NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1:
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Description of Business and Summary of Significant Accounting Policies
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Description of Business: References herein to HollyFrontier Corporation (“HollyFrontier”) include HollyFrontier and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s (“SEC”) “Plain English” guidelines, this Annual Report on Form 10-K has been written in the first person. In these financial statements, the words “we,” “our,” “ours” and “us” refer only to HollyFrontier and its consolidated subsidiaries or to HollyFrontier 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 HollyFrontier, unless when used in disclosures of transactions or obligations between HEP and HollyFrontier 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 HollyFrontier. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.
We are an independent petroleum refiner and marketer that produces high-value light products such as gasoline, diesel fuel, jet fuel and other specialty products. We own and operate petroleum refineries that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. In addition, we produce base oils and other specialized lubricants in the United States, Canada and the Netherlands, with retail and wholesale marketing of our products through a global sales network with locations in Canada, the United States, Europe, China and Latin America. As of December 31, 2019, we:
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owned and operated a petroleum refinery in El Dorado, Kansas (the “El Dorado Refinery”), two refinery facilities located in Tulsa, Oklahoma (collectively, the “Tulsa Refineries”), a refinery in Artesia, New Mexico that is operated in conjunction with crude oil distillation and vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the “Navajo Refinery”), a refinery located in Cheyenne, Wyoming (the “Cheyenne Refinery”) and a refinery in Woods Cross, Utah (the “Woods Cross Refinery”);
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owned and operated Petro-Canada Lubricants Inc. (“PCLI”) located in Mississauga, Ontario, which produces base oils and other specialty lubricant products;
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owned and operated Sonneborn with manufacturing facilities in Petrolia, Pennsylvania and the Netherlands, which produce specialty lubricant products, such as white oils, petrolatums and waxes;
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owned and operated Red Giant Oil Company LLC (“Red Giant Oil”), which supplies locomotive engine oil and has storage and distribution facilities in Iowa, Kansas, Utah and Wyoming, along with a blending and packaging facility in Texas;
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owned and operated HollyFrontier Asphalt Company LLC (“HFC Asphalt”), which operates various asphalt terminals in Arizona, New Mexico and Oklahoma; and
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owned a 57% 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 Mountain regions of the United States.
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On November 12, 2018, we entered into an equity purchase agreement to acquire 100% of the issued and outstanding capital stock of Sonneborn US Holdings Inc. and 100% of the membership rights in Sonneborn Coöperatief U.A. (collectively, “Sonneborn”). The acquisition closed on February 1, 2019.
On July 10, 2018, we entered into a definitive agreement to acquire Red Giant Oil, a privately-owned lubricants company. The acquisition closed on August 1, 2018.
On October 29, 2016, we entered into a share purchase agreement with Suncor Energy Inc. (“Suncor”) to acquire 100% of the outstanding capital stock of PCLI. The acquisition closed on February 1, 2017.
See Note 2 for additional information on these acquisitions.
Principles of Consolidation: Our consolidated financial statements include our accounts and the accounts of partnerships and joint ventures that we control through an ownership interest greater than 50% or through a controlling financial interest with respect to variable interest entities. All significant intercompany transactions and balances have been eliminated.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
Variable Interest Entities: HEP is a VIE as defined under U.S. generally accepted accounting principles (“GAAP”). A VIE is a legal entity whose equity owners do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or, as a group, the equity holders lack the power, through voting rights, to direct the activities that most significantly impact the entity's financial performance, the obligation to absorb the entity's expected losses or rights to expected residual returns. As the general partner of HEP, we have the sole ability to direct the activities of HEP that most significantly impact HEP's financial performance, and therefore as HEP's primary beneficiary, we consolidate HEP.
In 2019, HEP Cushing LLC, 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 Pipeline & Terminal LLC. Cushing Connect Pipeline & Terminal LLC 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 is constructing and will operate the Cushing Connect Pipeline, and HEP has more ability to direct the activities that most significantly impact the financial performance of Cushing Connect Pipeline & Terminal LLC 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.
Use of Estimates: The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents: We consider all highly liquid instruments with a maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents are stated at cost, which approximates market value and are primarily invested in highly-rated instruments issued by government or municipal entities with strong credit standings.
Balance Sheet Offsetting: We purchase and sell inventories of crude oil with certain same-parties that are net settled in accordance with contractual net settlement provisions. Our policy is to present such balances on a net basis since it presents our accounts receivables and payables consistent with our contractual settlement provisions.
Accounts Receivable: Our accounts receivable consist of amounts due from customers that are primarily companies in the petroleum industry. Credit is extended based on our evaluation of the customer's financial condition, and in certain circumstances collateral, such as letters of credit or guarantees, is required. We reserve for doubtful accounts based on our historical loss experience as well as specific accounts identified as high risk, which historically have been minimal. Credit losses are charged to the allowance for doubtful accounts when an account is deemed uncollectible. Our allowance for doubtful accounts was $4.5 million at December 31, 2019 and $3.6 million at December 31, 2018.
Accounts receivable attributable to crude oil resales generally represent the sale of excess crude oil to other purchasers and / or users in cases when our crude oil supplies are in excess of our immediate needs as well as certain reciprocal buy / sell exchanges of crude oil. At times we enter into such buy / sell exchanges to facilitate the delivery of quantities to certain locations. In many cases, we enter into net settlement agreements relating to the buy / sell arrangements, which may mitigate credit risk.
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. Cost, consisting of raw material, transportation and conversion costs, is determined using the LIFO inventory valuation methodology and market is determined using current replacement costs. Under the LIFO method, the most recently incurred costs are charged to cost of sales and inventories are valued at the earliest acquisition costs. 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 renewable identification numbers ("RINs") are stated at the lower of weighted-average cost or net realizable value.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 and lease expense is accounted for on a straight-line basis. 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 an operating lease.
Derivative Instruments: All derivative instruments are recognized as either assets or liabilities in our consolidated balance sheets and are measured at fair value. Changes in the derivative instrument's fair value are recognized in earnings unless specific hedge accounting criteria are met. See Note 14 for additional information.
Properties, Plants and Equipment: Properties, plants and equipment are stated at cost. Depreciation is provided by the straight-line method over the estimated useful lives of the assets, primarily 15 to 32 years for refining, pipeline and terminal facilities, 10 to 40 years for buildings and improvements, 5 to 30 years for other fixed assets and 5 years for vehicles.
Asset Retirement Obligations: We record legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and / or the normal operation of long-lived assets. The fair value of the estimated cost to retire a tangible long-lived asset is recorded as a liability with the associated retirement costs capitalized as part of the asset's carrying amount in the period in which it is incurred and when a reasonable estimate of the fair value of the liability can be made. If a reasonable estimate cannot be made at the time the liability is incurred, we record the liability when sufficient information is available to estimate the liability's fair value. Certain of our refining assets have no recorded liability for asset retirement obligations since the timing of any retirement and related costs are currently indeterminable.
Our asset retirement obligations were $35.9 million and $28.7 million at December 31, 2019 and 2018, respectively, which are included in “Other long-term liabilities” in our consolidated balance sheets. Accretion expense was insignificant for the years ended December 31, 2019, 2018 and 2017.
Intangibles, Goodwill and Long-lived Assets: Intangible assets are assets (other than financial assets) that lack physical substance, and goodwill represents the excess of the cost of an acquired entity over the fair value of the assets acquired and liabilities assumed. Goodwill acquired in a business combination and intangibles with indefinite useful lives are not amortized, whereas intangible assets with finite useful lives are amortized on a straight-line basis. Goodwill and intangible assets that are not subject to amortization are tested for impairment annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our goodwill impairment testing first entails either a quantitative assessment or an optional qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that based on the qualitative factors that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, a quantitative test is performed in which we estimate the fair value of the related reporting unit. If the carrying amount of a reporting unit exceeds its fair value, the goodwill of that reporting unit is impaired, and we measure goodwill impairment as the excess of the carrying amount of the reporting unit over the related fair value. The carrying amount of our intangible assets and goodwill may fluctuate from period to period due to the effects of foreign currency translation adjustments on goodwill and intangible assets assigned to our Lubricants and Specialty Products segment.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
Our long-lived assets principally consist of our refining assets that are organized as refining asset groups and the assets of our Lubricants and Specialty Products asset groups. The refinery asset groups also constitute our individual refinery reporting units that are used for testing and measuring goodwill impairments. Our long-lived assets are evaluated for impairment by identifying whether indicators of impairment exist and if so, assessing whether the long-lived assets are recoverable from estimated future undiscounted cash flows. The actual amount of impairment loss measured, if any, is equal to the amount by which the asset group’s carrying value exceeds its fair value.
See Note 11 for additional information regarding our goodwill and long-lived assets including impairment charges recorded during the years ended December 31, 2019 and 2017.
Equity Method Investments: We account for investments in which we have a noncontrolling interest, yet have significant influence over the entity, using the equity method of accounting, whereby we record our pro-rata share of earnings, and contributions to and distributions from joint ventures as adjustments to our investment balance. HEP has a 50% interest in Osage Pipe Line Company, LLC, the owner of a pipeline running from Cushing, Oklahoma to El Dorado, Kansas (the “Osage Pipeline”) and a 50% interest in Cheyenne Pipeline, LLC, the owner of a pipeline running from Fort Laramie, Wyoming to Cheyenne, Wyoming (the “Cheyenne Pipeline”). HEP also accounts for Cushing Connect Terminal, a subsidiary of the Cushing Connect Pipeline & Terminal LLC joint venture, using the equity method of accounting, as HEP does not have the ability to direct the activities that most significantly impact the entity. As of December 31, 2019, HEP's underlying equity and recorded investment balances in the joint ventures are $90.8 million and $120.1 million respectively. The differences are being amortized as adjustments to HEP's pro-rata share of earnings in the joint ventures.
Revenue Recognition: Revenues on refined product 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.
Cost Classifications: Costs of products sold include the cost of crude oil, other feedstocks, blendstocks and purchased finished products, inclusive of transportation costs. We purchase crude oil that at times exceeds the supply needs of our refineries. Quantities in excess of our needs are sold at market prices to purchasers of crude oil that are recorded on a gross basis with the sales price recorded as revenues and the corresponding acquisition cost as cost of products sold. Additionally, we enter into buy / sell exchanges of crude oil with certain parties to facilitate the delivery of quantities to certain locations that are netted at cost. Operating expenses include direct costs of labor, maintenance materials and services, utilities and other direct operating costs. Selling, general and administrative expenses include compensation, professional services and other support costs.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
Deferred Maintenance Costs: Our refinery units require regular major maintenance and repairs which are commonly referred to as “turnarounds.” Catalysts used in certain refinery processes also require regular “change-outs.” The required frequency of the maintenance varies by unit and by catalyst, but generally is every two to five years. Turnaround costs are deferred and amortized over the period until the next scheduled turnaround. Other repairs and maintenance costs are expensed when incurred. Deferred turnaround and catalyst amortization expense was $141.9 million, $110.9 million and $112.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Environmental Costs: Environmental costs are charged to operating expenses if they relate to an existing condition caused by past operations and do not contribute to current or future revenue generation. We have ongoing investigations of environmental matters at various locations and routinely assess our recorded environmental obligations, if any, with respect to such matters. Liabilities are recorded when site restoration and environmental remediation, cleanup and other obligations are either known or considered probable and can be reasonably estimated. Such estimates are undiscounted and require judgment with respect to costs, time frame and extent of required remedial and clean-up activities and are subject to periodic adjustments based on currently available information. Recoveries of environmental costs through insurance, indemnification arrangements or other sources are included in other assets to the extent such recoveries are considered probable.
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.
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.
In connection with our PCLI acquisition on February 1, 2017, we issued intercompany notes to initially fund certain of our foreign businesses. Remeasurement adjustments resulting from the conversion of such intercompany financing amounts to functional currencies are recorded as gains and losses as a component of other income (expense) in the income statement. Such adjustments are not recorded to the Lubricants and Specialty Products segment operations, but to Corporate and Other. See Note 20 for additional information on our segments.
Income Taxes: Provisions for income taxes include deferred taxes resulting from temporary differences in income for financial and tax purposes, using the liability method of accounting for income taxes. The liability method requires the effect of tax rate changes on deferred income taxes to be reflected in the period in which the rate change was enacted. The liability method also requires that deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized.
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.
Inventory Repurchase Obligations: We periodically enter into same-party sell / buy transactions, whereby we sell certain refined product inventory and subsequently repurchase the inventory in order to facilitate delivery to certain locations. Such sell / buy transactions are accounted for as inventory repurchase obligations under which proceeds received under the initial sell is recognized as inventory repurchase obligations that are subsequently reversed when the inventories are repurchased. For the years ended December 31, 2019, 2018 and 2017, we received proceeds of $52.1 million, $51.2 million and $47.4 million and subsequently repaid $49.2 million, $52.5 million and $49.8 million, respectively, under these sell / buy transactions.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
Accounting Pronouncements - Recently Adopted
Goodwill Impairment Testing
In January 2017, Accounting Standard Update (“ASU”) 2017-04, “Simplifying the Test for Goodwill Impairment,” was issued amending the testing for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. We adopted this standard effective in the second quarter of 2019, and the adoption of this standard resulted in no change to the amount of goodwill impairment recorded in the second quarter of 2019.
Leases
In February 2016, ASU 2016-02, “Leases,” was issued requiring leases to be measured and recognized as a lease liability, with a corresponding ROU asset on the balance sheet. We adopted this standard effective January 1, 2019 using the optional transition method, whereby comparative prior period financial information will not be restated and will continue to be reported under the lease accounting standard in effect during those periods. We also elected practical expedients provided by the new standard, including the package of practical expedients, whereby we did not reassess lease classification or initial indirect lease cost under the new standard. In addition, we elected to exclude short-term leases, which at inception have a lease term of 12 months or less, from the amounts recognized on our balance sheet. In addition, HEP elected an expedient whereby a lessor does not have to separate non-lease (service) components from lease components under certain contracts. Under this expedient, HEP treated the combined components of its leases with third parties (i.e., the contracts that are not eliminated upon consolidation of HEP by HFC) as an operating lease in which the dominant component was a lease in accordance with ASC 842. Upon adoption of this standard, we recognized $433.4 million of lease liabilities and corresponding ROU assets on our consolidated balance sheet. Adoption of this standard did not have a material impact on our results of operations or cash flows. In addition, upon our acquisition of Sonneborn on February 1, 2019, we recognized $15.6 million of lease liabilities and corresponding ROU assets.
Accounting Pronouncements - Not Yet Adopted
Credit Losses Measurement
In June 2016, ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” was issued requiring measurement of all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This standard is effective January 1, 2020, and our preliminary review of historic and expected credit losses indicates the amount of expected credit losses upon adoption would not be materially different from the current allowance for doubtful accounts balance.
Sonneborn
On November 12, 2018, we entered into an equity purchase agreement to acquire 100% of the capital stock of Sonneborn. The acquisition closed on February 1, 2019. Sonneborn is a producer of specialty hydrocarbon chemicals such as white oils, petrolatums and waxes with manufacturing facilities in the United States and Europe.
Aggregate consideration totaled $701.6 million and consisted of $662.7 million in cash paid at acquisition, net of cash acquired.
This transaction was accounted for as a business combination using the acquisition method of accounting, with the purchase price allocated to the fair value of the acquired Sonneborn assets and liabilities as of the February 1 acquisition date, with the excess purchase price recorded as goodwill assigned to our Lubricants and Specialty Products segment.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
The following summarizes our valuation of the Sonneborn assets and liabilities acquired on February 1, 2019:
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(In millions)
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Cash and cash equivalents
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$
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38.9
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Accounts receivable and other current assets
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58.4
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Inventories
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81.0
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Properties, plants and equipment
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168.2
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Goodwill
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282.3
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Intangibles and other noncurrent assets
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231.5
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Accounts payable and accrued liabilities
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(47.9
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)
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Deferred income tax liabilities
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(83.0
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)
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Other long-term liabilities
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(27.8
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)
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$
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701.6
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The purchase price allocation resulted in the recognition of $282.3 million in goodwill, which relates to the established workforce and global market presence of the acquired business as well as the expected synergies to be gained upon combining with our existing operations to form an expanded lubricants and specialty products business. This goodwill is not deductible for income tax purposes.
Intangibles include customer relationships, trademarks, patents and technical know-how totaling $214.6 million that are being amortized on a straight-line basis over a 12-year period.
Our consolidated financial and operating results reflect the Sonneborn operations beginning February 1, 2019. Our results of operations include revenue and income before income taxes of $340.3 million and $5.1 million, respectively, for the period from February 1, 2019 through December 31, 2019 related to these operations.
The following unaudited pro forma information for the years ended December 31, 2019 and 2018 presents the revenues and operating income for our Lubricants and Specialty Products segment assuming the acquisition of Sonneborn had occurred as of January 1, 2018. The proforma effects on consolidated HFC revenue and operating income are not material.
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Years Ended December 31,
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2019
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2018
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(In thousands)
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Sales and other revenues
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$
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2,124,778
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$
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2,195,690
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Operating income (1)
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$
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(116,254
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)
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$
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99,371
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(1) The year ended December 31, 2019, includes goodwill impairment of $152.7 million from the PCLI reporting unit of our Lubricants and Specialty Products segment. See Note 11 for additional information on this goodwill impairment.
Red Giant Oil
On July 10, 2018, we entered into a definitive agreement to acquire Red Giant Oil, a privately-owned lubricants company. The acquisition closed on August 1, 2018. Cash consideration paid was $54.2 million. Red Giant Oil is one of the largest suppliers of locomotive engine oil in North America and is headquartered in Council Bluffs, Iowa.
This transaction was accounted for as a business combination using the acquisition method of accounting, with the purchase price allocated to the fair value of the acquired Red Giant Oil assets and liabilities as of the August 1 acquisition date, with the excess purchase price recorded as goodwill assigned to our Lubricants and Specialty Products segment. This goodwill is deductible for income tax purposes. Fair values are as follows: current assets $14.4 million, properties and equipment $21.3 million, intangible assets $9.7 million, goodwill $10.8 million and current liabilities $2.0 million.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
PCLI
On October 29, 2016, we entered into a share purchase agreement with Suncor to acquire 100% of the outstanding capital stock of PCLI. The acquisition closed on February 1, 2017. Cash consideration paid was $862.1 million, or $1.125 billion Canadian dollars. PCLI is located in Mississauga, Ontario, Canada and is a producer of lubricant products such as base oils, white oils, specialty products and finished lubricants. The operations of our Petro-Canada Lubricants business also include marketing of these products to both retail and wholesale outlets through a global sales network with locations in Canada, the United States, Europe and China.
Aggregate consideration totaled $906.7 million and consists of $862.1 million in cash paid to Suncor at acquisition, a closing date working capital settlement of $30.6 million that was paid to Suncor in the second quarter of 2017, an accrued payable in the amount of $7.4 million, and $6.6 million representing a portion of the fair value of replacement restricted stock unit awards issued to PCLI employees that relate to pre-acquisition services.
This transaction was accounted for as a business combination using the acquisition method of accounting, with the purchase price allocated to the fair value of the acquired PCLI assets and liabilities as of the February 1 acquisition date, with the excess purchase price recorded as goodwill assigned to our Lubricants and Specialty Products segment. This goodwill is not deductible for income tax purposes. Fair values are as follows: cash and cash equivalents $21.6 million, current assets $333.4 million, properties, plants and equipment $438.0 million, goodwill $194.8 million, intangibles and other noncurrent assets $124.3 million, current liabilities $87.4 million and deferred income tax and other long-term liabilities $118.0 million.
We incurred $24.2 million, $3.6 million and $27.9 million, for the years ended December 31, 2019, 2018 and 2017, respectively, in incremental direct integration and regulatory costs that principally relate to legal, advisory, regulatory and other professional fees and are presented as selling, general and administrative expenses.
We have operating and finance leases for land, buildings, pipelines, storage tanks, transportation and other equipment for our operations. Our leases have remaining terms of one to 60 years, some of which include options to extend the leases for up to 10 years. Certain of our leases for pipeline assets include provisions for variable payments which are based on a measure of throughput and also contain a provision for the lessor to adjust the rate per barrel periodically over the life of the lease. These variable costs are not included in the initial measurement of ROU assets and lease liabilities.
The following table presents the amounts and balance sheet locations of our operating and financing leases recorded on our consolidated balance sheet.
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December 31, 2019
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(In thousands)
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Operating leases:
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Operating lease right-of-use assets
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$
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467,109
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Operating lease liabilities
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104,415
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Noncurrent operating lease liabilities
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364,420
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Total operating lease liabilities
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$
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468,835
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Finance leases:
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Properties, plants and equipment, at cost
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$
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13,406
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Accumulated amortization
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(6,233
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)
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Properties, plants and equipment, net
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$
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7,173
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Accrued liabilities
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$
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1,567
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Other long-term liabilities
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5,163
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Total finance lease liabilities
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$
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6,730
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HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
Supplemental balance sheet information related to our leases was as follows:
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December 31, 2019
|
|
|
|
Weighted average remaining lease term (in years)
|
|
|
Operating leases
|
|
7.2
|
|
Finance leases
|
|
8.1
|
|
|
|
|
Weighted average discount rate
|
|
|
Operating leases
|
|
4.0
|
%
|
Finance leases
|
|
5.2
|
%
|
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
Year Ended
December 31, 2019
|
|
|
(In thousands)
|
Operating lease expense
|
|
$
|
112,770
|
|
Finance lease expense:
|
|
|
Amortization of right-of-use assets
|
|
1,543
|
|
Interest on lease liabilities
|
|
334
|
|
Variable lease cost
|
|
4,449
|
|
Total lease expense
|
|
$
|
119,096
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
|
Year Ended
December 31, 2019
|
|
|
(In thousands)
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
|
$
|
116,980
|
|
Operating cash flows from finance leases
|
|
$
|
334
|
|
Financing cash flows from finance leases
|
|
$
|
1,551
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
Operating leases
|
|
$
|
121,750
|
|
As of December 31, 2019, minimum future lease payments of our operating and finance lease obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Finance
|
|
|
(In thousands)
|
2020
|
|
$
|
121,511
|
|
|
$
|
2,128
|
|
2021
|
|
102,480
|
|
|
1,304
|
|
2022
|
|
87,344
|
|
|
1,056
|
|
2023
|
|
72,751
|
|
|
1,110
|
|
2024
|
|
49,901
|
|
|
626
|
|
2025 and thereafter
|
|
124,612
|
|
|
2,255
|
|
Future minimum lease payments
|
|
558,599
|
|
|
8,479
|
|
Less: imputed interest
|
|
89,764
|
|
|
1,749
|
|
Total lease obligations
|
|
468,835
|
|
|
6,730
|
|
Less: current obligations
|
|
104,415
|
|
|
1,567
|
|
Long-term lease obligations
|
|
$
|
364,420
|
|
|
$
|
5,163
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
As of December 31, 2019, we have entered into certain leases that have not yet commenced. Such leases include a 15-year lease for plant equipment, with estimated future lease payments of $6.8 million, expected to commence in the second quarter of 2020, and a 5-year lease for office equipment, with estimated future lease payments of $0.4 million, expected to commence in the first quarter of 2020.
Our consolidated income statement reflects lease revenue recognized by HEP for contracts with third parties in which HEP is the lessor. Lease income recognized for the year ended December 31, 2019 was $33.2 million for operating leases.
Annual minimum undiscounted lease payments in which HEP is a lessor to third-party contracts as of December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
(In thousands)
|
2020
|
|
$
|
18,839
|
|
2021
|
|
12,794
|
|
2022
|
|
11,377
|
|
2023
|
|
11,248
|
|
2024
|
|
11,248
|
|
Thereafter
|
|
2,812
|
|
Total
|
|
$
|
68,318
|
|
The following are disclosures related to periods prior to our adoption of ASC 842.
We leased certain office and storage facilities, rail cars and other equipment under long-term operating leases, most of which contained renewal options. At December 31, 2018, the minimum future rental commitments under operating leases having non-cancellable lease terms in excess of one year were as follows:
|
|
|
|
|
|
|
|
(In thousands)
|
2019
|
|
$
|
104,362
|
|
2020
|
|
92,491
|
|
2021
|
|
84,581
|
|
2022
|
|
70,874
|
|
2023
|
|
61,063
|
|
Thereafter
|
|
88,206
|
|
Total
|
|
$
|
501,577
|
|
Rental expense charged to operations was $84.1 million and $95.7 million for the years ended December 31, 2018 and 2017, respectively.
|
|
NOTE 4:
|
Holly Energy Partners
|
HEP is a publicly held master limited partnership that 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 Mountain regions of the United States and Delek US Holdings, Inc's (“Delek”) refinery in Big Spring, Texas. Additionally, as of December 31, 2019 HEP owns a 75% interest in UNEV Pipeline, LLC (“UNEV”), the owner of a pipeline running from Woods Cross, Utah to Las Vegas, Nevada (the “UNEV Pipeline”) and associated product terminals; a 50% ownership interest in each of Osage Pipeline Company, LLC, the owner of a pipeline running from Cushing, Oklahoma to El Dorado, Kansas (the “Osage Pipeline”); Cheyenne Pipeline, LLC, the owner of a pipeline running from Fort Laramie, Wyoming to Cheyenne, Wyoming (the “Cheyenne Pipeline”) and Cushing Connect Pipeline & Terminal LLC (“Cushing Connect”), the owner of a crude oil storage terminal in Cushing, Oklahoma and a to-be-constructed pipeline that will run from Cushing, Oklahoma to our Tulsa Refineries.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
At December 31, 2019, we owned a 57% 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.
HEP has two primary customers (including us) and generates revenues by charging tariffs for transporting petroleum products and crude oil though 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 77% of HEP’s total revenues for the year ended December 31, 2019. We do not provide financial or equity support through any liquidity arrangements and / or debt guarantees to HEP.
HEP has outstanding debt under a 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 13 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
On October 2, 2019, HEP Cushing LLC, a wholly-owned subsidiary of HEP, and Plains Marketing, L.P., a wholly-owned subsidiary of Plains, formed a 50/50 joint venture, Cushing Connect, for (i) the development and construction of a new 160,000 barrel per day common carrier crude oil pipeline (the “Cushing Connect Pipeline”) that will connect 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 is expected to be placed in service during the second quarter of 2020, and the Cushing Connect Pipeline is expected to be placed in service during the first quarter of 2021. Long-term commercial agreements have been entered into to support the Cushing Connect assets.
Cushing Connect will contract with an affiliate of HEP to manage the construction and 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, and HEP estimates its share of the cost of the Cushing Connect Terminal contributed by Plains and Cushing Connect Pipeline construction costs are approximately $65.0 million.
SLC Pipeline and Frontier Pipeline
On October 31, 2017, HEP acquired the remaining 75% interest in SLC Pipeline LLC, the owner of a pipeline that serves refineries in the Salt Lake City, Utah area (the “SLC Pipeline”), and the remaining 50% interest in Frontier Aspen LLC, the owner of a pipeline running from Wyoming to Frontier Station, Utah (the “Frontier Pipeline”), from subsidiaries of Plains for cash consideration of $250.0 million.
These acquisitions were accounted for as a business combination achieved in stages. HEP’s preexisting equity method investments in SLC Pipeline LLC and Frontier Aspen LLC were remeasured at an acquisition date fair value of $112.0 million, since HEP acquired a controlling interest, and a gain was recognized on the remeasurement of $36.3 million in the fourth quarter of 2017. The fair value of HEP's preexisting equity method investments in SLC Pipeline LLC and Frontier Aspen LLC was estimated using Level 3 inputs under the income method for these entities, adjusted for lack of control and marketability.
The total consideration of $363.8 million, consisting of cash consideration of $250.0 million and the fair value of HEP's preexisting equity method investments in SLC Pipeline LLC and Frontier Aspen LLC of $112.0 million, and working capital adjustments of $1.8 million, was allocated to the acquisition date fair value of assets and liabilities acquired as of the October 31, 2017 acquisition date, with the excess purchase price recorded as goodwill. Fair values were as follows: cash and cash equivalents $4.6 million, current assets $5.2 million, properties and equipment $275.0 million, intangible assets $70.2 million, goodwill $13.8 million and current liabilities $5.0 million.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
Transportation Agreements
HEP serves our refineries under long-term pipeline, terminal and tankage throughput agreements and refinery processing tolling agreements expiring from 2021 through 2036. Under these agreements, we pay HEP fees to transport, store and process throughput volumes of refined products, crude oil and feedstocks on HEP's pipelines, terminals, tankage, loading rack facilities and refinery processing units that result in minimum annual payments to HEP including UNEV (a consolidated subsidiary of HEP). Under these agreements, the agreed upon tariff rates are subject to annual tariff rate adjustments on July 1 at a rate based upon the percentage change in Producer Price Index or Federal Energy Regulatory Commission index. As of December 31, 2019, these agreements result in minimum annualized payments to HEP of $348.1 million.
Our transactions with HEP and fees paid under our transportation agreements with HEP and UNEV are eliminated and have no impact on our consolidated financial statements.
Incentive Distribution Rights Simplification Agreement
On October 31, 2017, we closed on an equity restructuring transaction with HEP pursuant to which our incentive distribution rights were canceled and our 2% general partner interest in HEP was converted into a non-economic general partner interest in HEP. In consideration, we received 37,250,000 HEP common units. In addition, we agreed to waive $2.5 million of limited partner cash distributions for each of twelve consecutive quarters beginning with the first quarter the units issued were eligible to receive distributions as consideration.
HEP Private Placement Agreements
On January 25, 2018, HEP entered into a common unit purchase agreement in which certain purchasers agreed to purchase in a private placement 3,700,000 HEP common units, representing limited partner interests, at a price of $29.73 per common unit. The private placement closed on February 6, 2018, at which time HEP received proceeds of $110.0 million, which were used to repay indebtedness under the HEP Credit Agreement.
HEP Common Unit Continuous Offering Program
In May 2016, HEP established a continuous offering program under which HEP may issue and sell common units from time to time, representing limited partner interests, up to an aggregate gross sales amount of $200 million. During the year ended December 31, 2019, HEP did not issue any common units under this program. As of December 31, 2019, HEP has issued 2,413,153 common units under this program, providing $82.3 million in gross proceeds.
As a result of these transactions and resulting HEP ownership changes, we adjusted additional capital and equity attributable to HEP's noncontrolling interest holders to reallocate HEP's equity among its unitholders.
Substantially all revenue-generating activities relate to sales of refined product and excess crude oil inventories sold at market prices (variable consideration) under contracts with customers. Additionally, we have revenues attributable to HEP logistics services provided under petroleum product and crude oil pipeline transportation, processing, storage and terminalling agreements with third parties.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
Disaggregated revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
Revenues by type
|
|
|
|
|
|
|
Refined product revenues
|
|
|
|
|
|
|
Transportation fuels (1)
|
|
$
|
12,952,899
|
|
|
$
|
13,326,654
|
|
|
$
|
11,056,038
|
|
Specialty lubricant products (2)
|
|
1,864,450
|
|
|
1,636,859
|
|
|
1,415,842
|
|
Asphalt, fuel oil and other products (3)
|
|
1,025,663
|
|
|
985,234
|
|
|
743,394
|
|
Total refined product revenues
|
|
15,843,012
|
|
|
15,948,747
|
|
|
13,215,274
|
|
Excess crude oil revenues (4)
|
|
1,470,148
|
|
|
1,597,321
|
|
|
891,756
|
|
Transportation and logistic services
|
|
121,027
|
|
|
108,412
|
|
|
77,225
|
|
Other revenues (5)
|
|
52,391
|
|
|
60,186
|
|
|
67,044
|
|
Total sales and other revenues
|
|
$
|
17,486,578
|
|
|
$
|
17,714,666
|
|
|
$
|
14,251,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
Refined product revenues by market
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
Mid-Continent
|
|
$
|
8,424,191
|
|
|
$
|
8,427,200
|
|
|
$
|
7,099,754
|
|
Southwest
|
|
3,621,273
|
|
|
3,772,278
|
|
|
2,952,224
|
|
Rocky Mountains
|
|
2,208,541
|
|
|
2,476,044
|
|
|
2,055,221
|
|
Northeast
|
|
578,932
|
|
|
339,407
|
|
|
259,840
|
|
Canada
|
|
721,169
|
|
|
732,321
|
|
|
673,842
|
|
Europe, Asia and Latin America
|
|
288,906
|
|
|
201,497
|
|
|
174,393
|
|
Total refined product revenues
|
|
$
|
15,843,012
|
|
|
$
|
15,948,747
|
|
|
$
|
13,215,274
|
|
|
|
(1)
|
Transportation fuels consist 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 revenue include revenues attributable to our Refining and Lubricants and Specialty Products segments of $808.9 million and $216.8 million, respectively, for the year ended December 31, 2019, $822.6 million and $162.6 million, respectively, for the year ended December 31, 2018, and $565.2 million and $178.2 million, respectively, for the year ended December 31, 2017.
|
|
|
(4)
|
Excess crude oil revenues represent sales of purchased crude oil inventory that at times exceeds the supply needs of our refineries.
|
|
|
(5)
|
Other revenues are principally attributable to our Refining segment.
|
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 the acquisition of Sonneborn on February 1, 2019. The following table presents changes to contract liabilities for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
Balance at January 1
|
|
$
|
132
|
|
|
$
|
179
|
|
Sonneborn acquisition
|
|
6,463
|
|
|
—
|
|
Increase
|
|
26,751
|
|
|
6,748
|
|
Recognized as revenue
|
|
(28,694
|
)
|
|
(6,795
|
)
|
Balance at December 31
|
|
$
|
4,652
|
|
|
$
|
132
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
As of December 31, 2019, 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 2024. Such volumes are typically nominated in the month preceding delivery and delivered ratably throughout the following month. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
|
(In thousands)
|
Refined product sales volumes (barrels)
|
|
21,051
|
|
|
14,622
|
|
|
12,775
|
|
|
24,465
|
|
|
72,913
|
|
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 of revenues through 2025. Annual minimum revenues attributable to HEP’s third-party contracts as of December 31, 2019 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
|
(In thousands)
|
HEP contractual minimum revenues
|
|
$
|
29,536
|
|
|
$
|
22,822
|
|
|
$
|
13,267
|
|
|
$
|
25,308
|
|
|
$
|
90,933
|
|
We have no customers which had accounted for over 10% of our annual revenues for the years ended December 31, 2019, 2018 or 2017.
|
|
NOTE 6:
|
Fair Value Measurements
|
Our financial instruments measured at fair value on a recurring basis consist of derivative instruments and RINs 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.
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
The carrying amounts of derivative instruments and RINs credit obligations at December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
Fair Value by Input Level
|
Financial Instrument
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(In thousands)
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Commodity price swaps
|
|
$
|
13,455
|
|
|
$
|
—
|
|
|
$
|
13,455
|
|
|
$
|
—
|
|
Commodity forward contracts
|
|
4,133
|
|
|
—
|
|
|
4,133
|
|
|
—
|
|
Total assets
|
|
$
|
17,588
|
|
|
$
|
—
|
|
|
$
|
17,588
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
NYMEX futures contracts
|
|
$
|
2,578
|
|
|
$
|
2,578
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
|
6,722
|
|
|
—
|
|
|
6,722
|
|
|
—
|
|
Commodity price swaps
|
|
1,230
|
|
|
—
|
|
|
1,230
|
|
|
—
|
|
Commodity forward contracts
|
|
3,685
|
|
|
—
|
|
|
3,685
|
|
|
—
|
|
Total liabilities
|
|
$
|
14,215
|
|
|
$
|
2,578
|
|
|
$
|
11,637
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
Fair Value by Input Level
|
Financial Instrument
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(In thousands)
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
NYMEX futures contracts
|
|
$
|
2,473
|
|
|
$
|
2,473
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
|
25,956
|
|
|
—
|
|
|
25,956
|
|
|
—
|
|
Commodity price swaps
|
|
10,817
|
|
|
—
|
|
|
10,817
|
|
|
—
|
|
Commodity forward contracts
|
|
1,034
|
|
|
—
|
|
|
1,034
|
|
|
—
|
|
Total assets
|
|
$
|
40,280
|
|
|
$
|
2,473
|
|
|
$
|
37,807
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Commodity price swaps
|
|
$
|
956
|
|
|
$
|
—
|
|
|
$
|
956
|
|
|
$
|
—
|
|
Commodity forward contracts
|
|
1,137
|
|
|
—
|
|
|
1,137
|
|
|
—
|
|
RINs credit obligations (1)
|
|
4,084
|
|
|
—
|
|
|
4,084
|
|
|
—
|
|
Total liabilities
|
|
$
|
6,177
|
|
|
$
|
—
|
|
|
$
|
6,177
|
|
|
$
|
—
|
|
(1) Represent obligations for RINs credits for which we did not have sufficient quantities at December 31, 2018 to satisfy our Environmental Protection Agency (“EPA”) regulatory blending requirements.
Level 1 Financial Instruments
Our NYMEX futures contracts are exchange traded and are measured and recorded at fair value using quoted market prices, a Level 1 input.
Level 2 Financial Instruments
Derivative instruments consisting of foreign currency forward contracts, commodity price swaps and forward sales and purchase contracts are measured and recorded at fair value using Level 2 inputs. The fair value of the commodity price swap contracts is based on the net present value of expected future cash flows related to both variable and fixed rate legs of the respective swap agreements. The measurements are computed using market-based observable input and quoted forward commodity prices with respect to our commodity price swaps. RINs credit obligations are valued based on current market RINs 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.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
|
|
NOTE 7:
|
Earnings Per Share
|
Basic earnings per share is calculated as net income attributable to HollyFrontier stockholders divided by the average number of shares of common stock outstanding. Diluted earnings per share assumes, when dilutive, the issuance of the net incremental shares from restricted shares and performance share units. The following is a reconciliation of the denominators of the basic and diluted per share computations for net income attributable to HollyFrontier stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(In thousands, except per share data)
|
Net income attributable to HollyFrontier stockholders
|
|
$
|
772,388
|
|
|
$
|
1,097,960
|
|
|
$
|
805,395
|
|
Participating securities’ (restricted stock) share in earnings
|
|
1,034
|
|
|
3,714
|
|
|
5,047
|
|
Net income attributable to common shares
|
|
$
|
771,354
|
|
|
$
|
1,094,246
|
|
|
$
|
800,348
|
|
Average number of shares of common stock outstanding
|
|
166,287
|
|
|
175,009
|
|
|
176,174
|
|
Effect of dilutive variable restricted shares and performance share units (1)
|
|
1,098
|
|
|
1,652
|
|
|
1,022
|
|
Average number of shares of common stock outstanding assuming dilution
|
|
167,385
|
|
|
176,661
|
|
|
177,196
|
|
Basic earnings per share
|
|
$
|
4.64
|
|
|
$
|
6.25
|
|
|
$
|
4.54
|
|
Diluted earnings per share
|
|
$
|
4.61
|
|
|
$
|
6.19
|
|
|
$
|
4.52
|
|
|
|
|
|
|
|
|
(1) Excludes anti-dilutive restricted and performance share units of:
|
|
302
|
|
|
238
|
|
|
543
|
|
|
|
NOTE 8:
|
Stock-Based Compensation
|
We have a principal share-based compensation plan (the “Long-Term Incentive Compensation Plan”). The compensation cost charged against income for the plan was $41.5 million, $39.0 million and $39.8 million for the years ended December 31, 2019, 2018 and 2017, respectively. Our accounting policy for the recognition of compensation expense for awards with pro-rata vesting is to expense the costs ratably over the vesting periods.
Additionally, HEP maintains a share-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 share-based compensation plan was $2.5 million, $3.2 million and $2.5 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Restricted Stock and Restricted Stock Units
Under our Long-Term Incentive Compensation Plan, we grant certain officers and other key employees restricted stock unit awards, which are payable in stock or cash and generally vest over a period of three years. We previously granted restricted stock to certain officers and key employees with awards vesting over a period of three years. Certain restricted stock unit award recipients have the right to receive dividends, however, restricted stock units do not have any other rights of absolute ownership. Restricted stock award recipients are generally entitled to all the rights of absolute ownership of the restricted shares from the date of grant including the right to vote the shares and to receive dividends. Upon vesting, restrictions on the restricted stock and restricted stock units lapse at which time they convert to common shares or cash. In addition, we grant non-employee directors restricted stock unit awards, which typically vest over a period of one year and are payable in stock. The fair value of each restricted stock and restricted stock unit award is measured based on the grant date market price of our common shares and is amortized over the respective vesting period. We account for forfeitures on an estimated basis.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
A summary of restricted stock and restricted stock unit activity during the year ended December 31, 2019 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock and Restricted Stock Units
|
|
Grants
|
|
Weighted Average Grant Date Fair Value
|
|
Aggregate Intrinsic Value ($000)
|
|
|
|
|
|
|
|
Outstanding at January 1, 2019
|
|
1,196,914
|
|
|
$
|
46.81
|
|
|
|
Granted
|
|
661,329
|
|
|
$
|
52.62
|
|
|
|
Vested
|
|
(739,613
|
)
|
|
$
|
41.74
|
|
|
|
Forfeited
|
|
(60,234
|
)
|
|
$
|
46.30
|
|
|
|
Converted from performance share units
|
|
43,385
|
|
|
$
|
35.80
|
|
|
|
Outstanding at December 31, 2019
|
|
1,101,781
|
|
|
$
|
53.30
|
|
|
$
|
55,871
|
|
For the years ended December 31, 2019, 2018 and 2017, restricted stock and restricted stock units vested having a grant date fair value of $30.9 million, $30.0 million and $24.9 million, respectively. For the years ended December 31, 2018 and 2017, we granted restricted stock units having a weighted average grant date fair value of $64.96 and $35.02, respectively. As of December 31, 2019, there was $36.2 million of total unrecognized compensation cost related to non-vested restricted stock unit grants. That cost is expected to be recognized over a weighted-average period of 1.5 years. For the years ended December 31, 2019 and 2018, we paid $1.7 million and $0.1 million, respectively, in cash equal to the value of the stock award on the vest date, to certain employees to settle 32,648 and 2,481, respectively, restricted stock units. No restricted stock units were settled in cash in 2017.
Performance Share Units
Under our Long-Term Incentive Compensation Plan, we grant certain officers and other key employees performance share units, which are payable in stock or cash upon meeting certain criteria over the service period, and generally vest over a period of three years. Under the terms of our performance share unit grants, awards are subject to “financial performance” and “market performance” criteria. Financial performance is based on our financial performance compared to a peer group of independent refining companies, while market performance is based on the relative standing of total shareholder return achieved by HollyFrontier compared to peer group companies. The number of shares ultimately issued or cash paid under these awards can range from zero to 200% of target award amounts.
A summary of performance share unit activity and changes during the year ended December 31, 2019 is presented below:
|
|
|
|
|
Performance Share Units
|
|
Grants
|
|
|
|
Outstanding at January 1, 2019
|
|
662,431
|
|
Granted
|
|
177,428
|
|
Vested
|
|
(427,715
|
)
|
Forfeited
|
|
(11,046
|
)
|
Converted to restricted stock units
|
|
(25,510
|
)
|
Outstanding at December 31, 2019
|
|
375,588
|
|
For the year ended December 31, 2019, we issued 592,602 shares of common stock, representing a 200% payout on vested performance share units having a grant date fair value of $7.3 million. For the years ended December 31, 2018 and 2017, we issued common stock upon the vesting of the performance share units having a grant date fair value of $8.8 million and $6.6 million, respectively. As of December 31, 2019, there was $11.7 million of total unrecognized compensation cost related to non-vested performance share units having a grant date fair value of $58.50 per unit. That cost is expected to be recognized over a weighted-average period of 2.1 years. In addition, for the year ended December 31, 2019, 131,414 shares of common stock, representing target payout on performance share units having a grant date fair value of $8.9 million, vested and will be settled in 2020.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
Inventory consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
Crude oil
|
|
$
|
489,169
|
|
|
$
|
503,705
|
|
Other raw materials and unfinished products(1)
|
|
394,045
|
|
|
360,124
|
|
Finished products(2)
|
|
639,938
|
|
|
662,713
|
|
Lower of cost or market reserve
|
|
(240,363
|
)
|
|
(360,138
|
)
|
Process chemicals(3)
|
|
36,786
|
|
|
31,413
|
|
Repairs and maintenance supplies and other (4)
|
|
154,627
|
|
|
156,562
|
|
Total inventory
|
|
$
|
1,474,202
|
|
|
$
|
1,354,379
|
|
|
|
(1)
|
Other raw materials and unfinished products include feedstocks and blendstocks, other than crude.
|
|
|
(2)
|
Finished products include gasolines, jet fuels, diesels, lubricants, asphalts, LPG’s and residual fuels.
|
|
|
(3)
|
Process chemicals include additives and other chemicals.
|
Our inventories that are valued at the lower of LIFO cost or market reflect a valuation reserve of $240.4 million and $360.1 million at December 31, 2019 and 2018, respectively. The December 31, 2018 market reserve of $360.1 million was reversed due to the sale of inventory quantities that gave rise to the 2018 reserve. A new market reserve of $240.4 million was established as of December 31, 2019 based on market conditions and prices at that time. The effect of the change in the lower of cost or market reserve was a decrease to cost of products sold totaling $119.8 million for the year ended December 31, 2019 , an increase of $136.3 million for the year ended December 31, 2018 and a decrease of $108.7 million for the year ended December 31, 2017.
At December 31, 2019, 2018 and 2017, the LIFO value of inventory, net of the lower of cost or market reserve, was equal to current costs.
During the three months ended September 30, 2019, the EPA granted the Cheyenne Refinery and the Woods Cross Refinery each a one-year small refinery exemption from the Renewable Fuel Standard (“RFS”) program requirements for the 2018 calendar year end. As a result, the Cheyenne Refinery’s and the Woods Cross Refinery’s gasoline and diesel production are not subject to the Renewable Volume Obligation (“RVO”) for 2018. In the third quarter of 2019, we increased our inventory of RINs and reduced our cost of products sold by $36.6 million representing the net cost of the RINs charge to cost of products sold in 2018, less the loss incurred for selling 2018 vintage RINs in excess of those which we can use subject to the 20% carryover limit.
During the three months ended June 30, 2018, the EPA granted the Woods Cross Refinery a one-year small refinery exemption from the RFS program requirements for the 2017 calendar year end. As a result, the Woods Cross Refinery’s gasoline and diesel production are not subject to the RVO for 2017. In the second quarter of 2018, we increased our inventory of RINs and reduced our cost of products sold by $25.3 million, representing the net cost of the Woods Cross Refinery’s RINs charge to cost of products sold in 2017, less the loss incurred for selling 2017 vintage RINs in excess of those which we can use subject to the 20% carryover limit.
During the three months ended March 31, 2018, the EPA granted the Cheyenne Refinery a one-year small refinery exemption from the RFS program requirements for the 2015 and 2017 calendar years end. As a result, the Cheyenne Refinery’s gasoline and diesel production are not subject to the RVO for those years. At the date we received the 2017 Cheyenne Refinery exemption, we had not yet retired RINs to satisfy the 2017 RVO, which we intended to satisfy, in part, with 2016 vintage RINs subject to the 20% carryover limit. In the first quarter of 2018, we increased our inventory of RINs and reduced our cost of products sold by $37.9 million, representing the net cost of the Cheyenne Refinery’s RINs charged to cost of products sold in 2017, less the loss incurred from selling 2016 vintage RINs prior to their expiration in 2018.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
In the first quarter of 2018, the EPA provided us 2018 vintage RINs to replace the RINs previously retired to meet the Cheyenne Refinery’s 2015 RVO. In the first quarter of 2018, we increased our inventory of RINs and reduced our cost of products sold by $33.8 million representing the fair value of the 2018 replacement RINs obtained from the Cheyenne Refinery’s exemption of its 2015 RVO.
In May 2017, the EPA granted the Cheyenne Refinery a one-year small refinery exemption from the RFS program requirements for the 2016 calendar year. As a result, the Cheyenne Refinery’s gasoline and diesel production are not subject to the RVO for 2016. In September 2017, the EPA reinstated the RINs previously retired to meet our Cheyenne Refinery’s 2016 RVO. The cost of the RINs used earlier to satisfy the Cheyenne Refinery’s 2016 RVO of $30.5 million was charged to cost of products sold in 2016. In the second quarter of 2017, we increased our inventory of RINs and reduced our cost of products sold by this amount, representing the cost of the RINs that were reinstated as a result of the RFS exemption received by the Cheyenne Refinery.
Additionally, in December 2017, the EPA granted the Woods Cross Refinery a one-year small refinery exemption from the RFS program requirements for the 2016 calendar year. In the fourth quarter of 2017, we increased our inventory of RINs and reduced our cost of products sold in the amount of $27.3 million, representing the cost of the RINs reinstated as a result of the RFS exemption received by the Woods Cross Refinery.
Various subsidiaries of HollyFrontier moved to intervene in four lawsuits brought by renewable fuel interest groups against the EPA in federal courts alleging violations of the Renewable Fuel Standard under the Clean Air Act and challenging the EPA’s handling of small refinery exemptions. We intervened to vigorously defend the EPA’s position on small refinery exemptions because we believe the EPA correctly applied applicable law to the matters at issue. The U.S. Court of Appeals for the DC Circuit dismissed one of these four lawsuits on November 12, 2019 for lack of jurisdiction. On January 24, 2020, the U.S. Court of Appeals for the 10th Circuit vacated the small refinery exemptions granted to two of our refineries for 2016 and remanded the case to the EPA for further proceedings. It is not clear at this time what steps the EPA will take with respect to our 2016 small refinery exemptions, and we are unable to estimate costs we may incur, if any, at this time. It is also not clear how the case will impact future small refinery exemptions. It is too early to assess whether the remaining two cases are expected to have any impact on us.
|
|
NOTE 10:
|
Properties, Plants and Equipment
|
The components of properties, plants and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
Land, buildings and improvements
|
|
$
|
447,547
|
|
|
$
|
455,508
|
|
Refining facilities
|
|
4,258,764
|
|
|
4,034,546
|
|
Pipelines and terminals
|
|
1,775,657
|
|
|
1,729,994
|
|
Transportation vehicles
|
|
27,214
|
|
|
20,311
|
|
Other fixed assets
|
|
540,953
|
|
|
296,843
|
|
Construction in progress
|
|
187,162
|
|
|
243,778
|
|
|
|
7,237,297
|
|
|
6,780,980
|
|
Accumulated depreciation
|
|
(2,414,585
|
)
|
|
(2,098,446
|
)
|
|
|
$
|
4,822,712
|
|
|
$
|
4,682,534
|
|
We capitalized interest attributable to construction projects of $2.5 million, $4.8 million and $5.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Depreciation expense was $334.2 million, $309.0 million and $286.5 million for the years ended December 31, 2019, 2018 and 2017, respectively.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
|
|
NOTE 11:
|
Goodwill, Long-lived Assets and Intangibles
|
Goodwill and long-lived assets
As of December 31, 2019, our goodwill balance was $2.4 billion. During 2019, we recognized $282.3 million in goodwill as a result of our Sonneborn acquisition, all of which has been assigned to our Lubricants and Specialty Products segment. See Note 20 for additional information on our segments. The carrying amount of our goodwill may fluctuate from period to period due to the effects of foreign currency translation adjustments on goodwill assigned to our Lubricants and Specialty Products segment.
The following is a summary of our goodwill by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
Lubricants and Specialty Products
|
|
HEP
|
|
Total
|
|
|
(In thousands)
|
Balance at December 31, 2018
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
2,042,790
|
|
|
$
|
198,734
|
|
|
$
|
314,229
|
|
|
$
|
2,555,753
|
|
Accumulated impairment losses
|
|
(309,318
|
)
|
|
—
|
|
|
—
|
|
|
(309,318
|
)
|
|
|
1,733,472
|
|
|
198,734
|
|
|
314,229
|
|
|
2,246,435
|
|
|
|
|
|
|
|
|
|
|
Additional goodwill acquired
|
|
—
|
|
|
282,273
|
|
|
—
|
|
|
282,273
|
|
Current year impairment losses
|
|
—
|
|
|
(152,712
|
)
|
|
—
|
|
|
(152,712
|
)
|
Current year adjustments
|
|
—
|
|
|
—
|
|
|
(1,356
|
)
|
|
(1,356
|
)
|
Foreign currency translation adjustment
|
|
—
|
|
|
(733
|
)
|
|
—
|
|
|
(733
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
|
|
|
|
|
|
Goodwill
|
|
2,042,790
|
|
|
480,274
|
|
|
312,873
|
|
|
2,835,937
|
|
Accumulated impairment losses
|
|
(309,318
|
)
|
|
(152,712
|
)
|
|
—
|
|
|
(462,030
|
)
|
|
|
$
|
1,733,472
|
|
|
$
|
327,562
|
|
|
$
|
312,873
|
|
|
$
|
2,373,907
|
|
During the second quarter of 2019, we performed interim goodwill impairment testing of the PCLI reporting unit included in our Lubricants and Specialty Products segment. We elected to perform this interim assessment due to the recent reorganization of our reporting unit structure within the Lubricants and Specialty Products segment, combined with the identification of events and circumstances which were indicators of potential goodwill impairment at PCLI, including recent declines in gross margins to lower than historic levels. These recent lower gross margins are in the base oil market which is largely attributed to the increase in global supply of base oils with a current outlook for continued near-term softness.
Our interim goodwill impairment testing was performed as of May 31, 2019. The estimated fair values of our goodwill reporting units within our Lubricants and Specialty Products segment were derived using a combination of both income and market approaches. The income approach reflects expected future cash flows based on estimated future production volumes, selling prices, gross margins, operating costs and capital expenditures. Our market approach includes both the guideline public company and guideline transaction methods. Both methods utilize pricing multiples derived from historical market transactions of other like-kind assets. These fair value measurements involve significant unobservable inputs (Level 3 inputs). See Note 6 for further discussion of Level 3 inputs.
As a result of our impairment testing, we determined that the carrying value of the PCLI reporting unit’s goodwill within our Lubricants and Specialty Products segment was fully impaired and a goodwill impairment charge of $152.7 million was recorded. Our testing did not identify any other impairments.
We performed our annual goodwill impairment testing as of July 1, 2019 and determined there was no additional impairment of goodwill attributable to our reporting units. There was no impairment of goodwill during the years ended December 31, 2018 and 2017.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
In 2017, we incurred long-lived asset impairment charges totaling $23.2 million, including $19.2 million of construction-in-progress that primarily related to engineering work for a planned expansion to add lubricants production capabilities at our Woods Cross Refinery as we concluded to no longer pursue for various reasons including our recent acquisition of PCLI. The remaining $4.0 million in charges relate to property, plant and equipment that we expensed in the form of accelerated depreciation in the income statement.
There was no impairment of long-lived assets during the years ended December 31, 2019 and 2018.
Intangibles
The carrying amounts of our intangible assets presented in “Intangibles and other” in our consolidated balance sheet are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
Useful Life
|
|
2019
|
|
2018
|
|
|
|
|
(In thousands)
|
Customer relationships
|
|
10 - 20 years
|
|
$
|
245,479
|
|
|
$
|
91,941
|
|
Transportation agreements
|
|
30 years
|
|
59,933
|
|
|
59,933
|
|
Trademarks, patents and other
|
|
10 - 20 years
|
|
154,863
|
|
|
83,326
|
|
|
|
|
|
460,275
|
|
|
235,200
|
|
Accumulated amortization
|
|
|
|
(86,768
|
)
|
|
(52,834
|
)
|
Total intangibles, net
|
|
|
|
$
|
373,507
|
|
|
$
|
182,366
|
|
Amortization expense was $33.8 million, $16.6 million and $9.1 million for the years ended December 31, 2019, 2018 and 2017, respectively and expected to approximate $33.8 million for each of the next five years.
We expensed $11.2 million, $14.8 million and $13.1 million for the years ended December 31, 2019, 2018 and 2017, respectively, for environmental remediation obligations. The accrued environmental liability reflected in our consolidated balance sheets was $117.7 million and $110.2 million at December 31, 2019 and 2018, respectively, of which $95.6 million and $93.8 million, respectively, were classified as other long-term liabilities. These accruals include remediation and monitoring costs expected to be incurred over an extended period of time (up to 30 years for certain projects). The amount of our accrued liability included $4.9 million of environmental obligations assumed in connection with our February 1, 2019 Sonneborn acquisition. Estimated liabilities could increase in the future when the results of ongoing investigations become known, are considered probable and can be reasonably estimated.
HollyFrontier Credit Agreement
We have a $1.35 billion senior unsecured revolving credit facility maturing in February 2022 (the “HollyFrontier Credit Agreement”). The HollyFrontier Credit Agreement may be used for revolving credit loans and letters of credit from time to time and is available to fund general corporate purposes. At December 31, 2019, we were in compliance with all covenants, had no outstanding borrowings and had outstanding letters of credit totaling $4.9 million under the HollyFrontier Credit Agreement.
Indebtedness under the HollyFrontier Credit Agreement bears interest, at our option at either a) an alternate base rate (as defined in the credit agreement) plus an applicable margin of (ranging from 0.125% - 1.000%), b) LIBOR plus an applicable margin (ranging from 1.125% to 2.000%), or c) Canadian Dealer Offered Rate plus an applicable margin (ranging from 1.125% to 2.000%) for Canadian dollar denominated borrowings.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
HEP Credit Agreement
HEP has a $1.4 billion senior secured revolving credit facility maturing in July 2022 (the “HEP Credit Agreement”) and is available to fund capital expenditures, investments, acquisitions, distribution payments, working capital and for general partnership purposes. It is also available to fund letters of credit up to a $50 million sub-limit and has a $300 million accordion. During the year ended December 31, 2019, HEP received advances totaling $365.5 million and repaid $323.0 million under the HEP Credit Agreement. At December 31, 2019, HEP was in compliance with all of its covenants, had outstanding borrowings of $965.5 million and no outstanding letters of credit under the HEP Credit Agreement.
Indebtedness under the HEP Credit Agreement bears interest, at HEP's option, at either a reference rate announced by the administrative agent plus an applicable margin or at a rate equal to LIBOR plus an applicable margin. In each case, the applicable margin is based upon the ratio of HEP’s funded debt to earnings before interest, taxes, depreciation and amortization (as defined in the HEP Credit Agreement). The weighted average interest rates in effect on HEP’s Credit Agreement borrowings was 4.24% for both December 31, 2019 and 2018.
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.
HollyFrontier Senior Notes
HFC's 5.875% senior notes ($1 billion aggregate principal amount maturing April 2026) (the “HollyFrontier Senior Notes”) are unsecured and unsubordinated obligations of ours and rank equally with all our other existing and future unsecured and unsubordinated indebtedness.
HollyFrontier Financing Arrangements
In December 2018, certain of our wholly-owned subsidiaries entered into financing arrangements whereby such subsidiaries sold a portion of their precious metals catalyst to a financial institution and then leased back the precious metals catalyst in exchange for total cash received of $32.5 million. The volume of the precious metals catalyst and the lease rate are fixed over the one-year term of each lease, and the lease payments are recorded as interest expense. The leases mature on February 1, 2021. 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 $40.0 million at December 31, 2019 and included in “Accrued liabilities” in our consolidated balance sheets. See Note 6 for additional information on Level 2 inputs.
HEP Senior Notes
In July 2016 and September 2017, HEP issued $400 million and $100 million, respectively, in aggregate principal amount of 6.0% HEP senior notes maturing in August 2024 in a private placement. HEP used the net proceeds to repay indebtedness under the HEP Credit Agreement.
On February 4, 2020, HEP closed a private placement of $500 million in aggregate principal amount of 5.0% HEP senior unsecured notes maturing in February 2028. On February 5, 2020, HEP redeemed its existing $500 million 6.0% senior notes at a redemption cost of $522.5 million. HEP will record any early extinguishment losses associated with this redemption during the first quarter of 2020. HEP funded the $522.5 million redemption with proceeds from the issuance of its 5.0% senior notes and borrowing under the HEP Credit Agreement.
HEP's 5.0% 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. At any time when the HEP Senior Notes are rated investment grade by either Moody’s or Standard & Poor’s 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 under the HEP Senior Notes.
In January 2017, HEP redeemed its $300 million aggregate principal amount of 6.5% senior notes maturing March 2020 at a redemption cost of $309.8 million, at which time HEP recognized a $12.2 million early extinguishment loss consisting of a $9.8 million debt redemption premium and unamortized discount and financing costs of $2.4 million. HEP funded the redemption with borrowings under the HEP Credit Agreement.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
Indebtedness under the HEP Senior Notes is guaranteed by 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.
The carrying amounts of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
HollyFrontier 5.875% Senior Notes
|
|
|
|
|
Principal
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
Unamortized discount and debt issuance costs
|
|
(6,391
|
)
|
|
(7,360
|
)
|
|
|
993,609
|
|
|
992,640
|
|
|
|
|
|
|
HEP Credit Agreement
|
|
965,500
|
|
|
923,000
|
|
|
|
|
|
|
HEP 6% Senior Notes
|
|
|
|
|
Principal
|
|
500,000
|
|
|
500,000
|
|
Unamortized discount and debt issuance costs
|
|
(3,469
|
)
|
|
(4,100
|
)
|
|
|
496,531
|
|
|
495,900
|
|
|
|
|
|
|
Total HEP long-term debt
|
|
1,462,031
|
|
|
1,418,900
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
2,455,640
|
|
|
$
|
2,411,540
|
|
The fair values of the senior notes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
|
|
|
|
|
HollyFrontier senior notes
|
|
$
|
1,127,610
|
|
|
$
|
1,019,160
|
|
|
|
|
|
|
HEP senior notes
|
|
$
|
522,045
|
|
|
$
|
488,310
|
|
These fair values are based on a Level 2 input. See Note 6 for additional information on Level 2 inputs.
Principal maturities of long-term debt as of December 31, 2019 are as follows:
|
|
|
|
|
Years Ending December 31,
|
(In thousands)
|
2020
|
$
|
—
|
|
2021
|
—
|
|
2022
|
965,500
|
|
2023
|
—
|
|
2024
|
500,000
|
|
Thereafter
|
1,000,000
|
|
Total
|
$
|
2,465,500
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
|
|
NOTE 14:
|
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.
Foreign Currency Risk Management
We are exposed to market risk related to the volatility in foreign currency exchange rates. We periodically enter into derivative contracts in the form of foreign exchange forward and foreign exchange swap contracts to mitigate the exposure associated with fluctuations on intercompany notes with our foreign subsidiaries that are not denominated in the U.S. dollar.
Accounting Hedges
We have swap contracts serving as cash flow hedges against price risk on forecasted purchases of natural gas and to lock in basis spread differentials on forecasted purchases of crude oil. 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. These fair value adjustments are later reclassified to earnings as the hedging instruments mature.
The following table presents the pre-tax effect on other comprehensive income (“OCI”) and earnings due to fair value adjustments and maturities of hedging instruments under hedge accounting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized Gain (Loss) Recognized in OCI
|
|
Gain (Loss) Reclassified into Earnings
|
Derivatives Designated as Cash Flow Hedging Instruments
|
|
Years Ended December 31,
|
|
Income Statement Location
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
|
2019
|
|
2018
|
|
2017
|
(In thousands)
|
Commodity contracts
|
|
$
|
(5,349
|
)
|
|
$
|
11,221
|
|
|
$
|
14,538
|
|
|
Sales and other revenues
|
|
$
|
(1,799
|
)
|
|
$
|
(5,093
|
)
|
|
$
|
7,836
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
22,876
|
|
|
—
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
(1,364
|
)
|
|
(962
|
)
|
|
(19,244
|
)
|
Interest rate contracts (1)
|
|
—
|
|
|
—
|
|
|
(91
|
)
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
179
|
|
Total
|
|
$
|
(5,349
|
)
|
|
$
|
11,221
|
|
|
$
|
14,447
|
|
|
|
|
$
|
19,713
|
|
|
$
|
(6,055
|
)
|
|
$
|
(11,528
|
)
|
(1) HEP used interest rate swap contracts to manage its exposure to interest rate risk, which matured in July 2017.
Economic Hedges
We have commodity contracts including contracts to lock in basis spread differentials on forecasted purchases of crude oil, swap contracts to lock in the crack spread of WTI and gasoline, 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 13 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 income.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
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
|
|
|
|
Years Ended December 31,
|
|
Income Statement Location
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
(In thousands)
|
Commodity contracts
|
|
Cost of products sold
|
|
$
|
(8,475
|
)
|
|
$
|
16,655
|
|
|
$
|
(12,327
|
)
|
|
|
Operating expenses
|
|
—
|
|
|
—
|
|
|
(6,697
|
)
|
|
|
Interest expense
|
|
(6,427
|
)
|
|
(198
|
)
|
|
—
|
|
Foreign currency contracts
|
|
Gain on foreign currency transactions
|
|
(17,430
|
)
|
|
41,834
|
|
|
—
|
|
|
|
Gain on foreign currency swap contracts (1)
|
|
—
|
|
|
—
|
|
|
24,545
|
|
|
|
Total
|
|
$
|
(32,332
|
)
|
|
$
|
58,291
|
|
|
$
|
5,521
|
|
(1) Relates to Canadian currency swap contracts that settled on February 1, 2017 and effectively fixed the conversion rate on our PCLI purchase price.
As of December 31, 2019, we have the following notional contract volumes related to outstanding derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Contract Volumes by Year of Maturity
|
|
|
|
|
Total Outstanding Notional
|
|
2020
|
|
2021
|
|
Unit of Measure
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Natural gas price swaps - long
|
|
3,600,000
|
|
|
1,800,000
|
|
|
1,800,000
|
|
|
MMBTU
|
Crude oil price swaps (basis spread) - long
|
|
4,758,000
|
|
|
4,758,000
|
|
|
—
|
|
|
Barrels
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
NYMEX futures (WTI) - short
|
|
1,365,000
|
|
|
1,365,000
|
|
|
—
|
|
|
Barrels
|
Crude oil price swaps (basis spread) - long
|
|
1,464,000
|
|
|
1,464,000
|
|
|
—
|
|
|
Barrels
|
Forward gasoline and diesel contracts - long
|
|
1,251,200
|
|
|
1,251,200
|
|
|
—
|
|
|
Barrels
|
Foreign currency forward contracts
|
|
434,340,348
|
|
|
434,340,348
|
|
|
—
|
|
|
U. S. dollar
|
Forward commodity contracts (platinum)
|
|
41,147
|
|
|
—
|
|
|
41,147
|
|
|
Troy ounces
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
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)
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
Commodity price swap contracts
|
|
$
|
7,526
|
|
|
$
|
(1,784
|
)
|
|
$
|
5,742
|
|
|
$
|
1,230
|
|
|
$
|
—
|
|
|
$
|
1,230
|
|
|
|
$
|
7,526
|
|
|
$
|
(1,784
|
)
|
|
$
|
5,742
|
|
|
$
|
1,230
|
|
|
$
|
—
|
|
|
$
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as cash flow hedging instruments:
|
|
|
NYMEX futures contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,578
|
|
|
$
|
—
|
|
|
$
|
2,578
|
|
Commodity price swap contracts
|
|
7,713
|
|
|
—
|
|
|
7,713
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commodity forward contracts
|
|
4,133
|
|
|
—
|
|
|
4,133
|
|
|
3,685
|
|
|
—
|
|
|
3,685
|
|
Foreign currency forward contracts
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,722
|
|
|
—
|
|
|
6,722
|
|
|
|
$
|
11,846
|
|
|
$
|
—
|
|
|
$
|
11,846
|
|
|
$
|
12,985
|
|
|
$
|
—
|
|
|
$
|
12,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net balance
|
|
|
|
|
|
$
|
17,588
|
|
|
|
|
|
|
$
|
14,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet classification:
|
|
Prepayment and other
|
|
$
|
17,588
|
|
|
Accrued liabilities
|
|
$
|
12,985
|
|
|
|
|
|
—
|
|
|
Other long-term liabilities
|
|
1,230
|
|
|
|
|
|
$
|
17,588
|
|
|
|
|
|
|
$
|
14,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2018
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
Commodity price swap contracts
|
|
$
|
11,790
|
|
|
$
|
(973
|
)
|
|
$
|
10,817
|
|
|
$
|
1,755
|
|
|
$
|
(799
|
)
|
|
$
|
956
|
|
|
|
$
|
11,790
|
|
|
$
|
(973
|
)
|
|
$
|
10,817
|
|
|
$
|
1,755
|
|
|
$
|
(799
|
)
|
|
$
|
956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as cash flow hedging instruments:
|
|
|
NYMEX futures contracts
|
|
$
|
2,473
|
|
|
$
|
—
|
|
|
$
|
2,473
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity forward contracts
|
|
1,034
|
|
|
—
|
|
|
1,034
|
|
|
1,137
|
|
|
—
|
|
|
1,137
|
|
Foreign currency forward contracts
|
|
25,956
|
|
|
—
|
|
|
25,956
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
29,463
|
|
|
$
|
—
|
|
|
$
|
29,463
|
|
|
$
|
1,137
|
|
|
$
|
—
|
|
|
$
|
1,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net balance
|
|
|
|
|
|
$
|
40,280
|
|
|
|
|
|
|
$
|
2,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayments and other
|
|
$
|
37,982
|
|
|
Accrued liabilities
|
|
$
|
1,137
|
|
|
|
Intangibles and other
|
|
2,298
|
|
|
Other long-term liabilities
|
|
956
|
|
Balance sheet classification:
|
|
|
|
$
|
40,280
|
|
|
|
|
|
|
$
|
2,093
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
At December 31, 2019, we had a pre-tax net unrealized gain of $4.5 million classified in accumulated other comprehensive income that relates to all accounting hedges having contractual maturities through 2021. Assuming commodity prices remain unchanged, an unrealized gain of $5.7 million will be effectively transferred from accumulated other comprehensive income into the statement of income as the hedging instruments contractually mature over the next twelve-month period.
The provision for income taxes is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
187,134
|
|
|
$
|
239,566
|
|
|
$
|
102,786
|
|
State
|
|
29,547
|
|
|
40,788
|
|
|
2,760
|
|
Foreign
|
|
3,805
|
|
|
(10,080
|
)
|
|
19,597
|
|
Deferred
|
|
|
|
|
|
|
Federal
|
|
77,916
|
|
|
46,434
|
|
|
(156,767
|
)
|
State
|
|
26,073
|
|
|
27,845
|
|
|
28,527
|
|
Foreign
|
|
(25,323
|
)
|
|
2,690
|
|
|
(9,282
|
)
|
|
|
$
|
299,152
|
|
|
$
|
347,243
|
|
|
$
|
(12,379
|
)
|
The statutory federal income tax rate applied to pre-tax book income reconciles to income tax expense (benefit) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
Tax computed at statutory rate
|
|
$
|
246,013
|
|
|
$
|
320,138
|
|
|
$
|
304,102
|
|
Effect of the Tax Cuts and Jobs Act
|
|
—
|
|
|
(7,800
|
)
|
|
(307,101
|
)
|
State income taxes, net of federal tax benefit
|
|
47,259
|
|
|
56,936
|
|
|
21,343
|
|
Domestic production activities deduction
|
|
—
|
|
|
—
|
|
|
(9,937
|
)
|
Noncontrolling interest in net income
|
|
(25,494
|
)
|
|
(20,215
|
)
|
|
(29,357
|
)
|
Effect of nondeductible goodwill impairment charge
|
|
32,069
|
|
|
—
|
|
|
—
|
|
Other
|
|
(695
|
)
|
|
(1,816
|
)
|
|
8,571
|
|
|
|
$
|
299,152
|
|
|
$
|
347,243
|
|
|
$
|
(12,379
|
)
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Our deferred income tax assets and liabilities as of December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Assets
|
|
Liabilities
|
|
Total
|
|
|
(In thousands)
|
Deferred income taxes
|
|
|
|
|
|
|
Properties, plants and equipment (due primarily to tax in excess of book depreciation)
|
|
$
|
—
|
|
|
$
|
(809,966
|
)
|
|
$
|
(809,966
|
)
|
Lease obligation
|
|
120,435
|
|
|
—
|
|
|
120,435
|
|
Accrued employee benefits
|
|
13,635
|
|
|
—
|
|
|
13,635
|
|
Accrued post-retirement benefits
|
|
11,027
|
|
|
—
|
|
|
11,027
|
|
Accrued environmental costs
|
|
28,708
|
|
|
—
|
|
|
28,708
|
|
Hedging instruments
|
|
—
|
|
|
(2,439
|
)
|
|
(2,439
|
)
|
Inventory differences
|
|
—
|
|
|
(43,500
|
)
|
|
(43,500
|
)
|
Deferred turnaround costs
|
|
—
|
|
|
(135,920
|
)
|
|
(135,920
|
)
|
Net operating loss and tax credit carryforwards
|
|
22,912
|
|
|
—
|
|
|
22,912
|
|
Investment in HEP
|
|
—
|
|
|
(95,037
|
)
|
|
(95,037
|
)
|
Valuation allowance
|
|
—
|
|
|
(4,600
|
)
|
|
(4,600
|
)
|
Other
|
|
5,475
|
|
|
—
|
|
|
5,475
|
|
Total
|
|
$
|
202,192
|
|
|
$
|
(1,091,462
|
)
|
|
$
|
(889,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Assets
|
|
Liabilities
|
|
Total
|
|
|
(In thousands)
|
Deferred income taxes
|
|
|
|
|
|
|
Properties, plants and equipment (due primarily to tax in excess of book depreciation)
|
|
$
|
—
|
|
|
$
|
(577,133
|
)
|
|
$
|
(577,133
|
)
|
Accrued employee benefits
|
|
15,395
|
|
|
—
|
|
|
15,395
|
|
Accrued post-retirement benefits
|
|
8,482
|
|
|
—
|
|
|
8,482
|
|
Accrued environmental costs
|
|
29,937
|
|
|
—
|
|
|
29,937
|
|
Hedging instruments
|
|
—
|
|
|
(4,099
|
)
|
|
(4,099
|
)
|
Inventory differences
|
|
—
|
|
|
(22,518
|
)
|
|
(22,518
|
)
|
Deferred turnaround costs
|
|
—
|
|
|
(87,360
|
)
|
|
(87,360
|
)
|
Net operating loss and tax credit carryforwards
|
|
13,702
|
|
|
—
|
|
|
13,702
|
|
Investment in HEP
|
|
—
|
|
|
(94,587
|
)
|
|
(94,587
|
)
|
Valuation allowance
|
|
—
|
|
|
(3,100
|
)
|
|
(3,100
|
)
|
Other
|
|
—
|
|
|
(1,295
|
)
|
|
(1,295
|
)
|
Total
|
|
$
|
67,516
|
|
|
$
|
(790,092
|
)
|
|
$
|
(722,576
|
)
|
We have Kansas income tax credits of $6.8 million that can be carried forward for 16 tax years. We have an $18.4 million net operating loss in Luxembourg that we do not anticipate utilizing. We have reflected a valuation allowance of $4.6 million in 2019 and $3.1 million in 2018 related to net operating carry forwards that we do not anticipate utilizing, primarily in Luxembourg. We also have a $30.9 million net operating loss in Canada that can be carried forward for 20 years. We expect to fully utilize this loss.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred and created new taxes on certain foreign sourced earnings. At December 31, 2017, we had not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we made a reasonable estimate of the effects on our existing deferred tax balances, the one-time transition tax and related matters. For the items for which a reasonable estimate had been made, we recognized a provisional tax benefit amount of $307.1 million, which was included as a component of the income tax provision in 2017.
For the year ended December 31, 2018, we completed the analysis of the accounting for the tax effects for which provisional adjustments were made during the fourth quarter of 2017, resulting in our recording during 2018 of an additional tax benefit of $7.8 million. These adjustments to the previously recorded provisional amounts included the effects on existing deferred tax balances, the one-time transition tax and deferred U.S. taxes on foreign subsidiaries earnings and profits.
Deferred Tax Assets and Liabilities: For the year ended December 31, 2017, we remeasured certain deferred tax assets and liabilities based upon the rates at which they are expected to reverse in the future, which is generally 25%.
Foreign Tax Effects: The one-time transition tax was based on our foreign subsidiaries’ earnings and profits (“E&P”) arising primarily from our acquisition of PCLI in 2017. This E&P was previously deferred from U.S. income taxes at 35% plus the effect of U.S. state income tax, or together generally 38%. We previously provided deferred U.S. taxes for the repatriation of these deferred amounts. At December 31, 2017, we recorded a provisional amount for our one-time transition tax liability of $6.5 million for our foreign subsidiaries at 15.5% plus the effect of state income tax, or together generally 20%, as we had not yet completed our calculation of the total foreign E&P for these foreign subsidiaries. In the course of preparing our U.S. federal income tax return during 2018, this amount changed slightly upon finalizing the calculation of foreign E&P previously deferred from U.S. federal taxation. Additional income taxes were provided for the remaining outside basis difference inherent in these entities at 21% plus the effect of U.S. state income tax, or together generally 25% as these amounts were not considered to be indefinitely reinvested in foreign operations for which we provided deferred taxes of $1.4 million.
At December 31, 2018, our accounting for these provisional amounts related to foreign tax effects was completed. Our one-time transition tax calculation was finalized during 2018 and the resulting liability determined to be $6.6 million.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
(In thousands)
|
|
|
Balance at January 1
|
|
$
|
53,752
|
|
|
$
|
53,752
|
|
|
$
|
22,137
|
|
Additions based on tax positions related to the current year
|
|
—
|
|
|
—
|
|
|
31,615
|
|
Additions for tax positions of prior years
|
|
2,893
|
|
|
—
|
|
|
—
|
|
Reductions for tax positions of prior years
|
|
(24
|
)
|
|
—
|
|
|
—
|
|
Balance at December 31
|
|
$
|
56,621
|
|
|
$
|
53,752
|
|
|
$
|
53,752
|
|
At December 31, 2019, 2018 and 2017, there were $56.6 million, $53.8 million, and $53.8 million, respectively, of unrecognized tax benefits that, if recognized, would affect our effective tax rate. Unrecognized tax benefits are adjusted in the period in which new information about a tax position becomes available or the final outcome differs from the amount recorded.
The 2017 additions to unrecognized tax benefits relates to claims filed with the IRS on the federal income tax treatment of refundable biodiesel/ethanol blending tax credits for certain prior years. The issues related to the claims are complex and uncertain, and we cannot conclude that it is more likely than not that we will sustain the claims. Therefore, no tax benefit has been recognized for the filed claims. During the next 12 months, it is reasonably possible that an ultimate resolution regarding these claims could reduce unrecognized tax benefits (due to a court ruling in favor of the IRS).
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
We recognize interest and penalties relating to liabilities for unrecognized tax benefits as an element of tax expense. We have not recorded any penalties related to our uncertain tax positions as we believe that it is more likely than not that there will not be any assessment of penalties.
We are subject to U.S. and Canadian federal income tax, Oklahoma, Kansas, New Mexico, Iowa, Arizona, Utah, Colorado and Nebraska income tax and to income tax of multiple other state jurisdictions. We have substantially concluded all state and local income tax matters for tax years through 2014. Other than the federal claim noted above, we have materially concluded all U.S. federal income tax matters for tax years through December 31, 2016.
|
|
NOTE 16:
|
Stockholders' Equity
|
Shares of our common stock outstanding and activity for the years ended December 31, 2019, 2018 and 2017 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
Common shares outstanding at January 1
|
|
172,121,491
|
|
|
177,407,622
|
|
|
177,345,266
|
|
Issuance of restricted stock, excluding restricted stock with performance feature
|
|
—
|
|
|
—
|
|
|
55,626
|
|
Vesting of performance units
|
|
592,602
|
|
|
115,596
|
|
|
138,374
|
|
Vesting of restricted stock with performance feature
|
|
412,465
|
|
|
543,396
|
|
|
350,063
|
|
Forfeitures of restricted stock
|
|
(13,807
|
)
|
|
(58,497
|
)
|
|
(139,634
|
)
|
Purchase of treasury stock (1)
|
|
(11,266,226
|
)
|
|
(5,886,626
|
)
|
|
(342,073
|
)
|
Common shares outstanding at December 31
|
|
161,846,525
|
|
|
172,121,491
|
|
|
177,407,622
|
|
|
|
(1)
|
Includes 415,466, 369,255 and 342,073 shares, respectively, withheld 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, as well as other stock repurchases under separate authority from our Board of Directors.
|
In November 2019, our Board of Directors approved a $1.0 billion share repurchase program, which replaced all existing share repurchase programs, including $281.0 million remaining under the previously existing $1.0 billion share repurchase program. This program authorizes us to repurchase common stock in the open market or through privately negotiated transactions. The timing and amount of stock repurchases will depend on market conditions and corporate, regulatory and other relevant considerations. This program may be discontinued at any time by the Board of Directors. As of December 31, 2019, we had remaining authorization to repurchase up to $1.0 billion under this stock repurchase program. In addition, we are authorized by our Board of Directors to repurchase shares in an amount sufficient to offset shares issued under our compensation programs.
During the years ended December 31, 2019, 2018 and 2017, we withheld shares of our common stock from certain employees in the amounts of $21.9 million, $19.6 million and $15.9 million, respectively. These withholdings were made under the terms of restricted stock and performance share unit agreements upon vesting, at which time, we concurrently made cash payments to fund payroll and income taxes on behalf of officers and employees who elected to have shares withheld from vested amounts to pay such taxes.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
|
|
NOTE 17:
|
Other Comprehensive Income (Loss)
|
The components and allocated tax effects of other comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before-Tax
|
|
Tax Expense
(Benefit)
|
|
After-Tax
|
|
|
(In thousands)
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
Net change in foreign currency translation adjustment
|
|
$
|
13,337
|
|
|
$
|
2,848
|
|
|
$
|
10,489
|
|
Net unrealized loss on hedging instruments
|
|
(5,349
|
)
|
|
(1,365
|
)
|
|
(3,984
|
)
|
Net change in pension and other post-retirement benefit obligations
|
|
(7,207
|
)
|
|
(1,853
|
)
|
|
(5,354
|
)
|
Other comprehensive income attributable to HollyFrontier stockholders
|
|
$
|
781
|
|
|
$
|
(370
|
)
|
|
$
|
1,151
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
Net change in foreign currency translation adjustment
|
|
$
|
(38,227
|
)
|
|
$
|
(8,064
|
)
|
|
$
|
(30,163
|
)
|
Net unrealized gain on hedging instruments
|
|
11,221
|
|
|
2,857
|
|
|
8,364
|
|
Net change in pension and other post-retirement benefit obligations
|
|
(1,507
|
)
|
|
(378
|
)
|
|
(1,129
|
)
|
Other comprehensive loss attributable to HollyFrontier stockholders
|
|
$
|
(28,513
|
)
|
|
$
|
(5,585
|
)
|
|
$
|
(22,928
|
)
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
Net change in foreign currency translation adjustment
|
|
$
|
22,151
|
|
|
$
|
7,774
|
|
|
$
|
14,377
|
|
Net unrealized loss on marketable securities
|
|
$
|
(4
|
)
|
|
$
|
(1
|
)
|
|
$
|
(3
|
)
|
Net unrealized gain on hedging instruments
|
|
14,447
|
|
|
5,613
|
|
|
8,834
|
|
Net change in pension and other post-retirement benefit obligations
|
|
(5,807
|
)
|
|
(2,037
|
)
|
|
(3,770
|
)
|
Other comprehensive income
|
|
30,787
|
|
|
11,349
|
|
|
19,438
|
|
Less other comprehensive loss attributable to noncontrolling interest
|
|
(57
|
)
|
|
—
|
|
|
(57
|
)
|
Other comprehensive income attributable to HollyFrontier stockholders
|
|
$
|
30,844
|
|
|
$
|
11,349
|
|
|
$
|
19,495
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
The following table presents the income statement line item effects for reclassifications out of accumulated other comprehensive income (“AOCI”):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOCI Component
|
|
Gain (Loss) Reclassified From AOCI
|
|
Income Statement Line Item
|
|
|
Years Ended December 31,
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
(In thousands)
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
|
Commodity price swaps
|
|
$
|
(1,799
|
)
|
|
$
|
(5,093
|
)
|
|
$
|
7,836
|
|
|
Sales and other revenues
|
|
|
22,876
|
|
|
—
|
|
|
(299
|
)
|
|
Cost of products sold
|
|
|
(1,364
|
)
|
|
(962
|
)
|
|
(19,244
|
)
|
|
Operating expenses
|
Interest rate swaps
|
|
—
|
|
|
—
|
|
|
179
|
|
|
Interest expense
|
|
|
19,713
|
|
|
(6,055
|
)
|
|
(11,528
|
)
|
|
|
|
|
5,027
|
|
|
(1,544
|
)
|
|
(4,490
|
)
|
|
Income tax benefit
|
|
|
14,686
|
|
|
(4,511
|
)
|
|
(7,038
|
)
|
|
Net of tax
|
|
|
—
|
|
|
—
|
|
|
(74
|
)
|
|
Noncontrolling interest
|
|
|
14,686
|
|
|
(4,511
|
)
|
|
(7,112
|
)
|
|
Net of tax and noncontrolling interest
|
|
|
|
|
|
|
|
|
|
Other post-retirement benefit obligations:
|
|
|
|
|
|
|
|
|
Post-retirement healthcare obligations
|
|
3,587
|
|
|
3,481
|
|
|
3,481
|
|
|
Other, net
|
|
|
915
|
|
|
888
|
|
|
1,347
|
|
|
Income tax expense
|
|
|
2,672
|
|
|
2,593
|
|
|
2,134
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
Retirement restoration plan
|
|
(6
|
)
|
|
(27
|
)
|
|
(17
|
)
|
|
Other, net
|
|
|
(2
|
)
|
|
(7
|
)
|
|
(7
|
)
|
|
Income tax benefit
|
|
|
(4
|
)
|
|
(20
|
)
|
|
(10
|
)
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
17,354
|
|
|
$
|
(1,938
|
)
|
|
$
|
(4,988
|
)
|
|
|
Accumulated other comprehensive income in the equity section of our consolidated balance sheets includes:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
Foreign currency translation adjustment
|
|
$
|
(2,187
|
)
|
|
$
|
(12,676
|
)
|
Unrealized loss on pension obligation
|
|
(1,733
|
)
|
|
(1,404
|
)
|
Unrealized gain on post-retirement benefit obligations
|
|
15,333
|
|
|
20,358
|
|
Unrealized gain on hedging instruments
|
|
3,361
|
|
|
7,345
|
|
Accumulated other comprehensive income
|
|
$
|
14,774
|
|
|
$
|
13,623
|
|
|
|
NOTE 18:
|
Pension and Post-retirement Plans
|
In connection with our PCLI acquisition, we established employee benefit plans including union and non-union pension plans and a post-retirement healthcare plan for PCLI employees that were previously covered under legacy Suncor plans and are closed to new entrants. In September 2018, Suncor made a cash transfer to these newly established plans in accordance with our agreement.
Sonneborn employees in the Netherlands have a defined benefit pension plan which was frozen and all plan participants became inactive in 2016. The plan assets are in the form of a third-party insurance contract that is valued based on the assets held by the insurer and insures a value which approximates the accrued benefits related to the plan’s accumulated benefit obligation. At that time, a new plan was established to provide future indexation benefits to participants who had accrued benefits under the expiring arrangements.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
The following table sets forth the changes in the benefit obligation and plan assets of our PCLI pension plans for the years ended December 31, 2019 and 2018, and for our Sonneborn Netherlands plans for the period February 1, 2019 to December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
Change in plans' benefit obligations
|
|
|
|
|
Pension plans benefit obligation - beginning of period
|
|
$
|
64,435
|
|
|
$
|
63,582
|
|
Acquisition of Sonneborn
|
|
31,686
|
|
|
—
|
|
Service cost
|
|
4,135
|
|
|
4,420
|
|
Interest cost
|
|
3,026
|
|
|
2,249
|
|
Actuarial loss
|
|
5,161
|
|
|
1,058
|
|
Benefits paid
|
|
(1,132
|
)
|
|
(1,429
|
)
|
Transfer from other plans
|
|
330
|
|
|
—
|
|
Foreign currency exchange rate changes
|
|
2,769
|
|
|
(5,445
|
)
|
Pension plans benefit obligation - end of year
|
|
$
|
110,410
|
|
|
$
|
64,435
|
|
|
|
|
|
|
Change in pension plans assets
|
|
|
|
|
Fair value of plans assets - beginning of period
|
|
$
|
62,462
|
|
|
$
|
59,261
|
|
Acquisition of Sonneborn
|
|
29,376
|
|
|
—
|
|
Actual return on plans assets
|
|
7,947
|
|
|
3,599
|
|
Employer contributions
|
|
3,681
|
|
|
6,239
|
|
Benefits paid
|
|
(1,132
|
)
|
|
(1,429
|
)
|
Transfer payments
|
|
330
|
|
|
—
|
|
Foreign currency exchange rate changes
|
|
2,694
|
|
|
(5,208
|
)
|
Fair value of plans assets - end of year
|
|
$
|
105,358
|
|
|
$
|
62,462
|
|
|
|
|
|
|
Funded status
|
|
|
|
|
Under-funded balance
|
|
$
|
(5,052
|
)
|
|
$
|
(1,973
|
)
|
|
|
|
|
|
Amounts recognized in consolidated balance sheets
|
|
|
|
|
Other long-term liabilities
|
|
$
|
(5,052
|
)
|
|
$
|
(1,973
|
)
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income
|
|
|
|
|
Cumulative actuarial loss
|
|
$
|
3,155
|
|
|
$
|
1,977
|
|
The accumulated benefit obligation was $100.5 million and $52.5 million at December 31, 2019 and 2018, respectively, which are also the measurement dates used for our pension plans.
The weighted average assumptions used to determine end of period benefit obligations for the PCLI plan for the years ended December 31, 2019 and 2018 were discount rates of 3.10% and 3.70%, respectively, and rates of future compensation increases of 3.00% for each year. For the year ended December 31, 2019, the weighted average assumption used to determine end of period benefit obligations for Sonneborn was a discount rate of 1.50%.
Net periodic pension expense consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
Service cost - benefit earned during the period
|
|
$
|
4,135
|
|
|
$
|
4,420
|
|
Interest cost on projected benefit obligations
|
|
3,026
|
|
|
2,249
|
|
Expected return on plans assets
|
|
(3,840
|
)
|
|
(3,464
|
)
|
Net periodic pension expense
|
|
$
|
3,321
|
|
|
$
|
3,205
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
The components, other than service cost, of our net periodic pension expense are recorded in Other, net in our consolidated statements of income.
At December 31, 2019 and 2018, PCLI's pension plans assets were allocated as follows:
|
|
|
|
|
|
|
|
|
|
Percentage of Plan Assets at Year End
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Asset Category
|
|
|
|
|
|
|
|
Canadian equities
|
|
47
|
%
|
|
—
|
%
|
Fixed income
|
|
29
|
%
|
|
—
|
%
|
Real estate and infrastructure
|
|
14
|
%
|
|
—
|
%
|
Other
|
|
9
|
%
|
|
—
|
%
|
Cash
|
|
1
|
%
|
|
100
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
The equity investments are valued using quoted market prices, a Level 1 input. Fixed income, real estate and infrastructure and other investments are valued using quoted market prices for similar type investments, a Level 2 input. See Note 6 for additional information on Level 1 and 2 inputs.
The expected long-term rate of return on plan assets is 5.75% for the PCLI pension plan, and is based on a target investment mix of 46% Canadian equities, 30% fixed income, 14% real estate and infrastructure and 10% other.
It is estimated that there will be no actuarial loss that will be amortized from accumulated other comprehensive income into net periodic benefit expense in 2020.
We expect to contribute $3.6 million to the PCLI and Sonneborn pensions plans in 2020. Benefit payments, which reflect expected future service, are expected to be paid as follows: $1.8 million in 2020, $2.1 million in 2021, $2.5 million in 2022, $2.9 million in 2023, $3.2 million in 2024 and $21.7 million in 2025 to 2029.
Post-retirement Healthcare Plans
We have post-retirement healthcare and other benefits plans that are available to certain of our employees who satisfy certain age and service requirements. These plans are unfunded and provide differing levels of healthcare benefits dependent upon hire date and work location. Not all of our employees are covered by this plan at December 31, 2019.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
The following table sets forth the changes in the benefit obligation and plan assets of our post-retirement healthcare plans for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
Change in plans' benefit obligation
|
|
|
|
|
Post-retirement plans' benefit obligation - beginning of year
|
|
$
|
26,880
|
|
|
$
|
29,499
|
|
Sonneborn acquisition
|
|
877
|
|
|
—
|
|
Service cost
|
|
1,582
|
|
|
1,648
|
|
Interest cost
|
|
1,029
|
|
|
938
|
|
Participant contributions
|
|
—
|
|
|
178
|
|
Benefits paid
|
|
(2,028
|
)
|
|
(1,931
|
)
|
Actuarial loss (gain)
|
|
2,412
|
|
|
(2,643
|
)
|
Foreign currency exchange rate changes
|
|
521
|
|
|
(809
|
)
|
Post-retirement plans' benefit obligation - end of year
|
|
$
|
31,273
|
|
|
$
|
26,880
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
Fair value of plan assets - beginning of year
|
|
$
|
—
|
|
|
$
|
—
|
|
Employer contributions
|
|
2,003
|
|
|
1,676
|
|
Participant contributions
|
|
25
|
|
|
255
|
|
Benefits paid
|
|
(2,028
|
)
|
|
(1,931
|
)
|
Fair value of plan assets - end of year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Funded status
|
|
|
|
|
Under-funded balance
|
|
$
|
(31,273
|
)
|
|
$
|
(26,880
|
)
|
|
|
|
|
|
Amounts recognized in consolidated balance sheets
|
|
|
|
|
Accrued liabilities
|
|
$
|
(1,817
|
)
|
|
$
|
(1,909
|
)
|
Other long-term liabilities
|
|
(29,456
|
)
|
|
(24,971
|
)
|
|
|
$
|
(31,273
|
)
|
|
$
|
(26,880
|
)
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income
|
|
|
|
|
Cumulative actuarial (loss) gain
|
|
$
|
(197
|
)
|
|
$
|
2,379
|
|
Prior service credit
|
|
21,992
|
|
|
25,473
|
|
Total
|
|
$
|
21,795
|
|
|
$
|
27,852
|
|
Benefit payments, which reflect expected future service, are expected to be paid as follows: $1.8 million in 2020; $1.8 million in 2021; $1.9 million in 2022; $1.9 million in 2023; $2.0 million in 2024; and $9.8 million in 2025 through 2029.
The weighted average assumptions used to determine end of period benefit obligations:
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Discount rate
|
|
2.94% - 3.20%
|
|
3.70% - 3.95%
|
Current health care trend rate
|
|
6.00% - 6.50%
|
|
6.50%
|
Ultimate health care trend rate
|
|
4.50% - 5.00%
|
|
5.00%
|
Year rate reaches ultimate trend rate
|
|
2022 - 2023
|
|
2022 - 2028
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
Net periodic post-retirement credit consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
Service cost – benefit earned during the year
|
|
$
|
1,582
|
|
|
$
|
1,648
|
|
|
$
|
1,511
|
|
Interest cost on projected benefit obligations
|
|
1,029
|
|
|
938
|
|
|
987
|
|
Amortization of prior service credit
|
|
(3,481
|
)
|
|
(3,481
|
)
|
|
(3,481
|
)
|
Amortization of gain
|
|
(106
|
)
|
|
—
|
|
|
—
|
|
Net periodic post-retirement credit
|
|
$
|
(976
|
)
|
|
$
|
(895
|
)
|
|
$
|
(983
|
)
|
The components, other than service cost, of our net periodic post-retirement credit are recorded in Other, net in our consolidated statements of income. Prior service credits are amortized over the average remaining effective period to obtain full benefit eligibility for participants.
The effect of a 1% change in health care cost trend rates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
1% Point Increase
|
|
1% Point Decrease
|
|
|
(In thousands)
|
Service and interest costs
|
|
$
|
502
|
|
|
$
|
(396
|
)
|
Year-end accumulated post-retirement benefit obligation
|
|
$
|
3,489
|
|
|
$
|
(2,990
|
)
|
Retirement Restoration Plan
We have an unfunded retirement restoration plan that provides for additional payments from us so that total retirement plan benefits for certain executives will be maintained at the levels provided in the retirement plan before the application of Internal Revenue Code limitations. We expensed $0.1 million for each of the years ended December 31, 2019, 2018 and 2017 in connection with this plan. The accrued liability reflected in the consolidated balance sheets was $2.4 million and $2.3 million at December 31, 2019 and 2018, respectively. As of December 31, 2019, the projected benefit obligation under this plan was $2.4 million. Annual benefit payments of $0.2 million are expected to be paid through 2029, which reflect expected future service.
Defined Contribution Plans
We have defined contribution plans that cover substantially all qualified employees in the U.S, Canada and the Netherlands. Our contributions are based on an employee's eligible compensation and years of service. We also partially match our employees’ contributions. We expensed $30.3 million, $19.1 million and $17.6 million for the years ended December 31, 2019, 2018 and 2017, respectively, in connection with this plan
|
|
NOTE 19:
|
Contingencies and Contractual Commitments
|
We are a party to various litigation and legal proceedings which we believe, based on advice of counsel, will not either individually or in the aggregate have a materially adverse effect on our financial condition, results of operations or cash flows.
We filed a business interruption claim with our insurance carriers related to a fire at our Woods Cross Refinery that occurred in the first quarter 2018. As of December 31, 2019, we have collected interim payments totaling $56.0 million, but have not reached a final agreement regarding the amounts owed to us pursuant to our business interruption coverage. We have accounted for this claim as a gain contingency and accordingly, we have deferred revenue recognition for the interim payments received until such time that uncertainties regarding the amounts owed to us have been resolved.
On January 24, 2020, the small refinery exemptions granted to two of our refineries for 2016 were vacated by the U.S. Court of Appeals for the 10th Circuit, and the case was remanded to the EPA for further proceedings. It is not clear at this time what steps the EPA will take, and we are unable to estimate costs we may incur, if any, at this time. See Note 9 for additional information.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
Contractual Commitments
We have various long-term agreements (entered in the normal course of business) to purchase crude oil, natural gas, feedstocks and other resources to ensure we have adequate supplies to operate our refineries. The substantial majority of our purchase obligations are based on market prices or rates. These contracts expire in 2020 through 2025.
We also have long-term agreements with third parties for the transportation and storage of crude oil, natural gas and feedstocks to our refineries and for terminal and storage services that expire in 2020 through 2039. At December 31, 2019, the minimum future transportation and storage fees under transportation agreements having terms in excess of one year are as follows:
|
|
|
|
|
|
|
|
(In thousands)
|
2020
|
|
$
|
137,457
|
|
2021
|
|
116,058
|
|
2022
|
|
111,058
|
|
2023
|
|
112,399
|
|
2024
|
|
111,939
|
|
Thereafter
|
|
685,941
|
|
Total
|
|
$
|
1,274,852
|
|
Transportation and storage costs incurred under these agreements totaled $144.8 million, $143.3 million and $140.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. These amounts do not include contractual commitments under our long-term transportation agreements with HEP, as all transactions with HEP are eliminated in these consolidated financial statements.
|
|
NOTE 20:
|
Segment Information
|
Our operations are organized into three reportable segments: Refining, Lubricants and Specialty Products and HEP. Our operations that are not included in the Refining, Lubricants and Specialty Products and HEP segments are included in Corporate and Other. Intersegment transactions are eliminated in our consolidated financial statements and are included in Eliminations. Corporate and Other and Eliminations are aggregated and presented under the Corporate, Other and Eliminations column.
The Refining segment represents the operations of the El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries and HFC Asphalt (aggregated as a reportable segment). Refining activities involve the purchase and refining of crude oil and wholesale and branded 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 Mountain regions of the United States. HFC Asphalt operates various asphalt terminals in Arizona, New Mexico and Oklahoma.
The Lubricants and Specialty Products segment involves PCLI’s production operations, located in Mississauga, Ontario, that includes lubricant products such as base oils, white oils, specialty products and finished lubricants, and the operations of our Petro-Canada Lubricants business that includes the marketing of products to both retail and wholesale outlets through a global sales network with locations in Canada, the United States, Europe and China. Additionally, the Lubricants and Specialty Products segment includes specialty lubricant products produced at our Tulsa Refineries that are marketed throughout North America and are distributed in Central and South America. Also, effective with our acquisition that closed August 1, 2018, the Lubricants and Specialty Products segment includes Red Giant Oil, one of the largest suppliers of locomotive engine oil in North America, and effective with our acquisition that closed February 1, 2019, includes Sonneborn, a producer of specialty hydrocarbon chemicals such as white oils, petrolatums and waxes with manufacturing facilities in the United States and Europe.
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
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 Mountain regions of the United States. As of December 31, 2019, the HEP segment also includes a 75% ownership interest in UNEV (a consolidated subsidiary of HEP) and 50% ownership interest in each of the Osage Pipeline, the Cheyenne Pipeline and Cushing Connect. 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 (see Note 1).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
Lubricants and Specialty Products
|
|
HEP
|
|
Corporate, Other and Eliminations
|
|
Consolidated
Total
|
|
|
(In thousands)
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Sales and other revenues:
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
15,284,110
|
|
|
$
|
2,081,221
|
|
|
$
|
121,027
|
|
|
$
|
220
|
|
|
$
|
17,486,578
|
|
Intersegment revenues
|
|
312,678
|
|
|
11,307
|
|
|
411,750
|
|
|
(735,735
|
)
|
|
—
|
|
|
|
$
|
15,596,788
|
|
|
$
|
2,092,528
|
|
|
$
|
532,777
|
|
|
$
|
(735,515
|
)
|
|
$
|
17,486,578
|
|
Cost of products sold (exclusive of lower of cost or market inventory valuation adjustment)
|
|
$
|
12,980,506
|
|
|
$
|
1,580,036
|
|
|
$
|
—
|
|
|
$
|
(642,158
|
)
|
|
$
|
13,918,384
|
|
Lower of cost or market inventory valuation adjustment
|
|
$
|
(119,775
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(119,775
|
)
|
Operating expenses
|
|
$
|
1,095,488
|
|
|
$
|
231,523
|
|
|
$
|
161,996
|
|
|
$
|
(94,955
|
)
|
|
$
|
1,394,052
|
|
Selling, general and administrative expenses
|
|
$
|
120,518
|
|
|
$
|
168,595
|
|
|
$
|
10,251
|
|
|
$
|
54,872
|
|
|
$
|
354,236
|
|
Depreciation and amortization
|
|
$
|
309,932
|
|
|
$
|
88,781
|
|
|
$
|
96,706
|
|
|
$
|
14,506
|
|
|
$
|
509,925
|
|
Goodwill impairment
|
|
$
|
—
|
|
|
$
|
152,712
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
152,712
|
|
Income (loss) from operations
|
|
$
|
1,210,119
|
|
|
$
|
(129,119
|
)
|
|
$
|
263,824
|
|
|
$
|
(67,780
|
)
|
|
$
|
1,277,044
|
|
Earnings of equity method investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,180
|
|
|
$
|
—
|
|
|
$
|
5,180
|
|
Capital expenditures
|
|
$
|
199,002
|
|
|
$
|
40,997
|
|
|
$
|
30,112
|
|
|
$
|
23,652
|
|
|
$
|
293,763
|
|
Total assets
|
|
$
|
7,189,094
|
|
|
$
|
2,223,418
|
|
|
$
|
2,205,437
|
|
|
$
|
546,892
|
|
|
$
|
12,164,841
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
Lubricants and Specialty Products
|
|
HEP
|
|
Corporate, Other and Eliminations
|
|
Consolidated
Total
|
|
|
(In thousands)
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Sales and other revenues:
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
15,806,304
|
|
|
$
|
1,799,506
|
|
|
$
|
108,412
|
|
|
$
|
444
|
|
|
$
|
17,714,666
|
|
Intersegment revenues
|
|
370,259
|
|
|
13,197
|
|
|
397,808
|
|
|
(781,264
|
)
|
|
—
|
|
|
|
$
|
16,176,563
|
|
|
$
|
1,812,703
|
|
|
$
|
506,220
|
|
|
$
|
(780,820
|
)
|
|
$
|
17,714,666
|
|
Cost of products sold (exclusive of lower of cost or market inventory valuation adjustment)
|
|
$
|
13,250,849
|
|
|
$
|
1,381,540
|
|
|
$
|
—
|
|
|
$
|
(691,607
|
)
|
|
$
|
13,940,782
|
|
Lower of cost or market inventory valuation adjustment
|
|
$
|
136,305
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
136,305
|
|
Operating expenses
|
|
$
|
1,055,209
|
|
|
$
|
167,820
|
|
|
$
|
146,430
|
|
|
$
|
(83,621
|
)
|
|
$
|
1,285,838
|
|
Selling, general and administrative expenses
|
|
$
|
113,641
|
|
|
$
|
143,750
|
|
|
$
|
11,041
|
|
|
$
|
21,992
|
|
|
$
|
290,424
|
|
Depreciation and amortization
|
|
$
|
284,439
|
|
|
$
|
43,255
|
|
|
$
|
98,492
|
|
|
$
|
11,138
|
|
|
$
|
437,324
|
|
Income (loss) from operations
|
|
$
|
1,336,120
|
|
|
$
|
76,338
|
|
|
$
|
250,257
|
|
|
$
|
(38,722
|
)
|
|
$
|
1,623,993
|
|
Earnings of equity method investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,825
|
|
|
$
|
—
|
|
|
$
|
5,825
|
|
Capital expenditures
|
|
$
|
202,791
|
|
|
$
|
37,448
|
|
|
$
|
54,141
|
|
|
$
|
16,649
|
|
|
$
|
311,029
|
|
Total assets
|
|
$
|
6,465,155
|
|
|
$
|
1,506,209
|
|
|
$
|
2,142,027
|
|
|
$
|
881,210
|
|
|
$
|
10,994,601
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Sales and other revenues:
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
12,579,672
|
|
|
$
|
1,594,036
|
|
|
$
|
77,225
|
|
|
$
|
366
|
|
|
$
|
14,251,299
|
|
Intersegment revenues
|
|
338,390
|
|
|
—
|
|
|
377,137
|
|
|
(715,527
|
)
|
|
—
|
|
|
|
$
|
12,918,062
|
|
|
$
|
1,594,036
|
|
|
$
|
454,362
|
|
|
$
|
(715,161
|
)
|
|
$
|
14,251,299
|
|
Cost of products sold (exclusive of lower of cost or market inventory valuation adjustment)
|
|
$
|
11,009,419
|
|
|
$
|
1,093,984
|
|
|
$
|
—
|
|
|
$
|
(635,530
|
)
|
|
$
|
11,467,873
|
|
Lower of cost or market inventory valuation adjustment
|
|
$
|
(107,479
|
)
|
|
$
|
(1,206
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(108,685
|
)
|
Operating expenses
|
|
$
|
1,008,859
|
|
|
$
|
222,461
|
|
|
$
|
137,856
|
|
|
$
|
(72,507
|
)
|
|
$
|
1,296,669
|
|
Selling, general and administrative expenses
|
|
$
|
103,246
|
|
|
$
|
105,666
|
|
|
$
|
14,336
|
|
|
$
|
42,473
|
|
|
$
|
265,721
|
|
Depreciation and amortization
|
|
$
|
289,434
|
|
|
$
|
31,894
|
|
|
$
|
77,660
|
|
|
$
|
10,949
|
|
|
$
|
409,937
|
|
Long-lived asset impairment
|
|
$
|
19,247
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,247
|
|
Income (loss) from operations
|
|
$
|
595,336
|
|
|
$
|
141,237
|
|
|
$
|
224,510
|
|
|
$
|
(60,546
|
)
|
|
$
|
900,537
|
|
Earnings of equity method investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,510
|
|
|
$
|
—
|
|
|
$
|
12,510
|
|
Capital expenditures
|
|
$
|
176,533
|
|
|
$
|
31,464
|
|
|
$
|
44,810
|
|
|
$
|
19,452
|
|
|
$
|
272,259
|
|
Total assets
|
|
$
|
6,474,666
|
|
|
$
|
1,610,472
|
|
|
$
|
2,191,984
|
|
|
$
|
415,032
|
|
|
$
|
10,692,154
|
|
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
|
|
NOTE 21:
|
Quarterly Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Year
|
|
|
(In thousands, except per share data)
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Sales and other revenues
|
|
$
|
3,897,247
|
|
|
$
|
4,782,615
|
|
|
$
|
4,424,828
|
|
|
$
|
4,381,888
|
|
|
$
|
17,486,578
|
|
Operating costs and expenses
|
|
$
|
3,507,906
|
|
|
$
|
4,450,874
|
|
|
$
|
3,998,049
|
|
|
$
|
4,252,705
|
|
|
$
|
16,209,534
|
|
Income from operations (1) (2)
|
|
$
|
389,341
|
|
|
$
|
331,741
|
|
|
$
|
426,779
|
|
|
$
|
129,183
|
|
|
$
|
1,277,044
|
|
Income before income taxes
|
|
$
|
363,991
|
|
|
$
|
306,153
|
|
|
$
|
401,001
|
|
|
$
|
100,359
|
|
|
$
|
1,171,504
|
|
Net income attributable to HollyFrontier stockholders
|
|
$
|
253,055
|
|
|
$
|
196,915
|
|
|
$
|
261,813
|
|
|
$
|
60,605
|
|
|
$
|
772,388
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to HollyFrontier stockholders - basic
|
|
$
|
1.48
|
|
|
$
|
1.16
|
|
|
$
|
1.60
|
|
|
$
|
0.38
|
|
|
$
|
4.64
|
|
Net income per share attributable to HollyFrontier stockholders - diluted
|
|
$
|
1.47
|
|
|
$
|
1.15
|
|
|
$
|
1.58
|
|
|
$
|
0.37
|
|
|
$
|
4.61
|
|
Dividends per common share
|
|
$
|
0.33
|
|
|
$
|
0.33
|
|
|
$
|
0.33
|
|
|
$
|
0.35
|
|
|
$
|
1.34
|
|
Average number of shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
170,851
|
|
|
169,356
|
|
|
163,676
|
|
|
161,398
|
|
|
166,287
|
|
Diluted
|
|
172,239
|
|
|
170,547
|
|
|
165,011
|
|
|
162,898
|
|
|
167,385
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Sales and other revenues
|
|
$
|
4,128,427
|
|
|
$
|
4,471,236
|
|
|
$
|
4,770,799
|
|
|
$
|
4,344,204
|
|
|
$
|
17,714,666
|
|
Operating costs and expenses
|
|
$
|
3,732,580
|
|
|
$
|
3,964,259
|
|
|
$
|
4,267,282
|
|
|
$
|
4,126,552
|
|
|
$
|
16,090,673
|
|
Income from operations (3)
|
|
$
|
395,847
|
|
|
$
|
506,977
|
|
|
$
|
503,517
|
|
|
$
|
217,652
|
|
|
$
|
1,623,993
|
|
Income before income taxes
|
|
$
|
373,899
|
|
|
$
|
480,360
|
|
|
$
|
478,390
|
|
|
$
|
191,818
|
|
|
$
|
1,524,467
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to HollyFrontier stockholders
|
|
$
|
268,091
|
|
|
$
|
345,507
|
|
|
$
|
342,466
|
|
|
$
|
141,896
|
|
|
$
|
1,097,960
|
|
Net income per share attributable to HollyFrontier stockholders - basic
|
|
$
|
1.51
|
|
|
$
|
1.96
|
|
|
$
|
1.95
|
|
|
$
|
0.82
|
|
|
$
|
6.25
|
|
Net income per share attributable to HollyFrontier stockholders - diluted
|
|
$
|
1.50
|
|
|
$
|
1.94
|
|
|
$
|
1.93
|
|
|
$
|
0.81
|
|
|
$
|
6.19
|
|
Dividends per common share
|
|
$
|
0.33
|
|
|
$
|
0.33
|
|
|
$
|
0.33
|
|
|
$
|
0.33
|
|
|
$
|
1.32
|
|
Average number of shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
176,617
|
|
|
175,899
|
|
|
175,097
|
|
|
172,485
|
|
|
175,009
|
|
Diluted
|
|
177,954
|
|
|
177,586
|
|
|
176,927
|
|
|
174,259
|
|
|
176,661
|
|
(1) For 2019, income from operations reflects non-cash lower of cost or market inventory valuation reductions of $232.3 million for the first quarter, and charges of $47.8 million, $34.1 million and $30.7 million for the second, third and fourth quarters, respectively.
(2) For 2019, income from operations reflects goodwill impairment charges of $152.7 million in the second quarter.
(3) For 2018, income from operations reflects non-cash lower of cost or market inventory valuation reductions of $103.8 million and $106.9 million for the first and second quarters, respectively, and charges of $17.8 million and $329.2 million for the third and fourth quarters, respectively.