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HFC HollyFrontier

Filed: 6 Aug 21, 1:43pm

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, 2021
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)
Delaware75-1056913
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
2828 N. Harwood, Suite 1300
Dallas, Texas75201
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock $0.01 par valueHFCNew 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 filerAccelerated filerNon-accelerated filerSmaller 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  
162,490,166 shares of Common Stock, par value $.01 per share, were outstanding on July 30, 2021.


HOLLYFRONTIER CORPORATION
INDEX
 
2

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. Unless specifically noted, all statements concerning our expectations for future results of operations are based on forecasts for our existing operations and do not include the potential impact of any future acquisitions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that our expectations will prove to be correct. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in these statements. Any differences could be caused by a number of factors including, but not limited to:

our ability to successfully close the pending Puget Sound refinery transaction, or, once closed, integrate the operation of the Puget Sound refinery with our existing operations;
(i) our ability to successfully close the Sinclair acquisition, which requires receipt of approval from our stockholders and certain regulatory approvals (including clearance by antitrust authorities); (ii) disruption the Sinclair acquisition may cause to customers, vendors, business partners and our ongoing business; (iii) once closed, our ability to integrate the operations of Sinclair with our existing operations and fully realize the expected synergies of the Sinclair acquisition on the expected timeline; and (iv) legal proceedings that may be instituted against us or HEP following the announcement of the Sinclair acquisition.
the extraordinary market environment and effects of the COVID-19 pandemic, including a significant decline in demand for refined petroleum products in markets that we serve;
risks and uncertainties with respect to the actions of actual or potential competitive suppliers and transporters of refined petroleum products or lubricant and specialty products in our markets;
the spread between market prices for refined products and market prices for crude oil;
the possibility of constraints on the transportation of refined products or lubricant and specialty products;
the possibility of inefficiencies, curtailments or shutdowns in refinery operations or pipelines, whether due to infection in the workforce or in response to reductions in demand;
the effects of current and/or future governmental and environmental regulations and policies, including the effects of current and/or future restrictions on various commercial and economic activities in response to the COVID-19 pandemic;
the availability and cost of our financing;
the effectiveness of our capital investments and marketing strategies;
our efficiency in carrying out and consummating construction projects, including our ability to complete announced capital projects, such as the conversion of the Cheyenne Refinery to a renewable diesel facility and the construction of the Artesia renewable diesel unit and pretreatment unit, on time and within capital guidance;
our ability to timely obtain or maintain permits, including those necessary for operations or capital projects,
our ability to acquire refined or lubricant product operations or pipeline and terminal operations on acceptable terms and to integrate any existing or future acquired operations;
the possibility of terrorist or cyberattacks and the consequences of any such attacks;
3

general economic conditions, including uncertainty regarding the timing, pace and extent of an economic recovery in the United States;
continued deterioration in gross margins or a prolonged economic slowdown due to the COVID-19 pandemic which could result in an impairment of goodwill and/or additional long-lived asset impairments; 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. You should not put any undue reliance on any forward-looking statements. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth under the heading “Risk Factors” included in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2020 and Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 and in this Quarterly Report on Form 10-Q, and in conjunction with the discussion in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Outlook” and “Liquidity and Capital Resources.” All forward-looking statements included in this Form 10-Q and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
4

DEFINITIONS

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

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

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

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

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

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

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

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

LPG” means liquid petroleum gases.

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

MMBTU” means one million British thermal units.

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

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

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

Renewable diesel” means a diesel fuel derived from vegetable oils or animal fats that is produced through various processes, most commonly through hydrotreating, reacting the feedstock with hydrogen under temperatures and pressure in the presence of a catalyst.

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

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

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

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

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


5

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
HOLLYFRONTIER CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30,
2021
December 31, 2020
 (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (HEP:$19,561 and $21,990, respectively)
$1,398,280 $1,368,318 
Accounts receivable: Product and transportation (HEP: $14,749 and $14,543, respectively)
803,858 590,526 
Crude oil resales122,579 39,510 
926,437 630,036 
Inventories: Crude oil and refined products1,522,907 989,296 
Materials, supplies and other (HEP: $1,041 and $895, respectively)
177,698 184,180 
1,700,605 1,173,476 
Income taxes receivable69,862 91,348 
Prepayments and other (HEP: $4,286 and $8,591, respectively)
49,266 47,583 
Total current assets4,144,450 3,310,761 
Properties, plants and equipment, at cost (HEP: $2,160,681 and $2,119,295, respectively)
7,633,297 7,299,517 
Less accumulated depreciation (HEP: $(674,298) and $(644,149), respectively)
(2,873,658)(2,726,378)
4,759,639 4,573,139 
Operating lease right-of-use assets (HEP: $70,922 and $72,480, respectively)
404,009 350,548 
Other assets: Turnaround costs
303,707 314,816 
Goodwill (HEP: $312,873 and $312,873, respectively)
2,293,544 2,293,935 
Intangibles and other (HEP: $221,309 and $224,430, respectively)
654,684 663,665 
3,251,935 3,272,416 
Total assets$12,560,033 $11,506,864 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable (HEP: $25,773 and $28,565, respectively)
$1,480,820 $1,000,959 
Income taxes payable6,146 1,801 
Operating lease liabilities (HEP: $3,815 and $3,827, respectively)
104,768 97,937 
Accrued liabilities (HEP: $19,570 and $29,518, respectively)
421,037 274,459 
Total current liabilities2,012,771 1,375,156 
Long-term debt (HEP: $1,362,570 and $1,405,603, respectively)
3,100,969 3,142,718 
Noncurrent operating lease liabilities (HEP: $67,481 and $68,454, respectively)
327,838 285,785 
Deferred income taxes (HEP: $451 and $449, respectively)
805,734 713,703 
Other long-term liabilities (HEP: $45,755 and $55,105, respectively)
272,477 267,299 
Equity:
HollyFrontier stockholders’ equity:
Preferred stock, $1.00 par value – 5,000,000 shares authorized; NaN issued
Common stock $.01 par value – 320,000,000 shares authorized; 256,046,051 shares issued as of June 30, 2021 and December 31, 20202,560 2,560 
Additional capital4,225,032 4,207,672 
Retained earnings4,172,560 3,913,179 
Accumulated other comprehensive income9,653 13,462 
Common stock held in treasury, at cost – 93,562,308 and 93,632,391 shares as of June 30, 2021 and December 31, 2020, respectively(2,966,430)(2,968,512)
Total HollyFrontier stockholders’ equity5,443,375 5,168,361 
Noncontrolling interest596,869 553,842 
Total equity6,040,244 5,722,203 
Total liabilities and equity$12,560,033 $11,506,864 

Parenthetical amounts represent asset and liability balances attributable to Holly Energy Partners, L.P. (“HEP”) as of June 30, 2021 and December 31, 2020. HEP is a variable interest entity.

See accompanying notes.
6

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

 Three Months Ended
June 30,
Six Months Ended
June 30,
 2021202020212020
Sales and other revenues$4,577,123 $2,062,930 $8,081,416 $5,463,475 
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)3,825,729 1,576,996 6,786,034 4,270,722 
Lower of cost or market inventory valuation adjustment(118,825)(269,904)(318,862)290,560 
3,706,904 1,307,092 6,467,172 4,561,282 
Operating expenses (exclusive of depreciation and amortization)334,191 303,359 734,100 631,704 
Selling, general and administrative expenses (exclusive of depreciation and amortization)77,754 75,369 159,729 163,106 
Depreciation and amortization124,042 130,178 248,121 270,753 
Long-lived asset impairment436,908 436,908 
Total operating costs and expenses4,242,891 2,252,906 7,609,122 6,063,753 
Income (loss) from operations334,232 (189,976)472,294 (600,278)
Other income (expense):
Earnings of equity method investments3,423 2,156 5,186 3,870 
Interest income1,029 1,506 2,060 5,579 
Interest expense(28,942)(32,695)(67,328)(55,334)
Gain on tariff settlement51,500 
Gain on sales-type leases33,834 33,834 
Loss on early extinguishment of debt(25,915)
Gain (loss) on foreign currency transactions583 2,285 (734)(1,948)
Other, net7,927 1,572 9,817 3,422 
(15,980)8,658 501 (36,492)
Income (loss) before income taxes318,252 (181,318)472,795 (636,770)
Income tax expense (benefit):
Current(9,175)(65,607)1,990 (77,047)
Deferred132,660 34,696 93,188 (116,030)
123,485 (30,911)95,178 (193,077)
Net income (loss)194,767 (150,407)377,617 (443,693)
Less net income attributable to noncontrolling interest25,917 26,270 60,550 37,607 
Net income (loss) attributable to HollyFrontier stockholders$168,850 $(176,677)$317,067 $(481,300)
Earnings (loss) per share:
Basic$1.03 $(1.09)$1.92 $(2.97)
Diluted$1.03 $(1.09)$1.92 $(2.97)
Average number of common shares outstanding:
Basic162,523 161,889 162,501 161,882 
Diluted162,523 161,889 162,501 161,882 

See accompanying notes.
7

HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
 Three Months Ended
June 30,
Six Months Ended
June 30,
 2021202020212020
Net income (loss)$194,767 $(150,407)$377,617 $(443,693)
Other comprehensive income (loss):
Foreign currency translation adjustment2,088 11,710 (3,775)(9,876)
Hedging instruments:
Change in fair value of cash flow hedging instruments475 1,513 (18,042)(5,235)
Reclassification adjustments to net income (loss) on settlement of cash flow hedging instruments4,949 5,401 18,824 (1,175)
Net unrealized gain (loss) on hedging instruments5,424 6,914 782 (6,410)
Pension and other post-retirement benefit obligations:
Actuarial loss on pension plans(45)
Pension plans gain reclassified to net income(104)(205)
Actuarial gain on post-retirement healthcare plans
Post-retirement healthcare plans gain reclassified to net income(837)(1,675)
Retirement restoration plan loss reclassified to net income18 
Net change in pension and other post-retirement benefit obligations(932)(1,862)(42)
Other comprehensive income (loss) before income taxes6,580 18,624 (4,855)(16,328)
Income tax expense (benefit)1,585 4,250 (1,046)(3,779)
Other comprehensive income (loss)4,995 14,374 (3,809)(12,549)
Total comprehensive income (loss)199,762 (136,033)373,808 (456,242)
Less noncontrolling interest in comprehensive income25,917 26,270 60,550 37,607 
Comprehensive income (loss) attributable to HollyFrontier stockholders$173,845 $(162,303)$313,258 $(493,849)

See accompanying notes.

8

HOLLYFRONTIER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 Six Months Ended June 30,
 20212020
Cash flows from operating activities:
Net income (loss)$377,617 $(443,693)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization248,121 270,753 
Long-lived asset impairment436,908 
Lower of cost or market inventory valuation adjustment(318,862)290,560 
Earnings of equity method investments, inclusive of distributions(1,298)
Loss on early extinguishment of debt25,915 
Gain on sales-type leases(33,834)
Gain on sale of assets(5,423)(357)
Deferred income taxes93,188 (116,030)
Equity-based compensation expense21,142 14,289 
Change in fair value – derivative instruments(3,531)(9,377)
(Increase) decrease in current assets:
Accounts receivable(292,901)281,011 
Inventories(204,708)(764)
Income taxes receivable21,314 (72,382)
Prepayments and other(200)9,704 
Increase (decrease) in current liabilities:
Accounts payable467,203 (314,892)
Income taxes payable4,097 (9,268)
Accrued liabilities154,224 3,340 
Turnaround expenditures(51,926)(49,248)
Other, net(19,274)27,965 
Net cash provided by operating activities490,081 309,302 
Cash flows from investing activities:
Additions to properties, plants and equipment(275,125)(98,996)
Additions to properties, plants and equipment – HEP(57,716)(30,740)
Proceeds from sale of assets7,422 
Investment in equity company - HEP(2,400)
Distributions from equity method investments in excess of equity earnings3,107 470 
Net cash used for investing activities(322,312)(131,666)
Cash flows from financing activities:
Borrowings under credit agreements141,000 168,000 
Repayments under credit agreements(184,500)(138,500)
Proceeds from issuance of senior notes - HEP500,000 
Redemption of senior notes - HEP(522,500)
Purchase of treasury stock(491)(1,243)
Dividends(57,663)(114,430)
Distributions to noncontrolling interests(38,188)(51,008)
Contributions from noncontrolling interests17,593 13,263 
Payments on finance leases(1,296)(843)
Deferred financing costs(14,500)(8,714)
Other, net(433)456 
Net cash used for financing activities(138,478)(155,519)
Effect of exchange rate on cash flow671 (4,770)
Cash and cash equivalents:
Increase for the period29,962 17,347 
Beginning of period1,368,318 885,162 
End of period$1,398,280 $902,509 
Supplemental disclosure of cash flow information:
Cash (paid) received during the period for:
Interest$(68,328)$(64,003)
Income taxes, net$22,996 $(4,738)
Increase in accrued and unpaid capital expenditures$7,544 $4,588 

See accompanying notes.
9


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

HollyFrontier Stockholders' Equity
Common Stock Additional CapitalRetained EarningsAccumulated Other Comprehensive IncomeTreasury StockNon-controlling InterestTotal
Equity
 
Balance at December 31, 2020$2,560 $4,207,672 $3,913,179 $13,462 $(2,968,512)$553,842 $5,722,203 
Net income— — 148,217 — — 34,633 182,850 
Dividends ($0.35 declared per common share)— — (57,663)— — — (57,663)
Distributions to noncontrolling interest holders— — — — — (19,977)(19,977)
Other comprehensive loss, net of tax— — — (8,804)— — (8,804)
Issuance of common stock under incentive compensation plans— 56 — — (56)— — 
Equity-based compensation— 9,088 — — — 682 9,770 
Purchase of treasury stock— — — — (12)— (12)
Purchase of HEP units for restricted grants— — — — — (68)(68)
Contributions from noncontrolling interests— — — — — 9,747 9,747 
Balance at March 31, 2021$2,560 $4,216,816 $4,003,733 $4,658 $(2,968,580)$578,859 $5,838,046 
Net income— — 168,850 — — 25,917 194,767 
Distributions to noncontrolling interest holders— — — — — (18,211)(18,211)
Other comprehensive income, net of tax— — — 4,995 — — 4,995 
Issuance of common stock under incentive compensation plans— (2,629)— — 2,629 — — 
Equity-based compensation— 10,845 — — — 527 11,372 
Purchase of treasury stock— — — — (479)— (479)
Purchase of HEP units for restricted grants— — — — — (2)(2)
Contributions from noncontrolling interests— — — — — 9,779 9,779 
Other— — (23)— — — (23)
Balance at June 30, 2021$2,560 $4,225,032 $4,172,560 $9,653 $(2,966,430)$596,869 $6,040,244 

10


HollyFrontier Stockholders' Equity
Common Stock Additional CapitalRetained EarningsAccumulated Other Comprehensive IncomeTreasury StockNon-controlling InterestTotal
Equity
 
Balance at December 31, 2019$2,560 $4,204,547 $4,744,120 $14,774 $(2,987,808)$531,233 $6,509,426 
Net income (loss)— — (304,623)— — 11,337 (293,286)
Dividends ($0.35 declared per common share)— — (57,248)— — — (57,248)
Distributions to noncontrolling interest holders— — — — — (33,918)(33,918)
Other comprehensive loss, net of tax— — — (26,923)— — (26,923)
Issuance of common stock under incentive compensation plans— (2,037)— — 2,037 — — 
Equity-based compensation— 5,824 — — — 506 6,330 
Purchase of treasury stock— — — — (1,062)— (1,062)
Purchase of HEP units for restricted grants— — — — — (145)(145)
Contributions from noncontrolling interests— — — — — 7,304 7,304 
Balance at March 31, 2020$2,560 $4,208,334 $4,382,249 $(12,149)$(2,986,833)$516,317 $6,110,478 
Net income (loss)— — (176,677)— — 26,270 (150,407)
Dividends ($0.35 declared per common share)— — (57,182)— — — (57,182)
Distributions to noncontrolling interest holders— — — — — (17,090)(17,090)
Other comprehensive income, net of tax— — — 14,374 — — 14,374 
Issuance of common stock under incentive compensation plans— (527)— — 527 — — 
Equity-based compensation— 7,484 — — — 475 7,959 
Purchase of treasury stock(181)(181)
Purchase of HEP units for restricted grants(2)(2)
Contributions from noncontrolling interests5,9595,959
Other603603
Balance at June 30, 2020$2,560 $4,215,894 $4,148,390 $2,225 $(2,986,487)$531,929 $5,914,511 

See accompanying notes.
11

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, 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 geographic 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, 2021, we:
owned and operated a petroleum refinery in El Dorado, Kansas (the “El Dorado Refinery”), 2 refinery facilities located in Tulsa, Oklahoma (collectively, the “Tulsa Refineries”), a refinery in Artesia, New Mexico that is operated in conjunction with crude oil distillation and vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the “Navajo Refinery”) and a refinery in Woods Cross, Utah (the “Woods Cross Refinery”);
owned a facility in Cheyenne, Wyoming, which operated as a petroleum refinery until early August 2020, at which time its assets began to be converted to renewable diesel production (the “Cheyenne Refinery”);
owned and operated Petro-Canada Lubricants Inc. (“PCLI”) located in Mississauga, Ontario, which produces base oils and other specialized lubricant products;
owned and operated manufacturing facilities in Petrolia, Pennsylvania and the Netherlands, which produce specialty lubricant products for our Sonneborn business, such as white oils, petrolatums and waxes;
owned and operated Red Giant Oil Company LLC (“Red Giant Oil”), which supplies locomotive engine oil and has storage and distribution facilities in Iowa 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 geographic regions of the United States.

On May 4, 2021, HollyFrontier Puget Sound Refining LLC, a wholly-owned subsidiary of HollyFrontier Corporation, entered into a sale and purchase agreement with Equilon Enterprises LLC d/b/a Shell Oil Products US (“Shell”) to acquire Shell’s refinery and related assets, including the on-site cogeneration facility and related logistics assets (the “Puget Sound Refinery”), for a base cash purchase price of $350 million plus hydrocarbon inventory to be valued at closing with an estimated current value in the range of $150 million to $180 million (the “Puget Sound Acquisition”). The Puget Sound Refinery is strategically located on approximately 850 acres in Anacortes, Washington, approximately 80 miles north of Seattle and 90 miles south of Vancouver. The 149,000 barrel per day facility is a large, high quality and complex refinery with catalytic cracking and delayed coking units and is well positioned geographically and logistically to source advantaged Canadian and Alaskan North Slope crudes. In addition to refining assets and an on-site cogeneration facility, the transaction includes a deep-water marine dock, a light product loading rack, a rail terminal, and storage tanks with approximately 5.8 million barrels of crude, product and other hydrocarbon storage capacity. The Puget Sound Acquisition is expected to close in the fourth quarter of 2021, subject to customary closing conditions. We expect to fund the Puget Sound Acquisition with a one-year suspension of our regular quarterly dividend and cash on hand.
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HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued

During the first quarter of 2021, we initiated a restructuring within our Lubricants and Specialty Products segment. As a result of this restructuring, we recorded $7.8 million in employee severance costs for the six months ended June 30, 2021, which were recognized primarily as selling, general and administrative expenses in our Lubricants and Specialty Products segment.

In the third quarter of 2020, we permanently ceased petroleum refining operations at our Cheyenne Refinery and subsequently began converting certain assets at our Cheyenne Refinery to renewable diesel production. In connection with the cessation of petroleum refining operations at our Cheyenne Refinery, we recognized $8.1 million and $16.3 million, in decommissioning expense and $0.2 million and $0.7 million, in employee severance costs for the three and six months ended June 30, 2021, respectively, which were recognized in operating expenses in our Corporate and Other segment.

During the second quarter of 2020, we recorded $1.1 million in employee severance costs related to the conversion of our Cheyenne Refinery. These severance costs were recognized in operating expenses and were reported in our Refining segment. Also, during the second quarter of 2020, we recorded a long-lived asset impairment charge of $232.2 million related to our Cheyenne Refinery asset group.

During the second quarter of 2020, we initiated and completed a corporate restructuring. As a result of this restructuring, we recorded $3.7 million in employee severance costs, which were recognized primarily as operating expenses in our Refining segment and selling, general and administrative expenses in our Corporate and Other segment.

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, 2021, the consolidated results of operations, comprehensive income and statements of equity for the three and six months ended June 30, 2021 and 2020 and consolidated cash flows for the six months ended June 30, 2021 and 2020 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, 2020 that has been filed with the SEC.

Our results of operations for the six months ended June 30, 2021 are not necessarily indicative of the results of operations to be realized for the year ending December 31, 2021.

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 expected credit losses based on our historical loss experience as well as expected credit losses from current economic conditions and management’s expectations of future economic conditions. Credit losses are charged to the allowance for expected credit losses when an account is deemed uncollectible. Our allowance for expected credit losses was $4.3 million at June 30, 2021 and $3.4 million at December 31, 2020.

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.

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HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Leases: At inception, we determine if an arrangement is or contains a lease. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our payment obligation under the leasing arrangement. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We use our estimated incremental borrowing rate (“IBR”) to determine the present value of lease payments as most of our leases do not contain an implicit rate. Our IBR represents the interest rate which we would pay to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term in a similar economic environment. We use the implicit rate when readily determinable.

Operating leases are recorded in operating lease right-of-use assets and current and noncurrent operating lease liabilities on our consolidated balance sheet. Finance leases are included in properties, plants and equipment and accrued liabilities and other long-term liabilities on our consolidated balance sheet.

Our lease term includes an option to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less are not recorded on our balance sheet. For certain equipment leases, we apply a portfolio approach for the operating lease ROU assets and liabilities. Also, as a lessee, we separate non-lease components that are identifiable and exclude them from the determination of net present value of lease payment obligations. In addition, HEP, as a lessor, does not separate the non-lease (service) component in contracts in which the lease component is the dominant component. HEP treats these combined components as a lease.

Goodwill and Long-lived Assets: As of June 30, 2021, our goodwill balance was $2.3 billion, with goodwill assigned to our Refining, Lubricants and Specialty Products and HEP segments of $1,733.5 million, $247.2 million and $312.9 million, respectively. See Note 14 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 carrying amount of the reporting unit is greater than its fair value, a quantitative test is performed in which we estimate the fair value of the related reporting unit. If the carrying amount of a reporting unit exceeds its fair value, the goodwill of that reporting unit is impaired, and we measure goodwill impairment as the excess of the carrying amount of the reporting unit over the related fair value.

For purposes of long-lived asset impairment evaluation, we have grouped our long-lived assets as follows: (i) our refinery asset groups, which include certain HEP logistics assets, (ii) our Lubricants and Specialty Products asset groups and (iii) our HEP asset groups, which comprises HEP assets not included in our refinery asset groups. These asset groups represent the lowest level for which independent cash flows can be identified. Our long-lived assets are evaluated for impairment by identifying whether indicators of impairment exist and if so, assessing whether the long-lived assets are recoverable from estimated future undiscounted cash flows. The actual amount of impairment loss measured, if any, is equal to the amount by which the asset group’s carrying value exceeds its fair value.

During the second quarter of 2020, we recorded long-lived asset impairment charges of $232.2 million and $204.7 million related to our Cheyenne Refinery and PCLI asset groups, respectively.

Revenue Recognition: Revenue on refined product and excess crude oil sales are recognized when delivered (via pipeline, in-tank or rack) and the customer obtains control of such inventory, which is typically when title passes and the customer is billed. All revenues are reported inclusive of shipping and handling costs billed and exclusive of any taxes billed to customers. Shipping and handling costs incurred are reported as cost of products sold.

Our lubricants and specialty products business has sales agreements with marketers and distributors that provide certain rights of return or provisions for the repurchase of products previously sold to them. Under these agreements, revenues and cost of revenues are deferred until the products have been sold to end customers. Our lubricants and specialty products business also has agreements that create an obligation to deliver products at a future date for which consideration has already been received and recorded as deferred revenue. This revenue is recognized when the products are delivered to the customer.

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HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
HEP recognizes revenues as products are shipped through its pipelines and terminals and as other services are rendered. Additionally, HEP has certain throughput agreements that specify minimum volume requirements, whereby HEP bills a customer for a minimum level of shipments in the event a customer ships below their contractual requirements. If there are no future performance obligations, HEP recognizes these deficiency payments as revenue. In certain of these throughput agreements, a customer may later utilize such shortfall billings as credit towards future volume shipments in excess of its minimum levels within its respective contractual shortfall make-up period. Such amounts represent an obligation to perform future services, which may be initially deferred and later recognized as revenue based on estimated future shipping levels, including the likelihood of a customer’s ability to utilize such amounts prior to the end of the contractual shortfall make-up period. HEP recognizes the service portion of these deficiency payments as revenue when HEP does not expect it will be required to satisfy these performance obligations in the future based on the pattern of rights exercised by the customer. Payment terms under our contracts with customers are consistent with industry norms and are typically payable within 30 days of the date of invoice.

Foreign Currency Translation: Assets and liabilities recorded in foreign currencies are translated into U.S. dollars using exchange rates in effect as of the balance sheet date. Revenue and expense accounts are translated using the weighted-average exchange rates during the period presented. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income.

We have intercompany notes that were issued to fund certain of our foreign businesses. Remeasurement adjustments resulting from the conversion of intercompany financing amounts to functional currencies are recorded as gains and losses as a component of other income (expense) in the consolidated statements of operations. Such adjustments are not recorded to the Lubricants and Specialty Products segment operations, but to Corporate and Other. See Note 14 for additional information on our segments.

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

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

For the six months ended June 30, 2021, we recorded income tax expense of $95.2 million compared to an income tax benefit of $193.1 million for the six months ended June 30, 2020. This increase was due principally to pre-tax income during the six months ended June 30, 2021 compared to pre-tax loss in the same period of 2020. Our effective tax rates were 20.1% and 30.3% for the six months ended June 30, 2021 and 2020, respectively. The year-over-year decrease in the effective tax rate is due principally to the relationship between the pre-tax results and the earnings attributable to the noncontrolling interest that is not included in income for tax purposes. The difference in the U.S. federal statutory rate and the effective tax rate for the six months ended June 30, 2021 was primarily due to the tax effects of income attributable to noncontrolling interests.

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, 2021 and 2020, we received proceeds of $23.0 million and $20.4 million, respectively, and subsequently repaid $24.2 million and $21.7 million, respectively, under these sell / buy transactions.


15

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, as well as other third-party refineries, in the Mid-Continent, Southwest and Rocky Mountain geographic regions of the United States. Additionally, as of June 30, 2021, HEP owned a 75% interest in UNEV Pipeline, LLC (“UNEV”), the owner of a pipeline running from Woods Cross, Utah to Las Vegas, Nevada (the “UNEV Pipeline”) and associated product terminals, and a 50% ownership interest in each of Osage Pipe Line Company, LLC, the owner of a pipeline running from Cushing, Oklahoma to El Dorado, Kansas (the “Osage Pipeline”); Cheyenne Pipeline, LLC, the owner of a pipeline running from Fort Laramie, Wyoming to Cheyenne, Wyoming (the “Cheyenne Pipeline”) and Cushing Connect Pipeline & Terminal LLC (“Cushing Connect”), the owner of a crude oil storage terminal in Cushing, Oklahoma and a pipeline under construction that will run from Cushing, Oklahoma to our Tulsa Refineries.

At June 30, 2021, 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 generates revenues by charging tariffs for transporting petroleum products and crude oil through its pipelines, by charging fees for terminalling refined products and other hydrocarbons, and by storing and providing other services at its storage tanks and terminals. Under our long-term transportation agreements with HEP (discussed further below), we accounted for 79% of HEP’s total revenues for the six months ended June 30, 2021. We do not provide financial or equity support through any liquidity arrangements and / or debt guarantees to HEP.

HEP has outstanding debt under a senior secured revolving credit agreement and its senior notes. HEP’s creditors have no recourse to our assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries. See Note 9 for a description of HEP’s debt obligations.

HEP has risk associated with its operations. If a major customer of HEP were to terminate its contracts or fail to meet desired shipping or throughput levels for an extended period of time, revenue would be reduced and HEP could suffer substantial losses to the extent that a new customer is not found. In the event that HEP incurs a loss, our operating results will reflect HEP’s loss, net of intercompany eliminations, to the extent of our ownership interest in HEP at that point in time.

Cushing Connect Joint Venture
In October 2019, HEP Cushing LLC (“HEP Cushing”), a wholly-owned subsidiary of HEP, and Plains Marketing, L.P. (“PMLP”), a wholly-owned subsidiary of Plains All American Pipeline, L.P. (“Plains”), formed a 50/50 joint venture, Cushing Connect, for (i) the development, construction, ownership and operation of a new 160,000 barrel per day common carrier crude oil pipeline (the “Cushing Connect Pipeline”) that will connect the Cushing, Oklahoma crude oil hub to our Tulsa Refineries and (ii) the ownership and operation of 1.5 million barrels of crude oil storage in Cushing, Oklahoma (the “Cushing Connect Terminal”). The Cushing Connect Terminal was fully in service beginning in April 2020, and the Cushing Connect Pipeline is expected to be placed in service during the third quarter of 2021. Long-term commercial agreements have been entered into to support the Cushing Connect assets.

Cushing Connect will contract with an affiliate of HEP to manage the construction and operation of the Cushing Connect Pipeline and with an affiliate of Plains to manage the operation of the Cushing Connect Terminal. The total investment in Cushing Connect will be shared equally among the partners. However, HEP is solely responsible for any Cushing Connect Pipeline constructions costs that exceed the budget by more than 10%. HEP estimates its share of the cost of the Cushing Connect Terminal contributed by Plains and Cushing Connect Pipeline construction costs are approximately $70 million to $75 million.

Cushing Connect and its two subsidiaries, Cushing Connect Pipeline and Cushing Connect Terminal, are each VIE’s because they do not have sufficient equity at risk to finance their activities without additional financial support. HEP is the primary beneficiary of two of these entities as HEP is constructing and will operate the Cushing Connect Pipeline, and HEP has more ability to direct the activities that most significantly impact the financial performance of Cushing Connect and Cushing Connect Pipeline. Therefore, HEP consolidates these two entities. HEP is not the primary beneficiary of Cushing Connect Terminal, which HEP accounts for using the equity method of accounting.

16

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Transportation Agreements
HEP serves our refineries under long-term pipeline, terminal and tankage throughput agreements and refinery processing tolling agreements expiring from 2022 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 July 1, 2021, these agreements require minimum annualized payments to HEP of $339.8 million.

Our transactions with HEP and fees paid under our transportation agreements with HEP and UNEV are eliminated and have no impact on our consolidated financial statements.

Lessor Accounting
Our consolidated statements of operations reflect lease revenue recognized by HEP for contracts with third parties in which HEP is the lessor.

Lease income recognized was as follows:
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
(In thousands)
Operating lease revenues$3,731 $5,442 $8,178 $13,732 
Gain on sales-type leases$$33,834 $$33,834 
Sales-type lease interest income$637 $642 $1,276 $642 
Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable$520 $286 $857 $286 
One of HEP’s throughput agreements with Delek US Holdings, Inc. (“Delek”) was partially renewed during the three months ended June 30, 2020. Certain components of this agreement met the criteria of sales-type leases since the underlying assets are not expected to have an alternative use at the end of the lease term to anyone other than Delek. Under sales-type lease accounting, at the commencement date, the lessor recognizes a net investment in the lease, based on the estimated fair value of the underlying leased assets at contract inception, and derecognizes the underlying assets with the difference recorded as selling profit or loss arising from the lease. Therefore, HEP recognized a gain on sales-type leases totaling $33.8 million during the three months ended June 30, 2020. This sales-type lease transaction, including the related gain, was a non-cash transaction.


NOTE 3:Revenues

Substantially all revenue-generating activities relate to sales of refined product and excess crude oil inventories sold at market prices (variable consideration) under contracts with customers. Additionally, we have revenues attributable to HEP logistics services provided under petroleum product and crude oil pipeline transportation, processing, storage and terminalling agreements with third parties.

17

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Disaggregated revenues were as follows:                        
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
(In thousands)
Revenues by type
Refined product revenues
Transportation fuels (1)
$3,323,897 $1,385,246 $5,795,668 $3,863,593 
Specialty lubricant products (2)
605,939 340,284 1,086,620 811,237 
Asphalt, fuel oil and other products (3)
221,743 145,298 380,329 346,641 
Total refined product revenues4,151,579 1,870,828 7,262,617 5,021,471 
Excess crude oil revenues (4)
389,275 163,394 745,575 363,173 
Transportation and logistic services27,092 19,244 52,350 45,670 
Other revenues (5)
9,177 9,464 20,874 33,161 
Total sales and other revenues$4,577,123 $2,062,930 $8,081,416 $5,463,475 
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
(In thousands)
Refined product revenues by market
United States
Mid-Continent$2,334,226 $867,660 $4,002,439 $2,400,584 
Southwest941,451 436,073 1,709,514 1,170,248 
Rocky Mountains373,252 274,973 611,055 743,752 
Northeast199,955 110,909 372,253 270,733 
Canada213,338 120,870 395,284 303,523 
Europe, Asia and Latin America89,357 60,343 172,072 132,631 
Total refined product revenues$4,151,579 $1,870,828 $7,262,617 $5,021,471 

(1)Transportation fuels consist of gasoline, diesel and jet fuel.
(2)Specialty lubricant products consist of base oil, waxes, finished lubricants and other specialty fluids.
(3)Asphalt, fuel oil and other products revenue include revenues attributable to our Refining and Lubricants and Specialty Products segments of $165.9 million and $55.8 million, respectively, for the three months ended June 30, 2021, $283.2 million and $97.1 million, respectively, for the six months ended June 30, 2021, $131.9 million and $13.4 million, respectively, for the three months ended June 30, 2020, $280.7 million and $65.9 million respectively, for the six months ended June 30, 2020.
(4)Excess crude oil revenues represent sales of purchased crude oil inventory that at times exceeds the supply needs of our refineries.
(5)Other revenues are principally attributable to our Refining segment.

18

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Our consolidated balance sheet reflects contract liabilities related to unearned revenues attributable to future service obligations under HEP’s third-party transportation agreements and production agreements from our Sonneborn operations. The following table presents changes to our contract liabilities during the six months ended June 30, 2021 and 2020.

Six Months Ended June 30,
20212020
(In thousands)
Balance at January 1$6,738 $4,652 
Increase15,314 16,115 
Recognized as revenue(14,686)(14,980)
Balance at June 30$7,366 $5,787 

As of June 30, 2021, we have long-term contracts with customers that specify minimum volumes of gasoline, diesel, lubricants and specialty products to be sold ratably at market prices through 2025. Such volumes are typically nominated in the month preceding delivery and delivered ratably throughout the following month. Future prices are subject to market fluctuations and therefore, we have elected the exemption to exclude variable consideration under these contracts under Accounting Standards Codification 606-10-50-14A. Aggregate minimum volumes expected to be sold (future performance obligations) under our long-term product sales contracts with customers are as follows:

Remainder of 202120222023ThereafterTotal
(In thousands)
Refined product sales volumes (barrels)9,528 14,272 12,795 11,698 48,293 

Additionally, HEP has long-term contracts with third-party customers that specify minimum volumes of product to be transported through its pipelines and terminals that result in fixed-minimum annual revenues through 2025. Annual minimum revenues attributable to HEP’s third-party contracts as of June 30, 2021 are presented below:

Remainder of 202120222023ThereafterTotal
(In thousands)
HEP contractual minimum revenues$10,422 $11,005 $8,922 $11,414 $41,763 


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.

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HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
The carrying amounts of derivative instruments and RINs credit obligations at June 30, 2021 and December 31, 2020 were as follows:
Fair Value by Input Level
Carrying AmountLevel 1Level 2Level 3
(In thousands)
June 30, 2021
Assets:
Commodity price swaps$892 $$892 $
Commodity forward contracts671 671 
Total assets$1,563 $$1,563 $
Liabilities:
NYMEX futures contracts$2,352 $2,352 $$
Commodity forward contracts1,112 1,112 
Foreign currency forward contracts19,059 19,059 
RINs credit obligations (1)
131,052 131,052 
Total liabilities$153,575 $2,352 $151,223 $
December 31, 2020
Assets:
Commodity forward contracts$275 $$275 $
Total assets$275 $$275 $
Liabilities:
NYMEX futures contracts$418 $418 $$
Commodity price swaps359 359 
Commodity forward contracts196 196 
Foreign currency forward contracts23,005 23,005 
Total liabilities$23,978 $418 $23,560 $

(1) Represent obligations for RINs credits for which we did not have sufficient quantities at June 30, 2021 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 input and quoted forward commodity prices with respect to our commodity price swaps. The fair value of the forward sales and purchase contracts are computed using quoted forward commodity prices. 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.


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HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 5:Earnings Per Share

Basic earnings per share is calculated as net income (loss) attributable to HollyFrontier stockholders, adjusted for participating securities’ share in earnings divided by the average number of shares of common stock outstanding. Diluted earnings per share includes the incremental shares resulting from certain share-based awards. The following is a reconciliation of the denominators of the basic and diluted per share computations for net income (loss) attributable to HollyFrontier stockholders:
 Three Months Ended
June 30,
Six Months Ended
June 30,
 2021202020212020
 (In thousands, except per share data)
Net income (loss) attributable to HollyFrontier stockholders$168,850 $(176,677)$317,067 $(481,300)
Participating securities’ share in earnings (1)
2,223 4,271 
Net income (loss) attributable to common shares$166,627 $(176,677)$312,796 $(481,300)
Average number of shares of common stock outstanding162,523 161,889 162,501 161,882 
Average number of shares of common stock outstanding assuming dilution162,523 161,889 162,501 161,882 
Basic earnings (loss) per share$1.03 $(1.09)$1.92 $(2.97)
Diluted earnings (loss) per share$1.03 $(1.09)$1.92 $(2.97)

(1) Unvested restricted stock unit awards and unvested performance share units represent participating securities because they participate in nonforfeitable dividends or distributions with the common stockholders of HollyFrontier. Participating earnings represent the distributed and undistributed earnings of HollyFrontier attributable to the participating securities. Unvested restricted stock unit awards and performance share units do not participate in undistributed net losses as they are not contractually obligated to do so.


NOTE 6:Stock-Based Compensation

We have a principal share-based compensation plan (the “2020 Long-Term Incentive Plan”), which allows us to grant new equity awards to certain officers, non-employee directors and other key employees of HollyFrontier. The restricted stock unit awards generally vest over a period of one to three years. Upon vesting, restrictions on the restricted stock units lapse at which time they convert to common shares or cash. The performance share units generally vest over a period of three years and are payable in stock or cash upon meeting certain financial and performance criteria. The number of shares ultimately issued or cash paid for the performance share units can range from 0 to 200% of target award amounts. The holders of unvested restricted stock units and performance share units have the right to receive dividends.

The compensation cost for these plans was $11.9 million and $8.1 million for the three months ended June 30, 2021 and 2020, respectively, and $22.8 million and $12.9 million, for the six months ended June 30, 2021 and 2020, respectively.

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 $0.5 million and $0.5 million for the three months ended June 30, 2021 and 2020, respectively, and $1.2 million and $1.0 million, for the six months ended June 30, 2021 and 2020, respectively.

In July 2021, we adopted a stock compensation deferral plan which allows non-employee directors to defer settlement of vested stock granted under our share-based compensation plan. This plan is effective October 1, 2021.
21

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
A summary of restricted stock unit and performance share unit activity during the six months ended June 30, 2021 is presented below:
Restricted Stock UnitsPerformance Share Units
Outstanding at January 1, 20212,057,045 635,204 
Granted (1)
9,983 
Vested(89,381)(3,565)
Forfeited(132,284)(26,192)
Outstanding at June 30, 20211,845,363 605,447 
(1) Weighted average grant date fair value per unit$34.98 $


NOTE 7:Inventories

Inventories consist of the following components:
June 30,
2021
December 31, 2020
(In thousands)
Crude oil$511,056 $451,967 
Other raw materials and unfinished products(1)
342,791 260,495 
Finished products(2)
669,060 595,696 
Lower of cost or market reserve(318,862)
Process chemicals(3)
43,021 35,006 
Repair and maintenance supplies and other (4)
134,677 149,174 
Total inventory$1,700,605 $1,173,476 

(1)Other raw materials and unfinished products include feedstocks and blendstocks, other than crude.
(2)Finished products include gasolines, jet fuels, diesels, lubricants, asphalts, LPG’s and residual fuels.
(3)Process chemicals include additives and other chemicals.
(4)Includes RINs.

Our inventories that are valued at the lower of LIFO cost or market reflected a valuation reserve of $318.9 million at December 31, 2020. The December 31, 2020 market reserve of $318.9 million was reversed during the six months ended June 30, 2021 due to the sale of inventory quantities that gave rise to the 2020 reserve. The effect of the change in lower of cost or market reserve was a decrease to cost of products sold totaling $118.8 million and $318.9 million for the three and six months ended June 30, 2021, respectively, and a decrease to cost of products sold totaling $269.9 million for the three months ended June 30, 2020, and an increase of $290.6 million for the six months ended June 30, 2020.

At June 30, 2021, the LIFO value of inventory was equal to cost.


22

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 8:Environmental

Environmental costs are charged to operating expenses if they relate to an existing condition caused by past operations and do not contribute to current or future revenue generation. We have ongoing investigations of environmental matters at various locations and routinely assess our recorded environmental obligations, if any, with respect to such matters. Liabilities are recorded when site restoration and environmental remediation, cleanup and other obligations are either known or considered probable and can be reasonably estimated. Such estimates are undiscounted and require judgment with respect to costs, time frame and extent of required remedial and cleanup activities and are subject to periodic adjustments based on currently available information. Recoveries of environmental costs through insurance, indemnification arrangements or other sources are included in other assets to the extent such recoveries are considered probable.

We incurred expense of $1.9 million and $0.4 million for the three months ended June 30, 2021 and 2020, respectively, and $2.0 million for both the six months ended June 30, 2021 and 2020, for environmental remediation obligations. The accrued environmental liability reflected in our consolidated balance sheets was $113.8 million and $115.0 million at June 30, 2021 and December 31, 2020, respectively, of which $94.8 million and $94.0 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
On April 30, 2021, we amended our $1.35 billion senior unsecured revolving credit facility to extend the maturity date to April 30, 2026 (the “HollyFrontier Credit Agreement”). The HollyFrontier Credit Agreement may be used for revolving credit loans and letters of credit from time to time and is available to fund general corporate purposes. At June 30, 2021, we were in compliance with all covenants, had 0 outstanding borrowings and had outstanding letters of credit totaling $2.3 million under the HollyFrontier Credit Agreement.

Indebtedness under the HollyFrontier Credit Agreement bears interest, at our option, at either (a) the alternate base rate (as defined in the HollyFrontier Credit Agreement) plus an applicable margin of (ranging from 0.25% to 1.125%), (b) the LIBO Rate (as defined in the HollyFrontier Credit Agreement) plus an applicable margin (ranging from 1.25% to 2.125%) or (c) the CDOR Rate (as defined in the HollyFrontier Credit Agreement) plus an applicable margin (ranging from 1.25% to 2.125%) for Canadian dollar denominated borrowings.

HEP Credit Agreement
On April 30, 2021, HEP amended its $1.4 billion senior secured revolving credit facility decreasing the commitments under the facility to $1.2 billion and extending the maturity to July 27, 2025 (the “HEP Credit Agreement”). The HEP Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments, working capital and for general partnership purposes. It is also available to fund letters of credit up to a $50 million sub-limit and continues to provide for an accordion feature that allows HEP to increase the commitments under the HEP Credit Agreement up to a maximum amount of $1.7 billion. During the six months ended June 30, 2021, HEP received advances totaling $141.0 million and repaid $184.5 million under the HEP Credit Agreement. At June 30, 2021, HEP was in compliance with all of its covenants, had outstanding borrowings of $870.0 million and 0 outstanding letters of credit under the HEP Credit Agreement.

Prior to the Investment Grade Date (as defined in the HEP Credit Agreement), indebtedness under the HEP Credit Agreement bears interest, at HEP’s option, at either (a) the alternate base rate (as defined in the HEP Credit Agreement) plus an applicable margin or (b) the Eurodollar Rate (as defined in the HEP Credit Agreement) plus an applicable margin. In each case, the applicable margin is based upon HEP’s Total Leverage Ratio (as defined in the HEP Credit Agreement). The weighted average interest rate in effect under the HEP Credit Agreement on HEP’s borrowings was 2.20% for June 30, 2021.

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.

23

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
HollyFrontier Senior Notes
At June 30, 2021, our senior notes consisted of the following:

$350.0 million in aggregate principal amount of 2.625% senior notes maturing October 2023 (the “2.625% Senior Notes”);
$1.0 billion in aggregate principal amount of 5.875% senior notes maturing April 2026 (the “5.875% Senior Notes”); and
$400.0 million in aggregate principal amount of 4.500% senior notes maturing October 2030 (the “4.500% Senior Notes”).

These senior notes (collectively, the “HollyFrontier Senior Notes”) are unsecured and unsubordinated obligations and rank equally with all our other existing and future unsecured and unsubordinated indebtedness.

HollyFrontier Financing Arrangements
Certain of our wholly-owned subsidiaries entered into financing arrangements whereby such subsidiaries sold a portion of their precious metals catalyst to a financial institution and then leased back the precious metals catalyst in exchange for cash. The volume of the precious metals catalyst and the lease rate are fixed over the term of each lease, and the lease payments are recorded as interest expense. The current leases mature on February 1, 2022. Upon maturity, we must either satisfy the obligation at fair market value or refinance to extend the maturity. These financing arrangements are recorded at a Level 2 fair value totaling $41.7 million and $43.9 million at June 30, 2021 and December 31, 2020, respectively, and are included in “Accrued liabilities” in our consolidated balance sheets. See Note 4 for additional information on Level 2 inputs.

HEP Senior Notes
In February 2020, HEP closed a private placement of $500.0 million in aggregate principal amount of 5.0% HEP senior unsecured notes maturing February 2028 (the “HEP Senior Notes”). Subsequently, in February 2020, HEP redeemed its existing $500.0 million aggregate principal amount of 6.0% senior notes maturing August 2024 at a redemption cost of $522.5 million. HEP recognized a $25.9 million early extinguishment loss consisting of a $22.5 million debt redemption premium and unamortized discount and financing costs of $3.4 million during the three months ended March 31, 2020.

The HEP Senior Notes are unsecured and impose certain restrictive covenants, including limitations on HEP’s ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. HEP was in compliance with the restrictive covenants for the HEP Senior Notes as of June 30, 2021. At any time when the HEP Senior Notes are rated investment grade by either Moody’s or Standard & Poor’s and no default or event of default exists, HEP will not be subject to many of the foregoing covenants. Additionally, HEP has certain redemption rights at varying premiums over face value under the HEP Senior Notes.

Indebtedness under the HEP Senior Notes is guaranteed by HEP’s wholly-owned subsidiaries. HEP’s creditors have no recourse to our assets. Furthermore, our creditors have no recourse to the assets of HEP and its consolidated subsidiaries.

24

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
The carrying amounts of long-term debt are as follows:
June 30,
2021
December 31,
2020
 (In thousands)
HollyFrontier
2.625% Senior Notes$350,000 $350,000 
5.875% Senior Notes1,000,000 1,000,000 
4.500% Senior Notes400,000 400,000 
1,750,000 1,750,000 
Unamortized discount and debt issuance costs(11,601)(12,885)
Total HollyFrontier long-term debt1,738,399 1,737,115 
HEP Credit Agreement870,000 913,500 
HEP 5.000% Senior Notes
Principal500,000 500,000 
Unamortized discount and debt issuance costs(7,430)(7,897)
Total HEP long-term debt1,362,570 1,405,603 
Total long-term debt$3,100,969 $3,142,718 

The fair values of the senior notes are as follows:
June 30,
2021
December 31,
2020
(In thousands)
HollyFrontier Senior Notes$1,948,756 $1,903,867 
HEP Senior Notes$512,245 $506,540 

These fair values are based on a Level 2 input. See Note 4 for additional information on Level 2 inputs.

We capitalized interest attributable to construction projects of $2.8 million and $0.8 million for the three months ended June 30, 2021 and 2020, respectively, and $4.7 million and $1.4 million, for the six months ended June 30, 2021 and 2020, 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.

25

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 swap contracts to lock in basis spread differentials on forecasted purchases of crude oil and forward sales contracts that lock in the prices of future sales of crude oil and refined product. These contracts have been designated as accounting hedges and are measured at fair value with offsetting adjustments (gains/losses) recorded directly to other comprehensive income. These fair value adjustments are later reclassified to earnings as the hedging instruments mature.

The following table presents the pre-tax effect on other comprehensive income (“OCI”) and earnings due to fair value adjustments and maturities of hedging instruments under hedge accounting:
Net Unrealized Gain (Loss) Recognized in OCIGain (Loss) Reclassified into Earnings
Derivatives Designated as Cash Flow Hedging InstrumentsThree Months Ended
June 30,
Income Statement LocationThree Months Ended
June 30,
2021202020212020
(In thousands)
Commodity contracts$5,424 $6,914 Sales and other revenues$(5,052)$(5,403)
Cost of products sold459 
Operating expenses103 (457)
Total$5,424 $6,914 $(4,949)$(5,401)

Derivatives Designated as Cash Flow Hedging InstrumentsSix Months Ended
June 30,
Income Statement LocationSix Months Ended
June 30,
2021202020212020
(In thousands)
Commodity contracts$782 $(6,410)Sales and other revenues$(18,771)$49 
Cost of products sold2,289 
Operating expenses(53)(1,163)
Total$782 $(6,410)$(18,824)$1,175 

Economic Hedges
We have commodity contracts including NYMEX futures contracts to lock in prices on forecasted purchases and sales of inventory and forward purchase and sell contracts, as well as periodically have contracts to lock in basis spread differentials on forecasted purchases of crude oil, that serve as economic hedges (derivatives used for risk management, but not designated as accounting hedges). We also have forward currency contracts to fix the rate of foreign currency. In addition, our catalyst financing arrangements discussed in Note 9 could require repayment under certain conditions based on the future pricing of platinum, which is an embedded derivative. These contracts are measured at fair value with offsetting adjustments (gains/losses) recorded directly to earnings.

The following table presents the pre-tax effect on income due to maturities and fair value adjustments of our economic hedges:
Gain (Loss) Recognized in Earnings
Derivatives Not Designated as Hedging InstrumentsIncome Statement LocationThree Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
(In thousands)
Commodity contractsCost of products sold$(9,469)$(7,180)$(12,079)$17,909 
Interest expense4,831 (5,100)7,506 4,712 
Foreign currency contractsGain (loss) on foreign currency transactions(6,086)(14,315)(12,829)19,160 
Total$(10,724)$(26,595)$(17,402)$41,781 

26

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
As of June 30, 2021, we have the following notional contract volumes related to outstanding derivative instruments:
Notional Contract Volumes by Year of Maturity
Total Outstanding Notional20212022Unit of Measure
Derivatives Designated as Hedging Instruments
Natural gas price swaps - long900,000 900,000 MMBTU
Forward crude oil contracts - short90,000 90,000 Barrels
Derivatives Not Designated as Hedging Instruments
NYMEX futures (WTI) - short665,000 665,000 Barrels
Forward gasoline and diesel contracts - long365,000 365,000 Barrels
Foreign currency forward contracts434,968,532 210,609,988 224,358,544 U.S. dollar
Forward commodity contracts (platinum)38,723 38,723 Troy ounces

The following table presents the fair value and balance sheet locations of our outstanding derivative instruments. These amounts are presented on a gross basis with offsetting balances that reconcile to a net asset or liability position in our consolidated balance sheets. We present on a net basis to reflect the net settlement of these positions in accordance with provisions of our master netting arrangements.
Derivatives in Net Asset PositionDerivatives in Net Liability Position
Gross AssetsGross Liabilities Offset in Balance SheetNet Assets Recognized in Balance SheetGross LiabilitiesGross Assets Offset in Balance SheetNet Liabilities Recognized in Balance Sheet
 (In thousands)
June 30, 2021
Derivatives designated as cash flow hedging instruments:
Commodity price swap contracts$892 $$892 $$$
Commodity forward contracts462 462 
$892 $$892 $462 $$462 
Derivatives not designated as cash flow hedging instruments:
NYMEX futures contracts$$$$2,352 $$2,352 
Commodity forward contracts671 671 650 650 
Foreign currency forward contracts20,007 (948)19,059 
$671 $$671 $23,009 $(948)$22,061 
Total net balance$1,563 $22,523 
Balance sheet classification:Prepayment and other$1,563 Accrued liabilities$22,523 

27

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Derivatives in Net Asset PositionDerivatives in Net Liability Position
Gross AssetsGross Liabilities Offset in Balance SheetNet Assets Recognized in Balance SheetGross LiabilitiesGross Assets Offset in Balance SheetNet Liabilities Recognized in Balance Sheet
 (In thousands)
December 31, 2020
Derivatives designated as cash flow hedging instruments:
Commodity price swap contracts$$$$359 $$359 
$$$$359 $$359 
Derivatives not designated as cash flow hedging instruments:
NYMEX futures contracts$$$$418 $$418 
Commodity forward contracts275 275 196 196 
Foreign currency forward contracts23,005 23,005 
$275 $$275 $23,619 $$23,619 
Total net balance$275 $23,978 
Balance sheet classification:Prepayment and other$275 Accrued liabilities$23,978 

At June 30, 2021, we had a pre-tax net unrealized gain of $0.4 million classified in accumulated other comprehensive income that relates to all accounting hedges having contractual maturities through 2021, which, assuming commodity prices remain unchanged, will be effectively transferred from accumulated other comprehensive income into the statement of operations as the hedging instruments contractually mature over the next twelve-month period.


NOTE 11:Equity

In November 2019, our Board of Directors approved a $1.0 billion share repurchase program, which replaced all existing share repurchase programs, authorizing us to repurchase common stock in the open market or through privately negotiated transactions. The timing and amount of stock repurchases will depend on market conditions and corporate, regulatory and other relevant considerations. This program may be discontinued at any time by the Board of Directors. As of June 30, 2021, we had not repurchased common stock under this stock repurchase program. In addition, we are authorized by our Board of Directors to repurchase shares in an amount sufficient to offset shares issued under our compensation programs.

During the six months ended June 30, 2021 and 2020, we withheld 14,063 and 29,587, respectively, shares of our common stock from certain employees. These withholdings were made under the terms of restricted stock unit and performance share unit agreements upon vesting, at which time, we concurrently made cash payments to fund payroll and income taxes on behalf of officers and employees who elected to have shares withheld from vested amounts to pay such taxes.


28

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 12:Other Comprehensive Income

The components and allocated tax effects of other comprehensive income are as follows:
Before-TaxTax Expense
(Benefit)
After-Tax
 (In thousands)
Three Months Ended June 30, 2021
Net change in foreign currency translation adjustment$2,088 $450 $1,638 
Net unrealized gain on hedging instruments5,424 1,363 4,061 
Net change in pension and other post-retirement benefit obligations(932)(228)(704)
Other comprehensive income attributable to HollyFrontier stockholders$6,580 $1,585 $4,995 
Three Months Ended June 30, 2020
Net change in foreign currency translation adjustment$11,710 $2,488 $9,222 
Net unrealized gain on hedging instruments6,914 1,762 5,152 
Other comprehensive income attributable to HollyFrontier stockholders$18,624 $4,250 $14,374 
Six Months Ended June 30, 2021
Net change in foreign currency translation adjustment$(3,775)$(775)$(3,000)
Net unrealized gain on hedging instruments782 194 588 
Net change in pension and other post-retirement benefit obligations(1,862)(465)(1,397)
Other comprehensive loss attributable to HollyFrontier stockholders$(4,855)$(1,046)$(3,809)
Six Months Ended June 30, 2020
Net change in foreign currency translation adjustment$(9,876)$(2,139)$(7,737)
Net unrealized loss on hedging instruments(6,410)(1,636)(4,774)
Net change in pension and other post-retirement benefit obligations(42)(4)(38)
Other comprehensive loss attributable to HollyFrontier stockholders$(16,328)$(3,779)$(12,549)
29

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued

The following table presents the statements of operations line item effects for reclassifications out of accumulated other comprehensive income (“AOCI”):
AOCI ComponentGain (Loss) Reclassified From AOCIStatement of Operations Line Item
Three Months Ended June 30,
20212020
(In thousands)
Hedging instruments:
Commodity price swaps$(5,052)$(5,403)Sales and other revenues
459 Cost of products sold
103 (457)Operating expenses
(4,949)(5,401)
(1,247)(1,377)Income tax benefit
(3,702)(4,024)Net of tax
Other post-retirement benefit obligations:
Pension obligations104 Other, net
26 Income tax expense
78 Net of tax
Post-retirement healthcare obligations837 Other, net
211 Income tax expense
626 Net of tax
Retirement restoration plan(9)Other, net
(2)Income tax benefit
(7)Net of tax
Total reclassifications for the period$(3,005)$(4,024)

30

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
AOCI ComponentGain (Loss) Reclassified From AOCIStatement of Operations Line Item
Six Months Ended June 30,
20212020
(In thousands)
Hedging instruments:
Commodity price swaps$(18,771)$49 Sales and other revenues
2,289 Cost of products sold
(53)(1,163)Operating expenses
(18,824)1,175 
(4,744)300 Income tax expense (benefit)
(14,080)875 Net of tax
Other post-retirement benefit obligations:
Pension obligations205 Other, net
52 Income tax expense
153 Net of tax
Post-retirement healthcare obligations1,675 Other, net
422 Income tax expense
1,253 Net of tax
Retirement restoration plan(18)Other, net
(5)Income tax benefit
(13)Net of tax
Total reclassifications for the period$(12,687)$875 

Accumulated other comprehensive income in the equity section of our consolidated balance sheets includes:
June 30,
2021
December 31,
2020
 (In thousands)
Foreign currency translation adjustment$(318)$2,682 
Unrealized loss on pension obligation(453)(248)
Unrealized gain on post-retirement benefit obligations10,118 11,310 
Unrealized gain (loss) on hedging instruments306 (282)
Accumulated other comprehensive income$9,653 $13,462 


NOTE 13:Contingencies

We are a party to various litigation and legal proceedings which we believe, based on advice of counsel, will not either individually or in the aggregate have a materially adverse effect on our financial condition, results of operations or cash flows.

During 2017, 2018 and 2019, the EPA granted the Cheyenne Refinery and Woods Cross Refinery each a one-year small refinery exemption from the Renewable Fuel Standard (“RFS”) program requirements for the 2016, 2017 and 2018, respectively, calendar years. As a result, the Cheyenne Refinery’s and Woods Cross Refinery’s gasoline and diesel production are not subject to the Renewable Volume Obligation for the respective years. Upon each exemption granted, we increased our inventory of RINs and reduced our cost of products sold.

31

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
Various subsidiaries of HollyFrontier are currently intervenors in two lawsuits brought by renewable fuel interest groups against the EPA in federal courts alleging violations of the RFS under the Clean Air Act and challenging the EPA’s handling of small refinery exemptions. We intervened to vigorously defend the EPA’s position on small refinery exemptions because we believe the EPA correctly applied applicable law to the matters at issue. The first lawsuit is before the U.S. Court of Appeals for the Tenth Circuit. The matter is fully briefed and remains pending before that court. The second lawsuit is before the U.S. Court of Appeals for the DC Circuit. Briefing of the issues before the court commenced on December 7, 2020; however, in light of the Supreme Court’s decision to review HollyFrontier’s petition for certiorari of the Tenth Circuit January 24, 2020 decision, this case was stayed pending a decision from the Supreme Court. The stay has not been lifted to date. On January 24, 2020, in a separate matter before the Tenth Circuit, the Tenth Circuit vacated the small refinery exemptions granted to two of our refineries for 2016 and remanded the case to the EPA for further proceedings. On April 15, 2020, the Tenth Circuit issued its mandate, remanding the matter back to the EPA. On September 4, 2020, various subsidiaries of HollyFrontier filed a Petition for a Writ of Certiorari with the U.S. Supreme Court seeking review of the Tenth Circuit decision. On January 8, 2021, the U.S. Supreme Court granted HollyFrontier's petition. The oral argument occurred on April 27, 2021. The U.S. Supreme Court issued its opinion in this matter on June 25, 2021 and reversed the Tenth Circuit. On July 27, 2021, the Tenth Circuit recalled the mandate it issued to the EPA on April 15, 2020 and vacated its January 24, 2020 judgment. On July 29, 2021, the Tenth Circuit issued an order and judgment confirming that it recalled its mandate and vacated its previous judgment in this case. The Tenth Circuit also issued a new mandate returning jurisdiction to the EPA. In December 2020, various subsidiaries of HollyFrontier also filed a petition for review in the DC Circuit challenging the EPA's denial of small refinery exemption petitions for years prior to 2016. The petition was consolidated with petitions from eight other refining companies challenging the same decision. In light of the Supreme Court's decision to hear HollyFrontier's appeal of the Tenth Circuit decision, this case was stayed pending a decision from the Supreme Court. Following the Supreme Court’s decision, HollyFrontier’s subsidiaries filed a motion on July 26, 2021 to dismiss their petition. The DC Circuit granted this motion and dismissed the case on July 28, 2021. We are unable to estimate the costs we may incur, if any, at this time. It is too early to assess how the U.S. Supreme Court decision will impact future small refinery exemptions or whether the remaining cases are expected to have any impact on us.

We have been party to multiple proceedings before the Federal Energy Regulatory Commission (“FERC”) challenging the rates charged by SFPP, L.P. (“SFPP”) on its East Line pipeline facilities from El Paso, Texas to Phoenix, Arizona. In March 2018, FERC ruled that SFPP, as a master limited partnership, was prohibited from including an allowance for investor income taxes in the cost of service underlying its East Line rates. We reached a negotiated settlement with SFPP that provides for a payment to us of $51.5 million. FERC approved the settlement on December 31, 2020 subject to a rehearing period that resulted in a settlement effective date of February 2, 2021. Under the terms of the settlement agreement, SFPP made the $51.5 million payment to us on February 10, 2021. As of December 31, 2020, we had no enforceable right to collect any of the settlement. Accordingly, recognition of a gain occurred when the uncertainties were resolved on February 2, 2021, and we recorded as Gain on tariff settlement in our consolidated statements of operations for the six months ended June 30, 2021.


32

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 14:Segment Information

Our operations are organized into 3 reportable segments, Refining, Lubricants and Specialty Products and HEP. Our operations that are not included in the Refining, Lubricants and Specialty Products and HEP segments are included in Corporate and Other. Intersegment transactions are eliminated in our consolidated financial statements and are included in Eliminations. Corporate and Other and Eliminations are aggregated and presented under the Corporate, Other and Eliminations column.

The Refining segment represents the operations of the El Dorado, Tulsa, Navajo and Woods Cross Refineries and HFC Asphalt (aggregated as a reportable segment). Refining activities involve the purchase and refining of crude oil and wholesale and branded marketing of refined products, such as gasoline, diesel fuel and jet fuel. These petroleum products are primarily marketed in the Mid-Continent, Southwest and Rocky Mountain geographic regions of the United States. HFC Asphalt operates various asphalt terminals in Arizona, New Mexico and Oklahoma. The Refining segment also included the operations of the Cheyenne Refinery through the third quarter of 2020, at which time it permanently ceased petroleum refining operations.

The Lubricants and Specialty Products segment involves PCLI’s production operations, located in Mississauga, Ontario, that includes lubricant products such as base oils, white oils, specialty products and finished lubricants, and the operations of our Petro-Canada Lubricants business that includes the marketing of products to both retail and wholesale outlets through a global sales network with locations in Canada, the United States, Europe and China. Additionally, the Lubricants and Specialty Products segment includes specialty lubricant products produced at our Tulsa Refineries that are marketed throughout North America and are distributed in Central and South America and Red Giant Oil, one of the largest suppliers of locomotive engine oil in North America. Also, the Lubricants and Specialty Products segment includes Sonneborn, a producer of specialty hydrocarbon chemicals such as white oils, petrolatums and waxes with manufacturing facilities in the United States and Europe.

The HEP segment includes all of the operations of HEP, which owns and operates logistics and refinery assets consisting of petroleum product and crude oil pipelines, terminals, tankage, loading rack facilities and refinery processing units in the Mid-Continent, Southwest and Rocky Mountain geographic regions of the United States. The HEP segment also includes a 75% ownership interest in UNEV (a consolidated subsidiary of HEP) and 50% ownership interests in each of the Osage Pipeline, the Cheyenne Pipeline and Cushing Connect. Revenues from the HEP segment are earned through transactions with unaffiliated parties for pipeline transportation, rental and terminalling operations as well as revenues relating to pipeline transportation services provided for our refining operations. Due to certain basis differences, our reported amounts for the HEP segment may not agree to amounts reported in HEP’s periodic public filings.

The accounting policies for our segments are the same as those described in the summary of significant accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2020, except that our Refining segment excludes intercompany ROU assets and liabilities for operating leases.

33

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
RefiningLubricants and Specialty ProductsHEP
Corporate, Other
and Eliminations (1)
Consolidated
Total
(In thousands)
Three Months Ended June 30, 2021
Sales and other revenues:
Revenues from external customers$3,887,273 $662,755 $27,092 $$4,577,123 
Intersegment revenues205,186 6,434 99,142 (310,762)
$4,092,459 $669,189 $126,234 $(310,759)$4,577,123 
Cost of products sold (exclusive of lower of cost or market inventory)$3,619,319 $491,218 $$(284,808)$3,825,729 
Lower of cost or market inventory valuation adjustment$(118,825)$$$$(118,825)
Operating expenses$231,422 $61,310 $42,068 $(609)$334,191 
Selling, general and administrative expenses$30,136 $37,583 $2,846 $7,189 $77,754 
Depreciation and amortization$79,938 $19,152 $22,275 $2,677 $124,042 
Income (loss) from operations$250,469 $59,926 $59,045 $(35,208)$334,232 
Earnings of equity method investments$$$3,423 $$3,423 
Capital expenditures$33,150 $5,614 $24,498 $119,618 $182,880 
Three Months Ended June 30, 2020
Sales and other revenues:
Revenues from external customers$1,690,042 $353,644 $19,244 $$2,062,930 
Intersegment revenues37,462 3,643 95,563 (136,668)
$1,727,504 $357,287 $114,807 $(136,668)$2,062,930 
Cost of products sold (exclusive of lower of cost or market inventory)$1,433,437 $258,347 $$(114,788)$1,576,996 
Lower of cost or market inventory valuation adjustment$(269,904)$$$$(269,904)
Operating expenses$239,359 $47,840 $34,737 $(18,577)$303,359 
Selling, general and administrative expenses$32,811 $35,919 $2,535 $4,104 $75,369 
Depreciation and amortization$81,694 $19,779 $24,008 $4,697 $130,178 
Long-lived asset impairment (2)
$215,242 $204,708 $16,958 $$436,908 
Income (loss) from operations$(5,135)$(209,306)$36,569 $(12,104)$(189,976)
Earnings of equity method investments$$$2,156 $$2,156 
Capital expenditures$12,102 $4,311 $11,798 $17,776 $45,987 

34

HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
RefiningLubricants and Specialty ProductsHEP
Corporate, Other
and Eliminations (1)
Consolidated
Total
(In thousands)
Six Months Ended June 30, 2021
Sales and other revenues:
Revenues from external customers$6,844,306 $1,184,753 $52,350 $$8,081,416 
Intersegment revenues265,648 8,999 201,068 (475,715)
$7,109,954 $1,193,752 $253,418 $(475,708)$8,081,416 
Cost of products sold (exclusive of lower of cost or market inventory)$6,381,262 $822,741 $$(417,969)$6,786,034 
Lower of cost or market inventory valuation adjustment$(318,353)$$$(509)$(318,862)
Operating expenses$524,277 $122,063 $83,433 $4,327 $734,100 
Selling, general and administrative expenses$58,632 $83,136 $5,815 $12,146 $159,729 
Depreciation and amortization$168,020 $39,273 $45,281 $(4,453)$248,121 
Income (loss) from operations$296,116 $126,539 $118,889 $(69,250)$472,294 
Earnings of equity method investments$$$5,186 $$5,186 
Capital expenditures$73,511 $9,701 $57,716 $191,913 $332,841 
Six Months Ended June 30, 2020
Sales and other revenues:
Revenues from external customers$4,540,662 $877,143 $45,670 $$5,463,475 
Intersegment revenues121,708 6,747 196,991 (325,446)
$4,662,370 $883,890 $242,661 $(325,446)$5,463,475 
Cost of products sold (exclusive of lower of cost or market inventory)$3,902,188 $649,727 $$(281,193)$4,270,722 
Lower of cost or market inventory valuation adjustment$290,560 $$$$290,560 
Operating expenses$498,533 $101,971 $69,718 $(38,518)$631,704 
Selling, general and administrative expenses$63,811 $84,881 $5,237 $9,177 $163,106 
Depreciation and amortization$171,873 $41,828 $47,986 $9,066 $270,753 
Long-lived asset impairment (2)
$215,242 $204,708 $16,958 $$436,908 
Income (loss) from operations$(479,837)$(199,225)$102,762 $(23,978)$(600,278)
Earnings of equity method investments$$$3,870 $$3,870 
Capital expenditures$65,116 $13,392 $30,740 $20,488 $129,736 

(1) For the three and the six months ended June 30, 2021, Corporate and Other includes $11.3 million and $24.1 million, respectively, of operating expenses and $113.8 million and $184.0 million, respectively, of capital expenditures related to the construction of our renewable diesel units.
(2) The results of our HEP reportable segment for the three and six months ended June 30, 2020 include a long-lived asset impairment charge attributed to HEP’s logistics assets at our Cheyenne Refinery.

RefiningLubricants and Specialty ProductsHEPCorporate, Other
and Eliminations
Consolidated
Total
(In thousands)
June 30, 2021
Cash and cash equivalents$6,383 $126,944 $19,561 $1,245,392 $1,398,280 
Total assets$7,018,933 $2,015,176 $2,255,752 $1,270,172 $12,560,033 
Long-term debt$$$1,362,570 $1,738,399 $3,100,969 
December 31, 2020
Cash and cash equivalents$3,106 $163,729 $21,990 $1,179,493 $1,368,318 
Total assets$6,203,847 $1,864,313 $2,198,478 $1,240,226 $11,506,864 
Long-term debt$$$1,405,603 $1,737,115 $3,142,718 
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HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
NOTE 15:Subsequent Event

HFC Transactions

On August 2, 2021, HollyFrontier, Hippo Parent Corporation, a wholly owned subsidiary of HollyFrontier (“New Parent”), Hippo Merger Sub, Inc., a wholly owned subsidiary of New Parent (“Parent Merger Sub”), The Sinclair Companies (“Sinclair”), and Hippo Holding LLC, a wholly owned subsidiary of Sinclair (the “Target Company”), entered into a Business Combination Agreement (the “Business Combination Agreement”). Pursuant to the Business Combination Agreement, HollyFrontier will acquire the Target Company by effecting (a) a holding company merger in accordance with Section 251(g) of the Delaware General Corporation Law whereby HollyFrontier will merge with and into Parent Merger Sub, with HollyFrontier surviving such merger as a direct wholly owned subsidiary of New Parent (the “HFC Merger”) and (b) immediately following the HFC Merger, a contribution whereby Sinclair will contribute all of the equity interests of the Target Company to New Parent in exchange for shares of New Parent, resulting in the Target Company becoming a direct wholly owned subsidiary of New Parent (the “Sinclair Oil Acquisition” and together with the HFC Merger, the “HFC Transactions”).

Under the terms of the Business Combination Agreement, at the effective time of the HFC Merger, (a) each share of common stock of HollyFrontier, par value $0.01 per share, will be automatically converted into 1 share of common stock of New Parent, par value $0.01 per share (“New Parent Common Stock”) and (b) immediately thereafter, Sinclair will contribute the equity interests in the Target Company to New Parent in exchange for 60,230,036 shares of New Parent Common Stock, subject to adjustment if, as a condition to obtaining antitrust clearance for the Sinclair Transactions (as defined below), HollyFrontier agrees to divest certain Woods Cross Refinery assets and the sales price for such assets does not exceed a threshold provided in the Business Combination Agreement.

On a pro forma basis following the closing, Sinclair is expected to own 26.75% of the outstanding common stock of New Parent, and HollyFrontier’s current stockholders are expected to hold in the aggregate 73.25% of the outstanding common stock of New Parent, based on HollyFrontier’s outstanding shares of common stock as of July 30, 2021.

Consummation of the HFC Transactions is subject to satisfaction or waiver of certain customary conditions, including, among others, receipt of approval for the issuance of New Parent common stock from HollyFrontier’s stockholders; the satisfaction of certain required regulatory consents and approvals, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act; and the consummation of the HEP Transactions (as defined below), which will occur immediately prior to the HFC Transactions (the HEP Transactions, together with the HFC Transactions, the “Sinclair Transactions”).

The Business Combination Agreement automatically terminates if the HEP Transactions are terminated and contains other customary termination rights. In the event that certain events occur under specified circumstances outlined in the Business Combination Agreement, HollyFrontier could be required to pay Sinclair a termination fee equal to $200 million or $35 million as reimbursement for expenses.

Upon closing of the Sinclair Transactions, HollyFrontier’s existing senior management team will operate the combined company. Under the definitive agreements, Sinclair will be granted the right to nominate two directors to the New Parent Board of Directors at the closing. The Sinclair stockholders have also agreed to certain customary lock up, voting and standstill restrictions, as well as customary registration rights, for the New Parent Common Stock to be issued to the stockholders of Sinclair. The new company will be headquartered in Dallas, Texas, with combined business offices in Salt Lake City, Utah. Following the consummation of the HFC Merger, New Parent will assume HollyFrontier’s listing on the New York Stock Exchange and will be renamed “HF Sinclair Corporation”.

HEP Transactions

On August 2, 2021, HEP, Sinclair, and Sinclair Transportation Company, a wholly owned subsidiary of Sinclair (“STC”), entered into a Contribution Agreement (the “Contribution Agreement”) pursuant to which the Partnership will acquire all of the outstanding shares of STC in exchange for 21 million newly issued common limited partner units of HEP and cash consideration equal to $325 million (the “HEP Transactions”).

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HOLLYFRONTIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Continued
The cash consideration for the HEP Transactions is subject to customary adjustments at closing for working capital of STC. The number of HEP common limited partner units to be issued to Sinclair at closing is subject to downward adjustment if, as a condition to obtaining antitrust clearance for the Sinclair Transactions, HEP agrees to divest a portion of its equity interest in UNEV Pipeline LLC and the sales price for such interests does not exceed the threshold provided in the Contribution Agreement.

The Contribution Agreement contains customary representations, warranties and covenants of HEP, Sinclair, and STC. The HEP Transactions are expected to close in mid-2022, subject to the satisfaction or waiver of certain customary conditions, including, among others, the receipt of certain required regulatory consents and approvals, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, and the consummation of the HFC Transactions.

The Contribution Agreement automatically terminates if the HFC Transactions are terminated and contains other customary termination rights, including a termination right for each of the Partnership and Sinclair if, under certain circumstances, the closing does not occur by May 2, 2022 (the “Outside Date”), except that the Outside Date can be extended by either party by up to 2 90 day periods to obtain any required antitrust clearance.

Upon closing of the HEP Transactions, HEP’s existing senior management team will continue to operate HEP. Under the definitive agreements, Sinclair will be granted the right to nominate 1 director to the HEP Board of Directors at the closing. The Sinclair stockholders have also agreed to certain customary lock up restrictions and registration rights for the HEP common limited partner units to be issued to the stockholders of Sinclair. HEP will continue to operate under the name Holly Energy Partners, L.P.

On August 2, 2021, in connection with the Sinclair Transactions, HEP and HollyFrontier entered into a Letter Agreement (“Letter Agreement”) pursuant to which, among other things, HEP and HollyFrontier agreed, upon the consummation of the Sinclair Transactions, to enter into amendments to certain of the agreements by and among HEP and HollyFrontier, including the master throughput agreement, to include within the scope of such agreements the assets to be acquired by HEP pursuant to the Contribution Agreement.

In addition, the Letter Agreement provides that if, as a condition to obtaining antitrust clearance for the Sinclair Transactions, HollyFrontier enters into a definitive agreement to divest its Woods Cross Refinery, then HEP would sell certain assets located at, or relating to, the Woods Cross Refinery to HollyFrontier in exchange for cash consideration equal to $232.5 million plus the certain accounts receivable of HEP in respect of such assets, with such sale to be effective immediately prior to the closing of the sale of the Woods Cross Refinery by HollyFrontier. The Letter Agreement also provides that HEP’s right to future revenues from HollyFrontier in respect of such Woods Cross Refinery assets will terminate at the closing of such sale.
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Item 2 contains “forward-looking” statements. See “Forward-Looking Statements” at the beginning of Part I of this Quarterly Report on Form 10-Q. In this document, the words “we,” “our,” “ours” and “us” refer only to HollyFrontier Corporation (“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.


OVERVIEW

We are an independent petroleum refiner and marketer 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 refineries located in El Dorado, Kansas (the “El Dorado Refinery”), Tulsa, Oklahoma (the “Tulsa Refineries”), which comprise two production facilities, the Tulsa West and East facilities, Artesia, New Mexico, which operates in conjunction with crude, vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the “Navajo Refinery”) and Woods Cross, Utah (the “Woods Cross Refinery”). We market our refined products principally in the Southwest United States, the Rocky Mountains extending into the Pacific Northwest and in other neighboring Plains states. In addition, we produce base oils and other specialized lubricants in the United States, Canada and the Netherlands, and export products to more than 80 countries. We also own a 57% limited partner interest and a non-economic general partner interest in HEP, a master limited partnership that provides petroleum product and crude oil transportation, terminalling, storage and throughput services to the petroleum industry, including HollyFrontier Corporation subsidiaries.

On August 2, 2021, HollyFrontier, Hippo Parent Corporation, a wholly owned subsidiary of HollyFrontier (“New Parent”), Hippo Merger Sub, Inc., a wholly owned subsidiary of New Parent (“Parent Merger Sub”), The Sinclair Companies (“Sinclair”), and Hippo Holding LLC, a wholly owned subsidiary of Sinclair (the “Target Company”), entered into a Business Combination Agreement (the “Business Combination Agreement”). Pursuant to the Business Combination Agreement, HollyFrontier will acquire the Target Company by effecting (a) a holding company merger in accordance with Section 251(g) of the Delaware General Corporation Law whereby HollyFrontier will merge with and into Parent Merger Sub, with HollyFrontier surviving such merger as a direct wholly owned subsidiary of New Parent (the “HFC Merger”) and (b) immediately following the HFC Merger, a contribution whereby Sinclair will contribute all of the equity interests of the Target Company to New Parent in exchange for shares of New Parent, resulting in the Target Company becoming a direct wholly owned subsidiary of New Parent (the “Sinclair Oil Acquisition” and together with the HFC Merger, the “HFC Transactions”).

Under the terms of the Business Combination Agreement, (a) each share of common stock of HollyFrontier, par value $0.01 per share, will be automatically converted into one share of common stock of New Parent, par value $0.01 per share (“New Parent Common Stock”) and (b) Sinclair will contribute the equity interests in the Target Company to New Parent in exchange for 60,230,036 shares of New Parent Common Stock, subject to adjustment if, as a condition to obtaining antitrust clearance for the Sinclair Transactions (as defined below), HollyFrontier agrees to divest certain Woods Cross Refinery assets and the sales price for such assets does not exceed a threshold provided in the Business Combination Agreement.

Additionally, on August 2, 2021, HEP, Sinclair, and Sinclair Transportation Company, a wholly owned subsidiary of Sinclair (“STC”), entered into a Contribution Agreement (the “Contribution Agreement”) pursuant to which HEP will acquire all of the outstanding shares of STC in exchange for 21 million newly issued common limited partner units of HEP and cash consideration equal to $325 million (the “HEP Transactions”, and together with the HFC Transactions, the “Sinclair Transactions”), subject to downward adjustment if, as a condition to obtaining antitrust clearance for the Sinclair Transactions, HEP agrees to divest a portion of its equity interest in UNEV Pipeline LLC and the sales price for such interests does not exceed the threshold provided in the Contribution Agreement.

The Sinclair Transactions are expected to close in mid-2022, subject to customary closing conditions and regulatory clearance, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and the receipt of required approvals of HFC’s stockholders. In addition, the HFC Transactions and the HEP Transactions are cross-conditioned on each other. See Note 15 of Notes to Consolidated Financial Statements included in “Item 1. Financial Statements” for additional information.

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On May 4, 2021, HollyFrontier Puget Sound Refining LLC, a wholly-owned subsidiary of HollyFrontier Corporation, entered into a sale and purchase agreement with Equilon Enterprises LLC d/b/a Shell Oil Products US (“Shell”) to acquire Shell’s refinery and related assets, including the on-site cogeneration facility and related logistics assets (the “Puget Sound Refinery”), for a base cash purchase price of $350 million plus hydrocarbon inventory to be valued at closing with an estimated current value in the range of $150 million to $180 million (the “Puget Sound Acquisition”). The Puget Sound Refinery is strategically located on approximately 850 acres in Anacortes, Washington, approximately 80 miles north of Seattle and 90 miles south of Vancouver. The 149,000 barrel per day facility is a large, high quality and complex refinery with catalytic cracking and delayed coking units and is well positioned geographically and logistically to source advantaged Canadian and Alaskan North Slope crudes. In addition to refining assets and an on-site cogeneration facility, the transaction includes a deep-water marine dock, a light product loading rack, a rail terminal, and storage tanks with approximately 5.8 million barrels of crude, product and other hydrocarbon storage capacity. The Puget Sound Acquisition is expected to close in the fourth quarter of 2021, subject to customary closing conditions. We expect to fund the Puget Sound Acquisition with a one-year suspension of our regular quarterly dividend and cash on hand.

On April 27, 2021, our wholly-owned subsidiary, 7037619 Canada Inc, entered into a contract for sale of property in Mississuaga, Canada for base consideration of Canadian $125 million, and we expect the transaction to close in the third quarter of 2021.

In the third quarter of 2020, we permanently ceased petroleum refining operations at our facility in Cheyenne, Wyoming (the “Cheyenne Refinery”) and subsequently began converting certain assets at our Cheyenne Refinery to renewable diesel production. In connection with the cessation of petroleum refining operations at our Cheyenne Refinery, we recognized $8.1 million and $16.3 million, in decommissioning expense and $0.2 million and $0.7 million, in employee severance costs for the three and six months ended June 30, 2021, respectively, which were recognized in operating expenses in our Corporate and Other segment.

During the first quarter of 2021, we initiated a restructuring within our Lubricants and Specialty Products segment, which is expected to save approximately $15 million per year of ongoing cash expenses. We recorded $7.8 million in employee severance costs for the six months ended June 30, 2021, which were recognized primarily as selling, general and administrative expenses in our Lubricants and Specialty Products segment.

For the three months ended June 30, 2021, net income attributable to HollyFrontier stockholders was $168.9 million compared to net loss of $176.7 million for the three months ended June 30, 2020. For the six months ended June 30, 2021, net income attributable to HollyFrontier stockholders was $317.1 million compared to net loss of $481.3 million for the six months ended June 30, 2020. Included in our financial results for the second quarter of 2021 was an inventory reserve adjustment that resulted in a benefit of $118.8 million. Gross refining margin per produced barrel sold in our Refining segment increased 45% for the three months ended June 30, 2021 over the same period of 2020. Included in the three months ended June 30, 2020 were long-lived asset impairment charges of $436.9 million related to our Cheyenne Refinery and Petro-Canada Lubricants Inc. (“PCLI”).

Pursuant to the 2007 Energy Independence and Security Act, the Environmental Protection Agency (“EPA”) promulgated the Renewable Fuel Standard (“RFS”) regulations, which increased the volume of renewable fuels mandated to be blended into the nation’s fuel supply. The regulations, in part, require refiners to add annually increasing amounts of “renewable fuels” to their petroleum products or purchase credits, known as renewable identification numbers (“RINs”), in lieu of such blending. Compliance with RFS regulations significantly increases our cost of products sold, with RINs costs totaling $175.0 million for the three months ended June 30, 2021. At June 30, 2021, our open RINs credit obligations were $131.1 million. We will continue to monitor and adjust our RINs position commensurate with our production levels, market conditions and RFS regulations.

Impact of COVID-19 on Our Business
The COVID-19 pandemic caused a decline in U.S. and global economic activity starting in the first quarter of 2020. This decrease reduced both volumes and unit margins across our businesses, resulting in lower gross margins and earnings. Global demand for transportation fuels has continued to improve beginning late in the second quarter of 2020, but remains below pre-pandemic levels. In response to this demand and margin environment, as well as both planned and unplanned maintenance, we operated our Refining segment refineries at an average crude charge of 416,350 BPD during the second quarter of 2021.

In our Lubricants and Specialty Products segment, the Rack Back portion saw a combination of strong demand as well as limited supply due to a number of factors driving strong margins and earnings across the segment. In the Rack Forward portion, despite strong sales volumes and price increases, the rapid rise in base oil prices through the quarter compressed margins in the second quarter of 2021.

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Continued increases in commodity prices resulted in market values for our inventories held at June 30, 2021 above the costs of these inventories using the last-in, first-out (“LIFO”) method and in a lower of cost or market valuation gain of $118.8 million for the three months ended June 30, 2021.

Our standalone (excluding HEP) liquidity was approximately $2.7 billion at June 30, 2021, consisting of cash and cash equivalents of $1.4 billion and an undrawn $1.35 billion credit facility maturing in 2026. Our standalone (excluding HEP) principal amount of long-term debt was $1.75 billion as of June 30, 2021, which consists of $350.0 million in 2.625% senior notes due in 2023, $1.0 billion of 5.875% senior notes due in 2026 and $400.0 million in 4.500% senior notes due in 2030.


OUTLOOK

The impact of the COVID-19 pandemic on the global macroeconomy created an unprecedented reduction in demand, as well as a lack of forward visibility, for many of the transportation fuels, lubricants and specialty products and the associated transportation and terminal services we provide. Since the declines in demand at the beginning of the COVID-19 pandemic, we began to see improvement in demand for these products and services beginning late in the second quarter of 2020 that continued through the second quarter of 2021, and with the increasing availability of vaccines, we believe there is a path to a fulsome recovery in demand in 2021.

With increasing vaccination rates, most of our employees have returned to work at our locations, and we continue to follow Centers for Disease Control and local government guidance. We will continue to monitor developments in the COVID-19 pandemic and the dynamic environment it has created to properly address these policies going forward.

Within our Refining segment, for the third quarter of 2021, we expect to run between 380,000-400,000 barrels per day of crude oil. We expect to adjust refinery production levels commensurate with market demand and planned maintenance.

Within our Lubricants and Specialty Products segment, for the full year 2021, we expect to earn between $180 million to $220 million in income from operations and $230 million to $270 million of EBITDA in the Rack Forward portion of the segment. Within the Rack Back portion, for the third quarter of 2021, we expect base oil margins to fall from spot market levels, but remain higher than the past three years. Similar to our Refining segment, we expect to adjust production levels commensurate with market demand.

At HEP, we expect to see demand for transportation and terminal services grow with underlying demand for transportation fuels and crude oil. In 2021, HEP expects to hold the quarterly distribution constant at $0.35 per unit, or $1.40 on an annualized basis. HEP remains committed to its distribution strategy focused on funding all capital expenditures and distributions within operating cash flow and improving distributable cash flow coverage to 1.3x or greater with the goal of reducing leverage to 3.0-3.5x.

During the third quarter of 2020, we increased our liquidity by $750.0 million with the issuance of $350.0 million in 2.625% senior notes due in 2023 and $400.0 million in 4.500% senior notes due in 2030. This additional liquidity may be used for general corporate purposes and is expected to support the planned growth of our renewables business and the unexpected economic impact of COVID-19, as needed. We do not intend to repurchase common stock under our $1.0 billion share repurchase program until demand for our products normalize. In addition, we announced the Puget Sound Acquisition, which is expected to close in the fourth quarter of 2021, subject to customary closing conditions. We expect to fund the Puget Sound Acquisition with a one-year suspension of our regular quarterly dividend and cash on hand. Our Board of Directors approved the one-year suspension of the regular quarterly dividend effective with the dividend to be declared for the first quarter of 2021 and is expected to resume the dividend after such time.

On March 27, 2020, the U.S. government passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), an approximately $2 trillion stimulus package that included various provisions intended to provide relief to individuals and businesses in the form of tax changes, loans and grants, among others. At this time, we have not sought relief in the form of loans or grants from the CARES Act; however, we have benefited from certain tax deferrals in the CARES Act and may benefit from other tax provisions if we meet the requirements to do so.

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The extent to which our future results are affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic, the effects of any new variant strains of the underlying virus, additional actions by businesses and governments in response to the pandemic and the speed and effectiveness of responses to combat the virus. The COVID-19 pandemic, and the volatile regional and global economic conditions stemming from it, could also exacerbate the risk factors identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 and in this Form 10-Q. The COVID-19 pandemic may also materially adversely affect our results in a manner that is either not currently known or that we do not currently consider to be a significant risk to our business.

A more detailed discussion of our financial and operating results for the three and six months ended June 30, 2021 and 2020 is presented in the following sections.

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RESULTS OF OPERATIONS

Financial Data
 Three Months Ended
June 30,
Change from 2020
 20212020ChangePercent
 (In thousands, except per share data)
Sales and other revenues$4,577,123 $2,062,930 $2,514,193 122 %
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)3,825,729 1,576,996 2,248,733 143 
Lower of cost or market inventory valuation adjustment(118,825)(269,904)151,079 (56)
3,706,904 1,307,092 2,399,812 184 
Operating expenses (exclusive of depreciation and amortization)334,191 303,359 30,832 10 
Selling, general and administrative expenses (exclusive of depreciation and amortization)77,754 75,369 2,385 
Depreciation and amortization124,042 130,178 (6,136)(5)
Long-lived asset impairment— 436,908 (436,908)(100)
Total operating costs and expenses4,242,891 2,252,906 1,989,985 88 
Income (loss) from operations334,232 (189,976)524,208 (276)
Other income (expense):
Earnings of equity method investments3,423 2,156 1,267 59 
Interest income1,029 1,506 (477)(32)
Interest expense(28,942)(32,695)3,753 (11)
Gain on sales-type leases— 33,834 (33,834)(100)
Gain on foreign currency transactions583 2,285 (1,702)(74)
Other, net7,927 1,572 6,355 404 
(15,980)8,658 (24,638)(285)
Income (loss) before income taxes318,252 (181,318)499,570 (276)
Income tax expense (benefit)123,485 (30,911)154,396 (499)
Net income (loss)194,767 (150,407)345,174 (229)
Less net income attributable to noncontrolling interest25,917 26,270 (353)(1)
Net income (loss) attributable to HollyFrontier stockholders$168,850 $(176,677)$345,527 (196)%
Earnings (loss) per share attributable to HollyFrontier stockholders:
Basic$1.03 $(1.09)$2.12 (194)%
Diluted$1.03 $(1.09)$2.12 (194)%
Cash dividends declared per common share$— $0.35 $(0.35)(100)%
Average number of common shares outstanding:
Basic162,523 161,889 634 — %
Diluted162,523 161,889 634 — %


42



 Six Months Ended
June 30,
Change from 2020
 20212020ChangePercent
 (In thousands, except per share data)
Sales and other revenues$8,081,416 $5,463,475 2,617,941 48 %
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)6,786,034 4,270,722 2,515,312 59 
Lower of cost or market inventory valuation adjustment(318,862)290,560 (609,422)(210)
6,467,172 4,561,282 1,905,890 42 
Operating expenses (exclusive of depreciation and amortization)734,100 631,704 102,396 16 
Selling, general and administrative expenses (exclusive of depreciation and amortization)159,729 163,106 (3,377)(2)
Depreciation and amortization248,121 270,753 (22,632)(8)
Long-lived asset impairment— 436,908 (436,908)(100)
Total operating costs and expenses7,609,122 6,063,753 1,545,369 25 
Income (loss) from operations472,294 (600,278)1,072,572 (179)
Other income (expense):
Earnings of equity method investments5,186 3,870 1,316 34 
Interest income2,060 5,579 (3,519)(63)
Interest expense(67,328)(55,334)(11,994)22 
Gain on tariff settlement51,500 — 51,500 — 
Gain on sales-type leases— 33,834 (33,834)(100)
Loss on early extinguishment of debt— (25,915)25,915 (100)
Loss on foreign currency transactions(734)(1,948)1,214 (62)
Other, net9,817 3,422 6,395 187 
501 (36,492)36,993 (101)
Income (loss) before income taxes472,795 (636,770)1,109,565 (174)
Income tax expense (benefit)95,178 (193,077)288,255 (149)
Net income (loss)377,617 (443,693)821,310 (185)
Less net income attributable to noncontrolling interest60,550 37,607 22,943 61 
Net income (loss) attributable to HollyFrontier stockholders$317,067 $(481,300)$798,367 (166)%
Earnings (loss) per share attributable to HollyFrontier stockholders:
Basic$1.92 $(2.97)$4.89 (165)%
Diluted$1.92 $(2.97)$4.89 (165)%
Cash dividends declared per common share$0.35 $0.70 $(0.35)(50)%
Average number of common shares outstanding:
Basic162,501 161,882 619 — %
Diluted162,501 161,882 619 — %


Balance Sheet Data
June 30, 2021December 31, 2020
(Unaudited)
 (In thousands)
Cash and cash equivalents$1,398,280 $1,368,318 
Working capital$2,131,679 $1,935,605 
Total assets$12,560,033 $11,506,864 
Long-term debt$3,100,969 $3,142,718 
Total equity$6,040,244 $5,722,203 

43

Other Financial Data 
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
 (In thousands)
Net cash provided by operating activities$427,755 $119,204 $490,081 $309,302 
Net cash used for investing activities$(175,248)$(45,572)$(322,312)$(131,666)
Net cash used for financing activities$(48,917)$(84,062)$(138,478)$(155,519)
Capital expenditures$182,880 $45,987 $332,841 $129,736 
EBITDA (1)
$444,290 $(46,221)$725,634 $(353,869)

(1)Earnings before interest, taxes, depreciation and amortization, which we refer to as “EBITDA,” is calculated as net income (loss) attributable to HollyFrontier stockholders plus (i) interest expense, net of interest income, (ii) income tax provision, and (iii) depreciation and amortization. EBITDA is not a calculation provided for under GAAP; however, the amounts included in the EBITDA calculation are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies. EBITDA is presented here because it is a widely used financial indicator used by investors and analysts to measure performance. EBITDA is also used by our management for internal analysis and as a basis for financial covenants. EBITDA presented above is reconciled to net income under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.

Segment Operating Data

Our operations are organized into three reportable segments, Refining, Lubricants and Specialty Products and HEP. See Note 14 “Segment Information” in the Notes to Consolidated Financial Statements for additional information on our reportable segments.

Refining Segment Operating Data

Our refinery operations include the El Dorado, Tulsa, Navajo and Woods Cross Refineries. The following tables set forth information, including non-GAAP performance measures, about our consolidated refinery operations. The cost of products and refinery gross and net operating margins do not include the non-cash effects of lower of cost or market inventory valuation adjustments, depreciation and amortization and long-lived asset impairments. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q. 

In the third quarter of 2020, we permanently ceased petroleum refining operations at our Cheyenne Refinery and subsequently began converting certain assets at our Cheyenne Refinery to renewable diesel production. The disaggregation of our refining geographic operating data is presented in two regions, Mid-Continent and West, to best reflect the economic drivers of our refining operations. The Mid-Continent region continues to be comprised of the El Dorado and Tulsa Refineries, and the new West region is comprised of the Navajo and Woods Cross Refineries. Refining segment operating data for the three and six months ended June 30, 2020 have been retrospectively adjusted to reflect the revised regional groupings.

44

Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
Mid-Continent Region (El Dorado and Tulsa Refineries)
Crude charge (BPD) (1)
278,380 206,950 247,500 229,670 
Refinery throughput (BPD) (2)
293,050 220,010 257,030 245,470 
Sales of produced refined products (BPD) (3)
287,680 216,280 249,400 237,760 
Refinery utilization (4)
107.1 %79.6 %95.2 %88.3 %
Average per produced barrel (5)
Refinery gross margin$10.82 $6.31 $8.99 $8.07 
Refinery operating expenses (6)
5.27 5.68 7.22 5.47 
Net operating margin$5.55 $0.63 $1.77 $2.60 
Refinery operating expenses per throughput barrel (7)
$5.18 $5.58 $6.89 $5.30 
Feedstocks:
Sweet crude oil64 %61 %62 %56 %
Sour crude oil14 %16 %14 %19 %
Heavy sour crude oil17 %17 %19 %19 %
Other feedstocks and blends%%%%
Total100 %100 %100 %100 %
Sales of produced refined products:
Gasolines51 %54 %51 %53 %
Diesel fuels34 %36 %34 %33 %
Jet fuels%%%%
Fuel oil%%%%
Asphalt%%%%
Base oils%%%%
LPG and other%%%%
Total100 %100 %100 %100 %
West Region (Navajo and Woods Cross Refineries)
Crude charge (BPD) (1)
137,970 105,120 134,940 122,690 
Refinery throughput (BPD) (2)
151,680 117,840 148,160 136,090 
Sales of produced refined products (BPD) (3)
156,260 132,610 150,290 141,610 
Refinery utilization (4)
95.2 %72.5 %93.1 %84.6 %
Average per produced barrel (5)
Refinery gross margin$13.35 $10.96 $11.88 $12.41 
Refinery operating expenses (6)
6.57 7.26 7.29 7.07 
Net operating margin$6.78 $3.70 $4.59 $5.34 
Refinery operating expenses per throughput barrel (7)
$6.77 $7.62 $7.40 $7.36 
Feedstocks:
Sweet crude oil22 %32 %23 %29 %
Sour crude oil59 %48 %59 %50 %
Black wax crude oil10 %%%11 %
Other feedstocks and blends%11 %%10 %
Total100 %100 %100 %100 %
Sales of produced refined products:
Gasolines52 %55 %53 %56 %
Diesel fuels37 %34 %37 %35 %
Fuel oil%%%%
Asphalt%%%%
LPG and other%%%%
Total100 %100 %100 %100 %
45

Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Consolidated
Crude charge (BPD) (1)
416,350 312,070 382,440 352,360 
Refinery throughput (BPD) (2)
444,730 337,850 405,190 381,560 
Sales of produced refined products (BPD) (3)
443,940 348,890 399,690 379,370 
Refinery utilization (4)
102.8 %77.1 %94.4 %87.0 %
Average per produced barrel (5)
Refinery gross margin$11.71 $8.08 $10.07 $9.69 
Refinery operating expenses (6)
5.73 6.28 7.25 6.07 
Net operating margin$5.98 $1.80 $2.82 $3.62 
Refinery operating expenses per throughput barrel (7)
$5.72 $6.48 $7.07 $6.03 
Feedstocks:
Sweet crude oil50 %51 %48 %46 %
Sour crude oil30 %27 %30 %30 %
Heavy sour crude oil11 %11 %12 %12 %
Black wax crude oil%%%%
Other feedstocks and blends%%%%
Total100 %100 %100 %100 %
Sales of produced refined products:
Gasolines51 %54 %52 %54 %
Diesel fuels35 %35 %35 %34 %
Jet fuels%%%%
Fuel oil%%%%
Asphalt%%%%
Base oils%%%%
LPG and other%%%%
Total100 %100 %100 %100 %
 
(1)Crude charge represents the barrels per day of crude oil processed at our refineries.
(2)Refinery throughput represents the barrels per day of crude and other refinery feedstocks input to the crude units and other conversion units at our refineries.
(3)Represents barrels sold of refined products produced at our refineries (including HFC Asphalt) and does not include volumes of refined products purchased for resale or volumes of excess crude oil sold.
(4)Represents crude charge divided by total crude capacity (BPSD). Our consolidated crude capacity is 405,000 BPSD.
(5)Represents average amount per produced barrel sold, which is a non-GAAP measure. Reconciliations to amounts reported under GAAP are provided under “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q.
(6)Represents total refining segment operating expenses, exclusive of depreciation and amortization and Cheyenne Refinery operating expenses, divided by sales volumes of refined products produced at our refineries.
(7)Represents total refining segment operating expenses, exclusive of depreciation and amortization and Cheyenne Refinery operating expenses, divided by refinery throughput.


46

Lubricants and Specialty Products Operating Data

The following table sets forth information about our lubricants and specialty products operations.
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Lubricants and Specialty Products
Throughput (BPD)19,310 16,370 19,860 19,060 
Sales of produced refined products (BPD)36,670 26,990 34,630 31,900 
Sales of produced refined products:
Finished products51 %56 %52 %51 %
Base oils29 %19 %27 %23 %
Other20 %25 %21 %26 %
Total100 %100 %100 %100 %

Supplemental financial data attributable to our Lubricants and Specialty Products segment is presented below.
Rack Back (1)
Rack Forward (2)
Eliminations (3)
Total Lubricants and Specialty Products
(In thousands)
Three months ended June 30, 2021
Sales and other revenues$254,485 $629,211 $(214,507)$669,189 
Cost of products sold$163,280 $542,445 $(214,507)$491,218 
Operating expenses$29,106 $32,204 $— $61,310 
Selling, general and administrative expenses$5,914 $31,669 $— $37,583 
Depreciation and amortization$6,230 $12,922 $— $19,152 
Income from operations$49,955 $9,971 $— $59,926 
Three months ended June 30, 2020
Sales and other revenues$85,857 $343,927 $(72,497)$357,287 
Cost of products sold$67,210 $263,634 $(72,497)$258,347 
Operating expenses$21,034 $26,806 $— $47,840 
Selling, general and administrative expenses$5,617 $30,302 $— $35,919 
Depreciation and amortization$5,877 $13,902 $— $19,779 
Long-lived asset impairment$167,017 $37,691 $— $204,708 
Loss from operations$(180,898)$(28,408)$— $(209,306)
Six months ended June 30, 2021
Sales and other revenues$427,927 $1,112,457 $(346,632)$1,193,752 
Cost of products sold$295,812 $873,561 $(346,632)$822,741 
Operating expenses$57,727 $64,336 $— $122,063 
Selling, general and administrative expenses$12,653 $70,483 $— $83,136 
Depreciation and amortization$13,535 $25,738 $— $39,273 
Income from operations$48,200 $78,339 $— $126,539 
Six months ended June 30, 2020
Sales and other revenues$250,686 $817,984 $(184,780)$883,890 
Cost of products sold$247,810 $586,697 $(184,780)$649,727 
Operating expenses$44,303 $57,668 $— $101,971 
Selling, general and administrative expenses$10,980 $73,901 $— $84,881 
Depreciation and amortization$16,744 $25,084 $— $41,828 
Long-lived asset impairment$167,017 $37,691 $— $204,708 
Income (loss) from operations$(236,168)$36,943 $— $(199,225)
(1) Rack Back consists of our PCLI base oil production activities, by-product sales to third parties and intra-segment base oil sales to Rack Forward.
(2) Rack Forward activities include the purchase of base oils from Rack Back and the blending, packaging, marketing and distribution and sales of finished lubricants and specialty products to third parties.
(3) Intra-segment sales of Rack Back produced base oils to Rack Forward are eliminated under the “Eliminations” column.
47



Results of Operations – Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Summary
Net income attributable to HollyFrontier stockholders for the three months ended June 30, 2021 was $168.9 million ($1.03 per basic and diluted share), a $345.5 million increase from a net loss of $176.7 million ($(1.09) per basic and diluted share) for the three months ended June 30, 2020. The increase in net income was principally due to long-lived asset impairment charges of $436.9 million for the three months ended June 30, 2020, partially offset by lower of cost or market inventory reserve adjustments that increased pre-tax earnings by $118.8 million for the three months ended June 30, 2021 as compared to $269.9 million for the three months ended June 30, 2020. Refinery gross margins for the three months ended June 30, 2021 increased to $11.71 per produced barrel sold from $8.08 for the three months ended June 30, 2020.

Sales and Other Revenues
Sales and other revenues increased 122% from $2,062.9 million for the three months ended June 30, 2020 to $4,577.1 million for the three months ended June 30, 2021 due to the increase in sales prices and higher refined product sales volumes. Sales and other revenues for the three months ended June 30, 2021 and 2020 included $27.1 million and $19.2 million, respectively, of HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties. Additionally, sales and other revenues included $662.8 million and $353.6 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the three months ended June 30, 2021 and 2020, respectively.

Cost of Products Sold
Total cost of products sold increased 184% from $1,307.1 million for the three months ended June 30, 2020 to $3,706.9 million for the three months ended June 30, 2021 principally due to higher crude oil costs and higher refined product volumes. During the second quarter of 2021, we recognized a lower of cost or market inventory valuation adjustment benefit of $118.8 million compared to a benefit of $269.9 million for the same period in 2020.

Gross Refinery Margins
Gross refinery margin per produced barrel sold increased 45% from $8.08 for the three months ended June 30, 2020 to $11.71 for the three months ended June 30, 2021. The increase was due to the effects of an increase in the average per barrel sold sales price during the current year quarter, partially offset by increased crude oil and feedstock prices. Gross refinery margin per barrel does not include the non-cash effects of lower of cost or market inventory valuation adjustments or depreciation and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q for a reconciliation to the income statement of sale prices of products sold and cost of products purchased.

Operating Expenses
Operating expenses, exclusive of depreciation and amortization, increased 10% from $303.4 million for the three months ended June 30, 2020 to $334.2 million for the three months ended June 30, 2021 primarily due to an increase in repair and maintenance costs and the increase in natural gas prices and natural gas utilization compared to the three months ended June 30, 2020. Lower natural gas prices and utilization during 2020 were primarily the result of the COVID-19 pandemic.

Selling, General and Administrative Expenses
Selling, general and administrative expenses of $77.8 million for the three months ended June 30, 2021 were consistent with the same period in the prior year.

Depreciation and Amortization Expenses
Depreciation and amortization decreased 5% from $130.2 million for the three months ended June 30, 2020 to $124.0 million for the three months ended June 30, 2021. This decrease was primarily due to lower capitalized refinery turnaround costs during 2020 and lower depreciation expense resulting from the assets impaired in the second quarter of 2020.

Long-lived Asset Impairment
During the three months ended June 30, 2020, we recorded long-lived asset impairment charges of $232.2 million related to our Cheyenne Refinery and $204.7 million related to PCLI. See Note 1 “Description of Business and Presentation of Financial Statements” in the Notes to Consolidated Financial Statements for additional information on these impairments.

48

Interest Expense
Interest expense was $28.9 million for the three months ended June 30, 2021 compared to $32.7 million for the three months ended June 30, 2020. This decrease was primarily due to net gains related to our catalyst financing arrangement during the three months ended June 30, 2021 as compared to net losses during the same period in the prior year, partially offset by interest expense on our senior notes issued in September 2020.

For the three months ended June 30, 2021 and 2020, interest expense attributable to our HEP segment was $13.9 million and $12.1 million, respectively.

Gain on Sales-type Leases
During the second quarter of 2020, HEP and Delek US Holdings, Inc. renewed the original throughput agreement on specific HEP assets. Portions of the new throughput agreement meet the definition of sales-type leases, which resulted in an accounting gain of $33.8 million upon the initial recognition of the sales-type lease during the three months ended June 30, 2020.

Gain on Foreign Currency Transactions
Remeasurement adjustments resulting from the foreign currency conversion of the intercompany financing notes payable by PCLI net of mark-to-market valuations on foreign exchange forward contracts with banks which hedge the foreign currency exposure on these intercompany notes were net gains of $0.6 million and $2.3 million for the three months ended June 30, 2021 and 2020, respectively. For the three months ended June 30, 2021 and 2020, gain on foreign currency transactions included a loss of $6.1 million and $14.3 million, respectively, on foreign exchange forward contracts (utilized as an economic hedge).

Other, Net
For the three months ended June 30, 2021, HEP recorded a $5.3 million gain related to the sale of certain pipeline assets.

Income Taxes
For the three months ended June 30, 2021, we recorded an income tax expense of $123.5 million compared to a benefit of $30.9 million for the three months ended June 30, 2020. This increase was principally due to pre-tax income during the three months ended June 30, 2021 compared to a pre-tax loss in the same period of 2020. Our effective tax rates were 38.8% and 17.0% for the three months ended June 30, 2021 and 2020, respectively. The increase in the effective tax rate is principally due to the relationship between the pre-tax results and the earnings attributable to the noncontrolling interest that is not included in income for tax purposes. The difference in the U.S. federal statutory rate and the effective tax rate for the three months ended June 30, 2021 was primarily due to the reversal of benefits recorded in the previous quarter due to increased income, partially offset by benefits recorded on state tax rate decreases enacted in the current quarter.


Results of Operations – Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Summary
Net income attributable to HollyFrontier stockholders for the six months ended June 30, 2021 was $317.1 million ($1.92 per basic and diluted share), a $798.4 million increase compared to a net loss of $481.3 million ($(2.97) per basic and diluted share) for the six months ended June 30, 2020. Net income increased principally due to lower of cost or market inventory reserve adjustments that increased pre-tax earnings by $318.9 million for the six months ended June 30, 2021 and decreased pre-tax earnings by $290.6 million for the six months ended June 30, 2020. In addition, we recorded long-lived asset impairment charges of $436.9 million for the six months ended June 30, 2020. The increase in net income for the six months ended June 30, 2021 was partially offset by the impact of winter storm Uri, which increased natural gas costs by approximately $65 million across our refining system. Refinery gross margins for the six months ended June 30, 2021 increased to $10.07 per barrel sold from $9.69 for the six months ended June 30, 2020.

Sales and Other Revenues
Sales and other revenues increased 48% from $5,463.5 million for the six months ended June 30, 2020 to $8,081.4 million for the six months ended June 30, 2021 due to a year-over-year increase in sales prices and higher refined product sales volumes. Sales and other revenues for the six months ended June 30, 2021 and 2020 include $52.4 million and $45.7 million, respectively, in HEP revenues attributable to pipeline and transportation services provided to unaffiliated parties. Additionally, sales and other revenues included $1,184.8 million and $877.1 million in unaffiliated revenues related to our Lubricants and Specialty Products segment for the six months ended June 30, 2021 and 2020, respectively.

49

Cost of Products Sold
Total cost of products sold increased 42% from $4,561.3 million for the six months ended June 30, 2020 to $6,467.2 million for the six months ended June 30, 2021 principally due to the increase in crude oil and feedstock prices and refined product sales volumes. We recognized a lower of cost or market inventory valuation benefit of $318.9 million for the six months ended June 30, 2021 compared to a charge of $290.6 million for the same period of 2020, resulting in no lower of cost or market reserve at June 30, 2021.

Gross Refinery Margins
Gross refinery margin per barrel sold increased 4% from $9.69 for the six months ended June 30, 2020 to $10.07 for the six months ended June 30, 2021 principally due to the increase in the average per barrel sold sales prices, partially offset by the increase in crude oil and feedstock prices. Gross refinery margin per barrel does not include the non-cash effects of lower of cost or market inventory valuation adjustments or depreciation and amortization. See “Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles” following Item 3 of Part I of this Form 10-Q for a reconciliation to the income statement of sales prices of products sold and cost of products purchased.

Operating Expenses
Operating expenses, exclusive of depreciation and amortization, increased 16% from $631.7 million for the six months ended June 30, 2020 to $734.1 million for the six months ended June 30, 2021 primarily due to the increase in natural gas prices and natural gas utilization and higher planned and unplanned repair and maintenance costs compared to the six months ended June 30, 2020. The increase in natural gas prices was due in part to winter storm Uri during the first quarter of 2021.

Selling, General and Administrative Expenses
Selling, general and administrative expenses of $159.7 million for the six months ended June 30, 2021 were consistent with the same period in the prior year.

Depreciation and Amortization Expenses
Depreciation and amortization decreased 8% from $270.8 million for the six months ended June 30, 2020 to $248.1 million for the six months ended June 30, 2021. This decrease was principally due to lower capitalized refinery turnaround costs during 2020 and lower depreciation expense resulting from the assets impaired in the second quarter of 2020.

Long-lived Asset Impairment
During the six months ended June 30, 2020, we recorded long-lived asset impairment charges of $232.2 million that related to our Cheyenne Refinery and $204.7 million related to PCLI. See Note 1 “Description of Business and Presentation of Financial Statements” in the Notes to Consolidated Financial Statements for additional information on these impairments.

Interest Expense
Interest expense was $67.3 million for the six months ended June 30, 2021 compared to $55.3 million for the six months ended June 30, 2020. This increase was primarily due to interest expense on our senior notes issued in September 2020 and net losses related to our catalyst financing arrangements during the six months ended June 30, 2021 as compared to net gains during the six months ended June 30, 2020. The increase was partially offset by lower weighted average balance and lower market interest rates on HEP’s credit facility during the six months ended June 30, 2021.

For the six months ended June 30, 2021 and 2020, interest expense attributable to our HEP Segment was $27.2 million and $28.2 million, respectively.

Gain on Tariff Settlement
For the six months ended June 30, 2021, we recorded a gain of $51.5 million upon the settlement of a tariff rate case. See Note 13 “Contingencies” in the Notes to Consolidated Financial Statements for additional information on this case and settlement.

Gain on Sales-type Leases
During the second quarter of 2020, HEP and Delek US Holdings, Inc. renewed the original throughput agreement on specific HEP assets. Portions of the new throughput agreement meet the definition of sales-type leases, which resulted in an accounting gain of $33.8 million upon the initial recognition of the sales-type lease during the six months ended June 30, 2020.

Loss on Early Extinguishment of Debt
For the six months ended June 30, 2020, HEP recorded a $25.9 million loss on the redemption of its $500 million aggregate principal amount of 6.0% senior notes maturing August 2024 for $522.5 million.

50

Loss on Foreign Currency Transactions
Remeasurement adjustments resulting from the foreign currency conversion of the intercompany financing notes payable by PCLI net of mark-to-market valuations on foreign exchange forward contracts with banks which hedge the foreign currency exposure on these intercompany notes were net losses of $0.7 million and $1.9 million for the six months ended June 30, 2021 and 2020, respectively. For the six months ended June 30, 2021 and 2020, loss on foreign currency transactions included a net loss of $12.8 million and a gain of $19.2 million, respectively, on foreign exchange forward contracts (utilized as an economic hedge).

Other, Net
For the six months ended June 30, 2021, HEP recorded a $5.3 million gain related to the sale of certain pipeline assets.

Income Taxes
For the six months ended June 30, 2021, we recorded an income tax expense of $95.2 million compared to a benefit of $193.1 million for the six months ended June 30, 2020. This change to income tax expense in 2021 from income tax benefit in 2020 was principally due to pre-tax income during the six months ended June 30, 2021 as compared to a pre-tax loss during 2020. Our effective tax rates were 20.1% and 30.3% for the six months ended June 30, 2021 and 2020, respectively. The year-over-year decrease in the effective tax rate is principally due to the relationship between the pre-tax results and the earnings attributable to the noncontrolling interest that is not included in income for tax purposes. The difference in the U.S. federal statutory rate and the effective tax rate for the six months ended June 30, 2021 was primarily due to the tax effects of income attributable to noncontrolling interests.


LIQUIDITY AND CAPITAL RESOURCES

HollyFrontier Credit Agreement
On April 30, 2021, we amended our $1.35 billion senior unsecured revolving credit facility to extend the maturity date to April 30, 2026 (the “HollyFrontier Credit Agreement”). The HollyFrontier Credit Agreement may be used for revolving credit loans and letters of credit from time to time and is available to fund general corporate purposes. At June 30, 2021, 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.

HollyFrontier Financing Arrangements
Certain of our wholly-owned subsidiaries entered into financing arrangements whereby such subsidiaries sold a portion of their precious metals catalyst to a financial institution and then leased back the precious metals catalyst in exchange for cash. The volume of the precious metals catalyst and the lease rate are fixed over the term of each lease, and the lease payments are recorded as interest expense. The current leases mature on February 1, 2022. Upon maturity, we must either satisfy the obligation at fair market value or refinance to extend the maturity.

HEP Credit Agreement
On April 30, 2021, HEP amended its $1.4 billion senior secured revolving credit facility decreasing the commitments under the facility to $1.2 billion and extending the maturity to July 27, 2025 (the “HEP Credit Agreement”). The HEP Credit Agreement is available to fund capital expenditures, investments, acquisitions, distribution payments, working capital and for general partnership purposes. It is also available to fund letters of credit up to a $50 million sub-limit and continues to provide for an accordion feature that allows HEP to increase the commitments under the HEP Credit Agreement up to a maximum amount of $1.7 billion. During the six months ended June 30, 2021, HEP received advances totaling $141.0 million and repaid $184.5 million under the HEP Credit Agreement. At June 30, 2021, HEP was in compliance with all of its covenants, had outstanding borrowings of $870.0 million and no outstanding letters of credit under the HEP Credit Agreement.

See Note 9 “Debt” in the Notes to Consolidated Financial Statements for additional information on our debt instruments.

Liquidity
We believe our current cash and cash equivalents, along with future internally generated cash flow and funds available under our credit facilities, will provide sufficient resources to fund currently planned capital projects and our liquidity needs for the foreseeable future. We expect that, to the extent necessary, we can raise additional funds from time to time through equity or debt financings in the public and private capital markets. In addition, components of our growth strategy include the expansion of existing units at our facilities and selective acquisition of complementary assets for our refining operations intended to increase earnings and cash flow. In connection with the the Puget Sound Acquisition, our Board of Directors approved a one-year suspension of the regular quarterly dividend effective with the dividend to be declared for the first quarter of 2021 and is expected to resume the dividend after such time.

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Our standalone (excluding HEP) liquidity was approximately $2.7 billion at June 30, 2021, consisting of cash and cash equivalents of $1.4 billion and an undrawn $1.35 billion credit facility.

We consider all highly-liquid instruments with a maturity of three months or less at the time of purchase to be cash equivalents. These primarily consist of investments in conservative, highly-rated instruments issued by financial institutions, government and corporate entities with strong credit standings and money market funds. Cash equivalents are stated at cost, which approximates market value.

In November 2019, our Board of Directors approved a $1.0 billion share repurchase program, which replaced all existing share repurchase programs, authorizing us to repurchase common stock in the open market or through privately negotiated transactions. 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 June 30, 2021, we had not repurchased common stock under this stock repurchase program. In addition, we are authorized by our Board of Directors to repurchase shares in an amount sufficient to offset shares issued under our compensation programs. We do not intend to repurchase common stock under our $1.0 billion share repurchase program until completion of our ongoing renewables capital projects at the earliest.
Cash Flows – Operating Activities

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Net cash flows provided by operating activities were $490.1 million for the six months ended June 30, 2021 compared to $309.3 million for the six months ended June 30, 2020, an increase of $180.8 million. The increase in operating cash flows was primarily due to the increase in gross refinery margins and $51.5 million received upon settlement of a tariff rate case, partially offset by higher operating expenses.

Changes in working capital increased operating cash flows by $149.0 million and decreased operating cash flows by $103.3 million, for the six months ended June 30, 2021 and 2020, respectively. Changes in working capital items adjust for the timing of receipts and payments of actual cash.

Cash Flows – Investing Activities and Planned Capital Expenditures

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Net cash flows used for investing activities were $322.3 million for the six months ended June 30, 2021 compared to $131.7 million for the six months ended June 30, 2020, an increase of $190.6 million. Cash expenditures for properties, plants and equipment for the first six months of 2021 increased to $332.8 million from $129.7 million for the same period in 2020, primarily due to expenditures related to our renewable diesel units that are expected to be completed in early 2022. Cash expenditures for properties, plants and equipment include HEP capital expenditures of $57.7 million and $30.7 million for the six months ended June 30, 2021 and 2020, respectively. For the six months ended June 30, 2020, HEP also invested $2.4 million in the Cushing Connect Pipeline & Terminal LLC joint venture.

HollyFrontier Corporation
Each year our Board of Directors approves our annual capital budget which includes specific projects that management is authorized to undertake. Additionally, when conditions warrant or as new opportunities arise, additional projects may be approved. The funds appropriated for a particular capital project may be expended over a period of several years, depending on the time required to complete the project. Therefore, our planned capital expenditures for a given year consist of expenditures appropriated in that year’s capital budget plus expenditures for projects appropriated in prior years which have not yet been completed. Refinery turnaround spending is amortized over the useful life of the turnaround.

The refining industry is capital intensive and requires on-going investments to sustain our refining operations. This includes replacement of, or rebuilding, refinery units and components that extend the useful life. We also invest in projects that improve operational reliability and profitability via enhancements that improve refinery processing capabilities as well as production yield and flexibility. Our capital expenditures also include projects related to renewable diesel, environmental, health and safety compliance and include initiatives as a result of federal and state mandates.

Our refinery operations and related emissions are highly regulated at both federal and state levels, and we invest in our facilities as needed to remain in compliance with these standards. Additionally, when faced with new emissions or fuels standards, we seek to execute projects that facilitate compliance and also improve the operating costs and / or yields of associated refining processes.

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HEP
Each year the Holly Logistic Services, L.L.C. board of directors approves HEP’s annual capital budget, which specifies capital projects that HEP management is authorized to undertake. Additionally, at times when conditions warrant or as new opportunities arise, special projects may be approved. The funds allocated for a particular capital project may be expended over a period in excess of a year, depending on the time required to complete the project. Therefore, HEP’s planned capital expenditures for a given year consist of expenditures approved for capital projects included in its current year capital budget as well as, in certain cases, expenditures approved for capital projects in capital budgets for prior years. In addition, HEP may spend funds periodically to perform capital upgrades or additions to its assets where a customer reimburses HEP for such costs. The upgrades or additions would generally benefit the customer over the remaining life of the related service agreements.

Expected capital and turnaround cash spending for 2021 is as follows:    
Expected Cash Spending Range
(In millions)
HollyFrontier Capital Expenditures
Refining$190.0 $220.0 
Renewables625.0 675.0 
Lubricants and Specialty Products40.0 50.0 
Turnarounds and catalyst320.0 350.0 
Total HollyFrontier1,175.0 1,295.0 
HEP
Maintenance17.0 21.0 
Expansion and joint venture investment38.0 42.0 
Refining unit turnarounds5.0 8.0 
Total HEP60.0 71.0 
Total$1,235.0 $1,366.0 

Cash Flows – Financing Activities

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
For the six months ended June 30, 2021, our net cash flows used for financing activities were $138.5 million. During the six months ended June 30, 2021, we paid $57.7 million in dividends and $7.9 million of deferred financing costs in connection with the amendment of the HollyFrontier Credit Agreement in April 2021. During the six months ended June 30, 2021, HEP had net repayments of $43.5 million under the HEP Credit Agreement and paid $6.6 million of deferred financing costs in connection with the amendment of the HEP Credit Agreement in April 2021. In addition, HEP paid distributions of $38.2 million to noncontrolling interests and received contributions from noncontrolling interests of $17.6 million.

For the six months ended June 30, 2020, our net cash flows used for financing activities were $155.5 million. During the six months ended June 30, 2020, we paid $114.4 million in dividends. HEP received $168.0 million and repaid $138.5 million under the HEP Credit Agreement, paid $522.5 million upon the redemption of HEP’s 6.0% senior notes and received $491.3 million in net proceeds from the issuance of HEP 5.0% senior notes. In addition, HEP paid distributions of $51.0 million to noncontrolling interests and received contributions from noncontrolling interests of $13.3 million.

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Contractual Obligations and Commitments

HollyFrontier Corporation

In April 2021, we renewed a contract for terminal and storage services with a third party for an additional 15-year term. The agreement provides for storage capacity of 200,000 barrels per month for a total commitment of $9.4 million over the 15 year term. In addition, the agreement provides a throughput volume commitment of 225,000 barrels per day of crude oil for a total commitment of $92.4 million over the 15-year term. We also had certain lease renewals that increased our lease liabilities on our consolidated balance sheets during the six months ended June 30, 2021. There were no other significant changes to our long-term contractual obligations during the six months ended June 30, 2021.

HEP

During the six months ended June 30, 2021, HEP had net repayments of $43.5 million resulting in $870.0 million of outstanding borrowings under the HEP Credit Agreement at June 30, 2021.

There were no other significant changes to HEP’s long-term contractual obligations during this period.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2020. Certain critical accounting policies that materially affect the amounts recorded in our consolidated financial statements include the use of the last-in, first-out (“LIFO”) method of valuing certain inventories, assessing the possible impairment of certain long-lived assets and goodwill, and assessing contingent liabilities for probable losses.

Inventory Valuation: Inventories related to our refining operations are stated at the lower of cost, using the LIFO method for crude oil and unfinished and finished refined products, or market. In periods of rapidly declining prices, LIFO inventories may have to be written down to market value due to the higher costs assigned to LIFO layers in prior periods. In addition, the use of the LIFO inventory method may result in increases or decreases to cost of sales in years that inventory volumes decline as the result of charging cost of sales with LIFO inventory costs generated in prior periods. An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final year-end LIFO inventory valuation.

At June 30, 2021, the LIFO value of inventory was equal to cost. Future decreases in overall inventory values could result in an establishment of a lower of cost or market inventory valuation reserve and additional charges to cost of products sold.

Inventories consisting of process chemicals, materials and maintenance supplies and RINs are stated at the lower of weighted-average cost or net realizable value. Inventories of our Petro-Canada Lubricants and Sonneborn businesses are stated at the lower of cost, using the FIFO method, or net realizable value.

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Goodwill and Long-lived Assets: As of June 30, 2021, our goodwill balance was $2.3 billion, with goodwill assigned to our Refining, Lubricants and Specialty Products and HEP segments of $1,733.5 million, $247.2 million and $312.9 million, respectively. 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 carrying value of the reporting unit is greater than its fair value, 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.

For purposes of long-lived asset impairment evaluation, we have grouped our long-lived assets as follows: (i) our refinery asset groups, which include certain HEP logistics assets, (ii) our Lubricants and Specialty Products asset groups and (iii) our HEP asset groups, which comprises HEP assets not included in our refinery asset groups. These asset groups represent the lowest level for which independent cash flows can be identified. Our long-lived assets are evaluated for impairment by identifying whether indicators of impairment exist and if so, assessing whether the long-lived assets are recoverable from estimated future undiscounted cash flows. The actual amount of impairment loss measured, if any, is equal to the amount by which the asset group’s carrying value exceeds its fair value.

We continually monitor and evaluate various factors for potential indicators of goodwill and long-lived asset impairment. A reasonable expectation exists that further deterioration in our operating results or overall economic conditions could result in an impairment of goodwill and / or long-lived asset impairments at some point in the future. Future impairment charges could be material to our results of operations and financial condition.

Contingencies
We are subject to proceedings, lawsuits and other claims related to environmental, labor, product and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.


RISK MANAGEMENT

We use certain strategies to reduce some commodity price and operational risks. We do not attempt to eliminate all market risk exposures when we believe that the exposure relating to such risk would not be significant to our future earnings, financial position, capital resources or liquidity or that the cost of eliminating the exposure would outweigh the benefit.

Commodity Price Risk Management
Our primary market risk is commodity price risk. We are exposed to market risks related to the volatility in crude oil and refined products, as well as volatility in the price of natural gas used in our refining operations. We periodically enter into derivative contracts in the form of commodity price swaps, forward purchase and sales and futures contracts to mitigate price exposure with respect to our inventory positions, natural gas purchases, sales prices of refined products and crude oil costs.

Foreign Currency Risk Management
We are exposed to market risk related to the volatility in foreign currency exchange rates. We periodically enter into derivative contracts in the form of foreign exchange forward 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.

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As of June 30, 2021, we have the following notional contract volumes related to all outstanding derivative instruments used to mitigate commodity price and foreign currency risk:
Notional Contract Volumes by Year of Maturity
Derivative InstrumentTotal Outstanding Notional20212022Unit of Measure
Natural gas price swaps - long900,000 900,000 — MMBTU
NYMEX futures (WTI) - short665,000 665,000 — Barrels
Forward gasoline and diesel contracts - long365,000 365,000 — Barrels
Forward crude oil contracts -short90,000 90,000 — Barrels
Foreign currency forward contracts434,968,532 210,609,988 224,358,544 U.S. dollar
Forward commodity contracts (platinum) (1)
38,723 — 38,723 Troy ounces

(1) Represents an embedded derivative within our catalyst financing arrangements, which may be refinanced or require repayment under certain conditions. See Note 9 “Debt” in the Notes to Consolidated Financial Statements for additional information on these financing arrangements.

The following sensitivity analysis provides the hypothetical effects of market price fluctuations to the commodity hedged under our derivative contracts:
Estimated Change in Fair Value at June 30,
Commodity-based Derivative Contracts20212020
(In thousands)
Hypothetical 10% change in underlying commodity prices$4,512 $2,826 

Interest Rate Risk Management
The market risk inherent in our fixed-rate debt is the potential change arising from increases or decreases in interest rates as discussed below.

For the fixed rate HollyFrontier Senior Notes and HEP Senior Notes, changes in interest rates will generally affect fair value of the debt, but not earnings or cash flows. The outstanding principal, estimated fair value and estimated change in fair value (assuming a hypothetical 10% change in the yield-to-maturity rates) for this debt as of June 30, 2021 is presented below:
Outstanding
Principal
Estimated
Fair Value
Estimated
Change in
Fair Value
 (In thousands)
HollyFrontier Senior Notes$1,750,000 $1,948,756 $23,904 
HEP Senior Notes$500,000 $512,245 $13,211 

For the variable rate HEP Credit Agreement, changes in interest rates would affect cash flows, but not the fair value. At June 30, 2021, outstanding borrowings under the HEP Credit Agreement were $870.0 million. A hypothetical 10% change in interest rates applicable to the HEP Credit Agreement would not materially affect cash flows.

Our operations are subject to hazards of petroleum processing operations, including but not limited to fire, explosion, cyberattacks and weather-related perils. We maintain various insurance coverages, including property damage, business interruption and cyber insurance, subject to certain deductibles and insurance policy terms and conditions. We are not fully insured against certain risks because such risks are not fully insurable, coverage is unavailable, or premium costs, in our judgment, do not justify such expenditures.

Financial information is reviewed on the counterparties in order to review and monitor their financial stability and assess their ongoing ability to honor their commitments under the derivative contracts. We have not experienced, nor do we expect to experience, any difficulty in the counterparties honoring their commitments.

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We have a risk management oversight committee consisting of members from our senior management. This committee oversees our risk enterprise program, monitors our risk environment and provides direction for activities to mitigate identified risks that may adversely affect the achievement of our goals.


Item 3.Quantitative and Qualitative Disclosures About Market Risk

See “Risk Management” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles

Reconciliations of earnings before interest, taxes, depreciation and amortization (“EBITDA”) to amounts reported under generally accepted accounting principles in financial statements.

Earnings before interest, taxes, depreciation and amortization, which we refer to as EBITDA, is calculated as net income (loss) attributable to HollyFrontier stockholders plus (i) interest expense, net of interest income, (ii) income tax provision, and (iii) depreciation and amortization. EBITDA is not a calculation provided for under GAAP; however, the amounts included in the EBITDA calculation are derived from amounts included in our consolidated financial statements. EBITDA should not be considered as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity. EBITDA is not necessarily comparable to similarly titled measures of other companies. EBITDA is presented here because it is a widely used financial indicator used by investors and analysts to measure performance. EBITDA is also used by our management for internal analysis and as a basis for financial covenants.

Set forth below is our calculation of EBITDA.
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
 (In thousands)
Net income (loss) attributable to HollyFrontier stockholders$168,850 $(176,677)$317,067 $(481,300)
Add interest expense28,942 32,695 67,328 55,334 
Subtract interest income(1,029)(1,506)(2,060)(5,579)
Add (subtract) income tax expense (benefit)123,485 (30,911)95,178 (193,077)
Add depreciation and amortization124,042 130,178 248,121 270,753 
EBITDA$444,290 $(46,221)$725,634 $(353,869)

Reconciliations of refinery operating information (non-GAAP performance measures) to amounts reported under generally accepted accounting principles in financial statements.

Refinery gross margin and net operating margin are non-GAAP performance measures that are used by our management and others to compare our refining performance to that of other companies in our industry. We believe these margin measures are helpful to investors in evaluating our refining performance on a relative and absolute basis. Refinery gross margin per produced barrel sold is total refining segment revenues less total refining segment cost of products sold, exclusive of lower of cost or market inventory valuation adjustments, divided by sales volumes of produced refined products sold. Net operating margin per barrel sold is the difference between refinery gross margin and refinery operating expenses per produced barrel sold. These two margins do not include the non-cash effects of lower of cost or market inventory valuation adjustments, depreciation and amortization or long-lived asset impairment charges. Each of these component performance measures can be reconciled directly to our consolidated statements of operations. Other companies in our industry may not calculate these performance measures in the same manner.

Below are reconciliations to our consolidated statements of operations for refinery net operating and gross margin and operating expenses, in each case averaged per produced barrel sold. Due to rounding of reported numbers, some amounts may not calculate exactly.

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Reconciliation of average refining segment net operating margin per produced barrel sold to refinery gross margin to total sales
and other revenues
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
 (Dollars in thousands, except per barrel amounts)
Consolidated
Net operating margin per produced barrel sold$5.98 $1.80 $2.82 $3.62 
Add average refinery operating expenses per produced barrel sold5.73 6.28 7.25 6.07 
Refinery gross margin per produced barrel sold11.71 8.08 10.07 9.69 
Times produced barrels sold (BPD)443,940 348,890 399,690 379,370 
Times number of days in period91 91 181 182 
Refining gross margin473,067 256,532 728,503 669,049 
Add (subtract) rounding73 (115)189 12 
West and Mid-Continent regions gross margin473,140 256,417 728,692 669,061 
Add West and Mid-Continent regions cost of products sold3,619,319 1,335,427 6,381,262 3,622,535 
Add Cheyenne Refinery sales and other revenues— 135,660 — 370,774 
Refining segment sales and other revenues4,092,459 1,727,504 7,109,954 4,662,370 
Add lubricants and specialty products segment sales and other revenues669,189 357,287 1,193,752 883,890 
Add HEP segment sales and other revenues126,234 114,807 253,418 242,661 
Subtract corporate, other and eliminations(310,759)(136,668)(475,708)(325,446)
Sales and other revenues$4,577,123 $2,062,930 $8,081,416 $5,463,475 


Reconciliation of average refining segment operating expenses per produced barrel sold to total operating expenses
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
 (Dollars in thousands, except per barrel amounts)
Consolidated
Average refinery operating expenses per produced barrel sold$5.73 $6.28 $7.25 $6.07 
Times produced barrels sold (BPD)443,940 348,890 399,690 379,370 
Times number of days in period91 91 181 182 
Refinery operating expenses231,484 199,384 524,493 419,105 
Add (subtract) rounding(62)(98)(216)(165)
West and Mid-Continent regions operating expenses231,422 199,286 524,277 418,940 
Add Cheyenne Refinery operating expenses— 40,073 — 79,593 
Refining segment operating expenses231,422 239,359 524,277 498,533 
Add lubricants and specialty products segment operating expenses61,310 47,840 122,063 101,971 
Add HEP segment operating expenses42,068 34,737 83,433 69,718 
Add (subtract) corporate, other and eliminations(609)(18,577)4,327 (38,518)
Operating expenses (exclusive of depreciation and amortization)$334,191 $303,359 $734,100 $631,704 


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Item 4.Controls and Procedures

Evaluation of disclosure controls and procedures. Our principal executive officer and principal financial officer have evaluated, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2021.

Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II. OTHER INFORMATION
 
Item 1.Legal Proceedings

In the ordinary course of business, we may become party to legal, regulatory or administrative proceedings or governmental investigations, including environmental and other matters. Damages or penalties may be sought from us in some matters and certain matters may require years to resolve. While the outcome and impact of these proceedings and investigations on us cannot be predicted with certainty, based on advice of counsel and information currently available to us, management believes that the resolution of these proceedings and investigations through settlement or adverse judgment will not either individually or in the aggregate have a material adverse effect on our financial condition, results of operations or cash flows.

The environmental proceedings are reported to comply with SEC regulations which require us to disclose proceedings arising under provisions regulating the discharge of materials into the environment or protecting the environment when a governmental authority is party to the proceedings and such proceedings involve potential monetary sanctions that we reasonably believe could exceed $300,000 or more. Certain disclosures made under the SEC’s prior $100,000 threshold will remain until their resolution.

Environmental Matters

El Dorado
HollyFrontier El Dorado Refining LLC (“HFEDR”) has been engaged in discussions with, and has responded to document requests from, the EPA, the U.S. Department of Justice (“DOJ”) and the State of Kansas regarding alleged Clean Air Act civil violations relating to flaring devices and other equipment at the refinery. Topics of the discussions included: (a) three information requests for activities beginning in January 2009, (b) the Clean Air Act’s Risk Management Program (“RMP”) compliance issues relating to a November 2014 inspection and subsequent events, (c) a Notice of Violation issued by the EPA in August 2017, and (d) possible late reporting under the Emergency Planning and Community Right-to-Know Act for the release of sulfur dioxide and visible emissions from October 2018.

Some of the foregoing civil investigations resulted from fires that occurred at the El Dorado Refinery in September 2017, October 2018 and March 2019. An employee fatality occurred during the September 2017 event. On May 28, 2020, HFEDR reached a settlement in the form of a proposed consent decree with the EPA, the DOJ, and the State of Kansas regarding the alleged Clean Air Act civil violations relating to flaring devices and other equipment at the refinery, as well as compliance with the RMP.

The proposed consent decree was lodged with the U.S. District Court for the District of Kansas, and the 30-day public comment period ended on July 18, 2020. On July 27, 2020, the EPA, the DOJ and the State of Kansas filed their Unopposed Motion to enter the Consent Decree with the U.S. District Court for the District of Kansas, and on August 27, 2020, the consent decree was entered by the district judge and became effective. Pursuant to the consent decree, among other terms and conditions, HFEDR is required to complete certain projects, implement protocols regarding the examination of its fired heaters and conduct a third party RMP audit of certain of its processes. In addition, HFEDR was required to pay a civil penalty of $2 million to the United States and $2 million to the State of Kansas in two installments, the first half within 30 days of entry of the consent decree and the second within six months of entry of the consent decree. All payments have been timely made, and HFEDR has undertaken several of the required projects. The consent decree resolves the alleged federal and state civil Clean Air Act liability for penalties and injunctive relief, other than potential civil penalties for RMP violations. Finally, as part of the settlement, a 2009 consent decree applicable to the refinery was terminated. In March 2021, the EPA contacted HFEDR to begin discussions on potential civil penalties for the RMP violations noted above.

The Occupational Safety and Health Administration (“OSHA”) conducted investigations into both the September 2017 and March 2019 events identified above, and HFEDR settled the OSHA claims related to those investigations in 2018 and 2019, respectively. In April 2019, HFEDR became aware that the EPA also initiated a criminal investigation into one or more of the foregoing events. HFEDR has received a grand jury subpoena requesting certain documents be provided to the EPA with respect to the September 2017 event. HFEDR cooperated with the EPA in responding to the subpoena. In May 2021, the EPA returned the records that HFEDR produced in response to the subpoena. We do not believe that criminal charges will be brought.

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Tulsa
HollyFrontier Tulsa Refining LLC (“HFTR”) operates under two Consent Decrees with the EPA and the Oklahoma Department of Environmental Quality (“ODEQ”) for the East and West Refineries. On April 3, 2019, the EPA notified HFTR of potential violations of the Consent Decrees. On December 1, 2020, ODEQ, on behalf of ODEQ and the EPA, issued two demand letters alleging violations under the Consent Decrees, which stemmed from inspections conducted by the EPA at the refineries from May 1 through 5, 2017, as well as from a review of the refineries’ records. The alleged violations included the failure to comply with applicable continuous emissions monitoring system (CEMS) requirements and exceedances of the hydrogen sulfide (H2S) emission limits. During a follow-up conference call with ODEQ, on January 6, 2021, ODEQ shared its stipulated penalty amounts for alleged violations pursuant to the two Consent Decrees. HFTR submitted timely responses to the ODEQ demand letters on February 8, 2021. Based on HFTR’s responses, during a follow-up conference call on April 9, 2021, ODEQ confirmed both ODEQ and EPA had reduced the stipulated penalties for the alleged violations of the two Consent Decrees and was seeking total stipulated penalties of $93,500. On April 9, 2021, HFTR confirmed acceptance of the above-referenced penalties. This matter will be resolved once ODEQ issues the revised demand letters and HFTR pays the penalty following its receipt of the revised demand letters.

Woods Cross
HollyFrontier Woods Cross Refining LLC (“HFWCR”) operates under a federal consent decree with the EPA and the Utah Department of Environmental Quality. On November 3, 2020, HFWCR received a letter from the EPA identifying potential violations of HFWCR’s federal consent decree that occurred from calendar year 2015 through the date of the letter. HFWCR provided a response letter to the EPA on December 3, 2020 disputing certain of the potential violations in the EPA's November 3, 2020 letter, and HFWCR supplemented its response letter on February 5, 2021, March 5, 2021 March 31, 2021 and April 16, 2021, with additional information. On May 20, 2021, the EPA sent a final demand letter with an assessment of stipulated penalties totaling $212,922.50 based on HFWCR’s defenses and responses to the initial informal demand letter. The penalty was paid in June 2021.

Renewable Fuel Standard

Various subsidiaries of HollyFrontier are currently intervenors in two lawsuits brought by renewable fuel interest groups against the EPA in federal courts alleging violations of the Renewable Fuel Standard under the Clean Air Act and challenging the EPA’s handling of small refinery exemptions. We intervened to vigorously defend the EPA’s position on small refinery exemptions because we believe the EPA correctly applied applicable law to the matters at issue.

The first lawsuit is before the U.S. Court of Appeals for the Tenth Circuit. The matter is fully briefed and remains pending before that court.

The second lawsuit is before the U.S. Court of Appeals for the DC Circuit. Briefing of the issues before the court commenced on December 7, 2020; however, in light of the Supreme Court’s decision to review HollyFrontier’s petition for certiorari of the Tenth Circuit January 24, 2020 decision, this case was stayed pending a decision from the Supreme Court. The stay has not been lifted to date.

On January 24, 2020, in a separate matter before the Tenth Circuit, the Tenth Circuit vacated the small refinery exemptions granted to two of our refineries for 2016 and remanded the case to the EPA for further proceedings. On April 15, 2020, the Tenth Circuit issued its mandate, remanding the matter back to the EPA. On September 4, 2020, various subsidiaries of HollyFrontier filed a Petition for a Writ of Certiorari with the U.S. Supreme Court seeking review of the Tenth Circuit decision. On January 8, 2021, the U.S. Supreme Court granted HollyFrontier’s petition. The oral argument occurred on April 27, 2021. The U.S. Supreme Court issued its opinion in this matter on June 25, 2021 and reversed the Tenth Circuit. On July 27, 2021, the Tenth Circuit recalled the mandate it issued to the EPA on April 15, 2020, and vacated its January 24, 2020 judgment. On July 29, 2021, the Tenth Circuit issued an order and judgment confirming that it recalled its mandate and vacated its previous judgment in this case. The Tenth Circuit also issued a new mandate returning jurisdiction to the EPA.

In December 2020, various subsidiaries of HollyFrontier also filed a petition for review in the DC Circuit challenging EPA’s denial of small refinery exemption petitions for years prior to 2016. The petition was consolidated with petitions from eight other refining companies challenging the same decision. In light of the Supreme Court’s decision to hear HollyFrontier’s appeal of the Tenth Circuit decision, this case was stayed pending a decision from the Supreme Court. Following the Supreme Court’s decision, HollyFrontier’s subsidiaries filed a motion on July 26, 2021 to dismiss their petition. The DC Circuit granted this motion and dismissed the case on July 28, 2021.

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Other

We are a party to various other litigation and proceedings that we believe, based on advice of counsel, will not either individually or in the aggregate have a materially adverse impact on our financial condition, results of operations or cash flows.


Item 1A.Risk Factors

Except for the risk factors below, there have been no material changes in our risk factors as previously disclosed in Part 1, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and in Part II, “Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021. You should carefully consider the risk factors discussed below and in our 2020 Form 10-K and March 31, 2021 Form 10-Q, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

The pending Sinclair Transactions may not be consummated on a timely basis or at all. Failure to complete the acquisition within the expected timeframe or at all could adversely affect our stock price and our future business and financial results.

On August 2, 2021, we entered into the Business Combination Agreement with Sinclair and certain other parties thereto in connection with the Sinclair Transactions. We expect the Sinclair Transactions to close in mid-2022. The Sinclair Transactions are subject to closing conditions. If these conditions are not satisfied or waived, the Sinclair Transactions will not be consummated. If the closing of the Sinclair Transactions are substantially delayed or do not occur at all, or if the terms of the Sinclair Transactions are required to be modified substantially, we may not realize the anticipated benefits of the acquisition fully or at all or they may take longer to realize than expected. The closing conditions include, among others, the affirmative vote of the majority of the votes cast by holders of shares of our common stock present in person or represented by proxy and entitled to vote at a special meeting of our stockholders in favor of the issuance of New Parent Common Stock to Sinclair in the Sinclair Transactions, the absence of a law or order prohibiting the transactions contemplated by the Business Combination Agreement and the termination or expiration of any waiting periods under the Hart-Scott Rodino Act, as amended, with respect to the Sinclair Transactions. We will also incur substantial transaction costs whether or not the Sinclair Transactions are completed. Any failure to complete the Sinclair Transactions could have a material adverse effect on our stock price, our competitiveness and reputation in the marketplace, and our future business and financial results, including our ability to execute on our strategy to return capital to our stockholders that was described in our press release and investor presentation announcing the Sinclair Transactions.

The anticipated benefits of the pending Sinclair Transactions may not be realized fully or at all or may take longer to realize than expected.

The Sinclair Transactions will require management to devote significant attention and resources to integrating the Sinclair business with our business. Potential difficulties that may be encountered in the integration process include, among others:

the inability to successfully integrate the Sinclair business into the HollyFrontier business in a manner that permits us to achieve the full revenue and cost savings anticipated from the Sinclair Transactions, including the approximately $100 million in run-rate synergies that HollyFrontier expects the combined company to realize, as well as another $100 to $200 million in estimated one-time savings from working capital benefits during the first two years after closing of the Sinclair Transactions;
complexities associated with managing the larger, integrated business;
potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the Sinclair Transactions;
integrating personnel from the two companies while maintaining focus on providing consistent, high-quality products and services;
loss of key employees;
integrating relationships with customers, vendors and business partners;
performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the Sinclair Transactions and integrating Sinclair’s operations into HollyFrontier; and
the disruption of, or the loss of momentum in, each company’s ongoing business or inconsistencies in standards, controls, procedures and policies.

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Delays or difficulties in the integration process could adversely affect our business, financial results, financial condition and stock price. Even if we are able to integrate our business operations successfully, there can be no assurance that this integration will result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that we currently expect from this integration or that these benefits will be achieved within the anticipated time frame.

The actual value of the consideration we will pay to Sinclair may exceed the value allocated to such consideration at the time we entered into the Business Combination Agreement.

Under the Business Combination Agreement, the number of shares of New Parent Common Stock we will issue to Sinclair at the closing is fixed at 60,230,036, which represents approximately 26.75% of HollyFrontier’s outstanding common stock as of July 30, 2021, and there will be no adjustment for changes in the market price of our common stock. Neither we nor the Sinclair stockholders are permitted to “walk away” from the transaction solely because of changes in the market price of our common stock between the signing of the Business Combination Agreement and the closing. Our common stock has historically experienced volatility. Stock price changes may result from a variety of factors that are beyond our control, including changes in our business, operations and prospects, regulatory considerations and general market and economic conditions. The closing price of our common stock on the New York Stock Exchange on July 30, 2021, was $29.40; and on August 5, 2021, the closing price of our common stock was $29.40. The value of the common stock we issue in connection with the closing of the Sinclair Transactions may be significantly higher at the closing than when we entered into the Business Combination Agreement.

We will issue a large number of shares New Parent Common Stock in connection with the Sinclair Transactions, which will result in dilution to our existing stockholders and may cause the market price of our common stock to decline in the future as the result of sales of our common stock owned by Sinclair stockholders or current HollyFrontier stockholders. Our stockholders may not realize a benefit from the Sinclair Transactions commensurate with the ownership dilution they will experience.

At the closing of the Sinclair Transactions, we will issue 60,230,036 shares of New Parent Common Stock, which represents 26.75% of the outstanding shares of our common stock on an adjusted basis as of July 30, 2021. The issuance of the such shares of common stock will result in dilution of our existing stockholders’ ownership interests and may also have an adverse impact on net income per share in fiscal periods that include (or follow) the closing.

The Stockholders Agreement (the “Stockholders Agreement”) by and among New Parent, Sinclair and the stockholders of Sinclair (the “Sinclair Parties”) subjects 45,172,527 of the shares of New Parent Common Stock issued to the Sinclair Parties (“Restricted Shares”) to a “lock-up” period commencing on the closing date, with one-third of such Restricted Shares being released from such restrictions on the date that is six months after the closing, one-third of the Restricted Shares being released from such restrictions on the first anniversary of the closing date, and the remainder being released from such restrictions on the date that is 15 months from the closing date. In addition, until the earliest to occur of (i) the date on which the Sinclair Parties beneficially own New Parent Common Stock constituting less than 5% of all outstanding New Parent Common Stock and (ii) the date on which a Change of Control (as defined in the Stockholders Agreement) occurs, the Sinclair Parties will be prohibited from transferring the shares of New Parent Common Stock owned by them to certain prohibited transferees, subject to certain permitted exceptions.

Further, New Parent has agreed to file, within five business days following the closing date, a shelf registration statement under the Securities Act, to permit the public resale of all the registrable securities held by the Sinclair Parties once the Restricted Shares are no longer subject to a lock-up.

In addition, following their receipt of shares of New Parent Common Stock as stock consideration in the Sinclair Transactions, subject to release from the associated lock-up provisions and the filing of a resale registration statement or satisfaction of the requirements of Rule 144, the Sinclair Parties may seek to sell the shares of New Parent Common Stock delivered to them. HollyFrontier stockholders may also seek to sell shares held by them of our common stock held in anticipation of completion of the closing, or of New Parent Common Stock following the closing. These sales (or the perception that these sales may occur), coupled with the increase in the outstanding number of shares of New Parent Common Stock, may affect the market for, and the market price of, our common stock and New Parent Common Stock in an adverse manner.

If we are unable to realize the strategic and financial benefits currently anticipated from the Sinclair Transactions, our stockholders will have experienced dilution of their ownership interest without receiving commensurate benefit, and we may be unable to execute on our strategy to return capital to our stockholders that was described in our press release and investor presentation announcing the Sinclair Transactions.

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Sinclair will become a significant holder of the combined company’s common stock following completion of the Sinclair Transactions.

On a pro forma basis, based on our outstanding shares of common stock as of July 30, 2021,Sinclair will own 26.75% of the New Parent Common Stock following the closing of the Sinclair Transactions. Additionally, pursuant to the Stockholders Agreement, the Sinclair Parties will be entitled to nominate (i) two persons to the board of directors of New Parent at the closing and for so long as the Sinclair Parties beneficially own common stock constituting not less than 15% of all outstanding New Parent Common Stock and (ii) one person to the Board for so long as the Sinclair Parties beneficially own less than 15% but more than or equal to 5% of all outstanding New Parent Common Stock. As a result, Sinclair (and the Sinclair Parties) will have the ability to influence our management and affairs. Further, the existence of a new significant stockholder may have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem to be in the best interests of our company.

So long as Sinclair continues to control a significant amount of the New Parent Common Stock, it will continue to be able to influence all matters requiring stockholder approval, subject to the voting agreements of the Sinclair Parties set forth in the Stockholders Agreement. Moreover, this concentration of stock ownership may also adversely affect the trading price of the New Parent Common Stock to the extent investors perceive a disadvantage in owning stock of a company with a significant stockholder.

The Sinclair Transactions will expand our business into branded marketing and licensing, and we could face a variety of risks of expanding into a new business.

The Sinclair Transactions will expand our business into branded marketing and licensing, including the addition of over 300 distributors and 1,500 branded retail sites. Risks of our expanding this business line include: (i) potential diversion of management’s attention and other resources, including available cash, from our existing businesses; (ii) unanticipated liabilities or contingencies; (iii) the need for additional capital and other resources to expand this line of business; and (iv) inefficient combination or integration of operational and management systems and controls. Expanding this line of business may also lead to increased litigation and regulatory risk and could have an impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the expansion and integration of the branded marketing business could have a material adverse effect on our business, results of operations and financial condition.

Potential litigation relating to the Sinclair Transactions could result in substantial costs to HollyFrontier.

Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into acquisition, merger or other business combination agreements. Even if such a lawsuit is without merit, defending against these claims can result in substantial costs and divert the time and resources of management. An adverse judgment could result in monetary damages, which could have a negative impact on our liquidity and financial condition.

Our operations are subject to catastrophic losses, operational hazards and unforeseen interruptions and other disruptive risks for which we may not be adequately insured.

Our operations are subject to catastrophic losses, operational hazards, unforeseen interruptions and other disruptive risks such as natural disasters, adverse weather, accidents, maritime disasters or casualties (including those involving marine vessels/terminals), fires, explosions, hazardous materials releases or spills, terror or cyberattacks, domestic vandalism, power failures, mechanical failures and other events beyond our control. These events could result in an injury, loss of life, property damage or destruction, as well as a curtailment or an interruption in our operations and may affect our ability to meet customer commitments. In addition, the consequences of any operational incident (including as a result of a maritime disaster or casualty) at our marine terminal facilities may be even more significant as a result of the complexities involved in addressing releases or spills occurring in U.S. federal and/or state waters and/or the repair of marine terminal facilities.

We may not be able to maintain or obtain insurance of the type and amount we desire at commercially reasonable rates and exclusions from coverage may limit our ability to recover the amount of the full loss in all situations. As a result of market conditions, premiums and deductibles for certain of our insurance policies could increase. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage.

There can be no assurance that insurance will cover all or any damages and losses resulting from these types of hazards. We are not fully insured against all risks to our business and therefore, we self-insure certain risks. If any of our facilities were to experience an interruption in operations, our earnings could be materially adversely affected (to the extent not recoverable through insurance) because of lost production and repair costs.
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The energy industry is highly capital intensive, and the entire or partial loss of individual facilities can result in significant costs to both industry companies, such as us, and their insurance carriers. In recent years, several large energy industry claims have resulted in significant increases in the level of premium costs and deductible periods for participants in the energy industry. As a result of large energy industry claims, insurance companies that have historically participated in underwriting energy-related facilities may discontinue that practice or demand significantly higher premiums or deductible periods to cover these facilities. If significant changes in the number or financial solvency of insurance underwriters for the energy industry occur, or if other adverse conditions over which we have no control prevail in the insurance market, we may be unable to obtain and maintain adequate insurance at reasonable cost. In addition, we cannot assure you that our insurers will renew our insurance coverage on acceptable terms, if at all, or that we will be able to arrange for adequate alternative coverage in the event of non-renewal. Further, our underwriters could have credit issues that affect their ability to pay claims. If a significant accident or event occurs that is self-insured or not fully insured, it could have a material adverse effect on our business, financial condition and results of operations.


Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

(c) Common Stock Repurchases Made in the Quarter

Under our common stock repurchase programs, repurchases are being made from time to time in the open market or privately negotiated transactions based on market conditions, securities law limitations and other factors. The following table includes repurchases made under these programs during the second quarter of 2021.
PeriodTotal Number of
Shares Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased
as Part of Publicly Announced Plans or Programs
Maximum Dollar
Value of Shares
that May Yet Be
Purchased Under the Plans or Programs
April 2021— $— — $1,000,000,000 
May 2021— $— — $1,000,000,000 
June 2021— $— — $1,000,000,000 
Total for April to June 2021— — 


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Item 6.Exhibits

Exhibit Number  Description
2.1+
2.2†
3.1
3.2
10.1
10.2†
10.3+*
10.4*
10.5†
10.6
31.1*
31.2*
32.1**
32.2**
101++The following financial information from HollyFrontier Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted as inline XBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, and (v) Notes to the Consolidated Financial Statements. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
104++Cover page Interactive Data File (formatted as inline XBRL and contained in exhibit 101).

* Filed herewith.
** Furnished herewith.
+ Constitutes management contracts or compensatory plans or arrangements.
++ Filed electronically herewith.
† Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant agrees to furnish supplementally a copy of the omitted schedules and exhibits to the SEC upon request.

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
HOLLYFRONTIER CORPORATION
(Registrant)
Date: August 6, 2021/s/ Richard L. Voliva III
Richard L.Voliva III
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 6, 2021/s/ Indira Agarwal
Indira Agarwal
Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
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