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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________
FORM 10-Q
_________________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from    __________   to   ____________         
Commission File Number 1-3876
 _________________________________________________________________
HOLLYFRONTIER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
75-1056913
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
2828 N. Harwood, Suite 1300
 
 
Dallas
 
 
Texas
 
75201
(Address of principal executive offices)
 
(Zip Code)
(214) 871-3555
(Registrant’s telephone number, including area code)
_________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock $0.01 par value
HFC
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
164,578,167 shares of Common Stock, par value $.01 per share, were outstanding on July 26, 2019.


Table of Content

HOLLYFRONTIER CORPORATION
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019 (Unaudited) and December 31, 2018
 
 
 
Three and Six Months Ended June 30, 2019 and 2018
 
 
 
Three and Six Months Ended June 30, 2019 and 2018
 
 
 
Six Months Ended June 30, 2019 and 2018
 
 
 
Three and Six Months Ended June 30, 2019 and 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Index to Exhibits
 
 
Signatures


Table of Content

FORWARD-LOOKING 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 this document, 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. This document contains 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.

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact included in this Form 10-Q, including, but not limited to, those under “Results of Operations,” “Liquidity and Capital Resources” and “Risk Management” in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and those in Part II, Item 1 “Legal Proceedings” are forward-looking statements. Forward-looking statements use words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “intend,” “should,” “would,” “could,” “believe,” “may,” and similar expressions and statements regarding our plans and objectives for future operations. These statements are based on management’s beliefs and assumptions using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks and uncertainties. All statements concerning our expectations for future results of operations are based on forecasts for our existing operations and do not include the potential impact of any future acquisitions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that our expectations will prove to be correct. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in these statements. Any differences could be caused by a number of factors including, but not limited to:

risks and uncertainties with respect to the actions of actual or potential competitive suppliers of refined petroleum products in our markets;
the demand for and supply of crude oil and refined products;
the spread between market prices for refined products and market prices for crude oil;
the possibility of constraints on the transportation of refined products;
the possibility of inefficiencies, curtailments or shutdowns in refinery operations or pipelines;
effects of governmental and environmental regulations and policies;
the availability and cost of our financing;
the effectiveness of our capital investments and marketing strategies;
our efficiency in carrying out construction projects;
our ability to acquire refined or lubricant product operations or pipeline and terminal operations on acceptable terms and to integrate any existing or future acquired operations;
the possibility of terrorist or cyber attacks and the consequences of any such attacks;
general economic conditions; and
other financial, operational and legal risks and uncertainties detailed from time to time in our SEC filings.

Cautionary statements identifying important factors that could cause actual results to differ materially from our expectations are set forth in this Form 10-Q, including without limitation, the forward-looking statements that are referred to above. This summary discussion should be read in conjunction with the discussion of the known material risk factors and other cautionary statements under the heading “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 and in conjunction with the discussion in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Liquidity and Capital Resources.” All forward-looking statements included in this Form 10-Q and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

3

Table of Content

PART I. FINANCIAL INFORMATION

DEFINITIONS

Within this report, the following terms have these specific meanings:

BPD” means the number of barrels per calendar day of crude oil or petroleum products.

BPSD” means the number of barrels per stream day (barrels of capacity in a 24 hour period) of crude oil or petroleum products.

Base oil” is a lubricant grade oil initially produced from refining crude oil or through chemical synthesis that is used in producing lubricant products such as lubricating greases, motor oil and metal processing fluids.

Black wax crude oil” is a low sulfur, low gravity crude oil produced in the Uintah Basin in Eastern Utah that has certain characteristics that require specific facilities to transport, store and refine into transportation fuels.

Cracking” means the process of breaking down larger, heavier and more complex hydrocarbon molecules into simpler and lighter molecules.

Crude oil distillation” means the process of distilling vapor from liquid crudes, usually by heating, and condensing the vapor slightly above atmospheric pressure turning it back to liquid in order to purify, fractionate or form the desired products.

FCC,” or fluid catalytic cracking, means a refinery process that breaks down large complex hydrocarbon molecules into smaller more useful ones using a circulating bed of catalyst at relatively high temperatures.

LPG” means liquid petroleum gases.

Lubricant” or “lube” means a solvent neutral paraffinic product used in commercial heavy duty engine oils, passenger car oils and specialty products for industrial applications such as heat transfer, metalworking, rubber and other general process oil.

MMBTU” means one million British thermal units.

Rack back” represents the portion of our Lubricants and Specialty Products business operations that entails the processing of feedstocks into base oils.

Rack forward” represents the portion of our Lubricants and Specialty Products business operations that entails the processing of base oils into finished lubricants and the packaging, distribution and sale to customers.

Refinery gross margin” means the difference between average net sales price and average cost per barrel sold. This does not include the associated depreciation and amortization costs.

“RINs” means renewable identification numbers and refers to serial numbers assigned to credits generated from renewable fuel production under the Environmental Protection Agency’s Renewable Fuel Standard (“RFS”) regulations, which require blending renewable fuels into the nation’s fuel supply. In lieu of blending, refiners may purchase these transferable credits in order to comply with the regulations.

Sour crude oil” means crude oil containing quantities of sulfur greater than 0.4 percent by weight, while “sweet crude oil” means crude oil containing quantities of sulfur equal to or less than 0.4 percent by weight.

Vacuum distillation” means the process of distilling vapor from liquid crudes, usually by heating, and condensing the vapor below atmospheric pressure turning it back to a liquid in order to purify, fractionate or form the desired products.

“White oil” is an extremely pure, highly-refined petroleum product that has a wide variety of applications ranging from pharmaceutical to cosmetic products.

“WTI” means West Texas Intermediate and is a grade of crude oil used as a common benchmark in oil pricing. WTI is a sweet crude oil and has a relatively low density.



4

Table of Content

Item 1.
Financial Statements
HOLLYFRONTIER CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
 
June 30,
2019
 
December 31, 2018
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents (HEP: $6,941 and $3,045, respectively)
 
$
914,644

 
$
1,154,752

 
 
 
 
 
Accounts receivable: Product and transportation (HEP: $15,074 and $12,332, respectively)
 
747,725

 
635,623

Crude oil resales
 
51,643

 
36,078

 
 
799,368

 
671,701

Inventories: Crude oil and refined products
 
1,439,685

 
1,166,404

Materials, supplies and other (HEP: $900 and $858, respectively)
 
196,896

 
187,975

 
 
1,636,581

 
1,354,379

Income taxes receivable
 
64,574

 
34,040

Prepayments and other (HEP: $2,983 and $3,452, respectively)
 
51,230

 
81,507

Total current assets
 
3,466,397

 
3,296,379

 
 
 
 
 
Properties, plants and equipment, at cost (HEP: $2,071,467 and $2,058,388, respectively)
 
7,066,375

 
6,780,980

Less accumulated depreciation (HEP: $(535,019) and $(489,217), respectively)
 
(2,263,405
)
 
(2,098,446
)
 
 
4,802,970

 
4,682,534

Operating lease right-of-use assets (HEP: $76,551)
 
449,745

 

 
 
 
 
 
Other assets: Turnaround costs
 
372,198

 
339,861

Goodwill (HEP: $312,873 and $314,229, respectively)
 
2,375,651

 
2,246,435

Intangibles and other (HEP: $169,678 and $176,291, respectively)
 
637,530

 
429,392

 
 
3,385,379

 
3,015,688

Total assets
 
$
12,104,491

 
$
10,994,601

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable (HEP: $10,659 and $16,723, respectively)
 
$
1,199,311

 
$
872,627

Income taxes payable
 
25,820

 
17,636

Operating lease liabilities (HEP: $5,346)
 
93,991

 

Accrued liabilities (HEP: $29,444 and $27,240, respectively)
 
344,905

 
277,892

Total current liabilities
 
1,664,027

 
1,168,155

 
 
 
 
 
Long-term debt (HEP: $1,437,710 and $1,418,900, respectively)
 
2,430,832

 
2,411,540

Noncurrent operating lease liabilities (HEP: $71,550)
 
357,635

 

Deferred income taxes (HEP: $423 and $488, respectively)
 
877,456

 
722,576

Other long-term liabilities (HEP: $61,195 and $63,534, respectively)
 
243,542

 
233,271

 
 
 
 
 
Equity:
 
 
 
 
HollyFrontier stockholders’ equity:
 
 
 
 
Preferred stock, $1.00 par value – 5,000,000 shares authorized; none issued
 

 

Common stock $.01 par value – 320,000,000 shares authorized; 256,036,760 and 256,036,788 shares issued as of June 30, 2019 and December 31, 2018, respectively
 
2,560

 
2,560

Additional capital
 
4,216,305

 
4,196,125

Retained earnings
 
4,533,364

 
4,196,902

Accumulated other comprehensive income
 
30,202

 
13,623

Common stock held in treasury, at cost – 90,138,137 and 83,915,297 shares as of June 30, 2019 and December 31, 2018, respectively
 
(2,769,284
)
 
(2,490,639
)
Total HollyFrontier stockholders’ equity
 
6,013,147

 
5,918,571

Noncontrolling interest
 
517,852

 
540,488

Total equity
 
6,530,999

 
6,459,059

Total liabilities and equity
 
$
12,104,491

 
$
10,994,601


Parenthetical amounts represent asset and liability balances attributable to Holly Energy Partners, L.P. (“HEP”) as of June 30, 2019 and December 31, 2018. HEP is a variable interest entity.

See accompanying notes.

5

Table of Content

HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Sales and other revenues
 
$
4,782,615

 
$
4,471,236

 
$
8,679,862

 
$
8,599,663

Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of products sold (exclusive of depreciation and amortization):
 
 
 
 
 
 
 
 
Cost of products sold (exclusive of lower of cost or market inventory valuation adjustment)
 
3,704,884

 
3,595,916

 
6,904,089

 
6,943,041

Lower of cost or market inventory valuation adjustment
 
47,801

 
(106,926
)
 
(184,545
)
 
(210,764
)
 
 
3,752,685

 
3,488,990

 
6,719,544

 
6,732,277

Operating expenses (exclusive of depreciation and amortization)
 
333,252

 
296,215

 
664,844

 
616,503

Selling, general and administrative expenses (exclusive of depreciation and amortization)
 
85,317

 
68,675

 
173,351

 
133,339

Depreciation and amortization
 
126,908

 
110,379

 
248,329

 
214,720

Goodwill impairment
 
152,712

 

 
152,712

 

Total operating costs and expenses
 
4,450,874

 
3,964,259

 
7,958,780

 
7,696,839

Income from operations
 
331,741

 
506,977

 
721,082

 
902,824

Other income (expense):
 
 
 
 
 
 
 
 
Earnings of equity method investments
 
1,783

 
1,734

 
3,883

 
3,013

Interest income
 
4,588

 
2,934

 
10,963

 
5,524

Interest expense
 
(34,264
)
 
(32,324
)
 
(70,911
)
 
(65,047
)
Gain (loss) on foreign currency transactions
 
2,213

 
(325
)
 
4,478

 
5,235

Other, net
 
92

 
1,364

 
649

 
2,710

 
 
(25,588
)
 
(26,617
)
 
(50,938
)
 
(48,565
)
Income before income taxes
 
306,153

 
480,360

 
670,144

 
854,259

Income tax expense:
 
 
 
 
 
 
 
 
Current
 
63,364

 
88,283

 
118,648

 
145,934

Deferred
 
25,972

 
29,164

 
58,193

 
56,550

 
 
89,336

 
117,447

 
176,841

 
202,484

Net income
 
216,817

 
362,913

 
493,303

 
651,775

Less net income attributable to noncontrolling interest
 
19,902

 
17,406

 
43,333

 
38,177

Net income attributable to HollyFrontier stockholders
 
$
196,915

 
$
345,507

 
$
449,970

 
$
613,598

Earnings per share attributable to HollyFrontier stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
1.16

 
$
1.96

 
$
2.64

 
$
3.47

Diluted
 
$
1.15

 
$
1.94

 
$
2.62

 
$
3.44

Average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
169,356

 
175,899

 
170,100

 
176,256

Diluted
 
170,547

 
177,586

 
171,264

 
177,820


See accompanying notes.

6

Table of Content

HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Net income
 
$
216,817

 
$
362,913

 
$
493,303

 
$
651,775

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
9,160

 
(11,503
)
 
13,523

 
(23,443
)
Hedging instruments:
 
 
 
 
 
 
 
 
Change in fair value of cash flow hedging instruments
 
(693
)
 
(4,077
)
 
14,897

 
(8,402
)
Reclassification adjustments to net income on settlement of cash flow hedging instruments
 
(5,321
)
 
5,598

 
(6,963
)
 
4,407

Net unrealized gain (loss) on hedging instruments
 
(6,014
)
 
1,521

 
7,934

 
(3,995
)
Post-retirement benefit obligations:
 
 
 
 
 
 
 
 
Gain on pension plans
 
72

 

 

 

Gain on post-retirement healthcare plan
 
2

 

 

 

Net change in post-retirement benefit obligations
 
74

 

 

 

Other comprehensive income (loss) before income taxes
 
3,220

 
(9,982
)
 
21,457

 
(27,438
)
Income tax expense (benefit)
 
416

 
(2,034
)
 
4,878

 
(5,910
)
Other comprehensive income (loss)
 
2,804

 
(7,948
)
 
16,579

 
(21,528
)
Total comprehensive income
 
219,621

 
354,965

 
509,882

 
630,247

Less noncontrolling interest in comprehensive income
 
19,902

 
17,406

 
43,333

 
38,177

Comprehensive income attributable to HollyFrontier stockholders
 
$
199,719

 
$
337,559

 
$
466,549

 
$
592,070


See accompanying notes.


7

Table of Content

HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Six Months Ended June 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
493,303

 
$
651,775

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
248,329

 
214,720

Goodwill impairment
 
152,712

 

Lower of cost or market inventory valuation adjustment
 
(184,545
)
 
(210,764
)
Earnings of equity method investments, inclusive of distributions
 

 
228

(Gain) loss on sale of assets
 
73

 
(107
)
Deferred income taxes
 
58,193

 
56,550

Equity-based compensation expense
 
21,562

 
17,306

Change in fair value – derivative instruments
 
31,454

 
(17,807
)
(Increase) decrease in current assets:
 
 
 
 
Accounts receivable
 
(72,300
)
 
(121,144
)
Inventories
 
(6,708
)
 
21,255

Income taxes receivable
 
(26,835
)
 
24,512

Prepayments and other
 
14,020

 
(6,053
)
Increase (decrease) in current liabilities:
 
 
 
 
Accounts payable
 
292,893

 
61,425

Income taxes payable
 
7,826

 
72,822

Accrued liabilities
 
38,003

 
35,161

Turnaround expenditures
 
(110,273
)
 
(76,384
)
Other, net
 
11,843

 
4,650

Net cash provided by operating activities
 
969,550

 
728,145

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Additions to properties, plants and equipment
 
(102,717
)
 
(117,907
)
Additions to properties, plants and equipment – HEP
 
(17,752
)
 
(31,570
)
Purchase of Sonneborn, net of cash acquired
 
(662,665
)
 

Other, net
 
825

 
3,399

Net cash used for investing activities
 
(782,309
)
 
(146,078
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Borrowings under credit agreements
 
175,000

 
305,500

Repayments under credit agreements
 
(156,500
)
 
(417,500
)
Proceeds from issuance of common units - HEP
 

 
114,831

Purchase of treasury stock
 
(266,996
)
 
(53,743
)
Dividends
 
(113,508
)
 
(117,500
)
Distributions to noncontrolling interest
 
(66,703
)
 
(60,759
)
Payments on finance leases
 
(783
)
 

Other, net
 
(374
)
 
(544
)
Net cash used for financing activities
 
(429,864
)
 
(229,715
)
 
 
 
 
 
Effect of exchange rate on cash flow
 
2,515

 
(3,237
)
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
Increase (decrease) for the period
 
(240,108
)
 
349,115

Beginning of period
 
1,154,752

 
630,757

End of period
 
$
914,644

 
$
979,872

 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
(67,620
)
 
$
(64,711
)
Income taxes, net
 
$
(138,587
)
 
$
(48,561
)

See accompanying notes.

8


HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)

 
HollyFrontier Stockholders' Equity
 
 
 
 
 
Common Stock
 
 Additional Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Treasury stock
 
Non-controlling Interest
 
Total
Equity
 
(In thousands)
Balance at December 31, 2018
$
2,560

 
$
4,196,125

 
$
4,196,902

 
$
13,623

 
$
(2,490,639
)
 
$
540,488

 
$
6,459,059

Net income

 

 
253,055

 

 

 
23,431

 
276,486

Dividends ($0.33 declared per common share)

 

 
(56,849
)
 

 

 

 
(56,849
)
Distributions to noncontrolling interest holders

 

 

 

 

 
(33,673
)
 
(33,673
)
Other comprehensive income, net of tax

 

 

 
13,775

 

 

 
13,775

Issuance of common stock under incentive compensation plans, net of tax

 
3

 

 

 
(3
)
 

 

Equity-based compensation

 
8,713

 

 

 

 
661

 
9,374

Purchase of treasury stock

 

 

 

 
(73,225
)
 

 
(73,225
)
Purchase of HEP units for restricted grants

 

 

 

 

 
(373
)
 
(373
)
Balance at March 31, 2019
$
2,560

 
$
4,204,841

 
$
4,393,108

 
$
27,398

 
$
(2,563,867
)
 
$
530,534

 
$
6,594,574

Net income

 

 
196,915

 

 

 
19,902

 
216,817

Dividends ($0.33 declared per common share)

 

 
(56,659
)
 

 

 

 
(56,659
)
Distributions to noncontrolling interest holders

 

 

 

 

 
(33,030
)
 
(33,030
)
Other comprehensive income, net of tax

 

 

 
2,804

 

 

 
2,804

Equity attributable to HEP common unit issuances, net of tax

 

 

 

 

 
(140
)
 
(140
)
Issuance of common stock under incentive compensation plans, net of tax

 
(138
)
 

 

 
138

 

 

Equity-based compensation

 
11,602

 

 

 

 
586

 
12,188

Purchase of treasury stock

 

 

 

 
(205,555
)
 

 
(205,555
)
Balance at June 30, 2019
$
2,560

 
$
4,216,305

 
$
4,533,364

 
$
30,202

 
$
(2,769,284
)
 
$
517,852

 
$
6,530,999




9


 
HollyFrontier Stockholders' Equity
 
 
 
 
 
Common Stock
 
 Additional Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Treasury stock
 
Non-controlling Interest
 
Total
Equity
 
(In thousands)
Balance at December 31, 2017
$
2,560

 
$
4,132,696

 
$
3,346,615

 
$
29,869

 
$
(2,140,911
)
 
$
526,111

 
$
5,896,940

Net income

 

 
268,091

 

 

 
20,771

 
288,862

Dividends ($0.33 declared per common share)

 

 
(58,856
)
 

 

 

 
(58,856
)
Distributions to noncontrolling interest holders

 

 

 

 

 
(29,237
)
 
(29,237
)
Other comprehensive loss, net of tax

 

 

 
(13,580
)
 

 

 
(13,580
)
Equity attributable to HEP common unit issuances, net of tax

 
41,980

 

 

 

 
58,031

 
100,011

Issuance of common stock under incentive compensation plans, net of tax

 
1,057

 

 

 
(1,057
)
 

 

Equity-based compensation

 
7,961

 

 

 

 
836

 
8,797

Purchase of treasury stock

 

 

 

 
(27,520
)
 

 
(27,520
)
Purchase of HEP units for restricted grants

 

 

 

 

 
(58
)
 
(58
)
Adoption of accounting standards

 

 
(11,019
)
 
3,572

 

 

 
(7,447
)
Other

 
1

 
(1
)
 

 

 

 

Balance at March 31, 2018
$
2,560

 
$
4,183,695

 
$
3,544,830

 
$
19,861

 
$
(2,169,488
)
 
$
576,454

 
$
6,157,912

Net income

 

 
345,507

 

 

 
17,406

 
362,913

Dividends ($0.33 declared per common share)

 

 
(58,644
)
 

 

 

 
(58,644
)
Distributions to noncontrolling interest holders

 

 

 

 

 
(31,522
)
 
(31,522
)
Other comprehensive loss, net of tax

 

 

 
(7,948
)
 

 

 
(7,948
)
Equity attributable to HEP common unit issuances, net of tax

 
221

 

 

 

 
232

 
453

Issuance of common stock under incentive compensation plans, net of tax

 
335

 

 

 
(335
)
 

 

Equity-based compensation

 
7,797

 

 

 

 
712

 
8,509

Purchase of treasury stock

 

 

 

 
(28,030
)
 

 
(28,030
)
Other

 
(3
)
 
3

 

 

 

 

Balance at June 30, 2018
$
2,560

 
$
4,192,045

 
$
3,831,696

 
$
11,913

 
$
(2,197,853
)
 
$
563,282

 
$
6,403,643





10

Table of Content

HOLLYFRONTIER CORPORATION
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 June 30, 2019, 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”), a refinery located in Cheyenne, Wyoming (the “Cheyenne Refinery”) and a refinery in Woods Cross, Utah (the “Woods Cross 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 with manufacturing facilities in Petrolia, Pennsylvania and the Netherlands;
owned and operated Red Giant Oil Company LLC (“Red Giant Oil”), which supplies locomotive engine oil with 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.

On November 12, 2018, we entered into an equity purchase agreement to acquire 100% of the issued and outstanding capital stock of Sonneborn US Holdings Inc. and 100% of the membership rights in Sonneborn Coöperatief U.A. (collectively, “Sonneborn”). The acquisition closed on February 1, 2019.

On July 10, 2018, we entered into a definitive agreement to acquire Red Giant Oil, a privately-owned lubricants company. The acquisition closed on August 1, 2018.

We have prepared these consolidated financial statements without audit. In management’s opinion, these consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of our consolidated financial position as of June 30, 2019, the consolidated results of operations, comprehensive income and statements of equity for the three and six months ended June 30, 2019 and 2018 and consolidated cash flows for the six months ended June 30, 2019 and 2018 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, 2018 that has been filed with the SEC.


11


Our results of operations for the six months ended June 30, 2019 are not necessarily indicative of the results of operations to be realized for the year ending December 31, 2019.

Accounts Receivable: Our accounts receivable consist of amounts due from customers that are primarily companies in the petroleum industry. Credit is extended based on our evaluation of the customer’s financial condition, and in certain circumstances collateral, such as letters of credit or guarantees, is required. We reserve for doubtful accounts based on our historical loss experience as well as specific accounts identified as high risk, which historically have been minimal. Credit losses are charged to the allowance for doubtful accounts when an account is deemed uncollectible. Our allowance for doubtful accounts was $4.4 million at June 30, 2019 and $3.6 million at December 31, 2018.

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 and lease expense is accounted for on a straight-line basis. For certain equipment leases, we apply a portfolio approach for the operating lease ROU assets and liabilities. Also, as a lessee, we separate non-lease components that are identifiable and exclude them from the determination of net present value of lease payment obligations. In addition, HEP, as a lessor, does not separate the non-lease (service) component in contracts in which the lease component is the dominant component. HEP treats these combined components as an operating lease.


12


Goodwill and Long-lived Assets: As of June 30, 2019, 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, $329.3 million and $312.9 million, respectively. During the six months ended June 30, 2019, we recognized $283.6 million in goodwill as a result of our Sonneborn acquisition, all of which has been assigned to our Lubricants and Specialty Products segment. See Note 17 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 reporting unit over the related fair value.

Our long-lived assets principally consist of our refining assets that are organized as refining asset groups and the assets of our Lubricants and Specialty Products asset groups. The refinery asset groups also constitute our individual refinery reporting units that are used for testing and measuring goodwill impairments. Our long-lived assets are evaluated for impairment by identifying whether indicators of impairment exist and if so, assessing whether the long-lived assets are recoverable from estimated future undiscounted cash flows. The actual amount of impairment loss measured, if any, is equal to the amount by which the asset group’s carrying value exceeds its fair value.

Goodwill impairment
During the second quarter of 2019, we performed interim goodwill impairment testing of the PCLI reporting unit included in our Lubricants and Specialty Products segment. We elected to perform this interim assessment due to the recent reorganization of our reporting unit structure within the Lubricants and Specialty Products segment, combined with the identification of events and circumstances which were indicators of potential goodwill impairment at PCLI, including recent declines in gross margins to lower than historic levels. These recent lower gross margins are in the base oil market which is largely attributed to the increase in global supply of base oils with a current outlook for continued near-term softness.

Our interim goodwill impairment testing was performed as of May 31, 2019. The estimated fair values of our goodwill reporting units within our Lubricants and Specialty Products segment were derived using a combination of both income and market approaches. The income approach reflects expected future cash flows based on estimated future production volumes, selling prices, gross margins, operating costs and capital expenditures. Our market approach includes both the guideline public company and guideline transaction methods. Both methods utilize pricing multiples derived from historical market transactions of other like-kind assets. These fair value measurements involve significant unobservable inputs (Level 3 inputs). See Note 6 for further discussion of Level 3 inputs.

As a result of our impairment testing, we determined that the carrying value of the PCLI reporting unit’s goodwill within our Lubricants and Specialty Products segment was fully impaired and a goodwill impairment charge of $152.7 million was recorded. Our testing did not identify any other impairments.

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. Additionally, 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.


13


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 on February 1, 2017, we issued intercompany notes to initially fund certain of our foreign businesses. Remeasurement adjustments resulting from the conversion of such intercompany financing amounts to functional currencies are recorded as gains and losses as a component of other income (expense) in the income statement. Such adjustments are not recorded to the Lubricants and Specialty Products segment operations, but to Corporate and Other. See Note 17 for additional information on our segments.

Income Taxes: Provisions for income taxes include deferred taxes resulting from temporary differences in income for financial and tax purposes, using the liability method of accounting for income taxes. The liability method requires the effect of tax rate changes on deferred income taxes to be reflected in the period in which the rate change was enacted. The liability method also requires that deferred tax assets be reduced by a valuation allowance unless it is more likely than not that the assets will be realized.

Potential interest and penalties related to income tax matters are recognized in income tax expense. We believe we have appropriate support for the income tax positions taken and to be taken on our income tax returns and that our accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.

Inventory Repurchase Obligations: We periodically enter into same-party sell / buy transactions, whereby we sell certain refined product inventory and subsequently repurchase the inventory in order to facilitate delivery to certain locations. Such sell / buy transactions are accounted for as inventory repurchase obligations under which proceeds received under the initial sell is recognized as an inventory repurchase obligation that is subsequently reversed when the inventory is repurchased. For the six months ended June 30, 2019 and 2018, we received proceeds of $12.6 million and $23.6 million, respectively, and repaid $12.9 million and $24.1 million, respectively, under these sell / buy transactions.

Cost Classifications: During the three months ended June 30, 2018, we recognized an adjustment in our Lubricants and Specialty Products segment to correct an expense misclassification related to the three months ended March 31, 2018, whereby $24.0 million of inventory transportation costs were classified as operating expenses, which should have been included in cost of products sold. This adjustment had no impact on our operating or net income.


14


Accounting Pronouncements - Recently Adopted

Goodwill Impairment Testing
In January 2017, Accounting Standard Update (“ASU”) 2017-04, “Simplifying the Test for Goodwill Impairment,” was issued amending the testing for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. We adopted this standard effective in the second quarter of 2019, and the adoption of this standard resulted in no change to the amount of goodwill impairment recorded in the second quarter of 2019.

Leases
In February 2016, ASU 2016-02, “Leases,” was issued requiring leases to be measured and recognized as a lease liability, with a corresponding ROU asset on the balance sheet. We adopted this standard effective January 1, 2019 using the optional transition method, whereby comparative prior period financial information will not be restated and will continue to be reported under the lease accounting standard in effect during those periods. We also elected practical expedients provided by the new standard, including the package of practical expedients, whereby we did not reassess lease classification or initial indirect lease cost under the new standard. In addition, we elected to exclude short-term leases, which at inception have a lease term of 12 months or less, from the amounts recognized on our balance sheet. In addition, HEP elected an expedient whereby a lessor does not have to separate non-lease (service) components from lease components under certain contracts. Under this expedient, HEP treated the combined components of its leases with third parties (i.e., the contracts that are not eliminated upon consolidation of HEP by HFC) as an operating lease in which the dominant component was a lease in accordance with ASC 842. Upon adoption of this standard, we recognized $433.4 million of lease liabilities and corresponding ROU assets on our consolidated balance sheet. Adoption of this standard did not have a material impact on our results of operations or cash flows. In addition, upon our acquisition of Sonneborn on February 1, 2019, we recognized $15.9 million of lease liabilities and corresponding ROU assets.

Accounting Pronouncements - Not Yet Adopted

Credit Losses Measurement
In June 2016, ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” was issued requiring measurement of all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This standard is effective January 1, 2020, and we are currently evaluating the impact of this standard.


NOTE 2:
Acquisitions

On November 12, 2018, we entered into an equity purchase agreement to acquire 100% of the capital stock of Sonneborn. The acquisition closed on February 1, 2019. Sonneborn is a producer of specialty hydrocarbon chemicals such as white oils, petrolatums and waxes with manufacturing facilities in the United States and Europe.

Aggregate consideration totaled $701.6 million and consisted of $662.7 million in cash paid at acquisition, net of cash acquired. Working capital settlement pursuant to the purchase agreement has been finalized.

This transaction is accounted for as a business combination using the acquisition method of accounting, with the purchase price allocated to the fair value of the acquired Sonneborn assets and liabilities as of the February 1 acquisition date, with the excess purchase price recorded as goodwill assigned to our Lubricants and Specialty Products segment.


15


The following summarizes our preliminary value estimates of the Sonneborn assets and liabilities acquired on February 1, 2019:
 
(In millions)
Cash and cash equivalents
$
38.9

Accounts receivable and other current assets
58.6

Inventories
81.3

Properties, plants and equipment
166.1

Goodwill