NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1:Description of Business and Presentation of Financial Statements
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 Quarterly Report on Form 10-Q 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 September 30, 2020, we:
•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”) and a refinery in Woods Cross, Utah (the “Woods Cross Refinery”);
•owned a facility in Cheyenne, Wyoming, which operated as a petroleum refinery until early August 2020 (the “Cheyenne Refinery”);
•owned and operated Petro-Canada Lubricants Inc. (“PCLI”) located in Mississauga, Ontario, which produces base oils and other specialized lubricant products;
•owned and operated Sonneborn (as defined below) with manufacturing facilities in Petrolia, Pennsylvania and the Netherlands, which produce specialty lubricant products, such as white oils, petrolatums and waxes;
•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;
•owned and operated HollyFrontier Asphalt Company LLC (“HFC Asphalt”), which operates various asphalt terminals in Arizona, New Mexico and Oklahoma; and
•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.
In the third quarter of 2020, we permanently ceased petroleum refining operations at our Cheyenne Refinery and subsequently began converting certain assets at our Cheyenne Refinery to renewable diesel production. This decision was primarily based on a positive outlook in the market for renewable diesel and the expectation that future free cash flow generation at our Cheyenne Refinery would be challenged due to lower gross margins resulting from the economic impact of the COVID-19 pandemic and compressed crude differentials due to dislocations in the crude oil market. Additional factors included uncompetitive operating and maintenance costs forecasted for our Cheyenne Refinery and the anticipated loss of the Environmental Protection Agency’s (“EPA”) small refinery exemption.
During the second quarter of 2020, we recorded a long-lived asset impairment of $232.2 million related to our Cheyenne Refinery asset group. In connection with the cessation of petroleum refining operations at our Cheyenne Refinery, we recognized $12.3 million in decommissioning expense during the third quarter of 2020. In addition, during the three and nine months ended September 30, 2020, we recorded $2.4 million and $3.5 million, respectively, in employee severance costs related to the conversion of our Cheyenne Refinery to renewable diesel production. These decommissioning and severance costs were recognized in operating expenses and were reported in our Refining segment.
During the second quarter of 2020, we also initiated and completed a corporate restructuring. As a result of this restructuring, we recorded $3.7 million in employee severance costs, which were recognized primarily as operating expenses in our Refining segment and selling, general and administrative expenses in our Corporate and Other segment.
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. Aggregate consideration totaled $701.6 million and consisted of $662.7 million in cash paid at acquisition, net of cash acquired. Sonneborn is a producer of specialty hydrocarbon chemicals such as white oils, petrolatums and waxes with manufacturing facilities in the United States and Europe. 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, 2019 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 $38.9 million, current assets $139.4 million, properties, plants and equipment $168.2 million, goodwill $282.3 million, intangibles and other noncurrent assets $231.5 million, current liabilities $47.9 million and deferred income tax and other long-term liabilities $110.8 million. We incurred $0.1 million and $3.9 million for the three months ended September 30, 2020 and 2019, respectively, and $2.0 million and $20.1 million for the nine months ended September 30, 2020 and 2019, respectively, in incremental direct integration and regulatory costs that principally relate to legal, advisory and other professional fees and are presented as selling, general and administrative expenses.
We have prepared these consolidated financial statements without audit. In management’s opinion, these consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of our consolidated financial position as of September 30, 2020, the consolidated results of operations, comprehensive income and statements of equity for the three and nine months ended September 30, 2020 and 2019 and consolidated cash flows for the nine months ended September 30, 2020 and 2019 in accordance with the rules and regulations of the SEC. Although certain notes and other information required by generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019 that has been filed with the SEC.
Our results of operations for the nine months ended September 30, 2020 are not necessarily indicative of the results of operations to be realized for the year ending December 31, 2020.
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 expected credit losses from current economic conditions and management’s expectations of future economic conditions. Credit losses are charged to the allowance for doubtful accounts when an account is deemed uncollectible. Our allowance for doubtful accounts was $3.1 million at September 30, 2020 and $4.5 million at December 31, 2019.
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. 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.
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. 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.
Goodwill and Long-lived Assets: As of September 30, 2020, our goodwill balance was $2.4 billion, with goodwill assigned to our Refining, Lubricants and Specialty Products and HEP segments of $1,733.5 million, $328.6 million and $312.9 million, respectively. See Note 15 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. Goodwill represents the excess of the cost of an acquired entity over the fair value of the assets acquired and liabilities assumed. Goodwill is not subject to amortization and is tested annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our goodwill impairment testing first entails either a quantitative assessment or an optional qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that based on the qualitative factors that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, a quantitative test is performed in which we estimate the fair value of the related reporting unit. If the carrying amount of a reporting unit exceeds its fair value, the goodwill of that reporting unit is impaired, and we measure goodwill impairment as the excess of the carrying amount of the reporting unit over the related fair value.
For purposes of long-lived asset impairment evaluation, we have grouped our long-lived assets as follows: (i) our refinery asset groups, which include certain HEP logistics assets, (ii) our Lubricants and Specialty Products asset groups and (iii) our HEP asset groups, which comprises HEP assets not included in our refinery asset groups. These asset groups represent the lowest level for which independent cash flows can be identified. Our long-lived assets are evaluated for impairment by identifying whether indicators of impairment exist and if so, assessing whether the long-lived assets are recoverable from estimated future undiscounted cash flows. The actual amount of impairment loss measured, if any, is equal to the amount by which the asset group’s carrying value exceeds its fair value.
Long-lived asset impairment testing
Due to the economic slowdown caused by the COVID-19 pandemic, in the second quarter of 2020 we determined that indicators of potential long-lived asset impairments were present. As a result of our long-lived asset impairment testing, we determined that the carrying value of the long-lived assets of our Cheyenne Refinery and PCLI asset groups were not recoverable, and thus recorded long-lived asset impairment charges of $232.2 million and $204.7 million, respectively, in the second quarter of 2020. Our testing did not result in any other impairments of long-lived assets in the second quarter. There were no additional indicators of long-lived asset impairment present in the third quarter of 2020.
The estimated fair values of the Cheyenne Refinery and PCLI asset groups were determined using a combination of the income and cost approaches. The income approach was based on management’s best estimates of the expected future cash flows over the remaining useful life of the asset group. The cost approach utilized assumptions for the current replacement costs of similar assets adjusted for estimated depreciation and economic obsolescence. These fair value measurements involve significant unobservable inputs (Level 3 inputs). See Note 4 for further discussion of Level 3 inputs.
Goodwill impairment testing
Due to the economic slowdown caused by the COVID-19 pandemic and a decrease in our market capitalization, we determined that indicators of potential goodwill impairment for our Refining and Lubricants and Specialty Products reporting units were present in the second quarter of 2020. As such, we performed an interim test for goodwill impairment as of May 31, 2020. Our interim goodwill impairment testing indicated that there was no impairment of goodwill at our Refining and Lubricants and Specialty Products reporting units as of May 31, 2020.
We performed our annual goodwill impairment testing quantitatively as of July 1, 2020 and determined there was no impairment of goodwill attributable to our reporting units. The excess of the fair values of the reporting units over their respective carrying values ranged from 10% to 229%.
The estimated fair values of our reporting units were derived using a combination of income and market approaches. The income approach reflects expected future cash flows based on estimated forecasted production levels, selling prices, gross margins, operating costs and capital expenditures. Our market approaches include 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 4 for further discussion of Level 3 inputs.
During the second quarter of 2019, we recorded a goodwill impairment charge of $152.7 million to fully impair the goodwill of the PCLI reporting unit included in our Lubricants and Specialty Products segment.
A reasonable expectation exists that further deterioration in our operating results or overall economic conditions could result in an impairment of goodwill and / or additional long-lived assets impairments at some point in the future. Future impairment charges could be material to our results of operations and financial condition.
Revenue Recognition: Revenue 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.
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, 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 15 for additional information on our segments.
Income Taxes: Provisions for income taxes include deferred taxes resulting from temporary differences in income for financial and tax purposes, using the liability method of accounting for income taxes. The liability method requires the effect of tax rate changes on deferred income taxes to be reflected in the period in which the rate change was enacted. The liability method also requires that deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized.
Potential interest and penalties related to income tax matters are recognized in income tax expense. We believe we have appropriate support for the income tax positions taken and to be taken on our income tax returns and that our accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.
For the nine months ended September 30, 2020, we recorded an income tax benefit of $188.5 million compared to income tax expense of $279.9 million for the nine months ended September 30, 2019. This decrease was due principally to a pre-tax loss during the nine months ended September 30, 2020 compared to pre-tax earnings in the same period of 2019. Our effective tax rates were 31.0% and 26.1% for the nine months ended September 30, 2020 and 2019, respectively. The year-over-year increase in the effective tax rate is due principally to the relationship between the pre-tax results and the earnings attributable to the noncontrolling interest that is not included in income for tax purposes.
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 an inventory repurchase obligation that is subsequently reversed when the inventory is repurchased. For the nine months ended September 30, 2020 and 2019, we received proceeds of $32.7 million and $13.2 million, respectively, and subsequently repaid $34.4 million and $12.5 million, respectively, under these sell / buy transactions.
Accounting Pronouncements - Recently Adopted
Income Tax Accounting
In December 2019, Accounting Standards Update (“ASU”) 2019-12, “Simplifying the Accounting for Income Taxes,” was issued which eliminates some exceptions to the general approach in ASC Topic 740 “Income Taxes” and also provides clarification of other aspects of ASC 740. We adopted this standard effective January 1, 2020 on a prospective basis, and recognized an income tax benefit for the nine months ended September 30, 2020 based upon the application of our estimated annual effective tax rate to our pre-tax loss.
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. We adopted this standard effective January 1, 2020, at which time our review of historic and expected credit losses resulted in a decrease of $3.2 million in our reserve for doubtful accounts. Based upon our assessment of the potential impact of current and forecasted conditions, we increased our reserve for doubtful accounts by $1.8 million during the nine months ended September 30, 2020. Assumptions about the potential effects of the COVID-19 pandemic on our estimate of expected credit losses are inherently subjective and difficult to forecast. However, we believe that our current estimate of allowance for doubtful accounts to be reasonable based upon current information and forecasts.
NOTE 2: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, as well as other third-party refineries, in the Mid-Continent, Southwest and Rocky Mountain regions of the United States. Additionally, as of September 30, 2020, HEP owned 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, and a 50% ownership interest in each of Osage Pipe Line 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.
At September 30, 2020, 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 through its pipelines, by charging fees for terminalling refined products and other hydrocarbons, and by storing and providing other services at its storage tanks and terminals. Under our long-term transportation agreements with HEP (discussed further below), we accounted for 80% of HEP’s total revenues for the nine months ended September 30, 2020. 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 9 for a description of HEP’s debt obligations.
HEP has risk associated with its operations. If a major customer of HEP were to terminate its contracts or fail to meet desired shipping or throughput levels for an extended period of time, revenue would be reduced and HEP could suffer substantial losses to the extent that a new customer is not found. In the event that HEP incurs a loss, our operating results will reflect HEP’s loss, net of intercompany eliminations, to the extent of our ownership interest in HEP at that point in time.
Cushing Connect Joint Venture
In October 2019, HEP Cushing LLC (“HEP Cushing”), a wholly-owned subsidiary of HEP, and Plains Marketing, L.P. (“PMLP”), a wholly-owned subsidiary of Plains All American Pipeline, L.P. (“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 was fully in service beginning in April 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.
Cushing Connect and its two subsidiaries, Cushing Connect Pipeline and Cushing Connect Terminal, are each VIE’s because they do not have sufficient equity at risk to finance their activities without additional financial support. HEP is the primary beneficiary of two of these entities as HEP 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 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.
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 pipeline, 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 September 30, 2020, these agreements result in minimum annualized payments to HEP of $351.1 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.
Lessor Accounting
Our consolidated statements of income reflect lease revenue recognized by HEP for contracts with third parties in which HEP is the lessor.
One of HEP’s throughput agreements with Delek US Holdings, Inc. (“Delek”) was renewed during the three months ended June 30, 2020. Certain components of this agreement met the criteria of sales-type leases since the underlying assets are not expected to have an alternative use at the end of the lease term to anyone other than Delek. Under sales-type lease accounting, at the commencement date, the lessor recognizes a net investment in the lease, based on the estimated fair value of the underlying leased assets at contract inception, and derecognizes the underlying assets with the difference recorded as selling profit or loss arising from the lease. Therefore, HEP recognized a gain on sales-type leases totaling $33.8 million, during the three months ended June 30, 2020. This sales-type lease transaction, including the related gain, was a non-cash transaction.
Lease income recognized was as follows:
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2020
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2019
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2020
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2019
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(In thousands)
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Operating lease revenues
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$
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5,080
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$
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8,374
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|
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$
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18,812
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|
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$
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24,840
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Gain on sales-type leases
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$
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—
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|
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$
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—
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$
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33,834
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$
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—
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|
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Sales-type lease interest income
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$
|
645
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|
|
$
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—
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|
|
$
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1,287
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|
|
$
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—
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Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable
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$
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335
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$
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—
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|
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$
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621
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$
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—
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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 nine months ended September 30, 2020, HEP did not issue any common units under this program. As of September 30, 2020, HEP has issued 2,413,153 common units under this program, providing $82.3 million in gross proceeds.
NOTE 3:Revenues
Substantially all revenue-generating activities relate to sales of refined product and excess crude oil inventories sold at market prices (variable consideration) under contracts with customers. Additionally, we have revenues attributable to HEP logistics services provided under petroleum product and crude oil pipeline transportation, processing, storage and terminalling agreements with third parties.
Disaggregated revenues were as follows:
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2020
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2019
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2020
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2019
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(In thousands)
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Revenues by type
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Refined product revenues
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Transportation fuels (1)
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$
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1,949,381
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$
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3,354,927
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$
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5,812,974
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$
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9,796,334
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Specialty lubricant products (2)
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421,254
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461,669
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1,232,491
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|
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1,413,194
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Asphalt, fuel oil and other products (3)
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171,844
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299,305
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518,485
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767,023
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Total refined product revenues
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2,542,479
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4,115,901
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7,563,950
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11,976,551
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Excess crude oil revenues (4)
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243,742
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264,675
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606,915
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997,988
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Transportation and logistic services
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26,740
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29,868
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72,410
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|
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89,388
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Other revenues (5)
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6,439
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|
|
14,384
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|
|
39,600
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|
|
40,763
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Total sales and other revenues
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|
$
|
2,819,400
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|
$
|
4,424,828
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$
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8,282,875
|
|
|
$
|
13,104,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In thousands)
|
|
Refined product revenues by market
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
Mid-Continent
|
|
$
|
1,254,828
|
|
|
$
|
2,191,014
|
|
|
$
|
3,655,412
|
|
|
$
|
6,283,488
|
|
|
Southwest
|
|
580,818
|
|
|
913,326
|
|
|
1,751,066
|
|
|
2,772,281
|
|
|
Rocky Mountains
|
|
343,905
|
|
|
611,003
|
|
|
1,087,657
|
|
|
1,739,401
|
|
|
Northeast
|
|
149,855
|
|
|
151,919
|
|
|
420,588
|
|
|
427,926
|
|
|
Canada
|
|
150,618
|
|
|
184,784
|
|
|
454,141
|
|
|
536,911
|
|
|
Europe, Asia and Latin America
|
|
62,455
|
|
|
63,855
|
|
|
195,086
|
|
|
216,544
|
|
|
|
|
|
|
|
|
|
|
|
|
Total refined product revenues
|
|
$
|
2,542,479
|
|
|
$
|
4,115,901
|
|
|
$
|
7,563,950
|
|
|
$
|
11,976,551
|
|
(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 $140.2 million and $31.6 million, respectively, for the three months ended September 30, 2020, $421.0 million and $97.5 million, respectively for the nine months ended September 30, 2020, $231.4 million and $67.9 million, respectively, for the three months ended September 30, 2019, and $612.0 million and $155.0 million, respectively, for the nine months ended September 30, 2019.
(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 our contract liabilities during the nine months ended September 30, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
(In thousands)
|
|
Balance at January 1
|
|
|
|
|
|
$
|
4,652
|
|
|
$
|
132
|
|
|
Sonneborn acquisition
|
|
|
|
|
|
—
|
|
|
6,463
|
|
|
Increase
|
|
|
|
|
|
21,583
|
|
|
19,255
|
|
|
Recognized as revenue
|
|
|
|
|
|
(18,224)
|
|
|
(21,135)
|
|
|
Balance at September 30
|
|
|
|
|
|
$
|
8,011
|
|
|
$
|
4,715
|
|
As of September 30, 2020, we have long-term contracts with customers that specify minimum volumes of gasoline, diesel, lubricants and specialty products to be sold ratably at market prices through 2025. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
|
|
|
(In thousands)
|
|
Refined product sales volumes (barrels)
|
|
5,047
|
|
|
16,047
|
|
|
12,799
|
|
|
24,465
|
|
|
58,358
|
|
Additionally, HEP has long-term contracts with third-party customers that specify minimum volumes of product to be transported through its pipelines and terminals that result in fixed-minimum annual revenues through 2025. Annual minimum revenues attributable to HEP’s third-party contracts as of September 30, 2020 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
|
|
|
(In thousands)
|
|
HEP contractual minimum revenues
|
|
$
|
6,441
|
|
|
$
|
21,942
|
|
|
$
|
10,954
|
|
|
$
|
20,292
|
|
|
$
|
59,629
|
|
NOTE 4: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.
The carrying amounts of derivative instruments and RINs credit obligations at September 30, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value by Input Level
|
|
|
|
Carrying Amount
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(In thousands)
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
NYMEX futures contracts
|
|
$
|
1,530
|
|
|
$
|
1,530
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Commodity price swaps
|
|
2,820
|
|
|
—
|
|
|
2,820
|
|
|
—
|
|
|
Commodity forward contracts
|
|
71
|
|
|
—
|
|
|
71
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,421
|
|
|
$
|
1,530
|
|
|
$
|
2,891
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity price swaps
|
|
$
|
134
|
|
|
$
|
—
|
|
|
$
|
134
|
|
|
$
|
—
|
|
|
Commodity forward contracts
|
|
58
|
|
|
—
|
|
|
58
|
|
|
—
|
|
|
Foreign currency forward contracts
|
|
3,589
|
|
|
—
|
|
|
3,589
|
|
|
—
|
|
|
RINs credit obligations (1)
|
|
6,710
|
|
|
—
|
|
|
6,710
|
|
|
—
|
|
|
Total liabilities
|
|
$
|
10,491
|
|
|
$
|
—
|
|
|
$
|
10,491
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Commodity price swaps
|
|
1,230
|
|
|
—
|
|
|
1,230
|
|
|
—
|
|
|
Commodity forward contracts
|
|
3,685
|
|
|
—
|
|
|
3,685
|
|
|
—
|
|
|
Foreign currency forward contracts
|
|
6,722
|
|
|
—
|
|
|
6,722
|
|
|
—
|
|
|
Total liabilities
|
|
$
|
14,215
|
|
|
$
|
2,578
|
|
|
$
|
11,637
|
|
|
$
|
—
|
|
(1) Represent obligations for RINs credits for which we did not have sufficient quantities at September 30, 2020 to satisfy our EPA regulatory blending requirements.
Level 1 Instruments
Our NYMEX futures contracts are exchange traded and are measured and recorded at fair value using quoted market prices, a Level 1 input.
Level 2 Instruments
Derivative instruments consisting of 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.
Nonrecurring Fair Value Measurements
During the three months ended June 30, 2020, we recognized long-lived asset impairment charges based on fair value measurements utilized during our goodwill and long-lived asset impairment testing (see Note 1). The fair value measurements were based on a combination of valuation methods including discounted cash flows, the guideline public company and guideline transaction methods and obsolescence adjusted replacement costs, all of which are Level 3 inputs.
During the three months ended June 30, 2020, HEP recognized a gain on sales-type leases (see Note 2). The estimated fair value of the underlying leased assets at contract inception and the present value of the estimated unguaranteed residual asset at the end of the lease term were used in determining the net investment in leases and related recognized gain on sales-type leases. The asset valuation estimates included Level 3 inputs based on a replacement cost valuation method.
NOTE 5:Earnings Per Share
Basic earnings per share is calculated as net income (loss) 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 stock units and performance share units. The following is a reconciliation of the denominators of the basic and diluted per share computations for net income (loss) attributable to HollyFrontier stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In thousands, except per share data)
|
|
Net income (loss) attributable to HollyFrontier stockholders
|
|
$
|
(2,401)
|
|
|
$
|
261,813
|
|
|
$
|
(483,701)
|
|
|
$
|
711,783
|
|
|
Participating securities’ (restricted stock) share in earnings
|
|
—
|
|
|
385
|
|
|
—
|
|
|
1,033
|
|
|
Net income (loss) attributable to common shares
|
|
$
|
(2,401)
|
|
|
$
|
261,428
|
|
|
$
|
(483,701)
|
|
|
$
|
710,750
|
|
|
Average number of shares of common stock outstanding
|
|
162,015
|
|
|
163,676
|
|
|
161,927
|
|
|
167,935
|
|
|
Effect of dilutive variable restricted stock units and performance share units (1)
|
|
—
|
|
|
1,335
|
|
|
—
|
|
|
1,190
|
|
|
Average number of shares of common stock outstanding assuming dilution
|
|
162,015
|
|
|
165,011
|
|
|
161,927
|
|
|
169,125
|
|
|
Basic earnings (loss) per share
|
|
$
|
(0.01)
|
|
|
$
|
1.60
|
|
|
$
|
(2.99)
|
|
|
$
|
4.23
|
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.01)
|
|
|
$
|
1.58
|
|
|
$
|
(2.99)
|
|
|
$
|
4.20
|
|
|
(1) Excludes anti-dilutive restricted and performance share units of:
|
|
566
|
|
|
109
|
|
|
550
|
|
|
120
|
|
NOTE 6:Stock-Based Compensation
We have a principal share-based compensation plan (the “2020 Long-Term Incentive Plan”), which allows us to grant new equity awards until February 12, 2030. We also have a long-term incentive compensation plan which expires pursuant to its terms on December 31, 2020 and will continue to govern outstanding equity awards granted thereunder; however, as of February 12, 2020, no new awards are being granted under this plan. The compensation cost charged against income for these plans was $6.9 million and $9.2 million for the three months ended September 30, 2020 and 2019, respectively, and $19.8 million and $30.0 million for the nine months ended September 30, 2020 and 2019, 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 $0.6 million and $0.5 million for the three months ended September 30, 2020 and 2019, respectively, and $1.5 million and $1.8 million for the nine months ended September 30, 2020 and 2019, respectively.
Restricted Stock Units
Under our long-term incentive 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. 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. Upon vesting, restrictions on the 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 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.
A summary of restricted stock unit activity during the nine months ended September 30, 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Grants
|
|
Weighted Average Grant Date Fair Value
|
|
Aggregate Intrinsic Value ($000)
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2020
|
|
1,101,781
|
|
|
$
|
53.30
|
|
|
|
|
Granted
|
|
65,041
|
|
|
35.26
|
|
|
|
|
Vested
|
|
(80,872)
|
|
|
44.40
|
|
|
|
|
Forfeited
|
|
(70,884)
|
|
|
53.51
|
|
|
|
|
Converted from performance share units
|
|
19,450
|
|
|
38.13
|
|
|
|
|
Outstanding at September 30, 2020
|
|
1,034,516
|
|
|
52.41
|
|
|
$
|
20,390
|
|
For the nine months ended September 30, 2020, restricted stock units vested having a grant date fair value of $3.6 million. As of September 30, 2020, there was $16.6 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 1.0 year.
Performance Share Units
Under our long-term incentive 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. Holders of performance share units have the right to receive dividend equivalents and other distributions with respect to such performance share units based on the target level of payout.
A summary of performance share unit activity and changes during the nine months ended September 30, 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Performance Share Units
|
|
Grants
|
|
|
|
|
|
Outstanding at January 1, 2020
|
|
375,588
|
|
|
|
|
|
|
Vested
|
|
(12,129)
|
|
|
Forfeited
|
|
(18,766)
|
|
|
Converted to restricted stock units
|
|
(19,450)
|
|
|
Outstanding at September 30, 2020
|
|
325,243
|
|
For the nine months September 30, 2020, we issued 7,889 shares of common stock, representing a 100% payout on vested performance share units having a grant date fair value of $0.5 million. As of September 30, 2020, there was $7.7 million of total unrecognized compensation cost related to non-vested performance share units having a grant date fair value of $58.07 per unit. That cost is expected to be recognized over a weighted-average period of 1.3 years.
NOTE 7:Inventories
Inventories consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
December 31, 2019
|
|
|
|
(In thousands)
|
|
Crude oil
|
|
$
|
477,012
|
|
|
$
|
489,169
|
|
|
Other raw materials and unfinished products(1)
|
|
288,006
|
|
|
394,045
|
|
|
Finished products(2)
|
|
636,739
|
|
|
639,938
|
|
|
Lower of cost or market reserve
|
|
(468,074)
|
|
|
(240,363)
|
|
|
Process chemicals(3)
|
|
28,615
|
|
|
36,786
|
|
|
Repair and maintenance supplies and other (4)
|
|
175,366
|
|
|
154,627
|
|
|
Total inventory
|
|
$
|
1,137,664
|
|
|
$
|
1,474,202
|
|
(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.
(4)Includes RINs.
Our inventories that are valued at the lower of LIFO cost or market reflect a valuation reserve of $468.1 million and $240.4 million at September 30, 2020 and December 31, 2019, respectively. The December 31, 2019 market reserve of $240.4 million was reversed due to the sale of inventory quantities that gave rise to the 2019 reserve. A new market reserve of $468.1 million was established as of September 30, 2020 based on market conditions and prices at that time. The effect of the change in lower of cost or market reserve was a decrease to cost of products sold totaling $62.8 million for the three months ended September 30, 2020 and an increase to cost of products sold totaling $34.1 million for the three months ended September 30, 2019, and an increase to cost of products sold totaling $227.7 million for the nine months ended September 30, 2020 and a decrease to cost of products sold totaling $150.5 million for the nine months ended September 30, 2019.
At September 30, 2020, the LIFO value of inventory, net of the lower of cost or market reserve, was equal to current costs.
In connection with our announcement of the conversion of our Cheyenne Refinery to renewable diesel production, we recorded a reserve of $2.9 million and $9.0 million, for the three and the nine months September 30, 2020, respectively, against our repair and maintenance supplies inventory. This charge was recorded in operating expenses.
NOTE 8:Environmental
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 cleanup 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.
We incurred expense of $2.2 million and $1.8 million for the three months ended September 30, 2020 and 2019, respectively, and $4.2 million and $5.5 million for the nine months ended September 30, 2020 and 2019, respectively, for environmental remediation obligations. The accrued environmental liability reflected in our consolidated balance sheets was $115.5 million and $117.7 million at September 30, 2020 and December 31, 2019, respectively, of which $94.1 million and $95.6 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). Estimated liabilities could increase in the future when the results of ongoing investigations become known, are considered probable and can be reasonably estimated.
NOTE 9:Debt
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 September 30, 2020, we were in compliance with all covenants, had no outstanding borrowings and had outstanding letters of credit totaling $5.7 million under the HollyFrontier Credit Agreement.
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 nine months ended September 30, 2020, HEP received advances totaling $219.5 million and repaid $237.0 million under the HEP Credit Agreement. At September 30, 2020, HEP was in compliance with all of its covenants, had outstanding borrowings of $948.0 million and no outstanding letters of credit under the HEP Credit Agreement.
HEP’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
On September 28, 2020, we completed a public offering of $350.0 million in aggregate principal amount of 2.625% senior notes maturing October 2023 (the “2.625% Senior Notes”) and $400.0 million in aggregate principal amount of 4.500% senior notes maturing October 2030 (the “4.500% Senior Notes”). We intend to use the net proceeds for general corporate purposes, which may include capital expenditures.
As a result, as of September 30, 2020, our outstanding senior notes consist of $1.0 billion in aggregate principal amount of 5.875% senior notes maturing April 2026 (the “5.875% Senior Notes”), the 2.625% Senior Notes and the 4.500% Senior Notes (collectively, the “HollyFrontier Senior Notes”). 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 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 $37.2 million and $40.0 million at September 30, 2020 and December 31, 2019, respectively, and are included in “Accrued liabilities” in our consolidated balance sheets. See Note 4 for additional information on Level 2 inputs.
HEP Senior Notes
On February 4, 2020, HEP closed a private placement of $500.0 million in aggregate principal amount of 5.0% HEP senior unsecured notes maturing February 2028 (the “HEP Senior Notes”). On February 5, 2020, HEP redeemed its existing $500.0 million aggregate principal amount of 6.0% senior notes maturing August 2024 at a redemption cost of $522.5 million. HEP recognized a $25.9 million early extinguishment loss consisting of a $22.5 million debt redemption premium and unamortized discount and financing costs of $3.4 million. HEP funded the $522.5 million redemption with proceeds from the issuance of its 5.0% senior notes and borrowings under the HEP Credit Agreement.
The HEP Senior Notes are unsecured and impose certain restrictive covenants, including limitations on HEP’s ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. HEP was in compliance with the restrictive covenants for the HEP Senior Notes as of September 30, 2020. 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 at varying premiums over face value under the HEP Senior Notes.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
December 31,
2019
|
|
|
|
(In thousands)
|
|
HollyFrontier
|
|
|
|
|
|
2.625% Senior Notes
|
|
$
|
350,000
|
|
|
$
|
—
|
|
|
5.875% Senior Notes
|
|
1,000,000
|
|
|
1,000,000
|
|
|
4.500% Senior Notes
|
|
400,000
|
|
|
—
|
|
|
|
|
1,750,000
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
Unamortized discount and debt issuance costs
|
|
(13,525)
|
|
|
(6,391)
|
|
|
|
|
|
|
|
|
Total HollyFrontier long-term debt
|
|
1,736,475
|
|
|
993,609
|
|
|
|
|
|
|
|
|
HEP
|
|
|
|
|
|
HEP Credit Agreement
|
|
948,000
|
|
|
965,500
|
|
|
|
|
|
|
|
|
5.0% Senior Notes
|
|
500,000
|
|
|
—
|
|
|
6.0% Senior Notes
|
|
—
|
|
|
500,000
|
|
|
|
|
500,000
|
|
|
500,000
|
|
|
|
|
|
|
|
|
Unamortized discount and debt issuance costs
|
|
(8,126)
|
|
|
(3,469)
|
|
|
|
|
|
|
|
|
Total HEP long-term debt
|
|
1,439,874
|
|
|
1,462,031
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
3,176,349
|
|
|
$
|
2,455,640
|
|
The fair values of the senior notes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
December 31,
2019
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
HollyFrontier Senior Notes
|
|
$
|
1,835,996
|
|
|
$
|
1,127,610
|
|
|
|
|
|
|
|
|
HEP Senior Notes
|
|
$
|
490,155
|
|
|
$
|
522,045
|
|
These fair values are based on a Level 2 input. See Note 4 for additional information on Level 2 inputs.
We capitalized interest attributable to construction projects of $1.1 million and $0.7 million for the three months ended September 30, 2020 and 2019, respectively, and $2.4 million and $1.8 million for the nine months ended September 30, 2020 and 2019, respectively.
NOTE 10: 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
|
|
Three Months Ended
September 30,
|
|
Income Statement Location
|
|
Three Months Ended
September 30,
|
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
|
(In thousands)
|
|
Commodity contracts
|
|
$
|
2,492
|
|
|
$
|
(7,562)
|
|
|
Sales and other revenues
|
|
$
|
(5,217)
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
983
|
|
|
6,027
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
(352)
|
|
|
(454)
|
|
|
Total
|
|
$
|
2,492
|
|
|
$
|
(7,562)
|
|
|
|
|
$
|
(4,586)
|
|
|
$
|
5,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized Gain (Loss) Recognized in OCI
|
|
Gain (Loss) Reclassified into Earnings
|
|
Derivatives Designated as Cash Flow Hedging Instruments
|
|
Nine Months Ended
September 30,
|
|
Income Statement Location
|
|
Nine Months Ended
September 30,
|
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
|
(In thousands)
|
|
Commodity contracts
|
|
$
|
(3,918)
|
|
|
$
|
372
|
|
|
Sales and other revenues
|
|
$
|
(5,168)
|
|
|
$
|
(1,799)
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
3,272
|
|
|
15,323
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
(1,515)
|
|
|
(987)
|
|
|
Total
|
|
$
|
(3,918)
|
|
|
$
|
372
|
|
|
|
|
$
|
(3,411)
|
|
|
$
|
12,537
|
|
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 9 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.
The following table presents the pre-tax effect on income due to maturities and fair value adjustments of our economic hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Earnings
|
|
Derivatives Not Designated as Hedging Instruments
|
|
Income Statement Location
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
(In thousands)
|
|
Commodity contracts
|
|
Cost of products sold
|
|
$
|
2,880
|
|
|
$
|
8,640
|
|
|
$
|
20,789
|
|
|
$
|
1,561
|
|
|
|
|
Interest expense
|
|
(2,170)
|
|
|
(1,720)
|
|
|
2,542
|
|
|
(2,995)
|
|
|
Foreign currency contracts
|
|
Gain (loss) on foreign currency transactions
|
|
(8,177)
|
|
|
5,713
|
|
|
10,983
|
|
|
(8,983)
|
|
|
|
|
Total
|
|
$
|
(7,467)
|
|
|
$
|
12,633
|
|
|
$
|
34,314
|
|
|
$
|
(10,417)
|
|
As of September 30, 2020, 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
|
|
2,250,000
|
|
|
450,000
|
|
|
1,800,000
|
|
|
|
|
|
|
MMBTU
|
|
Crude oil price swaps (basis spread) - long
|
|
1,196,000
|
|
|
1,196,000
|
|
|
—
|
|
|
|
|
|
|
Barrels
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYMEX futures (WTI) - short
|
|
1,045,000
|
|
|
830,000
|
|
|
215,000
|
|
|
|
|
|
|
Barrels
|
|
Crude oil price swaps (basis spread) - long
|
|
368,000
|
|
|
368,000
|
|
|
—
|
|
|
|
|
|
|
Barrels
|
|
WTI and gasoline crack spread swaps - short
|
|
100,000
|
|
|
100,000
|
|
|
—
|
|
|
|
|
|
|
Barrels
|
|
Forward gasoline and diesel contracts - long
|
|
200,000
|
|
|
200,000
|
|
|
—
|
|
|
|
|
|
|
Barrels
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
419,278,042
|
|
|
106,910,645
|
|
|
312,367,397
|
|
|
|
|
|
|
U.S. dollar
|
|
Forward commodity contracts (platinum)
|
|
40,867
|
|
|
—
|
|
|
40,867
|
|
|
|
|
|
|
Troy ounces
|
The following table presents the fair value and balance sheet locations of our outstanding derivative instruments. These amounts are presented on a gross basis with offsetting balances that reconcile to a net asset or liability position in our consolidated balance sheets. We present on a net basis to reflect the net settlement of these positions in accordance with provisions of our master netting arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Net Asset Position
|
|
Derivatives in Net Liability Position
|
|
|
|
Gross Assets
|
|
Gross Liabilities Offset in Balance Sheet
|
|
Net Assets Recognized in Balance Sheet
|
|
Gross Liabilities
|
|
Gross Assets Offset in Balance Sheet
|
|
Net Liabilities Recognized in Balance Sheet
|
|
|
|
|
|
(In thousands)
|
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
Commodity price swap contracts
|
|
$
|
915
|
|
|
$
|
(263)
|
|
|
$
|
652
|
|
|
$
|
58
|
|
|
$
|
—
|
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
915
|
|
|
$
|
(263)
|
|
|
$
|
652
|
|
|
$
|
58
|
|
|
$
|
—
|
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as cash flow hedging instruments:
|
|
|
|
NYMEX futures contracts
|
|
$
|
1,530
|
|
|
$
|
—
|
|
|
$
|
1,530
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Commodity price swap contracts
|
|
2,168
|
|
|
—
|
|
|
2,168
|
|
|
76
|
|
|
—
|
|
|
76
|
|
|
Commodity forward contracts
|
|
71
|
|
|
—
|
|
|
71
|
|
|
58
|
|
|
—
|
|
|
58
|
|
|
Foreign currency forward contracts
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,397
|
|
|
(1,808)
|
|
|
3,589
|
|
|
|
|
$
|
3,769
|
|
|
$
|
—
|
|
|
$
|
3,769
|
|
|
$
|
5,531
|
|
|
$
|
(1,808)
|
|
|
$
|
3,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net balance
|
|
|
|
|
|
$
|
4,421
|
|
|
|
|
|
|
$
|
3,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet classification:
|
|
Prepayment and other
|
|
$
|
4,421
|
|
|
Accrued liabilities
|
|
$
|
3,723
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
58
|
|
|
|
|
|
|
$
|
4,421
|
|
|
|
|
|
|
$
|
3,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
At September 30, 2020, we had a pre-tax net unrealized gain of $0.6 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 $0.7 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.
NOTE 11:Equity
In November 2019, our Board of Directors approved a $1.0 billion share repurchase program, which replaced all existing share repurchase programs, authorizing us to repurchase common stock in the open market or through privately negotiated transactions. 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 September 30, 2020, we had not repurchased common stock under this stock repurchase program. In addition, we are authorized by our Board of Directors to repurchase shares in an amount sufficient to offset shares issued under our compensation programs.
During the nine months ended September 30, 2020 and 2019, we withheld 105,787 and 5,359, respectively, shares of our common stock from certain employees. These withholdings were made under the terms of restricted stock unit 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.
NOTE 12:Other Comprehensive Income
The components and allocated tax effects of other comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before-Tax
|
|
Tax Expense
(Benefit)
|
|
After-Tax
|
|
|
|
(In thousands)
|
|
Three Months Ended September 30, 2020
|
|
|
|
|
|
|
|
Net change in foreign currency translation adjustment
|
|
$
|
7,727
|
|
|
$
|
1,705
|
|
|
$
|
6,022
|
|
|
Net unrealized gain on hedging instruments
|
|
2,492
|
|
|
636
|
|
|
1,856
|
|
|
Net change in pension and other post-retirement benefit obligations
|
|
—
|
|
|
1
|
|
|
(1)
|
|
|
Other comprehensive income attributable to HollyFrontier stockholders
|
|
$
|
10,219
|
|
|
$
|
2,342
|
|
|
$
|
7,877
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
|
|
|
|
|
|
Net change in foreign currency translation adjustment
|
|
$
|
(9,311)
|
|
|
$
|
(1,959)
|
|
|
$
|
(7,352)
|
|
|
Net unrealized loss on hedging instruments
|
|
(7,562)
|
|
|
(1,929)
|
|
|
(5,633)
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss attributable to HollyFrontier stockholders
|
|
$
|
(16,873)
|
|
|
$
|
(3,888)
|
|
|
$
|
(12,985)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
|
|
|
|
|
|
Net change in foreign currency translation adjustment
|
|
$
|
(2,149)
|
|
|
$
|
(434)
|
|
|
$
|
(1,715)
|
|
|
Net unrealized loss on hedging instruments
|
|
(3,918)
|
|
|
(1,000)
|
|
|
(2,918)
|
|
|
Net change in pension and other post-retirement benefit obligations
|
|
(42)
|
|
|
(3)
|
|
|
(39)
|
|
|
Other comprehensive loss attributable to HollyFrontier stockholders
|
|
$
|
(6,109)
|
|
|
$
|
(1,437)
|
|
|
$
|
(4,672)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
|
|
|
|
Net change in foreign currency translation adjustment
|
|
$
|
4,212
|
|
|
$
|
896
|
|
|
$
|
3,316
|
|
|
Net unrealized gain on hedging instruments
|
|
372
|
|
|
94
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income attributable to HollyFrontier stockholders
|
|
$
|
4,584
|
|
|
$
|
990
|
|
|
$
|
3,594
|
|
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
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(In thousands)
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
Commodity price swaps
|
|
$
|
(5,217)
|
|
|
$
|
—
|
|
|
Sales and other revenues
|
|
|
|
983
|
|
|
6,027
|
|
|
Cost of products sold
|
|
|
|
(352)
|
|
|
(454)
|
|
|
Operating expenses
|
|
|
|
(4,586)
|
|
|
5,573
|
|
|
|
|
|
|
(1,169)
|
|
|
1,421
|
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
(3,417)
|
|
|
$
|
4,152
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
Hedging instruments:
|
|
|
|
|
|
|
|
Commodity price swaps
|
|
$
|
(5,168)
|
|
|
$
|
(1,799)
|
|
|
Sales and other revenues
|
|
|
|
3,272
|
|
|
15,323
|
|
|
Cost of products sold
|
|
|
|
(1,515)
|
|
|
(987)
|
|
|
Operating expenses
|
|
|
|
(3,411)
|
|
|
12,537
|
|
|
|
|
|
|
(870)
|
|
|
3,197
|
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
(2,541)
|
|
|
$
|
9,340
|
|
|
Net of tax
|
Accumulated other comprehensive income in the equity section of our consolidated balance sheets includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
December 31,
2019
|
|
|
|
(In thousands)
|
|
Foreign currency translation adjustment
|
|
$
|
(3,902)
|
|
|
$
|
(2,187)
|
|
|
Unrealized loss on pension obligation
|
|
(1,798)
|
|
|
(1,733)
|
|
|
Unrealized gain on post-retirement benefit obligations
|
|
15,359
|
|
|
15,333
|
|
|
Unrealized gain on hedging instruments
|
|
443
|
|
|
3,361
|
|
|
Accumulated other comprehensive income
|
|
$
|
10,102
|
|
|
$
|
14,774
|
|
NOTE 13:Post-retirement Plans
PCLI has union and non-union pension plans which are closed to new entrants. In addition, Sonneborn employees in the Netherlands have a defined benefit pension plan which was frozen and all plan participants became inactive in 2016. Our net periodic pension expense consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In thousands)
|
|
Service cost - benefit earned during the period
|
|
$
|
1,117
|
|
|
$
|
1,209
|
|
|
$
|
3,321
|
|
|
$
|
3,605
|
|
|
Interest cost on projected benefit obligations
|
|
428
|
|
|
450
|
|
|
1,287
|
|
|
1,325
|
|
|
Expected return on plan assets
|
|
(1,016)
|
|
|
(822)
|
|
|
(3,029)
|
|
|
(2,441)
|
|
|
Amortization of loss
|
|
—
|
|
|
15
|
|
|
—
|
|
|
45
|
|
|
Net periodic pension expense
|
|
$
|
529
|
|
|
$
|
852
|
|
|
$
|
1,579
|
|
|
$
|
2,534
|
|
The expected long-term annual rates of return on plan assets are 5.75% and 1.50% for the PCLI and Sonneborn plans, respectively. These rates were used in measuring 2020 net periodic benefit costs.
We have post-retirement healthcare and other benefits that are available to certain of our employees who satisfy certain age and service requirements. The net periodic benefit credit of our post-retirement healthcare and other benefits plans consisted of the following components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
(In thousands)
|
|
Service cost – benefit earned during the period
|
|
$
|
451
|
|
|
$
|
387
|
|
|
$
|
1,352
|
|
|
$
|
1,161
|
|
|
Interest cost on projected benefit obligations
|
|
237
|
|
|
267
|
|
|
710
|
|
|
801
|
|
|
Amortization of prior service credit
|
|
(870)
|
|
|
(870)
|
|
|
(2,611)
|
|
|
(2,611)
|
|
|
Amortization of (gain) loss
|
|
13
|
|
|
(22)
|
|
|
38
|
|
|
(66)
|
|
|
Net periodic post-retirement credit
|
|
$
|
(169)
|
|
|
$
|
(238)
|
|
|
$
|
(511)
|
|
|
$
|
(715)
|
|
The components, other than service cost, of our net periodic pension expense and net periodic post-retirement credit are recorded in Other, net in our consolidated statements of income.
NOTE 14:Contingencies
We are a party to various litigation and legal proceedings which we believe, based on advice of counsel, will not either individually or in the aggregate have a materially adverse effect on our financial condition, results of operations or cash flows.
We filed a business interruption claim with our insurance carriers related to a loss at our Woods Cross Refinery that occurred in the first quarter 2018. During the three months ended September 30, 2020, we reached a final settlement agreement regarding the amounts owed to us pursuant to our business interruption coverage, and we recognized a gain of $81.0 million, which is reflected in our Corporate and Other segment.
During 2017, 2018 and 2019, the EPA granted the Cheyenne Refinery and Woods Cross Refinery each a one-year small refinery exemption from the Renewable Fuel Standard (“RFS”) program requirements for the 2016, 2017 and 2018, respectively, calendar years. As a result, the Cheyenne Refinery’s and Woods Cross Refinery’s gasoline and diesel production are not subject to the Renewable Volume Obligation for the respective years. Upon each exemption granted, we increased our inventory of RINs and reduced our cost of products sold.
In 2019, 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 RFS 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, in a second of these lawsuits, the U.S. Court of Appeals for the Tenth Circuit vacated the small refinery exemptions granted to two of our refineries for 2016 and remanded the case to the EPA for further proceedings. On March 24, 2020, various subsidiaries of HollyFrontier filed a Petition for Rehearing with the U.S. Court of Appeals for the Tenth Circuit. On April 7, 2020, the Tenth Circuit denied our request to reconsider its decision, and on April 15, 2020, the Tenth Circuit entered its mandate, remanding the matter back to the EPA. It is not clear at this time what steps the EPA will take with respect to our 2016 small refinery exemptions, or how the case will impact future small refinery exemptions. On September 4, 2020, various subsidiaries of HollyFrontier filed a Petition for a Writ of Certiorari with the U.S. Supreme Court appealing the Tenth Circuit decision. The third lawsuit is before the U.S. Court of Appeals for the Tenth Circuit, and the matter is fully briefed and remains pending before that court. The fourth lawsuit is before the U.S. Court of Appeals for the DC Circuit, and we anticipate briefing of the issues before the court to commence in the fourth quarter of 2020. We are unable to estimate the costs we may incur, if any, at this time. It is too early to assess how the matter currently on appeal to the U.S. Supreme Court will impact future small refinery exemptions or whether the remaining two cases are expected to have any impact on us.
NOTE 15: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 and Red Giant Oil, one of the largest suppliers of locomotive engine oil in North America. Also, effective with our acquisition that closed February 1, 2019, the Lubricants and Specialty Products segment includes Sonneborn, a producer of specialty hydrocarbon chemicals such as white oils, petrolatums and waxes with manufacturing facilities in the United States and Europe.
The HEP segment includes all of the operations of HEP, which owns and operates logistics and refinery assets consisting of petroleum product and crude oil pipelines, terminals, tankage, loading rack facilities and refinery processing units in the Mid-Continent, Southwest and Rocky Mountain regions of the United States. As of September 30, 2020, the HEP segment also includes a 75% ownership interest in UNEV (a consolidated subsidiary of HEP) and 50% ownership interests 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 in our Annual Report on Form 10-K for the year ended December 31, 2019.
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|
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|
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Refining
|
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Lubricants and Specialty Products
|
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HEP
|
|
Corporate, Other
and Eliminations (2)
|
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Consolidated
Total
|
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|
|
(In thousands)
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Three Months Ended September 30, 2020
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|
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|
|
Sales and other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
2,339,782
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|
|
$
|
452,878
|
|
|
$
|
26,740
|
|
|
$
|
—
|
|
|
$
|
2,819,400
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|
|
Intersegment revenues
|
|
56,331
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|
|
2,164
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|
|
100,991
|
|
|
(159,486)
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|
|
—
|
|
|
|
|
$
|
2,396,113
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|
|
$
|
455,042
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|
|
$
|
127,731
|
|
|
$
|
(159,486)
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|
|
$
|
2,819,400
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|
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Cost of products sold (exclusive of lower of cost or market inventory)
|
|
$
|
2,211,342
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|
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$
|
302,703
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|
|
$
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—
|
|
|
$
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(136,807)
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|
|
$
|
2,377,238
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|
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Lower of cost or market inventory valuation adjustment
|
|
$
|
(62,849)
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(62,849)
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|
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Operating expenses
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|
$
|
256,079
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|
|
$
|
54,488
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|
|
$
|
40,003
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|
|
$
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(18,074)
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|
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$
|
332,496
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Selling, general and administrative expenses
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|
$
|
30,866
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|
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$
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36,773
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|
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$
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2,332
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|
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$
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4,482
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$
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74,453
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Depreciation and amortization
|
|
$
|
79,146
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|
|
$
|
17,432
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|
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$
|
24,109
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|
|
$
|
4,593
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|
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$
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125,280
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|
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|
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Income (loss) from operations
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$
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(118,471)
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$
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43,646
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|
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$
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61,287
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$
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(13,680)
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$
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(27,218)
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Earnings of equity method investments
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$
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—
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$
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—
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|
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$
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1,316
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$
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—
|
|
|
$
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1,316
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|
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Capital expenditures
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|
$
|
41,740
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|
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$
|
6,995
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|
|
$
|
7,902
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|
|
$
|
26,635
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|
|
$
|
83,272
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
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Sales and other revenues:
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|
|
|
|
|
|
|
|
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Revenues from external customers
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|
$
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3,865,399
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|
|
$
|
529,561
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|
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$
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29,868
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|
|
$
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—
|
|
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$
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4,424,828
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Intersegment revenues
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81,571
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|
|
8,157
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|
|
106,027
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|
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(195,755)
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|
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—
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|
|
|
|
$
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3,946,970
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|
|
$
|
537,718
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|
|
$
|
135,895
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|
|
$
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(195,755)
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|
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$
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4,424,828
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Cost of products sold (exclusive of lower of cost or market inventory)
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|
$
|
3,177,167
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|
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$
|
397,926
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|
|
$
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—
|
|
|
$
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(171,326)
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|
|
$
|
3,403,767
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Lower of cost or market inventory valuation adjustment
|
|
$
|
34,062
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34,062
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|
|
Operating expenses
|
|
$
|
276,869
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|
|
$
|
57,974
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|
|
$
|
44,924
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|
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$
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(34,189)
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|
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$
|
345,578
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Selling, general and administrative expenses
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|
$
|
31,707
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|
|
$
|
43,875
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|
|
$
|
2,714
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|
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$
|
9,330
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|
|
$
|
87,626
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|
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Depreciation and amortization
|
|
$
|
76,765
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|
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$
|
22,700
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|
|
$
|
24,121
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|
|
$
|
3,430
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|
|
$
|
127,016
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|
|
|
|
|
|
|
|
|
|
|
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Income (loss) from operations
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|
$
|
350,400
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|
|
$
|
15,243
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|
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$
|
64,136
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$
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(3,000)
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|
|
$
|
426,779
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|
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Earnings of equity method investments
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|
$
|
—
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|
|
$
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—
|
|
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$
|
1,334
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|
|
$
|
—
|
|
|
$
|
1,334
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|
|
Capital expenditures
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|
$
|
53,506
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|
|
$
|
8,697
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|
|
$
|
6,076
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|
|
$
|
6,310
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|
|
$
|
74,589
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
Lubricants and Specialty Products
|
|
HEP
|
|
Corporate, Other
and Eliminations (2)
|
|
Consolidated
Total
|
|
|
|
(In thousands)
|
|
Nine Months Ended September 30, 2020
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|
|
|
|
|
|
|
|
|
Sales and other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
6,880,444
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|
|
$
|
1,330,021
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|
|
$
|
72,410
|
|
|
$
|
—
|
|
|
$
|
8,282,875
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|
|
Intersegment revenues
|
|
178,039
|
|
|
8,911
|
|
|
297,982
|
|
|
(484,932)
|
|
|
—
|
|
|
|
|
$
|
7,058,483
|
|
|
$
|
1,338,932
|
|
|
$
|
370,392
|
|
|
$
|
(484,932)
|
|
|
$
|
8,282,875
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|
|
Cost of products sold (exclusive of lower of cost or market inventory)
|
|
$
|
6,113,530
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|
|
$
|
952,430
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|
|
$
|
—
|
|
|
$
|
(418,000)
|
|
|
$
|
6,647,960
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|
|
Lower of cost or market inventory valuation adjustment
|
|
$
|
227,711
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
227,711
|
|
|
Operating expenses
|
|
$
|
754,612
|
|
|
$
|
156,459
|
|
|
$
|
109,721
|
|
|
$
|
(56,592)
|
|
|
$
|
964,200
|
|
|
Selling, general and administrative expenses
|
|
$
|
94,677
|
|
|
$
|
121,654
|
|
|
$
|
7,569
|
|
|
$
|
13,659
|
|
|
$
|
237,559
|
|
|
Depreciation and amortization
|
|
$
|
251,019
|
|
|
$
|
59,260
|
|
|
$
|
72,095
|
|
|
$
|
13,659
|
|
|
$
|
396,033
|
|
|
Long-lived asset impairment (1)
|
|
$
|
215,242
|
|
|
$
|
204,708
|
|
|
$
|
16,958
|
|
|
$
|
—
|
|
|
$
|
436,908
|
|
|
Income (loss) from operations
|
|
$
|
(598,308)
|
|
|
$
|
(155,579)
|
|
|
$
|
164,049
|
|
|
$
|
(37,658)
|
|
|
$
|
(627,496)
|
|
|
Earnings of equity method investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,186
|
|
|
$
|
—
|
|
|
$
|
5,186
|
|
|
Capital expenditures
|
|
$
|
106,856
|
|
|
$
|
20,387
|
|
|
$
|
38,642
|
|
|
$
|
47,123
|
|
|
$
|
213,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
Sales and other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
11,446,841
|
|
|
$
|
1,568,241
|
|
|
$
|
89,388
|
|
|
$
|
220
|
|
|
$
|
13,104,690
|
|
|
Intersegment revenues
|
|
244,799
|
|
|
8,157
|
|
|
311,755
|
|
|
(564,711)
|
|
|
—
|
|
|
|
|
$
|
11,691,640
|
|
|
$
|
1,576,398
|
|
|
$
|
401,143
|
|
|
$
|
(564,491)
|
|
|
$
|
13,104,690
|
|
|
Cost of products sold (exclusive of lower of cost or market inventory)
|
|
$
|
9,598,539
|
|
|
$
|
1,202,296
|
|
|
$
|
—
|
|
|
$
|
(492,979)
|
|
|
$
|
10,307,856
|
|
|
Lower of cost or market inventory valuation adjustment
|
|
$
|
(150,483)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(150,483)
|
|
|
Operating expenses
|
|
$
|
794,081
|
|
|
$
|
170,655
|
|
|
$
|
123,045
|
|
|
$
|
(77,359)
|
|
|
$
|
1,010,422
|
|
|
Selling, general and administrative expenses
|
|
$
|
88,322
|
|
|
$
|
125,681
|
|
|
$
|
7,322
|
|
|
$
|
39,652
|
|
|
$
|
260,977
|
|
|
Depreciation and amortization
|
|
$
|
227,405
|
|
|
$
|
65,891
|
|
|
$
|
72,192
|
|
|
$
|
9,857
|
|
|
$
|
375,345
|
|
|
Goodwill impairment
|
|
$
|
—
|
|
|
$
|
152,712
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
152,712
|
|
|
Income (loss) from operations
|
|
$
|
1,133,776
|
|
|
$
|
(140,837)
|
|
|
$
|
198,584
|
|
|
$
|
(43,662)
|
|
|
$
|
1,147,861
|
|
|
Earnings of equity method investments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,217
|
|
|
$
|
—
|
|
|
$
|
5,217
|
|
|
Capital expenditures
|
|
$
|
129,167
|
|
|
$
|
25,887
|
|
|
$
|
23,828
|
|
|
$
|
16,175
|
|
|
$
|
195,057
|
|
(1) The results of our HEP reportable segment for the nine months ended September 30, 2020 include a long-lived asset impairment charge attributed to HEP’s logistics assets at our Cheyenne Refinery.
(2) For the three and nine months ended September 30, 2020, Corporate and Other includes $1.8 million and $2.7 million, respectively, of operating expenses and $20.5 million and $33.1 million, respectively, of capital expenditures related to the construction of our renewable diesel units.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
Lubricants and Specialty Products
|
|
HEP
|
|
Corporate, Other
and Eliminations
|
|
Consolidated
Total
|
|
|
|
(In thousands)
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,085
|
|
|
$
|
211,646
|
|
|
$
|
18,091
|
|
|
$
|
1,289,066
|
|
|
$
|
1,524,888
|
|
|
Total assets
|
|
$
|
6,197,301
|
|
|
$
|
1,933,482
|
|
|
$
|
2,193,770
|
|
|
$
|
1,255,188
|
|
|
$
|
11,579,741
|
|
|
Long-term debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,439,874
|
|
|
$
|
1,736,475
|
|
|
$
|
3,176,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,755
|
|
|
$
|
169,277
|
|
|
$
|
13,287
|
|
|
$
|
692,843
|
|
|
$
|
885,162
|
|
|
Total assets
|
|
$
|
7,189,094
|
|
|
$
|
2,223,418
|
|
|
$
|
2,205,437
|
|
|
$
|
546,892
|
|
|
$
|
12,164,841
|
|
|
Long-term debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,462,031
|
|
|
$
|
993,609
|
|
|
$
|
2,455,640
|
|