Par Petroleum Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; interim financial statements are unaudited. The filing describes a diversified energy company operating in refining and distribution, retail, natural gas and oil production, and commodity marketing and logistics. (The supplied filing is for Par Petroleum Corporation.)
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $543.6 million | $743.2 million |
| Gross margin | $66.1 million | $30.2 million |
| Operating income (loss) | $17.9 million | $(14.8) million |
| Net income (loss) | $0.5 million | $(14.6) million |
| Operating cash flow | $86.8 million | $(7.9) million |
| Capital expenditures | $4.7 million | $2.0 million |
- Revenue declined 27%, while gross margin more than doubled. Management attributed the improvement primarily to higher refining sales volumes, lower crude prices and production costs, and a greater share of higher-margin products.
- Refining and distribution gross margin increased to $52.3 million from $19.1 million; retail gross margin rose to $13.3 million from $7.9 million. Commodity marketing and logistics gross margin fell to $0.04 million from $1.6 million, and natural gas and oil gross margin declined to $0.5 million from $1.5 million.
- Refinery throughput averaged 74.8 thousand barrels per day versus 67.0 thousand. Net refining operating margin was $3.65 per throughput barrel, compared with a loss of $1.36 a year earlier. Retail sales volume increased 7%.
- Adjusted EBITDA, a non-GAAP measure, was $22.4 million versus a loss of $9.1 million; adjusted net income was $11.7 million versus a loss of $15.9 million. These measures exclude specified items and are not substitutes for GAAP results.
- Operating cash flow benefited substantially from working-capital movements, including reductions in receivables and inventory. Investing cash use was $23.5 million, including a $13.8 million Piceance Energy contribution and a $5.0 million Mid Pac acquisition deposit. Financing cash use was $28.2 million, primarily net debt repayments.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $124.3 million; total current assets were $390.5 million and current liabilities were $280.8 million. Total assets were $687.6 million and stockholders’ equity was $294.1 million.
- Total debt, net of discount, was $112.5 million, including $40.5 million classified as current maturities. Debt was $136.6 million at December 31, 2014. The $35 million Term Loan repayment due March 31, 2015 was extended to March 31, 2016.
- Management reported $206.3 million of available liquidity at March 31, including cash and facility availability. By May 5, after the Mid Pac acquisition and a reduced Texadian borrowing base, reported available liquidity was $132.5 million, including $61.1 million cash and $71.4 million of revolver/ABL availability.
- Operating cash flow exceeded net income and included significant working-capital inflows; investors should not assume the quarter’s cash generation is recurring.
Material changes and significant events
- On April 1, 2015, the company completed its acquisition of Mid Pac for $107.0 million before adjustments. It used existing cash, the previously paid deposit and borrowing under a new Bank of Hawaii facility. The acquired business’s results are expected to be included beginning in Q2.
- The Mid Pac financing included a $50 million senior secured term loan and a $5 million revolving facility, both advanced at closing; the term loan matures in 2022 and the revolver in 2018.
- Par contributed $13.8 million to Piceance Energy in March, increasing its ownership to 33.7%; a further $13.8 million contribution was expected in May, with ownership projected to rise to 34.0%. Piceance Energy reported a $6.1 million quarterly net loss and had $69.5 million outstanding on its revolver. Par’s guarantee is limited to its pledged subsidiary equity.
- Reportable segments were reorganized to separate retail from refining and distribution; prior-period segment data was recast. A four-year extension of the refinery union contract was ratified on March 23, 2015.
Outlook, risks and contingencies
- Management expected cash flows and available resources to cover current capital expenditures, working capital and debt service needs for the next 12 months, while noting additional capital might be sought and could be unavailable or costly.
- The 2015 capital expenditure budget, excluding acquisitions, was $10–$15 million, primarily for refinery reliability and efficiency, plus approximately $28 million of planned Piceance Energy investments. The remaining Piceance contribution was expected in May.
- A pending refinery Clean Air Act consent decree was expected to require capital improvements estimated at $20–$25 million. Tesoro is responsible under the environmental agreement for reimbursing qualifying project costs and certain related penalties; the final decree and reimbursement remain subject to the stated terms.
- Mid Pac had a pending EPA/DOJ matter alleging Clean Air Act violations at its Kawaihae terminal. DOJ proposed approximately $700,000 in civil penalties; Mid Pac disputed the allegations, and the company said the ultimate exposure could not yet be quantified.
- Commodity prices, refining margins, renewable fuel credit (RIN) prices, interest rates and counterparty credit are key risks. The company reported hedges for some refinery fuel consumption and stated that a 1% increase in floating rates would increase annual interest expense by about $0.2 million.
- Quarterly results included noncash fair-value losses of $5.0 million on warrants and $4.9 million on contingent consideration, partly offset in the cash-flow reconciliation. These items made GAAP earnings more volatile.
- The company reported its disclosure controls were effective and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2014 Form 10-K.
Key facts investors should verify
- Whether the stronger refining margins and working-capital cash inflows persist in subsequent quarters.
- The final Mid Pac purchase-price allocation, post-closing adjustments, financing impact and resulting liquidity.
- Actual timing, cost and reimbursement terms for consent-decree refinery work, and the resolution and exposure of the Kawaihae terminal matter.
- Funding and operating performance of Piceance Energy, including the planned additional contribution and the impact of lower natural gas and condensate prices.
- Debt maturities, borrowing-base availability and covenant capacity following the acquisition.