PAR PACIFIC HOLDINGS, INC. annual report, FY2015

Business context and reporting period

Par Pacific Holdings, Inc. (NYSE MKT: PARR), formerly Par Petroleum Corporation, filed this Form 10-K for the fiscal year ended December 31, 2015. Its businesses include a 94,000-barrel-per-day refinery in Hawaii, Hawaii fuel retailing and logistics, Texadian commodity marketing, and an equity investment in Colorado natural-gas producer Laramie Energy. The April 1, 2015 acquisition of Mid Pac expanded its Hawaii retail and terminal operations; results include Mid Pac from that date. Segment reporting was reorganized in 2015, with prior periods recast.

Financial results and key metrics

Metric	FY 2015	FY 2014
Revenue	$2,066.3 million	$3,108.0 million
Gross margin	$279.0 million	$170.6 million
Operating income (loss)	$61.5 million	$(37.5) million
Net income (loss)	$(39.9) million	$(47.0) million
Net cash from (used in) operations	$132.4 million	$(54.6) million
Cash and cash equivalents at year-end	$167.8 million	$89.2 million
Total assets	$892.3 million	$735.2 million

• Revenue fell about 33%, while gross margin improved. Management attributed the stronger operating performance mainly to improved refining margins, lower energy costs and increased sales volumes. The year-over-year revenue comparison is affected by acquisition timing and commodity prices.
• Refining gross margin rose to $176.9 million from $83.9 million. Average throughput was 77.3 thousand barrels per day, or 82% utilization; adjusted refining margin was $6.82 per throughput barrel versus $3.37 in 2014, and net operating margin was $3.28 per barrel versus a $1.34 loss.
• Retail gross margin increased to $68.3 million from $44.5 million, principally reflecting Mid Pac. Texadian gross margin declined to a $2.3 million loss from $5.6 million of income.
• Adjusted EBITDA, a non-GAAP measure, was $110.4 million versus a $9.2 million loss; adjusted net income was $14.3 million versus a $38.8 million loss. These measures exclude specified items and are not substitutes for GAAP results.
• Fourth-quarter revenue was $443.5 million, operating loss $10.1 million and net loss $66.8 million. The quarter included a $41.1 million impairment of the Laramie investment; the full-year net loss also reflected financing termination costs, contingent-consideration remeasurement and other items.

Debt, liquidity and cash flow

• At December 31, 2015, principal debt was $170.1 million (reported debt, net of discounts and fees, was $165.2 million); current maturities were $11.0 million. The company also reported $237.7 million of obligations under inventory financing agreements. The latter are tied to refinery inventory and should be considered separately when assessing leverage and working-capital needs.
• Year-end total current assets were $531.8 million and current liabilities $365.0 million. Reported cash was $167.8 million. Total available liquidity was $229.2 million, including credit and deferred-payment availability; these facilities are not equivalent to cash.
• Operating cash flow improved by $187.0 million year over year. Investing cash use was $114.2 million, including $64.3 million for Mid Pac, $27.5 million invested in Laramie and $22.3 million of capital expenditures. Financing cash flow was $60.4 million, including net proceeds of approximately $73.8 million from a November share offering.
• The December 2015 KeyBank refinancing included $110 million of term loans and a $5 million revolver, which was undrawn at year-end. The KeyBank loans bear floating rates and are subject to financial covenants. The separate Term Loan carried a 10% cash or 12% payment-in-kind rate; $60.1 million remained outstanding at year-end.
• As of February 26, 2016, reported cash was $119.1 million and total available liquidity $175.1 million, after the $55 million Laramie contribution and the expiration of Texadian’s credit agreement, among other changes. Management stated it expected available resources and operating cash flow to cover anticipated needs for the next 12 months.

Material changes, outlook and risks

• In April 2015, Par acquired Mid Pac for approximately $74.4 million cash and assumed or refinanced $45.3 million of debt. It issued 3.4 million shares in November 2015 for $73.8 million net proceeds.
• Par replaced its Barclays supply-and-exchange and ABL arrangements with J. Aron supply-and-offtake agreements in June 2015. Termination-related losses were $19.7 million. J. Aron finances refinery inventory, but the arrangement creates repurchase, counterparty and liquidity exposure; inventory and related obligations remain on the balance sheet.
• Par committed $55 million to Laramie for a property acquisition. The transaction closed March 1, 2016, increasing Par’s ownership from 32.4% to 42.3%. Laramie’s 2015 net loss and impairment reflected lower commodity prices; Par recorded a $41.1 million impairment of its investment. Laramie’s credit facility generally restricts distributions to owners.
• Management budgeted $45 million to $50 million for 2016 capital expenditures, including major maintenance, and expected a refinery turnaround costing $30 million to $35 million. This single refinery accounts for a substantial majority of revenue, making turnaround timing and execution material.
• No numerical earnings guidance was provided. Management cited favorable 2015 crack spreads and lower energy costs, but refining results remain sensitive to crack spreads, crude and product prices, pricing lags, demand and operating interruptions.
• Other material exposures include environmental regulation and a pending Tesoro-related Clean Air Act consent decree. Compliance projects could cost $20 million to $30 million, with Tesoro responsible under the acquisition agreement for reimbursing eligible capital expenditures. The filing also describes evolving emissions and renewable-fuel requirements, including RIN price risk.
• Unresolved matters include a proposed $700,000 EPA penalty concerning Mid Pac’s Kawaihae loading rack, tentatively agreed at $200,000 subject to documentation; an NLRB bargaining claim; and 12 remaining predecessor-bankruptcy claims totaling about $23.1 million, including a disputed $22.4 million U.S. Government claim. The company estimated and reserved $1.1 million for probable and estimable bankruptcy claims.
• Par reported no cash dividends and said none were expected in the near term; debt agreements restrict dividends. Management and the auditor reported effective internal control over financial reporting, and the financial-statement audit opinion was unqualified.

Important facts for investors to verify

• Review the full cash-flow statement and working-capital movements, and distinguish cash from total liquidity and inventory-financing availability.
• Confirm the current debt balances, covenant headroom, variable-rate exposure and status of Texadian financing after its February 2016 expiration.
• Track refining margins, throughput, product mix and performance during the planned 2016 turnaround.
• Assess the final scope, timing, reimbursement terms and any uncovered operating costs associated with the consent decree.
• Monitor Laramie’s post-acquisition ownership, commodity exposure, debt restrictions, reserve revisions and any further impairment risk.
• Check the outcome and financial effect of the Mid Pac environmental matter, NLRB claim, Tesoro earnout and remaining bankruptcy claims.
• Consider dilution from the 2015 share offering, potential bankruptcy-claim settlements and other registered or equity-incentive shares.