements.
The following sensitivity analysis provides the hypothetical effects of market price fluctuations to the commodity hedged under our derivative contracts:
Estimated Change in Fair Value at June 30, | ||||||||||||||
| Commodity-based Derivative Contracts | 2022 | 2021 | ||||||||||||
| (In thousands) | ||||||||||||||
| Hypothetical 10% change in underlying commodity prices | $ | 12,948 | $ | 4,512 | ||||||||||
Interest Rate Risk Management
The market risk inherent in our fixed-rate debt is the potential change arising from increases or decreases in interest rates as discussed below.
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For the fixed rate 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 June 30, 2022 is presented below:
| Outstanding Principal | Estimated Fair Value | Estimated Change in Fair Value | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| HollyFrontier and HF Sinclair Senior Notes | $ | 1,750,000 | $ | 1,717,195 | $ | 35,470 | ||||||||||||||
| HEP Senior Notes | $ | 900,000 | $ | 808,706 | $ | 28,881 | ||||||||||||||
For the variable rate HEP Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. At June 30, 2022, outstanding borrowings under the HEP Credit Agreement were $721.0 million. A hypothetical 10% change in interest rates applicable to the HEP Credit Agreement would not materially affect cash flows.
Our operations are subject to catastrophic losses, operational hazards and unforeseen interruptions, including but not limited to fire, explosion, releases or spills, cyberattacks, weather-related perils, vandalism, power failures, mechanical failures and other events beyond our control. We maintain various insurance coverages, including general liability, property damage, business interruption and cyber insurance, subject to certain deductibles and insurance policy terms and conditions. We are not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do not justify such expenditures.
Financial information is reviewed on the counterparties in order to review and monitor their financial stability and assess their ongoing ability to honor their commitments under the derivative contracts. We have not experienced, nor do we expect to experience, any difficulty in the counterparties honoring their commitments.
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.”
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.
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| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Net income attributable to HF Sinclair stockholders | $ | 1,221,262 | $ | 168,850 | $ | 1,381,236 | $ | 317,067 | ||||||||||||||||||
| Add interest expense | 38,961 | 28,942 | 73,820 | 67,328 | ||||||||||||||||||||||
| Subtract interest income | (1,844) | (1,029) | (2,841) | (2,060) | ||||||||||||||||||||||
| Add income tax expense | 383,493 | 123,485 | 404,822 | 95,178 | ||||||||||||||||||||||
| Add depreciation and amortization | 164,044 | 124,042 | 308,645 | 248,121 | ||||||||||||||||||||||
| EBITDA | $ | 1,805,916 | $ | 444,290 | $ | 2,165,682 | $ | 725,634 | ||||||||||||||||||
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.
Reconciliation of average Refining segment net operating margin per produced barrel sold to refinery gross margin to total sales
and other revenues
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (Dollars in thousands, except per barrel amounts) | ||||||||||||||||||||||||||
| Consolidated | ||||||||||||||||||||||||||
| Net operating margin per produced barrel sold | $ | 28.49 | $ | 5.98 | $ | 18.20 | $ | 2.82 | ||||||||||||||||||
Add average refinery operating expenses per produced barrel sold | 7.87 | 5.73 | 7.73 | 7.25 | ||||||||||||||||||||||
| Refinery gross margin per produced barrel sold | 36.36 | 11.71 | 25.93 | 10.07 | ||||||||||||||||||||||
| Times produced barrels sold (BPD) | 655,570 | 443,940 | 589,240 | 399,690 | ||||||||||||||||||||||
| Times number of days in period | 91 | 91 | 181 | 181 | ||||||||||||||||||||||
| Refinery gross margin | 2,169,124 | 473,067 | 2,765,498 | 728,503 | ||||||||||||||||||||||
| Add rounding | 172 | 73 | 355 | 189 | ||||||||||||||||||||||
| Total Refining segment gross margin | 2,169,296 | 473,140 | 2,765,853 | 728,692 | ||||||||||||||||||||||
| Add Refining segment cost of products sold | 8,119,285 | 3,619,319 | 14,028,895 | 6,381,262 | ||||||||||||||||||||||
| Refining segment sales and other revenues | 10,288,581 | 4,092,459 | 16,794,748 | 7,109,954 | ||||||||||||||||||||||
| Add Renewables segment sales and other revenues | 194,578 | — | 241,945 | — | ||||||||||||||||||||||
| Add Marketing segment sales and other revenues | 1,336,302 | — | 1,613,343 | — | ||||||||||||||||||||||
| Add Lubricants and Specialty Products segment sales and other revenues | 849,941 | 669,189 | 1,604,950 | 1,193,752 | ||||||||||||||||||||||
| Add HEP segment sales and other revenues | 135,770 | 126,234 | 255,968 | 253,418 | ||||||||||||||||||||||
| Subtract corporate, other and eliminations | (1,643,012) | (310,759) | (1,890,044) | (475,708) | ||||||||||||||||||||||
| Sales and other revenues | $ | 11,162,160 | $ | 4,577,123 | $ | 18,620,910 | $ | 8,081,416 | ||||||||||||||||||
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Reconciliation of average Refining segment operating expenses per produced barrel sold to total operating expenses
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (Dollars in thousands, except per barrel amounts) | ||||||||||||||||||||||||||
| Consolidated | ||||||||||||||||||||||||||
Average refinery operating expenses per produced barrel sold | $ | 7.87 | $ | 5.73 | $ | 7.73 | $ | 7.25 | ||||||||||||||||||
| Times produced barrels sold (BPD) | 655,570 | 443,940 | 589,240 | 399,690 | ||||||||||||||||||||||
| Times number of days in period | 91 | 91 | 181 | 181 | ||||||||||||||||||||||
| Refinery operating expenses | 469,500 | 231,484 | 824,423 | 524,493 | ||||||||||||||||||||||
| Subtract rounding | (196) | (62) | (147) | (216) | ||||||||||||||||||||||
| Total Refining segment operating expenses | 469,304 | 231,422 | 824,276 | 524,277 | ||||||||||||||||||||||
| Add Renewables segment operating expenses | 29,273 | 11,231 | 56,369 | 24,052 | ||||||||||||||||||||||
| Add Lubricants and Specialty Products segment operating expenses | 74,470 | 61,310 | 140,471 | 122,063 | ||||||||||||||||||||||
| Add HEP segment operating expenses | 53,899 | 42,068 | 96,523 | 83,433 | ||||||||||||||||||||||
| Subtract corporate, other and eliminations | (20,819) | (11,840) | (34,078) | (19,725) | ||||||||||||||||||||||
| Operating expenses (exclusive of depreciation and amortization) | $ | 606,127 | $ | 334,191 | $ | 1,083,561 | $ | 734,100 | ||||||||||||||||||
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 income. Other companies in our industry may not calculate these performance measures in the same manner.
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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 June 30, 2022 | Six Months Ended June 30, 2022 | |||||||||||||
| (In thousands, except for per gallon amounts) | ||||||||||||||
| Renewables segment sales and other revenues | $ | 194,578 | $ | 241,945 | ||||||||||
| Renewables segment cost of products sold | 192,662 | 236,933 | ||||||||||||
| Lower of cost or market inventory adjustment | 34,543 | 25,992 | ||||||||||||
| (32,627) | (20,980) | |||||||||||||
| Subtract lower of cost or market inventory adjustment | 34,543 | 25,992 | ||||||||||||
| Renewables gross margin | $ | 1,916 | $ | 5,012 | ||||||||||
| Renewables operating expense | $ | 29,273 | $ | 56,369 | ||||||||||
| Produced gallons sold (in thousand gallons) | 25,688 | 30,632 | ||||||||||||
| Renewables gross margin per produced gallon sold | $ | 0.07 | $ | 0.16 | ||||||||||
| Less operating expense per produced gallon sold | 1.14 | 1.84 | ||||||||||||
| Net operating margin per produced gallon sold | $ | (1.07) | $ | (1.68) | ||||||||||
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 income. 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 June 30, 2022 | Six Months Ended June 30, 2022 | |||||||||||||
| (In thousands, except for per gallon amounts) | ||||||||||||||
| Marketing segment sales and other revenues | $ | 1,336,302 | $ | 1,613,343 | ||||||||||
| Marketing segment cost of products sold | 1,311,333 | 1,582,464 | ||||||||||||
| Marketing gross margin | $ | 24,969 | $ | 30,879 | ||||||||||
| Sales volumes (in thousand gallons) | 335,106 | 420,019 | ||||||||||||
| Marketing segment gross margin per gallon sold | $ | 0.07 | $ | 0.07 | ||||||||||
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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 June 30, 2022.
Changes in internal control over financial reporting. We acquired Sinclair Oil and STC effective March 14, 2022 and have included the operating results and assets and liabilities of the Acquired Sinclair Businesses in our consolidated financial statements as of June 30, 2022 and for the 109 days then ended. On November 1, 2021, we acquired the Puget Sound Refinery. Accordingly, the acquired assets and liabilities assumed are included in our consolidated balance sheets at December 31, 2021 and June 30, 2022 and the results of operations are reported in our consolidated statements of operations for the three and six months ended June 30, 2022. Other than our internal controls for the Acquired Sinclair Businesses and Puget Sound Refinery, 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.
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PART II. OTHER INFORMATION
Item 1.Legal Proceedings
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
El Dorado
HollyFrontier El Dorado Refining LLC (“HFEDR”) has been engaged in discussions with, and has responded to document requests from, the EPA, the U.S. Department of Justice (“DOJ”) and the State of Kansas regarding alleged Clean Air Act civil violations relating to flaring devices and other equipment at the refinery. Topics of the discussions included: (a) three information requests for activities beginning in January 2009, (b) compliance issues with respect to the Clean Air Act’s Risk Management Program (“RMP”) relating to a November 2014 inspection and subsequent events, (c) a Notice of Violation issued by the EPA in August 2017, and (d) possible late reporting under the Emergency Planning and Community Right-to-Know Act for the release of sulfur dioxide and visible emissions from October 2018.
Some of the foregoing civil investigations resulted from fires that occurred at the El Dorado Refinery in September 2017, October 2018 and March 2019. An employee fatality occurred during the September 2017 event. On May 28, 2020, HFEDR reached a settlement in the form of a proposed consent decree with the EPA, the DOJ, and the State of Kansas regarding the alleged Clean Air Act civil violations relating to flaring devices and other equipment at the refinery, as well as compliance with the RMP.
The proposed consent decree was lodged with the U.S. District Court for the District of Kansas, and the 30-day public comment period ended on July 18, 2020. On July 27, 2020, the EPA, the DOJ and the State of Kansas filed their Unopposed Motion to enter the Consent Decree with the U.S. District Court for the District of Kansas, and on August 27, 2020, the consent decree was entered by the district judge and became effective. Pursuant to the consent decree, among other terms and conditions, HFEDR is required to complete certain projects, implement protocols regarding the examination of its fired heaters and conduct a third party RMP audit of certain of its processes. In addition, HFEDR was required to pay a civil penalty of $2 million to the United States and $2 million to the State of Kansas in two installments, the first half within 30 days of entry of the consent decree and the second within six months of entry of the consent decree. All payments have been timely made, and HFEDR has undertaken several of the required projects. The consent decree resolves the alleged federal and state civil Clean Air Act liability for penalties and injunctive relief, other than potential civil penalties for RMP violations. Finally, as part of the settlement, a 2009 consent decree applicable to the refinery was terminated.
On June 6, 2022, HFEDR reached an agreement with DOJ and EPA, subject to court approval, to resolve the claims for civil penalties for alleged RMP violations that were excepted from the consent decree. The settlement stipulation and judgment required the payment of $1.6 million in civil penalties to the United States within 30 days of entry of the stipulation by the court. On June 16, 2022, the stipulation was entered by the district judge and became effective. The penalty was timely paid and this matter has been resolved.
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Navajo
HollyFrontier Navajo Refining LLC (“HFNR”) 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 HFNR’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.
Beginning in the spring of 2021, HFNR 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 HFNR potential claims for stipulated penalties for alleged noncompliance with a 2002 consent decree. 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.
HFNR 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.
Cheyenne
On March 25, 2022, HollyFrontier Cheyenne Refining LLC (“HFCR”) received a “Notice of Assessment of Stipulated Penalties” from the EPA pursuant to a 2009 consent decree entered into between Frontier Refining, Inc. (now known as HFCR), the EPA and the Wyoming Department of Environmental Quality (“WDEQ”). The notice assesses penalties for alleged violations of air quality standards during the period of time commencing in the third quarter of 2019 through the cessation of refinery operations in Cheyenne in the third quarter of 2020. The allegations include exceedances of emission limits for the refinery’s fluid catalytic cracking unit, sulfur recovery plant and flaring operations and failure to operate several continuous emission monitoring systems at the refinery. On April 21, 2022, HFCR submitted a response to the allegations containing legal and factual defenses. On June 3, 2022, HFCR, EPA and WDEQ had a conference call to further discuss the Notice of Assessment. On June 9, 2022, the EPA provided additional questions to HFCR, and HFCR responded to the EPA on June 23, 2022.
Port of Seattle
In October 2017, Sinclair Oil Corporation (now known as Sinclair Oil LLC (“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.
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.
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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
There have been no material changes in our risk factors as previously disclosed in Part I, “Item 1A. Risk Factors” of HollyFrontier’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. You should carefully consider the risk factors discussed in HollyFrontier’s 2021 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.
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 second quarter of 2022.
| 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) | ||||||||||||||||||||||
| April 2022 | — | $ | — | — | $ | 1,000,000,000 | ||||||||||||||||||||
| May 2022 | — | $ | — | — | $ | 1,000,000,000 | ||||||||||||||||||||
| June 2022 | 2,730,000 | $ | 48.45 | 2,730,000 | $ | 867,718,190 | ||||||||||||||||||||
| Total for April to June 2022 | 2,730,000 | 2,730,000 | ||||||||||||||||||||||||
(1) In November 2019, our Board of Directors approved a $1.0 billion share repurchase program, which replaced all existing share repurchase programs, authorizing us to repurchase common stock in the open market or through privately negotiated transactions. In June 2022, our Board of Directors determined that privately negotiated repurchases from REH Company (formerly known as The Sinclair Companies) are also authorized under the share repurchase program, subject to REH Company’s interest 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.
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Item 6.Exhibits
| Exhibit Number | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 4.4 | ||||||||
| 4.5 | ||||||||
| 4.6 | ||||||||
| 4.7 | ||||||||
| 4.8 | ||||||||
| 4.9 | ||||||||
| 4.10 | ||||||||
| 4.11 | ||||||||
| 10.1† | ||||||||
| 10.2 *+ | ||||||||
| 31.1* | ||||||||
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| Exhibit Number | Description | |||||||
| 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 June 30, 2022, 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.
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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: August 8, 2022 | /s/ Richard L. Voliva III | ||||||||||
| Richard L.Voliva III | |||||||||||
| Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||||||||
| Date: August 8, 2022 | /s/ Indira Agarwal | ||||||||||
| Indira Agarwal | |||||||||||
| Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer) | |||||||||||
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Exhibit 10.2
RETIREMENT AGREEMENT AND RELEASE
This Retirement Agreement and Release (“Agreement”) is between HF Sinclair Corporation, HollyFrontier Refining & Marketing LLC, HollyFrontier Renewables Holding Company LLC and HollyFrontier Payroll Services, Inc., on behalf of themselves and their respective parents, subsidiaries, and affiliates (collectively, the “Company”), and me, Thomas G. Creery. In exchange for my agreements and promises and the timely execution (and non-revocation) of the release of claims in the form set forth as Attachment B (the “Release”) which attachment is part of this Agreement, the Company has agreed to pay me Benefits (set forth on Attachment A) which I understand I would not receive unless I sign this Agreement. I acknowledge and agree to the following:
1.Retirement Date. I understand that my final day of active employment with the Company will be on my Retirement Date set forth on Attachment A, which attachment is part of this Agreement. All salary and other benefits will cease at that time, except as otherwise provided in this Agreement. If the Company choses to release me from employment prior to the Retirement Date set forth in Attachment A, for any reason other than violation of Paragraph 6 below, I am entitled to the Benefits set forth in Attachment A; provided that the remaining conditions of this Agreement are met.
2.Benefits. I understand that, as a result of my retirement, I am being separated from the Company’s payroll and that I have been offered Benefits (set forth on Attachment A) in exchange for signing and complying with the terms of this Agreement. This payment is subject to taxes and customary withholdings and will be paid within the time period set forth on Attachment A. I understand that payment will cease upon my breach of any part of this Agreement.
3.Release of Claims. I understand and agree that this Agreement is conditioned upon my timely execution and non-revocation of the Release. If I do not execute and return the Release to the HR Contact identified on Attachment A prior to thirty (30) days after my Retirement Date (but no earlier than my Retirement Date), or if I revoke the Release within the revocation period set forth in the Release, this Agreement will be null and void, the Company will have no obligations hereunder, and my employment will end on my Retirement Date.
4.Legal Action and Legal Fees. I understand that I must pay the Company’s legal fees if I sue the Company for any claims waived and/or released in the Release or otherwise break my promises in this Agreement. I understand that I do not have to pay the Company’s legal fees under this paragraph, and that I will not be penalized in any way, if I challenge only my waiver and/or release of age discrimination claims under the Age Discrimination in Employment Act (ADEA).
5.Cooperation. I agree, upon the Company’s request, to reasonably cooperate in any Company or government investigation, arbitration and/or litigation regarding events that occurred during my employment with the Company. I understand that the Company will compensate me for any reasonable expenses I incur as a result of such cooperation, as long as I request such compensation in advance and in writing.
6.Good Standing. In addition to signing the Release, I agree that in order to be eligible for benefits noted on Attachment A, I must satisfactorily perform my duties and remain in good standing with the Company through my Retirement Date. Satisfactorily performing duties and remaining in good standing includes, but is not limited to, carrying out assigned directives with integrity and in a cooperative and supportive manner as determined by the Company.
Retirement Agreement and Release – Creery
7.Certain Obligations. I understand that after my Retirement Date, I continue to be bound by my other obligations and promises to the Company, including, but not limited to, the obligations contained in the Company’s Code of Business Conduct and Ethics (the “Code”), and any intellectual property agreements signed by me, except as specifically modified by this Agreement. I also understand that this Agreement does not, however, limit me from providing information to the U.S. Securities and Exchange Commission and/or the Occupational Safety and Health Administration as part of a whistleblower action and/or a report of possible violation(s) of any federal securities law.
I affirm my obligation to the Company not to disclose to any third party non-public Company information. I understand that this paragraph shall not apply to information that is required to be disclosed by law or to information provided to a government agency or entity acting in its official capacity.
8.Return of Property. In accordance with my existing and continuing obligations to the Company (including those obligations arising under the Code and any confidentiality, intellectual property and/or other agreements that I have previously signed), except as otherwise agreed to with the Company in writing, I agree that I have returned or will immediately return to the Company, within five (5) days of my execution of this Agreement or on my Retirement Date (whichever is later), all Company property, including building passes, credit cards, keys, telephones, company files, documents, records, computer access codes, computer programs, instruction manuals, business plans, and other property that I received, prepared, or helped to prepare in connection with my employment with the Company. I also agree that I will not keep and have not kept any copies, duplicates, reproductions, computer disks, or excerpts of any confidential or proprietary Company materials, documents or trade secrets.
9. Proprietary Information. I will hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company’s Proprietary Information (defined below), unless an officer of the Company authorizes me to do so in writing. I will obtain the Company’s written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to my work while at the Company and/or that incorporates any Proprietary Information. I reaffirm that all Proprietary Information that I may have prepared or acquired during my employment is the sole property of the Company. The term “Proprietary Information” means and includes all confidential and/or proprietary knowledge, data or information of the Company, including trade secrets, inventions, ideas, processes, formulas, data, programs, know-how, improvements, discoveries, developments and designs and techniques. It also includes business information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, prices and costs, suppliers and customers as well as information regarding the identity, skills and compensation of other employees of the Company.
10. Statements Concerning the Company. I agree to refrain from publishing any oral or written statements about the Company or its directors, officers, employees, consultants, agents or representatives that (a) are slanderous, libelous or defamatory, or (b) place the Company or any of its directors, officers, employees, consultants, agents or representatives in a false light before the public. The foregoing shall not be violated by truthful statements in response to legal process, required governmental testimony or filings, or administrative or arbitral proceedings (including, without limitation, depositions in connection with such proceedings). A violation or threatened violation of this prohibition may be enjoined by the courts. The rights afforded to the Company under this provision are in addition to any and all rights and remedies otherwise afforded by law.
Retirement Agreement and Release – Creery
11.Update Social Media Sites. Within five (5) days following my Retirement Date, I will update any social networking sites, including, but not limited to, Twitter, Facebook, and LinkedIn, to indicate that I am no longer employed by the Company.
12.Non-Solicitation. I agree that from and after the date I receive this Agreement and until the expiration of the Consulting Period (defined below), I will not, either directly or through others, (a) solicit or attempt to solicit, or assist any other person in soliciting, any employee of the Company to end his or her relationship with the Company; (b) recruit, hire or attempt to recruit or hire, or assist any other person in recruiting or hiring, any employee of the Company for a competing business; or (c) solicit, or assist any other person in soliciting, any consultant, vendor, contractor or customer of the Company, with whom I had contact or whose identity I learned as a result of my employment with the Company, to diminish or materially alter its relationship with the Company. I also will not provide the names or any other information about any employees of the Company to any person, recruiter or competing business. I understand and agree that for purposes of this Agreement, a customer is any person or entity to which the Company has provided goods or services at any time during the two (2) year period before my Retirement Date.
13.Consulting.
a.For the period beginning on the day following my Retirement Date and continuing for a period of six months thereafter (the “Consulting Period”), the Company will pay me a retainer of $100,000 per month (pro-rated for partial months) to provide up to 40 hours of services per month (the “Services”) that the Company may reasonably request from time to time in the capacity of an independent contractor, which Services shall include providing consultation and assistance with respect to the transition of duties and such other duties and projects as the Chief Executive Officer may from time to time assign. I will submit an invoice to the Company within five (5) business days following the end of each month in which the Consulting Period existed that contains a description of the Services provided during the calendar month to which the invoice relates, and the Company will pay the retainer for the applicable calendar month within thirty (30) days of its receipt of such invoice. At the request of the Company, I will also submit reasonable documentation evidencing the work performed during a prior calendar month. Subject to reasonable prior approval of the Company, the Company shall pay or reimburse me for all reasonable (in type and amount) and necessary business expenses incurred by me in the course of providing Services for the Company. I will furnish the Company with the documentation required by the Internal Revenue Code of 1986, as amended (or by any successor revenue statute) and the regulations thereunder in connection with all such expenses, including, without limitation, all approved business travel and entertainment expenses.
b.Notwithstanding the foregoing, the retainer arrangements set forth in this Paragraph 13 (and the Consulting Period) may be terminated at any time by the Company or me, with or without cause, upon written notice to the other party; provided, however, that if the Company terminates the retainer arrangements set forth in this Paragraph 13 without “cause” (as defined below) or I terminate this Agreement due to an act of cause by the Company, in each case on or prior to the expiration of the Consulting Period, the Company shall pay me the unpaid retainer payment, at $100,000 per month (pro-rated for partial months), for each month until the expiration of the Consulting Period, with monthly payments being made within thirty (30) days after the end of each applicable calendar month (provided, however, any retainer that remains unpaid as of March 1 of any year
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will be paid no later than March 15 of such year. For purposes of this Paragraph 13, “cause” is defined as: (x) a party’s material breach of this Agreement to the extent such breach remains uncured (if capable of cure) after the other party has given such party notice in writing thereof and such party has failed to cure such breach within ten (10) business days; or (y) a party’s fraud, forgery, misrepresentation, dishonesty, errors or omissions that materially and adversely affects the other party. For purposes of section 409A of the Internal Revenue Code of 1986, as amended, (the “Code”) each installment payment payable pursuant to this Paragraph 13.b. will be treated as a separate payment.
c.In performing and providing the Services, I will comply with all applicable laws and with all applicable orders, rules and regulations of all duly constituted authorities.
d.For purposes of providing the Services to the Company and its subsidiaries, I shall at all times be an independent contractor during the Consulting Period. Nothing in this Agreement shall be construed as creating the relationship of principal and agent, or employer and employee, between the Company and me during the Consulting Period. During the Consulting Period, I shall have no authority to hire any persons on behalf of the Company, and any person whom I may employ shall be deemed to be solely my employee. I shall have control and management of the work under Paragraph 13 of this Agreement, and no right is reserved to the Company to direct or control the manner in which the work is performed, as distinguished from the result to be accomplished. Nothing herein contained shall be construed to authorize me to incur any debt, liability or obligation of any nature for or on behalf of the Company. I agree that any Services I perform shall be completed and delivered reasonably in accordance with requests provided to me by the Company from time to time and consistent with the policies and practices of the Company with respect to work performed on or with respect to its projects, property, or premises. Neither I nor my agents or employees, if any, shall be eligible to participate in any benefits or privileges given or extended by the Company to its employees (other than any benefits to which I may be entitled by virtue of my status as a former employee of the Company, prior to the beginning of the Consulting Period), including, but not limited to, pension, profit sharing, workers’ compensation insurance, unemployment insurance, other insurance, health, medical, life or disability benefits or coverage, or paid time off. I am responsible for paying any and all taxes owed on payments received by me pursuant to this Paragraph 13, and I shall indemnify and hold harmless the Company and its affiliates, and the foregoing entities’ respective representatives, for all claims, damages, costs and liabilities arising from my failure to do so. I agree to be solely responsible for (and to indemnify and hold harmless the Company and its affiliates for) my acts or omissions and the acts and omissions of my employees, if any, including acts or omissions during the performance of Services pursuant to this Agreement.
e.All proprietary technology and all financial, operating, and training ideas, processes, and materials, including works of expression and all copyrights in such works, relating to the Company’s current or potential business, that are developed, written, conceived of, or improved upon by me, singly or jointly, in connection with, as a result of, or otherwise incident to the performance of this Agreement (including in performing or providing the Services), shall be the sole property of the Company. Accordingly, I will disclose, deliver, and assign, and I do hereby assign, to the Company all of my right, title and interest in and to such patentable inventions, discoveries, and improvements, trade secrets, and all works subject to
Retirement Agreement and Release – Creery
copyright. I agree to execute all documents and patent applications, to make all arrangements necessary to further document such ownership and/or assignment, and to take whatever other steps may be needed to give the Company the full benefit of them, both during the term of this Agreement and thereafter. I specifically agree that all copyrighted materials generated or developed as a result of my services under this Agreement, including, but not limited to, computer programs and documentation, shall be considered works made for hire under the copyright laws of the United States and that they shall, upon creation, be owned exclusively by the Company.
f.Unless approved by the Company in writing, all Services under this Agreement shall be provided by me and by no other person.
14.Non-Competition. The Company has provided me with access to Company Proprietary Information and will continue to provide me with access to new Company Proprietary Information during the Consulting Period described in Paragraph 13. I acknowledge and agree that I will know the Competitors as of the Retirement Date. Further, I acknowledge and agree that I have voluntarily agreed to the covenants set forth in this Paragraph 14. I further agree and acknowledge that the limitations and restrictions set forth herein, including geographical and temporal restrictions on certain competitive activities, are reasonable in all respects and not oppressive, shall not cause me undue hardship, and are material and substantial parts of this Agreement intended and necessary to prevent unfair competition and to protect the Company’s Proprietary Information, goodwill and substantial and legitimate business interests.
g.I agree that, following my Retirement Date and prior to and including the last date of the Consulting Period, I will not, without the prior written approval of the Chief Executive Officer of the Company, directly or indirectly, for me or on behalf of or in conjunction with any other person or entity of any nature:
i.Directly or indirectly own, manage, operate, join, become an officer, director, employee or consultant of, or otherwise be affiliated with any Competitor; or
ii.Appropriate any Business Opportunity of, or relating to, the Company located in the Market Area.
h.The covenants in this Paragraph 14, and each provision and portion hereof, are severable and separate, and the unenforceability of any specific covenant (or portion thereof) shall not affect the provisions of any other covenant (or portion thereof). Moreover, in the event any arbitrator or court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which such arbitrator or court deems reasonable, and this Agreement shall thereby be reformed.
i.For purposes of this Paragraph 14, the following terms shall have the following meanings:
i.“Business Opportunity” shall mean any commercial, investment or other business opportunity relating to the Company.
ii.“Competitor” shall mean any direct competitor to the Company’s refinery business, which shall include the refining of petroleum regardless of the end product (whether gasoline, diesel fuel, jet fuel, specialty
Retirement Agreement and Release – Creery
lubricant products, specialty and modified asphalt or other refined products) or the manufacturing of renewable hydrocarbon biofuels (whether renewable diesel, renewable gasoline or other product), as of the Retirement Date.
iii.“Market Area” shall mean the United States and Canada.
15.Applicable Law. The laws of the State of Texas apply to this Agreement.
16.Enforceability. This Agreement is valid, even if any section or term is not enforceable. In the event that any one or more of the provisions contained in this Agreement shall for any reason be held to be unenforceable under the governing law, the rest of the Agreement shall continue to apply.
17.Waiver of Right to a Trial by Jury; Injunctive Relief. I understand that pursuant to this Agreement, I am giving up my right to a trial by jury. The Company also waives its right to a trial by jury. However, I recognize and agree that because of the difficulty of measuring economic losses to the Company as a result of a breach or threatened breach of the covenants set forth Paragraphs 7, 9, 10, 12 and 14 and because of the immediate and irreparable damage that would be caused to the Company for which it would have no other adequate remedy, the Company shall be entitled to enforce such covenants, in the event of a breach or threatened breach, by injunctions and restraining orders from any court of competent jurisdiction, without the necessity of showing any actual damages or that money damages would not afford an adequate remedy, and without the necessity of posting any bond or other security. The aforementioned equitable relief shall not be the Company’s exclusive remedy for a breach or threatened breach of the covenants set forth Paragraphs 7, 9, 10, 12 and 14 but instead shall be in addition to all other rights and remedies available to the Company at law and equity.
18.Successors and Assigns. This Agreement is binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company and their successors and assigns.
19.Entire Agreement. This Agreement and its attachments contain the entire agreement between the Company and me concerning the separation of my employment, except as set forth in Paragraph 7 above. In deciding to sign this Agreement, I am not relying on any statements or promises except those found in this Agreement. Except as set forth in Paragraph 7 above, this Agreement replaces any prior agreements between the Company and me dealing with the same subjects.
20.Consultation with an Attorney. The Company has advised me to consult with an attorney, at my own expense, before signing this Agreement, and I have had the opportunity to do so.
21.Reaffirmation. If asked by the Company to re-execute and reaffirm my obligations under this Agreement (including the Release) on or after my Retirement Date, I agree to do so as one of my obligations under this Agreement and as a condition of receiving the Benefits set forth on Attachment A.
22.Cancellation of this Agreement. I understand that, pursuant to the Older Workers Benefit Protection Act of 1990 (OWBPA), I have the right to consult an attorney at my own expense before signing this Agreement, and the Company has advised me to consult an attorney; I have at least twenty-one calendar days from the date I receive this Agreement to consider the Agreement before signing it; I may change my mind and cancel the Agreement within seven calendar days
Retirement Agreement and Release – Creery
after signing it; and that the Agreement shall not go into effect until then. If I decide to cancel this Agreement, I understand that the Company must receive written notice of my decision before the seven calendar day period expires. I must provide that notice to the HR Contact identified on Attachment A before the time period expires.
23.Confidentiality. I will keep confidential the amounts paid to me under this Agreement and all other terms of this Agreement. I will not reveal the amounts paid to me or the other terms of this Agreement to anyone, except to my immediate family or my legal and financial advisors.
24.MMSEA. I have not, as of today, incurred any medical expenses as a Medicare beneficiary, and am not aware of any medical expenses that Medicare has paid on my behalf and for which the Company may be liable.
25.Mediation and Arbitration. With the exception of any alleged violation of Paragraphs 7, 9, 10, 12 and 14 of this Agreement, any other controversy, dispute or claim arising out of or relating to this Agreement or its breach will first be settled through good faith negotiation. If the dispute cannot be settled through negotiation, the Company and I agree to attempt in good faith to settle the dispute by mediation administered by JAMS. If the Company and I are unsuccessful at resolving the dispute through mediation, we agree to binding arbitration administered by JAMS pursuant to its Employment Arbitration Rules & Procedures and subject to JAMS Policy on Employment Arbitration Minimum Standards of Procedural Fairness. Judgment on the award may be entered in any court having jurisdiction.
26.Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. Electronic copies of signatures shall be deemed to be original.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
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BY SIGNING THIS AGREEMENT, I STATE THAT: (A) THE COMPANY ADVISED ME TO CONSULT AN ATTORNEY, AT MY OWN EXPENSE, AND THAT I HAVE HAD AN OPPORTUNITY TO DO SO BEFORE SIGNING THIS AGREEMENT; AND (B) THIS AGREEMENT IS WRITTEN IN A CLEAR AND STRAIGHT-FORWARD MANNER, THAT I UNDERSTAND ITS TERMS, AND THAT I HAVE MADE A VOLUNTARY DECISION TO SIGN IT..
Agreed to and accepted by, on this 24th day of July , 2022.
| EMPLOYEE: | |||||||||||
| /s/ Thomas G. Creery | |||||||||||
| Thomas G. Creery | |||||||||||
Agreed to and accepted by, on this on this 24th day of July , 2022.
| HF Sinclair Corporation | |||||||||||
| HollyFrontier Refining & Marketing LLC | |||||||||||
| HollyFrontier Renewables Holding Company LLC | |||||||||||
| HollyFrontier Payroll Services, Inc. | |||||||||||
/s/ Michael C. Jennings | |||||||||||
| Michael C. Jennings | |||||||||||
| Chief Executive Officer | |||||||||||
Retirement Agreement and Release – Creery
ATTACHMENT A
| Employee Name: | Thomas G. Creery | ||||||||||
| Job Title: | President, Renewables | ||||||||||
| Retirement Date: | July 31, 2022 | ||||||||||
| Local HR Contact: | Dale Kunneman | ||||||||||
Benefits
The benefits noted in this section are conditioned upon your execution of the Agreement, your execution and non-revocation of the Release, and your continued employment through the Retirement Date. In addition, to be eligible for benefits noted on this Attachment A, you must satisfactorily perform your duties and remain in good standing with the Company through your Retirement Date.
Annual Incentive Bonus: $650,000
You will receive a pro-rated bonus of $650,000 based on ten months of service during the current performance period. The pro-rated bonus will be payable to you and reported on a Form W-2 and is subject to taxes and other withholdings. The pro-rated bonus will be paid within forty days after your Retirement Date provided that you timely executed, and did not revoke, the Release.
Unconditional Benefits
Employer Retiree Health Contribution:
If you were covered by the Medical Plan and are not otherwise eligible for Medicare, and if you meet the eligibility requirements, you may be eligible for the Employer Retiree Health Contribution (ERHC). You must complete an election form and submit the completed form to Human Resources no later than thirty days measured from the later of (a) the day you separated from service, or (b) the date that the form was postmarked or if not mailed, received in person by your HR Representative. If not received within this time period, you will not be eligible for coverage.
COBRA Coverage:
If you wish to participate in COBRA, you have 60 days from the termination of your current health benefits to make your election. You will be solely responsible for making a timely COBRA election and for paying all COBRA premiums in a timely manner. Please note that COBRA rates may change, and that the Company reserves the right to modify or replace benefit plans.
You will receive in the mail from TaxSaver after your Retirement Date, documents describing the COBRA health benefits available to you. You will need to review the documents and elect COBRA during your eligible enrollment period if desired. If you elect to continue health benefits through COBRA, it will be your responsibility to pay the required premiums in a timely manner.
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Life Insurance and Accidental Death and Dismemberment Coverage:
The Prudential Life and AD&D products/coverage may be converted from group to individual coverage. To do so, you must apply directly to the insurance provider within thirty days after you lose coverage. Forms to convert to an individual policy will be mailed to you by Prudential.
Accrued and Unused Vacation Time:
You will receive the cash value of any accrued and remaining unused vacation as of your Retirement Date, which will be payable to you and reported on a Form W-2, subject to taxes and other withholding, within forty days after your Retirement Date provided that you timely executed, and did not revoke, the Release.
Vesting of Long-Term Incentive Awards:
Any unvested equity awards that you hold on your Retirement Date will vest in accordance with the retirement terms in the applicable award agreements.
Settlement of the restricted stock units and performance share units will be made in accordance with Section 409A of the Internal Revenue Code, and therefore, settlement of the restricted stock units and performance share units will be six months following your Retirement Date. Settlement of these restricted stock units and performance share units will be subject to tax withholdings and reported as income on a Form W-2.
401(k) Plan:
If you are a participant in the 401(k) Retirement Plan, the applicable plan rules will govern your options with respect to managing your account balance and/or receiving distributions, as applicable, under the plan. You may also contact Principal at 1-800-547-7754 if you have any general questions concerning options after retirement.
Non-Qualified Deferred Compensation Plan:
As a participant in the Non-Qualified Deferred Compensation Plan, the irrevocable election you have previously made regarding the treatment of your account balance will govern the treatment of your account balance. You may also contact Principal at 1-800-999-4031 if you have any general questions concerning your options.
Taxes:
All amounts payable will be subject to all applicable tax withholdings.
Retirement Agreement and Release – Creery
ATTACHMENT B
RELEASE OF CLAIMS
This Release of Claims (“Release”) is between HF Sinclair Corporation, HollyFrontier Refining & Marketing LLC, HollyFrontier Renewables Holding Company LLC and HollyFrontier Payroll Services, Inc., on behalf of themselves and their respective parents, subsidiaries, and affiliates (collectively the “Company”), and me, Thomas G. Creery. By signing this Release, I am agreeing to waive and release all claims against the Company and promising not to sue the Company in the future, all as described in more detail below. In exchange for my agreements and promises, the Company has agreed to pay the Benefits set forth on Attachment A which I understand I would not receive unless I sign and do not revoke this Release as described in Paragraph 3 below. I acknowledge and agree to the following:
1. Waiver of Claims. I realize that there are various local, state, and federal laws, both statutory and common law, that may apply and/or relate to my employment with the Company. Such laws include, but are not limited to, Title VII of the Civil Rights Act of 1964, Sections 1981 through 1988 of Title 42 of the United States Code, the Employee Retirement Income Security Act of 1974, the Immigration Reform and Control Act, the Americans with Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967, the Worker Adjustment and Retraining Notification Act, the Fair Credit Reporting Act, the Family and Medical Leave Act, the Equal Pay Act, the Fair Labor Standards Act, the Genetic Information Nondiscrimination Act of 2008, and the Texas Commission on Human Rights Act (a/k/a Chapter 21 of the Texas Labor Code).
By signing this Release, I, on behalf of myself and anyone who may have the legal right to make claims on my behalf, release the Company, and its respective directors, officers, representatives, agents and employees, and any of the Company’s successors or predecessors, affiliates, or parent, subsidiary and related companies (collectively referred to as “Releasees”) from any and all claims, known or unknown, including claims for attorneys’ fees and costs, which relate to, or arise out of, my employment or separation from the Company, including any alleged violations of the laws listed above in this Paragraph 1. I understand that, subject to the limitations set forth in Paragraph 2 below, I am giving up all statutory, common law or contract claims and rights, including those that I am not currently aware of and those not mentioned in this Release, up to and through the date that I sign and deliver this Release to the Company. If any claim is not subject to release, I waive, to the extent permitted by law, any right or ability to be a class or collective action representative or to opt-in and/or otherwise participate in any putative or certified class, collective or multi-party action or proceeding based on such a claim in which the Company or any other Releasee identified in this Release is a party.
2. Certain Actions Not Prohibited. I understand that this Release does not prohibit or prevent me from filing a charge or participating, testifying, or assisting in investigations, hearings, or other proceedings conducted by the EEOC or the NLRB, or a similar agency enforcing federal, state or local anti-discrimination laws. However, to the maximum extent provided by law, I agree that if such an administrative claim is made to an anti-discrimination agency, I shall not be entitled to any individual damages, money, or other personal benefits as a result of such charge, investigation or proceeding. In addition, I understand that nothing in this Release prohibits me from (a) reporting possible violations of law (including securities laws) to any government agency or entity, including to the U.S. Congress, the U.S. Department of Justice, the U.S. Securities and Exchange Commission or any agency Inspector General; (b) making disclosures protected under federal whistleblower laws; or (c) otherwise fully participating in any federal whistleblower programs, including any such programs managed by the U.S. Securities and Exchange Commission and/or the Occupational Safety and Health Administration. This Release does not prohibit or prevent me from receiving individual monetary awards or other
Retirement Agreement and Release – Creery
individual relief by virtue of participating in such whistleblower programs. Furthermore, I understand, and the Company hereby acknowledges and agrees that this Release does not prevent me from exercising my rights, if any, to (a) vested benefits under any pension or savings plan or deferred compensation plan; (b) COBRA benefits under Section 601-608 of ERISA; (c) receive pay for accrued but unused vacation; and/or (d) any right to my base salary through my Retirement Date.
3. Revocation of This Release. I understand that, pursuant to the Older Workers Benefit Protection Act of 1990 (OWBPA), I have the right to consult an attorney at my own expense before signing this Release, and the Company has advised me to consult an attorney; I have at least forty-five calendar days from the date I receive this Release, which includes the Disclosure attached as Attachment C, to consider the Release before signing it; I may change my mind and revoke the Release within seven calendar days after signing it; and that the Release shall not go into effect until then. If I decide to revoke this Release, I understand that the Company must receive written notice of my decision before the seven calendar day period expires. I must provide that notice to the HR Contact identified on Attachment A before the time period expires.
4. Applicable Law. The laws of the State of Texas apply to this Release.
BY SIGNING THIS RELEASE, I STATE THAT: (A) THE COMPANY ADVISED ME TO CONSULT AN ATTORNEY, AT MY OWN EXPENSE, AND THAT I HAVE HAD AN OPPORTUNITY TO DO SO, BEFORE SIGNING THIS RELEASE; (B) I UNDERSTAND THAT IN ORDER TO RECEIVE THE BENEFITS SET FORTH ON ATTACHMENT A TO THE AGREEMENT, I MUST SIGN AND RETURN THIS RELEASE TO THE COMPANY PRIOR TO THIRTY (30) DAYS AFTER MY RETIREMENT DATE, BUT NO EARLIER THAN MY RETIREMENT DATE; (C) I UNDERSTAND THAT I HAVE SEVEN CALENDAR DAYS TO REVOKE THIS RELEASE AFTER SIGNING IT; AND (D) I ACKNOWLEDGE THAT THIS RELEASE IS WRITTEN IN A CLEAR AND STRAIGHT-FORWARD MANNER, THAT I UNDERSTAND ALL OF ITS TERMS, AND THAT I HAVE MADE A VOLUNTARY DECISION TO SIGN IT.
Agreed to and accepted by, on this 1st day of August , 2022.
| EMPLOYEE: | |||||||||||
| /s/ Thomas G. Creery | |||||||||||
| Thomas G. Creery | |||||||||||
Retirement Agreement and Release – Creery
Agreed to and accepted by, on this 1st day of August , 2022.
| HF Sinclair Corporation | |||||||||||
| HollyFrontier Refining & Marketing LLC | |||||||||||
| HollyFrontier Renewables Holding Company LLC | |||||||||||
| HollyFrontier Payroll Services, Inc. | |||||||||||
/s/ Michael C. Jennings | |||||||||||
| Michael C. Jennings | |||||||||||
| Chief Executive Officer | |||||||||||
Retirement Agreement and Release – Creery
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
| August 8, 2022 | /s/ Michael C. Jennings | |||||||
| Michael C. Jennings | ||||||||
| Chief Executive Officer | ||||||||
Exhibit 31.2
CERTIFICATION
I, Richard L. Voliva III, 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: August 8, 2022 | /s/ Richard L. Voliva III | |||||||
| Richard L. Voliva III | ||||||||
| 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 June 30, 2022 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: August 8, 2022 | /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 June 30, 2022 and filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard L. Voliva III, 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: August 8, 2022 | /s/ Richard L. Voliva III | |||||||
| Richard L. Voliva III | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
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