HF Sinclair(DINO) - 2022 Q4 - Annual Report

Part I Forward-Looking Statements This section clarifies the nature of forward-looking statements, emphasizing their reliance on current beliefs and the numerous risk factors that could cause actual results to differ materially - On March 14, 2022, HollyFrontier Corporation and Holly Energy Partners, L.P. established HF Sinclair Corporation as the new parent holding company after acquiring Sinclair Oil Corporation and Sinclair Transportation Company[15] - Key risk factors impacting future performance include the integration of Acquired Sinclair Businesses, demand for crude oil and refined products, refined product and crude oil price spreads, and governmental and environmental regulations[18] Definitions This section provides a glossary of technical terms and abbreviations, defining key processes, products, and metrics relevant to the oil refining and specialty products industry - Key industry terms defined include BPD (barrels per calendar day), Refinery gross margin (difference between average net sales price and average cost per barrel sold, excluding depreciation and amortization), and RINs (renewable identification numbers)[22][36][38] Business and Properties HF Sinclair is an independent energy company with five segments, significantly expanded by the 2022 Sinclair Oil acquisition and 2021 Puget Sound Refinery acquisition, and heavily invested in renewable diesel, all subject to extensive governmental regulation - On March 14, 2022, HF Sinclair formed as the new parent company after acquiring Sinclair Oil's refining, branded marketing, renewables, and midstream businesses, adding two refineries, over 1,300 branded stations, and a renewable diesel unit[46][48] - Renewable diesel capacity expanded in 2022 with Artesia RDU (135 million gallons/year) and Cheyenne RDU (90 million gallons/year) becoming operational, complementing the acquired Sinclair RDU (153 million gallons/year)[51][52][87] - As of December 31, 2022, the company employed 5,223 people, with 1,384 under collective bargaining agreements, emphasizing a culture of safety, integrity, teamwork, ownership, and inclusion[112][113] - Operations are subject to extensive regulation, including the Clean Air Act, Renewable Fuel Standard (RFS), and various state-level low carbon fuel programs, incurring significant compliance costs and capital expenditures[121][128][131] Company Overview This section details significant corporate transactions, including the March 2022 Sinclair Oil acquisition and November 2021 Puget Sound Refinery acquisition, alongside major investments in new renewable diesel units becoming operational in 2022 - On March 14, 2022, HF Sinclair completed its acquisition of Sinclair Oil, issuing 60.2 million shares of common stock and integrating Sinclair's refining, marketing, and renewables businesses[46][47] - The company acquired the 149,000 BPD Puget Sound refinery from Shell on November 1, 2021, for $624.3 million in cash, strategically expanding its West Coast presence[49] - New Renewable Diesel Units (RDUs) at Artesia (135 million gallons/year) and Cheyenne (90 million gallons/year) became operational in 2022, supported by a new pre-treatment unit (PTU) in Artesia[51][52][53] Operations by Segment Operations are detailed across five segments: Refining (678,000 BPSD capacity), Renewables (378 million gallons/year), Marketing (1,500+ sites), Lubricants and Specialty Products (global market), and HEP (midstream logistics) Refinery Crude Oil Processing Capacity (BPSD) | Region | Refinery | Capacity (BPSD) | | :--- | :--- | :--- | | Mid-Continent | El Dorado | 135,000 | | | Tulsa | 125,000 | | West | Puget Sound | 149,000 | | | Navajo | 100,000 | | | Parco | 94,000 | | | Woods Cross | 45,000 | | | Casper | 30,000 | | Total | | 678,000 | - The Renewables segment operates three RDUs: Artesia (135 million gallons/year), Cheyenne (90 million gallons/year), and the acquired Sinclair RDU (153 million gallons/year), processing feedstocks into renewable diesel for LCFS credit markets[87][88] - The Marketing segment includes branded fuel sales to over 1,500 sites and licenses the Sinclair brand to an additional 300+ locations, concentrated in the West and Mid-Continent regions[89] - The Lubricants and Specialty Products segment operates facilities in Canada, the U.S., and the Netherlands, producing base oils, finished lubricants, and specialty products for over 80 countries[90][91][92] - HF Sinclair holds a 47% limited partner interest in Holly Energy Partners (HEP), a publicly traded MLP operating critical pipelines, terminals, and processing units supporting refining operations[56][97] Human Capital and Governance As of year-end 2022, HF Sinclair employed 5,223 people, with 1,384 unionized, emphasizing safety, diversity, and talent development, achieving a 45% decline in OSHA incident rates - As of December 31, 2022, the company had 5,223 employees (4,336 in the U.S., 654 in Canada, 233 in Europe/Asia), with approximately 26% of the workforce unionized[113][219] - Workforce diversity as of December 31, 2022, included approximately 17% female employees and 22% non-white employees, with veterans representing about 5% of the U.S. workforce[115] - A strong focus on safety led to a 45% decline in the OSHA total recordable incident rate over the five years ending December 31, 2022[118] - In fiscal 2022, the company invested $6.0 million in employee training and development programs, offering a suite of programs for various career levels[120] Governmental Regulation Operations are heavily regulated by international, federal, state, and local laws, including the EPA's RFS and state LCFS programs, with increasing scrutiny on climate change and GHG emissions, requiring substantial compliance costs - HEP's interstate pipelines are subject to rate regulation by the Federal Energy Regulatory Commission (FERC) under the Interstate Commerce Act, requiring rates to be just and reasonable[124] - The company must comply with the EPA's Renewable Fuel Standard (RFS), requiring biofuel blending or RINs purchases, with increasing RVOs finalized for 2020-2022 and proposed for 2023-2025[131] - The company is subject to Low Carbon Fuel Standard (LCFS) programs in California, Oregon, and Washington, requiring reduced carbon intensity of transportation fuels and creating a market for LCFS credits[134][135][136] - Legislative and regulatory measures addressing climate change, including GHG cap-and-trade programs, carbon taxes, and potential SEC disclosure rules, are expected to increase operating and capital costs[140][143] Risk Factors This section details significant business, regulatory, cybersecurity, and financial risks, including volatile commodity prices, intense competition, operational hazards, integration challenges, environmental compliance costs, and cyberattack threats - Business/Industry Risks: Profitability is highly dependent on volatile crude oil and refined product prices, the industry is intensely competitive, and operations are subject to catastrophic losses and interruptions for which insurance may be inadequate[166][171][178] - Regulatory Risks: The company incurs significant costs to comply with extensive environmental, health, and safety laws, while climate change regulations and renewable fuel standards (like RFS) could increase operating costs and reduce demand for refined products[167][246][253] - Cybersecurity Risks: Information technology and operational systems are vulnerable to cyberattacks, potentially disrupting operations, compromising sensitive data, and causing significant financial and reputational harm[168][277][279] - Liquidity & Financial Risks: Volatility in capital markets may hinder funding, the company is exposed to credit risks of key customers and vendors, and hedging activities may limit gains or expose it to losses[169][288][290] Unresolved Staff Comments The company reports no unresolved comments from the staff of the Securities and Exchange Commission - The company states it does not have any unresolved staff comments[298] Legal Proceedings The company is involved in several legal and environmental proceedings, including discussions with the EPA regarding Clean Air Act noncompliance and legal challenges against EPA's RFS small refinery exemption decisions - HF Sinclair Navajo Refining LLC is in discussions with the EPA and New Mexico Environment Department regarding alleged noncompliance with the Clean Air Act at its Artesia and Lovington refineries[301] - The company is pursuing legal challenges against the EPA's decisions to reverse previously granted small refinery exemptions for the 2016 and 2018 compliance years and to deny petitions for 2019 and 2020[305][306] - As of December 31, 2022, the company has an accrued liability of $192.3 million for environmental remediation projects resulting from past releases of refined product and crude oil[158] Mine Safety Disclosures This section is not applicable to the company's operations - The company states that this item is not applicable[310] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE under 'DINO', with a new $1.0 billion share repurchase program approved in September 2022, and quarterly dividends considered based on financial performance - The company's common stock is traded on the NYSE under the symbol 'DINO'[313] - A new $1.0 billion share repurchase program was approved in September 2022, with $662.0 million remaining available as of Q4 2022[313][314] Share Repurchases in Q4 2022 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | October 2022 | 946,911 | $54.70 | | November 2022 | 2,391,249 | $61.69 | | December 2022 | 1,767,354 | $49.37 | Management's Discussion and Analysis of Financial Condition and Results of Operations Net income surged to $2.92 billion in 2022, driven by strong demand and acquisitions, with gross refining margin up 146% to $26.78/bbl, maintaining strong liquidity of $3.30 billion, and projecting $940 million to $1.15 billion in 2023 capital expenditures Key Financial Performance (2022 vs. 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Income (attributable to stockholders) | $2,922.7M | $558.3M | | Diluted EPS | $14.28 | $3.39 | | Sales and other revenues | $38,204.8M | $18,389.1M | | Net cash from operating activities | $3,777.2M | $406.7M | - The significant increase in 2022 earnings was driven by strong product demand returning to pre-pandemic levels, higher sales prices, and increased sales volumes from the acquisitions of the Puget Sound Refinery and the Acquired Sinclair Businesses[319][355] - The company's standalone liquidity was approximately $3.30 billion at year-end 2022, comprising $1.65 billion in cash and a $1.65 billion undrawn credit facility[386] - In 2022, the company repurchased 25.7 million shares for $1.31 billion under its share repurchase programs, including $750 million in privately negotiated repurchases from REH Company[390] Results of Operations Net income attributable to stockholders surged to $2.92 billion in 2022 from $558.3 million in 2021, driven by a 108% increase in sales to $38.2 billion and a sharp rise in consolidated refinery gross margin to $26.78/bbl Consolidated Refinery Operating Data (2022 vs 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Crude Charge (BPD) | 606,980 | 400,720 | | Refinery Utilization | 92.3% | 93.1% | | Refinery Gross Margin ($/bbl) | $26.78 | $10.89 | | Net Operating Margin ($/bbl) | $18.86 | $3.85 | - Sales and other revenues grew 108% to $38.2 billion in 2022, driven by higher sales prices and increased volumes from the Puget Sound and Sinclair acquisitions[356] - Cost of products sold increased 101% to $30.7 billion, reflecting higher crude oil costs and sales volumes, with a $52.4 million lower of cost or market inventory charge recorded in 2022, compared to a $310.1 million benefit in 2021[357] - The effective tax rate increased to 22.7% in 2022 from 15.7% in 2021, primarily due to the relationship between higher pre-tax income and non-taxable earnings attributable to noncontrolling interests[371] Liquidity and Capital Resources The company maintains strong liquidity of $3.30 billion at year-end 2022, with net cash from operations increasing to $3.78 billion, projecting $940 million to $1.15 billion in 2023 capital spending, and actively managing its debt structure - HF Sinclair entered into a new $1.65 billion senior unsecured revolving credit facility in April 2022, maturing in 2026, with no outstanding borrowings as of December 31, 2022[372] - HEP issued $400 million of 6.375% senior notes in April 2022 to repay credit facility borrowings, with $668.0 million outstanding on its credit facility at year-end[383][382] Projected 2023 Capital and Turnaround Spending | Category | Expected Spending (in millions) | | :--- | :--- | | HF Sinclair | | | Refining | $250.0 - $280.0 | | Renewables | $25.0 - $35.0 | | Lubricants & Specialty Products | $35.0 - $50.0 | | Marketing | $20.0 - $30.0 | | Corporate | $50.0 - $80.0 | | Turnarounds and catalyst | $530.0 - $630.0 | | HEP | $30.0 - $45.0 | | Total | $940.0 - $1,150.0 | - Net cash from financing activities was a use of $1.56 billion in 2022, primarily due to $1.37 billion in treasury stock purchases and $255.9 million in dividend payments[403] Critical Accounting Policies and Estimates This section outlines critical accounting policies requiring significant judgment, including LIFO inventory valuation, goodwill and long-lived asset impairment assessment, business combination valuations, and contingency reserves for environmental and legal liabilities - Inventory Valuation: The company uses the LIFO method for most crude oil and refined product inventories, recording a $61.2 million lower of cost or market reserve for renewables inventories in 2022, increasing cost of products sold by $52.4 million[410][412] - Goodwill and Long-Lived Assets: Goodwill totaled $3.0 billion as of December 31, 2022, with the July 1, 2022, impairment test indicating no impairment, as fair values exceeded carrying values by 32% to 47%[414][416] - Business Combinations: The company uses income, cost, and market approaches to estimate the fair value of assets acquired and liabilities assumed in business combinations, with these estimates based on inherently uncertain assumptions[419] - Contingencies: The company accrues for probable and reasonably estimable losses from proceedings and claims, with required reserves subject to change based on new developments[420] Quantitative and Qualitative Disclosures About Market Risk This section discusses primary market risks including commodity price, foreign currency, and interest rate risks, managed through derivative contracts and forward contracts, while acknowledging operational hazards are not fully insured - The company's primary market risk is commodity price volatility for crude oil, refined products, and natural gas, managed with derivative contracts[422] - As of December 31, 2022, a hypothetical 10% increase in underlying commodity prices would result in a derivative fair value loss of $3.5 million on open contracts[425] - For the company's fixed-rate senior notes, a hypothetical 10% change in yield-to-maturity rates would change the fair value by approximately $33.1 million for HF Sinclair notes and $24.2 million for HEP notes[427] Financial Statements and Supplementary Data This section presents the consolidated financial statements for fiscal year 2022, with management asserting effective internal controls (excluding Sinclair acquisition) and Ernst & Young LLP providing an unqualified opinion on both financial statements and internal controls - Management concluded that as of December 31, 2022, the company maintained effective internal control over financial reporting, excluding the internal controls of the Acquired Sinclair Businesses acquired on March 14, 2022[446] - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements, affirming fair presentation of financial position and results of operations in conformity with U.S. GAAP[461] - The auditor identified the valuation of personal property assets in the Sinclair acquisition as a Critical Audit Matter due to significant estimation and judgment required for fair value determination[467][468] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its independent registered public accountants regarding accounting and financial disclosure matters - The company has had no disagreements with its accountants on accounting and financial disclosure[744] Controls and Procedures As of December 31, 2022, the company's principal executive and financial officers concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the last fiscal quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[745] - No material changes to internal control over financial reporting occurred during the fourth quarter of 2022[746] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2023 annual meeting proxy statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2023 proxy statement[749] Executive Compensation Information detailing executive compensation policies and data is incorporated by reference from the forthcoming 2023 annual meeting proxy statement - Information regarding executive compensation is incorporated by reference from the forthcoming 2023 proxy statement[750] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning security ownership by major shareholders and management, and details on equity compensation plans, is incorporated by reference from the forthcoming 2023 annual meeting proxy statement - Information regarding security ownership and equity compensation plans is incorporated by reference from the forthcoming 2023 proxy statement[751] Certain Relationships and Related Transactions, and Director Independence Information covering related party transactions and director independence is incorporated by reference from the forthcoming 2023 annual meeting proxy statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the forthcoming 2023 proxy statement[753] Principal Accounting Fees and Services Information detailing fees paid to and services provided by the principal independent accountant is incorporated by reference from the forthcoming 2023 annual meeting proxy statement - Information regarding principal accounting fees and services is incorporated by reference from the forthcoming 2023 proxy statement[754] Part IV Exhibit and Financial Statement Schedules This section provides an index to the consolidated financial statements and a list of all exhibits filed with the Form 10-K, noting the omission of financial statement schedules as information is included elsewhere or not applicable - This section contains the index to the Consolidated Financial Statements and a list of all exhibits filed with the Form 10-K[756][757] - All financial statement schedules are omitted as the required information is included elsewhere in the report or is not applicable[756]