Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - HollyFrontier Corp | hfcex3223-31x201810q.htm |
| EX-32.1 - EXHIBIT 32.1 - HollyFrontier Corp | hfcex3213-31x201810q.htm |
| EX-31.2 - EXHIBIT 31.2 - HollyFrontier Corp | hfcex3123-31x201810q.htm |
| EX-31.1 - EXHIBIT 31.1 - HollyFrontier Corp | hfcex3113-31x201810q.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________
FORM 10-Q
_________________________________________________________________
(Mark One)
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2018
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)
_________________________________________________________________
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 | ý | 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 ý
176,542,274 shares of Common Stock, par value $.01 per share, were outstanding on April 27, 2018.
HOLLYFRONTIER CORPORATION
INDEX
Page | |
March 31, 2018 (Unaudited) and December 31, 2017 | |
Three Months Ended March 31, 2018 and 2017 | |
Three Months Ended March 31, 2018 and 2017 | |
Three Months Ended March 31, 2018 and 2017 | |
Index to Exhibits | |
Signatures | |
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 product operations or pipeline and terminal operations on acceptable terms and to integrate any existing or future acquired operations; |
• | the possibility of terrorist 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, 2017 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
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.
“Biodiesel” means a clean alternative fuel produced from renewable biological resources.
“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.
“Ethanol” means a high octane gasoline blend stock that is used to make various grades of gasoline.
“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.
“Hydrodesulfurization” means to remove sulfur and nitrogen compounds from oil or gas in the presence of hydrogen and a catalyst at relatively high temperatures.
“Hydrogen plant” means a refinery unit that converts natural gas and steam to high purity hydrogen, which is then used in the hydrodesulfurization, hydrocracking and isomerization processes.
“Isomerization” means a refinery process for rearranging the structure of C5/C6 molecules without changing their size or chemical composition and is used to improve the octane of C5/C6 gasoline blendstocks.
“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.
“MSAT2” means Control of Hazardous Air Pollutants from Mobile Sources, a rule issued by the U.S. Environmental Protection Agency to reduce hazardous emissions from motor vehicles and motor vehicle fuels.
“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.
5
Item 1. | Financial Statements |
HOLLYFRONTIER CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, 2018 | December 31, 2017 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents (HEP: $8,565 and $7,776, respectively) | $ | 781,467 | $ | 630,757 | ||||
Accounts receivable: Product and transportation (HEP: $14,534 and $12,803, respectively) | 669,978 | 659,530 | ||||||
Crude oil resales | 172,820 | 61,203 | ||||||
842,798 | 720,733 | |||||||
Inventories: Crude oil and refined products | 1,318,728 | 1,409,538 | ||||||
Materials, supplies and other (HEP: $916 and $916, respectively) | 273,553 | 220,554 | ||||||
1,592,281 | 1,630,092 | |||||||
Income taxes receivable | 21,610 | 44,337 | ||||||
Prepayments and other (HEP: $2,092 and $1,395, respectively) | 54,757 | 36,909 | ||||||
Total current assets | 3,292,913 | 3,062,828 | ||||||
Properties, plants and equipment, at cost (HEP: $2,024,405 and $2,011,915, respectively) | 6,557,922 | 6,523,789 | ||||||
Less accumulated depreciation (HEP: $(430,339) and $(408,599), respectively) | (1,884,643 | ) | (1,810,515 | ) | ||||
4,673,279 | 4,713,274 | |||||||
Other assets: Turnaround costs | 270,065 | 231,319 | ||||||
Goodwill (HEP: $312,059 and $310,610, respectively) | 2,242,980 | 2,244,744 | ||||||
Intangibles and other (HEP: $201,699 and $206,167, respectively) | 432,837 | 439,989 | ||||||
2,945,882 | 2,916,052 | |||||||
Total assets | $ | 10,912,074 | $ | 10,692,154 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable (HEP: $13,269 and $14,637, respectively) | $ | 1,194,082 | $ | 1,220,795 | ||||
Income taxes payable | 35,717 | 3,159 | ||||||
Accrued liabilities (HEP: $28,313 and $33,214, respectively) | 235,207 | 198,756 | ||||||
Total current liabilities | 1,465,006 | 1,422,710 | ||||||
Long-term debt (HEP: $1,390,952 and $1,507,308, respectively) | 2,382,874 | 2,498,993 | ||||||
Deferred income taxes (HEP: $565 and $525, respectively) | 679,899 | 647,785 | ||||||
Other long-term liabilities (HEP: $62,886 and $62,590, respectively) | 226,383 | 225,726 | ||||||
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; 256,015,579 and 256,015,550 shares issued as of March 31, 2018 and December 31, 2017, respectively | 2,560 | 2,560 | ||||||
Additional capital | 4,183,695 | 4,132,696 | ||||||
Retained earnings | 3,544,830 | 3,346,615 | ||||||
Accumulated other comprehensive income | 19,861 | 29,869 | ||||||
Common stock held in treasury, at cost – 79,236,939 and 78,607,928 shares as of March 31, 2018 and December 31, 2017, respectively | (2,169,488 | ) | (2,140,911 | ) | ||||
Total HollyFrontier stockholders’ equity | 5,581,458 | 5,370,829 | ||||||
Noncontrolling interest | 576,454 | 526,111 | ||||||
Total equity | 6,157,912 | 5,896,940 | ||||||
Total liabilities and equity | $ | 10,912,074 | $ | 10,692,154 | ||||
Parenthetical amounts represent asset and liability balances attributable to Holly Energy Partners, L.P. (“HEP”) as of March 31, 2018 and December 31, 2017. HEP is a variable interest entity.
See accompanying notes.
6
HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Sales and other revenues | $ | 4,128,427 | $ | 3,080,483 | ||||
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) | 3,347,125 | 2,641,176 | ||||||
Lower of cost or market inventory valuation adjustment | (103,838 | ) | 11,823 | |||||
3,243,287 | 2,652,999 | |||||||
Operating expenses (exclusive of depreciation and amortization) | 320,288 | 307,725 | ||||||
Selling, general and administrative expenses (exclusive of depreciation and amortization) | 64,664 | 57,255 | ||||||
Depreciation and amortization | 104,341 | 96,040 | ||||||
Total operating costs and expenses | 3,732,580 | 3,114,019 | ||||||
Income (loss) from operations | 395,847 | (33,536 | ) | |||||
Other income (expense): | ||||||||
Earnings of equity method investments | 1,279 | 1,840 | ||||||
Interest income | 2,590 | 819 | ||||||
Interest expense | (32,723 | ) | (27,158 | ) | ||||
Loss on early extinguishment of debt | — | (12,225 | ) | |||||
Gain (loss) on foreign currency transactions | 5,560 | (9,933 | ) | |||||
Gain on foreign currency swap contracts | — | 24,545 | ||||||
Other, net | 1,346 | 1,077 | ||||||
(21,948 | ) | (21,035 | ) | |||||
Income (loss) before income taxes | 373,899 | (54,571 | ) | |||||
Income tax expense (benefit): | ||||||||
Current | 57,651 | (24,316 | ) | |||||
Deferred | 27,386 | 7,527 | ||||||
85,037 | (16,789 | ) | ||||||
Net income (loss) | 288,862 | (37,782 | ) | |||||
Less net income attributable to noncontrolling interest | 20,771 | 7,686 | ||||||
Net income (loss) attributable to HollyFrontier stockholders | $ | 268,091 | $ | (45,468 | ) | |||
Earnings (loss) per share attributable to HollyFrontier stockholders: | ||||||||
Basic | $ | 1.51 | $ | (0.26 | ) | |||
Diluted | $ | 1.50 | $ | (0.26 | ) | |||
Cash dividends declared per common share | $ | 0.33 | $ | 0.33 | ||||
Average number of common shares outstanding: | ||||||||
Basic | 176,617 | 176,210 | ||||||
Diluted | 177,954 | 176,210 | ||||||
See accompanying notes.
7
HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Net income (loss) | $ | 288,862 | $ | (37,782 | ) | |||
Other comprehensive loss: | ||||||||
Foreign currency translation adjustment | (11,940 | ) | (6,713 | ) | ||||
Unrealized loss on marketable securities available for sale | — | (4 | ) | |||||
Hedging instruments: | ||||||||
Change in fair value of cash flow hedging instruments | (4,379 | ) | 3,413 | |||||
Reclassification adjustments to net income on settlement of cash flow hedging instruments | (1,191 | ) | 361 | |||||
Amortization of unrealized loss attributable to discontinued cash flow hedges | — | 270 | ||||||
Net unrealized gain (loss) on hedging instruments | (5,570 | ) | 4,044 | |||||
Other comprehensive loss before income taxes | (17,510 | ) | (2,673 | ) | ||||
Income tax benefit | (7,502 | ) | (235 | ) | ||||
Other comprehensive loss | (10,008 | ) | (2,438 | ) | ||||
Total comprehensive income (loss) | 278,854 | (40,220 | ) | |||||
Less noncontrolling interest in comprehensive income | 20,771 | 7,736 | ||||||
Comprehensive income (loss) attributable to HollyFrontier stockholders | $ | 258,083 | $ | (47,956 | ) | |||
See accompanying notes.
8
HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 288,862 | $ | (37,782 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 104,341 | 96,040 | ||||||
Lower of cost or market inventory valuation adjustment | (103,838 | ) | 11,823 | |||||
Earnings of equity method investments, inclusive of distributions | 243 | 273 | ||||||
Gain on sale of assets | (180 | ) | (65 | ) | ||||
Loss on early extinguishment of debt attributable to unamortized discount | — | 2,475 | ||||||
Deferred income taxes | 27,386 | 7,527 | ||||||
Equity-based compensation expense | 8,797 | 7,410 | ||||||
Change in fair value – derivative instruments | (18,096 | ) | (5,426 | ) | ||||
(Increase) decrease in current assets: | ||||||||
Accounts receivable | (136,841 | ) | (200 | ) | ||||
Inventories | 151,451 | 14,005 | ||||||
Income taxes receivable | 21,111 | (18,598 | ) | |||||
Prepayments and other | (5,297 | ) | (2,343 | ) | ||||
Increase (decrease) in current liabilities: | ||||||||
Accounts payable | (20,065 | ) | (122,744 | ) | ||||
Income taxes payable | 33,701 | 288 | ||||||
Accrued liabilities | 34,978 | 41,681 | ||||||
Turnaround expenditures | (56,833 | ) | (47,977 | ) | ||||
Other, net | 4,064 | 14,229 | ||||||
Net cash provided by (used for) operating activities | 333,784 | (39,384 | ) | |||||
Cash flows from investing activities: | ||||||||
Additions to properties, plants and equipment | (56,927 | ) | (51,492 | ) | ||||
Additions to properties, plants and equipment – HEP | (12,612 | ) | (8,265 | ) | ||||
Purchase of PCLI, net of cash acquired | — | (840,432 | ) | |||||
Purchases of marketable securities | — | (41,565 | ) | |||||
Sales and maturities of marketable securities | — | 465,716 | ||||||
Other, net | 3,458 | 3,022 | ||||||
Net cash used for investing activities | (66,081 | ) | (473,016 | ) | ||||
Cash flows from financing activities: | ||||||||
Borrowings under credit agreements | 227,000 | 406,000 | ||||||
Repayments under credit agreements | (343,500 | ) | (112,000 | ) | ||||
Redemption of senior notes - HEP | — | (309,750 | ) | |||||
Proceeds from issuance of common units - HEP | 114,529 | 37,563 | ||||||
Purchase of treasury stock | (25,182 | ) | — | |||||
Dividends | (58,856 | ) | (58,992 | ) | ||||
Distributions to noncontrolling interest | (29,237 | ) | (26,536 | ) | ||||
Shares withheld for tax withholding obligations | (465 | ) | (274 | ) | ||||
Other, net | — | (4,374 | ) | |||||
Net cash used for financing activities | (115,711 | ) | (68,363 | ) | ||||
Effect of exchange rate on cash flow | (1,282 | ) | (304 | ) | ||||
Cash and cash equivalents: | ||||||||
Increase (decrease) for the period | 150,710 | (581,067 | ) | |||||
Beginning of period | 630,757 | 710,579 | ||||||
End of period | $ | 781,467 | $ | 129,512 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | (17,293 | ) | $ | (27,111 | ) | ||
Income taxes, net | $ | (2,857 | ) | $ | (2,513 | ) | ||
See accompanying notes.
9
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 principally an independent petroleum refiner that produces high-value light products such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. 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 own and operate a lubricant production facility with retail and wholesale marketing of its products through a global sales network with locations in Canada, United States, Europe and China. As of March 31, 2018, 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 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”). |
On October 29, 2016, our wholly-owned subsidiary, 9952110 Canada Inc., entered into a share purchase agreement with Suncor Energy Inc. (“Suncor”) to acquire 100% of the outstanding capital stock of PCLI. The acquisition closed on February 1, 2017. Cash consideration paid was $862.1 million, or $1.125 billion in Canadian dollars.
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 March 31, 2018, the consolidated results of operations and comprehensive income for the three months ended March 31, 2018 and 2017 and consolidated cash flows for the three months ended March 31, 2018 and 2017 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, 2017 that has been filed with the SEC.
Our results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results of operations to be realized for the year ending December 31, 2018.
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 $3.6 million at both March 31, 2018 and December 31, 2017.
10
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Inventories: Inventories related to our refining operations are stated at the lower of cost, using the last-in, first-out (“LIFO”) method for crude oil and unfinished and finished refined products, or market. 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 business 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.
Goodwill and Long-lived Assets: As of March 31, 2018, our goodwill balance was $2.2 billion, with goodwill assigned to our Refining, Lubricants and Specialty Products and HEP segments of $1.7 billion, $0.2 billion and $0.3 billion, 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 long-lived assets principally consist of our refining assets that are organized as refining asset groups and our lubricants and specialty products business.
Foreign Currency Translation: The functional currency of PCLI and its affiliated non-U.S. Petro-Canada Lubricants entities includes the Canadian dollar, the euro and Chinese renminbi. Balance sheet accounts 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 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.
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. As of March 31, 2018, we have not fully completed our accounting for the tax effects of enactment of the Act; however, we have made a reasonable estimate of the effects on our existing deferred tax balance and the one-time transition tax and related matters.
At December 31, 2017, we remeasured certain deferred tax assets and liabilities based upon the rates at which they are expected to turn in the future, which is generally 25%. At March 31, 2018, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred amounts. Our accounting for these provisional amounts related to the Act is incomplete pending the completion of our analysis.
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.
11
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
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 three months ended March 31, 2018 and 2017, we received proceeds of $9.8 million and $12.3 million, respectively, and repaid $10.0 million and $12.7 million, respectively, under these sell / buy transactions.
Accounting Pronouncements - Recently Adopted
Accumulated Other Comprehensive Income
In February 2018, Accounting Standard Update (“ASU”) 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”),” was issued permitting a reclassification of stranded tax effects caused by the Tax Cuts and Jobs Act enacted on December 22, 2017 between AOCI and retained earnings. We adopted this standard effective for the period ended March 31, 2018 and recorded a cumulative effect adjustment of $3.6 million as an increase to AOCI and a decrease to retained earnings.
Hedge Accounting
In August 2017, ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities,” was issued amending hedge accounting recognition and presentation requirements, including elimination of the requirement to separately measure and report hedge ineffectiveness, and eases certain documentation and assessment requirements. We adopted this standard effective January 1, 2018 and recorded a cumulative effect adjustment of $0.1 million as a decrease to AOCI and an increase to retained earnings to eliminate the separate measurement of hedge ineffectiveness existing at the date of adoption. Our amended presentation and disclosures have been applied prospectively in Note 10.
Stock Compensation
In May 2017, ASU 2017-09, “Stock Compensation: Scope of Modification Accounting,” was issued to provide clarity to accounting for share-based payment awards in the event of a modification in the terms or conditions. We adopted this standard effective January 1, 2018 , which did not affect our financial position, results of operations or cash flows.
Post-retirement Benefit Cost
In March 2017, ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost,” was issued amending current GAAP related to the income statement presentation of the components of net periodic pension cost and net periodic post-retirement cost (credit). We adopted this standard effective January 1, 2018 on a retrospective basis with the presentation of service cost separate from the other components of net periodic costs. The interest cost, expected return on plan assets and amortization of prior service credit have been reclassified from selling, general and administrative expenses to other, net. The adoption of this standard had no impact on our financial condition, results of operations or cash flows.
The effect of the retrospective presentation change related to the net periodic cost / benefit of our defined benefit pension and other post-retirement plans on our consolidated income statement was as follows:
Three Months Ended March 31, 2017 | ||||||||||||
Income Statement | Prior to Adoption | Increase | As Adjusted | |||||||||
(In thousands) | ||||||||||||
Cost of products sold | $ | 2,641,157 | $ | 19 | $ | 2,641,176 | ||||||
Operating expenses | $ | 307,117 | $ | 608 | $ | 307,725 | ||||||
Selling, general and administrative expenses | $ | 57,070 | $ | 185 | $ | 57,255 | ||||||
Other, net | $ | 265 | $ | 812 | $ | 1,077 | ||||||
12
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Business Combinations
In January 2017, ASU 2017-01, “Business Combinations: Clarifying the Definition of a Business,” was issued clarifying the definition of a business with the objective of providing guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. We adopted this standard effective January 1, 2018, which did not affect our financial position, results of operations or cash flows.
Cash Flow Presentation
In August 2016, ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” was issued clarifying how entities should classify certain cash receipts and cash payments in the statements of cash flows and amends certain disclosure requirements. We adopted this standard effective January 1, 2018, which did not affect our financial position, results of operations or cash flows.
Revenue Recognition
In May 2014, ASU 2014-09 “Revenue from Contracts with Customers” was issued requiring revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the expected consideration for these goods or services. We adopted this standard effective January 1, 2018, and therefore, conformed our revenue recognition policies for certain lubricant product sales agreements with U.S. and European marketers and distributors that provide rights of return provisions under which we repurchase such products and sell directly to end customers. Prior to January 1, 2018, we recognized revenues and costs, net of allowances for expected returns under such agreements when such products were shipped to U.S. and European distributors. Effective with the adoption of ASU 2014-09, revenues and related product costs are no longer recognized when products are shipped to distributors, but rather, revenues and costs are recognized in earnings only when such products are ultimately sold to end customers.
We adopted this standard using the modified retrospective method, whereby the cumulative effect of applying the new standard was recorded as an adjustment to the opening balance of retained earnings as well as the carrying amounts of assets and liabilities as of January 1, 2018, which had no impact on our cash flows. The following reflects the cumulative effect of adoption as of January 1, 2018.
Prior to Adoption | Increase (Decrease) | As Adjusted | ||||||||||
(In thousands) | ||||||||||||
Accounts receivable: Product and transportation | $ | 659,530 | $ | (8,198 | ) | $ | 651,332 | |||||
Inventories: Crude oil and refined products | $ | 1,409,538 | $ | 5,124 | $ | 1,414,662 | ||||||
Accounts payable | $ | 1,220,795 | $ | 7,336 | $ | 1,228,131 | ||||||
Deferred income taxes | $ | 647,785 | $ | (2,963 | ) | $ | 644,822 | |||||
Retained earnings | $ | 3,346,615 | $ | (7,447 | ) | $ | 3,339,168 | |||||
See Note 3 for disclosure of revenues from contracts with customers.
Accounting Pronouncements - Not Yet Adopted
Leases
In February 2016, ASU 2016-02, “Leases,” was issued requiring leases to be measured and recognized as a lease liability, with a corresponding right-of-use asset on the balance sheet. This standard has an effective date of January 1, 2019, and we are evaluating the impact of this standard. In preparing for adoption, we have identified, reviewed and evaluated contracts containing lease and
embedded lease arrangements. Additionally, we have acquired software and are implementing systems to facilitate lease capture
and related accounting treatment.
13
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
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 in the Mid-Continent, Southwest and Rocky Mountain regions of the United States and Delek’s refinery in Big Spring, Texas. Additionally, HEP owns a 75% interest in UNEV Pipeline, LLC (“UNEV”), the owner of a pipeline running from Woods Cross, Utah to Las Vegas, Nevada (the “UNEV Pipeline”) and associated product terminals, 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”) and Cheyenne Pipeline, LLC, the owner of a pipeline running from Fort Laramie, Wyoming to Cheyenne, Wyoming (the “Cheyenne Pipeline”).
As of March 31, 2018, 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 storing and providing other services at its storage tanks and terminals. Under our long-term transportation agreements with HEP (discussed further below), we accounted for 79% of HEP’s total revenues for the three months ended March 31, 2018. 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.
SLC Pipeline and Frontier Pipeline
On October 31, 2017, HEP acquired the remaining 75% interest in SLC Pipeline LLC, the owner of a pipeline that serves refineries in the Salt Lake City, Utah area (the “SLC Pipeline”), and the remaining 50% interest in Frontier Aspen LLC, the owner of a pipeline running from Wyoming to Frontier Station, Utah (the “Frontier Pipeline”), from subsidiaries of Plains All American Pipeline, L.P. (“Plains”) for cash consideration of $250.0 million.
These acquisitions were accounted for as a business combination achieved in stages. HEP’s preexisting equity method investments in SLC Pipeline LLC and Frontier Aspen LLC were remeasured at an acquisition date fair value of $112.0 million, since HEP acquired a controlling interest, and a gain was recognized on the remeasurement of $36.3 million in the fourth quarter of 2017. The fair value of HEP's preexisting equity method investments in SLC Pipeline LLC and Frontier Aspen LLC was estimated using Level 3 inputs under the income method for these entities, adjusted for lack of control and marketability.
The total consideration of $363.8 million, consisting of cash consideration of $250.0 million, the fair value of HEP's preexisting equity method investments in SLC Pipeline LLC and Frontier Aspen LLC of $112.0 million, and working capital adjustments of $1.8 million, was allocated to the acquisition date fair value of assets and liabilities acquired as of the October 31, 2017 acquisition date, with the excess purchase price recorded as goodwill. Preliminary estimated fair values are as follows: cash and cash equivalents $4.6 million, current assets $5.2 million, properties and equipment $277.0 million, intangible assets $70.2 million, goodwill $11.6 million and current liabilities $4.8 million. The fair values are preliminary, and therefore, may change once all needed information has become available and valuations are complete.
HEP Private Placement Agreements
On January 25, 2018, HEP entered into a common unit purchase agreement in which certain purchasers agreed to purchase in a private placement 3,700,000 HEP common units, representing limited partner interests, at a price of $29.73 per common unit. The private placement closed on February 6, 2018, at which time HEP received proceeds of $110.0 million, which were used to repay indebtedness under the HEP Credit Agreement.
14
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
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 three months ended March 31, 2018, HEP issued 152,169 common units under this program, providing $4.6 million in net proceeds. As of March 31, 2018, HEP has issued 2,394,076 common units with an aggregate gross sales amount of $81.7 million.
HEP intends to use the net proceeds for general partnership purposes, which may include funding working capital, repayment of debt, acquisitions and capital expenditures. Amounts repaid under HEP’s credit facility may be reborrowed from time to time.
As a result of these transactions and resulting HEP ownership changes, we adjusted additional capital and equity attributable to HEP's noncontrolling interest holders to reallocate HEP's equity among its unitholders.
Transportation Agreements
HEP serves our refineries under long-term pipeline, terminal and tankage throughput agreements and refinery processing tolling agreements expiring from 2017 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 March 31, 2018, these agreements result in minimum annualized payments to HEP of $332.7 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.
NOTE 3: | Revenues from Contracts with Customers |
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 are as follows:
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
(In thousands) | ||||||||
Revenues by type | ||||||||
Refined product revenues | ||||||||
Transportation fuels (1) | $ | 3,074,388 | $ | 2,350,504 | ||||
Specialty lubricant products (2) | 399,039 | 289,853 | ||||||
Asphalt, fuel oil and other products (3) | 207,757 | 147,492 | ||||||
Total refined product revenues | 3,681,184 | 2,787,849 | ||||||
Excess crude oil revenues (4) | 396,716 | 258,741 | ||||||
Transportation and logistic services | 27,457 | 16,609 | ||||||
Other revenues (5) | 23,070 | 17,284 | ||||||
Total sales and other revenues | $ | 4,128,427 | $ | 3,080,483 | ||||
15
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
(In thousands) | ||||||||
Refined product revenues by market | ||||||||
North America | ||||||||
Mid-Continent | $ | 1,889,546 | $ | 1,538,245 | ||||
Southwest | 846,478 | 563,879 | ||||||
Rocky Mountains | 630,902 | 483,785 | ||||||
Northeast | 82,857 | 52,717 | ||||||
Canada | 180,422 | 117,959 | ||||||
Europe and Asia | 50,979 | 31,264 | ||||||
Total refined product revenues | $ | 3,681,184 | $ | 2,787,849 | ||||
(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 consist of revenues attributable to our Refining and Lubricants and Specialty Products segments of $161,956 and $45,801, respectively, for the three months ended March 31, 2018 and $116,076 and $31,416, respectively, for the three months ended March 31, 2017. |
(4) | Excess crude oil revenues represent sales of purchased crude oil inventory that at times exceeds the supply needs of our refineries. |
(5) | Other revenues consist of revenues attributable to our Refining and Corporate and Other segments of $22,807 and $263, respectively, for the three months ended March 31, 2018 and $17,284 and zero, respectively, for the three months ended March 31, 2017. |
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. HEP recognizes revenues as products are shipped through its pipelines and terminals and as other services are rendered. Additionally, HEP has certain long-term transportation contracts 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. 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. Payment terms under our contracts with customers are consistent with industry norms and are typically payable within 30 days of the date of invoice.
Our consolidated balance sheet reflects contract liabilities related to unearned revenues attributable to future service obligations under HEP’s third-party transportation agreements. The following table presents changes to our contract liabilities during the three months ended March 31, 2018.
January 1, 2018 | Increase | Recognized as Revenue | March 31, 2018 | |||||||||||||
(In thousands) | ||||||||||||||||
Accrued liabilities | $ | 179 | $ | 1,597 | $ | (179 | ) | $ | 1,597 | |||||||
As of March 31, 2018, 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 2020. 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:
16
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Remainder of 2018 | 2019 | 2020 | Thereafter | Total | |||||||||||
(In thousands) | |||||||||||||||
Refined product sales volumes (barrels) | 21,966 | 19,767 | 531 | — | 42,264 | ||||||||||
Additionally, HEP has long-term contracts with third-party customers that specify minimum volumes of product to be transported through its pipelines and terminals that result in fixed-minimum annual of revenues through 2022. Annual minimum revenues attributable to HEP’s third-party contracts as of March 31, 2018 are presented below:
Remainder of 2018 | 2019 | 2020 | Thereafter | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
HEP contractual minimum revenues | $ | 32,037 | $ | 41,369 | $ | 17,600 | $ | 12,839 | $ | 103,845 | ||||||||||
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 March 31, 2018 and December 31, 2017 were as follows:
Fair Value by Input Level | ||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
(In thousands) | ||||||||||||||||
March 31, 2018 | ||||||||||||||||
Assets: | ||||||||||||||||
Foreign currency forward contracts | $ | 16,197 | $ | — | $ | 16,197 | $ | — | ||||||||
Commodity forward contracts | 511 | — | 511 | — | ||||||||||||
Total assets | $ | 16,708 | $ | — | $ | 16,708 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
NYMEX futures contracts | $ | 1,309 | $ | 1,309 | $ | — | $ | — | ||||||||
Commodity price swaps | 3,580 | — | 3,580 | — | ||||||||||||
Commodity forward contracts | 3,730 | — | 3,730 | — | ||||||||||||
RINs credit obligations (1) | 3,025 | — | 3,025 | — | ||||||||||||
Total liabilities | $ | 11,644 | $ | 1,309 | $ | 10,335 | $ | — | ||||||||
17
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
December 31, 2017 | ||||||||||||||||
Assets: | ||||||||||||||||
Commodity forward contracts | $ | 3,840 | $ | — | $ | 3,840 | $ | — | ||||||||
Total assets | $ | 3,840 | $ | — | $ | 3,840 | $ | — | ||||||||
Liabilities: | ||||||||||||||||
NYMEX futures contracts | $ | 3,360 | $ | 3,360 | $ | — | $ | — | ||||||||
Commodity price swaps | 2,424 | — | 2,424 | — | ||||||||||||
Commodity forward contracts | 1,020 | — | 1,020 | — | ||||||||||||
RINs credit obligations (1) | 8,931 | — | 8,931 | — | ||||||||||||
Total liabilities | $ | 15,735 | $ | 3,360 | $ | 12,375 | $ | — | ||||||||
(1) | Represent obligations for RINs credits for which we do not have sufficient quantities at March 31, 2018 and December 31, 2017 to satisfy our Environmental Protection Agency (“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 inputs, 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.
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 shares 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 March 31, | ||||||||
2018 | 2017 | |||||||
(In thousands, except per share data) | ||||||||
Net income (loss) attributable to HollyFrontier stockholders | $ | 268,091 | $ | (45,468 | ) | |||
Participating securities’ (restricted stock) share in earnings | 950 | 379 | ||||||
Net income (loss) attributable to common shares | $ | 267,141 | $ | (45,847 | ) | |||
Average number of shares of common stock outstanding | 176,617 | 176,210 | ||||||
Effect of dilutive variable restricted shares and performance share units (1) | 1,337 | — | ||||||
Average number of shares of common stock outstanding assuming dilution | 177,954 | 176,210 | ||||||
Basic earnings (loss) per share | $ | 1.51 | $ | (0.26 | ) | |||
Diluted earnings (loss) per share | $ | 1.50 | $ | (0.26 | ) | |||
(1) Excludes anti-dilutive restricted and performance share units of: | 5 | 135 | ||||||
NOTE 6: | Stock-Based Compensation |
As of March 31, 2018, we have two principal share-based compensation plans (collectively, the “Long-Term Incentive Compensation Plan”).
The compensation cost charged against income for these plans was $8.0 million and $7.0 million for the three months ended March 31, 2018 and 2017, respectively. Our accounting policy for the recognition of compensation expense for awards with pro-rata vesting is to expense the costs ratably over the vesting periods.
Additionally, HEP maintains a share-based compensation plan for Holly Logistic Services, L.L.C.’s non-employee directors and certain executives and employees. Compensation cost attributable to HEP’s share-based compensation plan was $0.8 million and $0.4 million for the three months ended March 31, 2018 and 2017, respectively.
Restricted Stock and Restricted Stock Units
Under our Long-Term Incentive Compensation Plan, we grant certain officers and other key employees restricted stock unit awards with awards generally vesting over a period of two to three years. We previously granted restricted stock to certain officers and key employees with awards vesting over a period of three years. Certain restricted stock unit award recipients have the right to receive dividends, however, restricted stock units do not have any other rights of absolute ownership. Restricted stock award recipients are generally entitled to all the rights of absolute ownership of the restricted shares from the date of grant including the right to vote the shares and to receive dividends. Upon vesting, restrictions on the restricted shares and restricted share units lapse at which time they convert to common shares. In addition, we grant non-employee directors restricted stock unit awards, which typically vest over a period of one year and are payable in stock. The fair value of each restricted stock and restricted stock unit award is measured based on the grant date market price of our common shares and is amortized over the respective vesting period.
18
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
A summary of restricted stock and restricted stock unit activity and changes during the three months ended March 31, 2018 is presented below:
Restricted Stock and Restricted Stock Units | Grants | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value ($000) | ||||||||
Outstanding at January 1, 2018 (non-vested) | 1,726,188 | $ | 33.51 | ||||||||
Granted | 14,583 | 48.32 | |||||||||
Vesting (transfer/conversion to common stock) | (26,948 | ) | 31.03 | ||||||||
Forfeited | (59,436 | ) | 32.97 | ||||||||
Outstanding at March 31, 2018 (non-vested) | 1,654,387 | $ | 33.71 | $ | 80,833 | ||||||
For the three months ended March 31, 2018, restricted stock and restricted stock units vested having a grant date fair value of $0.8 million. As of March 31, 2018, there was $27.9 million of total unrecognized compensation cost related to non-vested restricted stock and restricted stock unit grants. That cost is expected to be recognized over a weighted-average period of 1.4 years.
Performance Share Units
Under our Long-Term Incentive Compensation Plan, we grant certain officers and other key employees performance share units, which are payable in stock 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 under these awards can range from zero to 200% of target award amounts.
A summary of performance share unit activity and changes during the three months ended March 31, 2018 is presented below:
Performance Share Units | Grants | ||
Outstanding at January 1, 2018 (non-vested) | 692,661 | ||
Forfeited | (38,126 | ) | |
Outstanding at March 31, 2018 (non-vested) | 654,535 | ||
As of March 31, 2018, there was $13.0 million of total unrecognized compensation cost related to non-vested performance share units having a grant date fair value of $33.93 per unit. That cost is expected to be recognized over a weighted-average period of 1.8 years.
19
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 7: | Inventories |
Inventory consists of the following components:
March 31, 2018 | December 31, 2017 | |||||||
(In thousands) | ||||||||
Crude oil | $ | 545,794 | $ | 581,417 | ||||
Other raw materials and unfinished products(1) | 338,327 | 396,618 | ||||||
Finished products(2) | 554,602 | 655,336 | ||||||
Lower of cost or market reserve | (119,995 | ) | (223,833 | ) | ||||
Process chemicals(3) | 33,905 | 24,792 | ||||||
Repair and maintenance supplies and other (4) | 239,648 | 195,762 | ||||||
Total inventory | $ | 1,592,281 | $ | 1,630,092 | ||||
(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. |
Inventories, which are valued at the lower of LIFO cost or market, reflect a valuation reserve of $120.0 million and $223.8 million at March 31, 2018 and December 31, 2017, respectively. The December 31, 2017 market reserve of $223.8 million was reversed due to the sale of inventory quantities that gave rise to the 2017 reserve. A new market reserve of $120.0 million was established as of March 31, 2018 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 goods sold totaling $103.8 million for the three months ended March 31, 2018 and an increase of $11.8 million for the three months ended March 31, 2017, respectively.
At March 31, 2018, the LIFO value of inventory, net of the lower of cost or market reserve, was equal to current costs.
During the three months ended March 31, 2018, the EPA granted the Cheyenne Refinery a one-year small refinery exemption from the Renewable Fuel Standard (“RFS”) program requirements for the 2015 and 2017 calendar years end. As a result, the Cheyenne Refinery’s gasoline and diesel production are not subject to the percentage of production that must satisfy a Renewable Volume Obligation (“RVO”) for those years.
As of the date we received the 2017 Cheyenne Refinery exemption, we had not yet submitted RINs to the EPA to satisfy this 2017 RVO, which we intended to satisfy, in part, with 2016 vintage RINs subject to the 20% carryover limit. In the first quarter of 2018, we increased our inventory of RINs and reduced our cost of products sold by $37.9 million, representing the net cost of the Cheyenne Refinery’s RINs charged to cost of products sold in 2017, less the loss incurred from selling 2016 vintage RINs prior to their expiration in 2018.
In the first quarter of 2018, the EPA allowed us to generate new 2018 vintage RINs to replace the RINs previously submitted to meet the Cheyenne Refinery’s 2015 RVO. In the first quarter of 2018, we increased our inventory of RINs and reduced our cost of products sold by $33.8 million representing the fair value of the 2018 RINs generated because of the Cheyenne Refinery’s exemption of its 2015 RVO.
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.
20
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
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 $0.3 million for the three months ended March 31, 2018 and and no expense for the three months ended March 31, 2017, for environmental remediation obligations. The accrued environmental liability reflected in our consolidated balance sheets was $102.3 million and $103.7 million at March 31, 2018 and December 31, 2017, respectively, of which $88.1 million and $89.6 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. During the three months ended March 31, 2018, there was no activity under the HollyFrontier Credit Agreement. At March 31, 2018, we were in compliance with all covenants, had no outstanding borrowings and had outstanding letters of credit totaling $2.3 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 three months ended March 31, 2018, HEP received advances totaling $227.0 million and repaid $343.5 million under the HEP Credit Agreement. At March 31, 2018, HEP was in compliance with all of its covenants, had outstanding borrowings of $895.5 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
Our 5.875% senior notes ($1 billion aggregate principal amount maturing April 2026) (the “HollyFrontier Senior Notes”) are unsecured and unsubordinated obligations of ours and rank equally with all our other existing and future unsecured and unsubordinated indebtedness.
HEP Senior Notes
HEP’s 6.0% senior notes ($500 million aggregate principal amount maturing August 2024) (the “HEP Senior Notes”) are unsecured and impose certain restrictive covenants, including limitations on HEP’s ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. At any time when the HEP Senior Notes are rated investment grade by both Moody’s and Standard & Poor’s and no default or event of default exists, HEP will not be subject to many of the foregoing covenants. Additionally, HEP has certain redemption rights under the HEP Senior Notes.
In January 2017, HEP redeemed its $300 million aggregate principal amount of 6.5% senior notes maturing March 2020 at a redemption cost of $309.8 million, at which time HEP recognized a $12.2 million early extinguishment loss consisting of a $9.8 million debt redemption premium and unamortized discount and financing costs of $2.4 million. HEP funded the redemption with borrowings under the HEP Credit Agreement.
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.
21
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
The carrying amounts of long-term debt are as follows:
March 31, 2018 | December 31, 2017 | |||||||
(In thousands) | ||||||||
HollyFrontier 5.875% Senior Notes | ||||||||
Principal | $ | 1,000,000 | $ | 1,000,000 | ||||
Unamortized discount and debt issuance costs | (8,078 | ) | (8,315 | ) | ||||
991,922 | 991,685 | |||||||
HEP Credit Agreement | 895,500 | 1,012,000 | ||||||
HEP 6% Senior Notes | ||||||||
Principal | 500,000 | 500,000 | ||||||
Unamortized discount and debt issuance costs | (4,548 | ) | (4,692 | ) | ||||
495,452 | 495,308 | |||||||
Total HEP long-term debt | 1,390,952 | 1,507,308 | ||||||
Total long-term debt | $ | 2,382,874 | $ | 2,498,993 | ||||
The fair values of the senior notes are as follows:
March 31, 2018 | December 31, 2017 | |||||||
(In thousands) | ||||||||
HollyFrontier senior notes | $ | 1,076,300 | $ | 1,113,470 | ||||
HEP senior notes | $ | 511,740 | $ | 525,120 | ||||
These fair values are based on estimates provided by a third party using market quotes for similar type instruments, a Level 2 input. See Note 4 for additional information on Level 2 inputs.
We capitalized interest attributable to construction projects of $0.9 million and $2.6 million for the three months ended March 31, 2018 and 2017, 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.
22
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Accounting Hedges
We have swap contracts serving as cash flow hedges against price risk on forecasted purchases of natural gas. We also periodically have forward sales contracts that lock in the prices of future sales of crude oil and refined product and swap contracts serving as cash flow hedges against price risk on forecasted purchases of WTI crude oil and forecasted sales of 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 derivatives designated as hedging instruments under hedge accounting:
Unrealized Gain (Loss) Recognized in OCI | Gain (Loss) Reclassified into Earnings | |||||||||||||||||
Derivatives Designated as Cash Flow Hedging Instruments | Three Months Ended March 31, | Income Statement Location | Three Months Ended March 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||
(In thousands) | ||||||||||||||||||
Commodity contracts | $ | (5,570 | ) | $ | 3,981 | Sales and other revenues | $ | 1,647 | $ | 3,950 | ||||||||
Cost of products sold | — | (299 | ) | |||||||||||||||
Operating expenses | (456 | ) | (4,295 | ) | ||||||||||||||
Interest rate contracts (1) | — | 63 | Interest expense | — | 13 | |||||||||||||
Total | $ | (5,570 | ) | $ | 4,044 | $ | 1,191 | $ | (631 | ) | ||||||||
(1) HEP used interest rate swap contracts to manage its exposure to interest rate risk, which matured in July 2017.
Economic Hedges
We have commodity contracts including forward purchase and sell contracts and NYMEX futures contracts to lock in prices on forecasted purchases and sales of inventory 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. 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 March 31, | ||||||||
2018 | 2017 | |||||||||
(In thousands) | ||||||||||
Commodity contracts | Cost of products sold | $ | (4,867 | ) | $ | 7,052 | ||||
Operating expenses | — | (4,222 | ) | |||||||
Foreign currency contracts | Gain (loss) on foreign currency transactions | 16,197 | — | |||||||
Gain on foreign currency swap contracts (1) | — | 24,545 | ||||||||
Total | $ | 11,330 | $ | 27,375 | ||||||
(1) Relates to Canadian currency swap contracts that settled on February 1, 2017 and effectively fixed the conversion rate on our PCLI purchase price.
23
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
As of March 31, 2018, we have the following notional contract volumes related to outstanding derivative instruments:
Notional Contract Volumes by Year of Maturity | ||||||||||||||||||||
Total Outstanding Notional | 2018 | 2019 | 2020 | 2021 | Unit of Measure | |||||||||||||||
Derivatives Designated as Hedging Instruments | ||||||||||||||||||||
Natural gas price swaps - long | 6,750,000 | 1,350,000 | 1,800,000 | 1,800,000 | 1,800,000 | MMBTU | ||||||||||||||
Forward gasoline and diesel contracts - short | 125,000 | 125,000 | — | — | — | Barrels | ||||||||||||||
Forward crude oil contracts - short | 784,905 | 784,905 | — | — | — | Barrels | ||||||||||||||
Derivatives Not Designated as Hedging Instruments | ||||||||||||||||||||
NYMEX futures (WTI) - short | 570,000 | 570,000 | — | — | — | Barrels | ||||||||||||||
Forward gasoline and diesel contracts - long | 150,000 | 150,000 | — | — | — | Barrels | ||||||||||||||
Foreign currency forward contracts | $ | 454,326,572 | $ | 340,605,264 | $ | 113,721,308 | — | — | U.S. Dollar | |||||||||||
The following table presents the fair value and balance sheet locations of our outstanding derivative instruments. These amounts are presented on a gross basis with offsetting balances that reconcile to a net asset or liability position in our consolidated balance sheets. We present on a net basis to reflect the net settlement of these positions in accordance with provisions of our master netting arrangements.
Derivatives in Net Asset Position | Derivatives in Net Liability Position | |||||||||||||||||||||||
Gross Assets | Gross Liabilities Offset in Balance Sheet | Net Assets Recognized in Balance Sheet | Gross Liabilities | Gross Assets Offset in Balance Sheet | Net Liabilities Recognized in Balance Sheet | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||||||
Derivatives designated as cash flow hedging instruments: | ||||||||||||||||||||||||
Commodity price swap contracts | $ | — | $ | — | $ | — | $ | 3,580 | $ | — | $ | 3,580 | ||||||||||||
Commodity forward contracts | 68 | — | 68 | 3,306 | — | 3,306 | ||||||||||||||||||
$ | 68 | $ | — | $ | 68 | $ | 6,886 | $ | — | $ | 6,886 | |||||||||||||
Derivatives not designated as cash flow hedging instruments: | ||||||||||||||||||||||||
Foreign exchange forward contracts | $ | 16,197 | $ | — | $ | 16,197 | $ | — | $ | — | $ | — | ||||||||||||
NYMEX futures contracts | — | — | — | 1,309 | — | 1,309 | ||||||||||||||||||
Commodity forward contracts | 443 | — | 443 | 424 | — | 424 | ||||||||||||||||||
$ | 16,640 | $ | — | $ | 16,640 | $ | 1,733 | $ | — | $ | 1,733 | |||||||||||||
Total net balance | $ | 16,708 | $ | 8,619 | ||||||||||||||||||||
Balance sheet classification: | Accrued liabilities | $ | 6,258 | |||||||||||||||||||||
Other long-term liabilities | 2,361 | |||||||||||||||||||||||
Prepayment and other | $ | 16,708 | $ | 8,619 | ||||||||||||||||||||
24
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Derivatives in Net Asset Position | Derivatives in Net Liability Position | |||||||||||||||||||||||
Gross Assets | Gross Liabilities Offset in Balance Sheet | Net Assets Recognized in Balance Sheet | Gross Liabilities | Gross Assets Offset in Balance Sheet | Net Liabilities Recognized in Balance Sheet | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Derivatives designated as cash flow hedging instruments: | ||||||||||||||||||||||||
Commodity price swap contracts | $ | — | $ | — | $ | — | $ | 2,424 | $ | — | $ | 2,424 | ||||||||||||
Commodity forward contracts | 3,067 | — | 3,067 | 418 | — | 418 | ||||||||||||||||||
$ | 3,067 | $ | — | $ | 3,067 | $ | 2,842 | $ | — | $ | 2,842 | |||||||||||||
Derivatives not designated as cash flow hedging instruments: | ||||||||||||||||||||||||
NYMEX futures contracts | $ | — | $ | — | $ | — | $ | 3,360 | $ | — | $ | 3,360 | ||||||||||||
Commodity forward contracts | 773 | — | 773 | 602 | — | 602 | ||||||||||||||||||
$ | 773 | $ | — | $ | 773 | $ | 3,962 | $ | — | $ | 3,962 | |||||||||||||
Total net balance | $ | 3,840 | $ | 6,804 | ||||||||||||||||||||
Balance sheet classification: | Accrued liabilities | $ | 5,365 | |||||||||||||||||||||
Other long-term liabilities | 1,439 | |||||||||||||||||||||||
Prepayment and other | $ | 3,840 | $ | 6,804 | ||||||||||||||||||||
At March 31, 2018, we had a pre-tax net unrealized loss of $6.9 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 loss of $4.5 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 |
Changes to equity during the three months ended March 31, 2018 are presented below:
HollyFrontier Stockholders’ Equity | Noncontrolling Interest | Total Equity | ||||||||||
(In thousands) | ||||||||||||
Balance at December 31, 2017 | $ | 5,370,829 | $ | 526,111 | $ | 5,896,940 | ||||||
Net income | 268,091 | 20,771 | 288,862 | |||||||||
Dividends | (58,856 | ) | — | (58,856 | ) | |||||||
Distributions to noncontrolling interest holders | — | (29,237 | ) | (29,237 | ) | |||||||
Other comprehensive loss, net of tax | (10,008 | ) | — | (10,008 | ) | |||||||
Allocated equity on HEP common unit issuances, net of tax | 41,980 | 58,031 | 100,011 | |||||||||
Equity-based compensation | 7,961 | 836 | 8,797 | |||||||||
Purchase of treasury stock (1) | (27,520 | ) | — | (27,520 | ) | |||||||
Purchase of HEP units for restricted grants | — | (58 | ) | (58 | ) | |||||||
Adoption of accounting standards | (11,019 | ) | — | (11,019 | ) | |||||||
Balance at March 31, 2018 | $ | 5,581,458 | $ | 576,454 | $ | 6,157,912 | ||||||
(1) Includes 11,920 shares withheld under the terms of stock-based compensation agreements to provide funds for the payment of payroll and income taxes due at the vesting of share-based awards.
25
HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
In May 2015, our Board of Directors approved a $1 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 March 31, 2018, we had remaining authorization to repurchase up to $151.7 million 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.
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 March 31, 2018 | ||||||||||||
Net change in foreign currency translation adjustment | $ | (11,940 | ) | $ | (2,528 | ) | $ | (9,412 | ) | |||
Net unrealized loss on hedging instruments | (5,570 | ) | (1,240 | ) | (4,330 | ) | ||||||
Net change in pension and other post-retirement benefit obligations | — | (3,734 | ) | 3,734 | ||||||||
Other comprehensive loss attributable to HollyFrontier stockholders | ||||||||||||