PAR PACIFIC HOLDINGS, INC. quarterly report, Q2 FY2019

Par Pacific Holdings, Inc. — Q2 2019 Form 10-Q

Reporting period: Three and six months ended June 30, 2019. Par operates refining, retail and logistics businesses, including refineries in Hawaii, Wyoming and, following its January 2019 acquisition, Tacoma, Washington. Amounts below are in millions of dollars unless noted.

Financial performance

Metric	Q2 2019	Q2 2018	First half 2019	First half 2018
Revenue	$1,409.4	$856.4	$2,600.7	$1,621.8
Operating income	$48.6	$29.0	$70.0	$56.6
Net income	$28.2	$16.2	$89.3	$31.4
Diluted EPS	$0.56	$0.35	$1.75	$0.68
Adjusted EBITDA (non-GAAP)	$69.0	$37.5	$116.6	$63.5

Q2 revenue rose 65% and net income rose 74% year over year. First-half revenue increased 60%; first-half net income was substantially boosted by a $66.6 million income tax benefit, principally from releasing part of the tax valuation allowance after the Washington acquisition.
Q2 adjusted EBITDA growth reflected the Washington refinery and logistics contribution, higher Hawaii throughput following the refinery expansion, and stronger retail fuel margins. The Washington assets contributed approximately $19.6 million of Q2 refining operating income and $5.3 million of logistics operating income.
Q2 segment operating income was $33.2 million in refining, $16.4 million in logistics and $12.0 million in retail. Hawaii refining faced lower crack spreads and a challenging crude market; retail fuel margins increased 21%.
First-half operating cash flow was $24.2 million, down from $31.3 million. Working-capital changes used approximately $80.7 million, mainly reflecting higher inventory and receivables. Investing cash outflow was $312.3 million, largely for the Washington acquisition and capital spending; financing provided $320.9 million.
Capital expenditures were $41.4 million in the first half. Management’s 2019 capital expenditure budget was $100–$110 million.

Liquidity, debt and balance sheet

At June 30, cash and cash equivalents were $106.2 million and restricted cash was $2.4 million. Management reported liquidity of $175.0 million, including cash and available financing arrangements.
Debt principal was $673.0 million; debt net of unamortized discounts and financing costs was $644.1 million. The balance included $300 million of 7.75% senior secured notes due 2025, $246.9 million outstanding under Term Loan B, and $79.9 million of 5.00% convertible notes due 2021. The ABL revolver had no borrowings and a $53.7 million borrowing base.
Current obligations under inventory financing agreements were $636.5 million. These arrangements finance refinery inventory and are distinct from the debt figures above. Operating lease liabilities totaled $392.2 million.
Par repurchased $35.1 million principal of convertible notes for $16.2 million cash and approximately 1.4 million shares; the transaction resulted in a $3.7 million extinguishment loss in Q2. The company reported compliance with its debt agreements at quarter-end.
Management believed cash flows and available capital would cover capital expenditures, working capital and debt service for the next 12 months, while noting additional capital might be needed for other significant business changes or refinancing.

Material changes, outlook and risks

The Washington acquisition closed January 11, 2019 for a total purchase price of $327.4 million, including acquired working capital. It materially increased reported revenue, throughput, assets, debt and operating costs; results are not directly comparable with 2018 because the refinery was not owned then.
Management reported no specific earnings guidance. The filing highlights ongoing projects, including Hawaii refinery work, renewable-fuels processing and storage at Tacoma, and preparation for refinery turnarounds. A Wyoming refinery turnaround was planned for 2020.
Commodity prices and refining margins are key sensitivities. Par estimated that a $1 per barrel change in average gross refining margins, based on Q2 throughput, would change annualized operating income by approximately $62.2 million, all else equal. Floating-rate exposure also remains; a 1% rate increase was estimated to raise annual costs by approximately $3.2 million in cost of revenues and $4.5 million in interest expense.
Natural-gas price weakness reduced the estimated fair value of Par’s 46% Laramie Energy investment to $100–$123 million versus its $137.4 million carrying value. Management recorded no impairment, concluding the decline was not other-than-temporary, but warned sustained price pressure could lead to a future impairment.
Environmental exposure includes Wyoming refinery remediation, for which $17.0 million was accrued, and an estimated $11.6 million wastewater-treatment system project. Costs for some remediation elements remain unestimable. The filing also describes risks from emissions rules, renewable fuel standards and the IMO 2020 marine-fuel sulfur standard.
Par adopted lease accounting standard ASC 842 in January 2019, recording operating lease assets and liabilities; management said adoption materially affected the balance sheet but did not materially affect earnings or cash flows. The Washington purchase-price allocation remained preliminary.

Investor verification points

Separate underlying operating performance from the $66.6 million first-half tax benefit and the non-GAAP adjustments used in adjusted EBITDA and adjusted net income.
Assess post-acquisition Washington refinery contribution, integration, purchase-price allocation and financing costs against the reported increase in scale.
Review working-capital demands, inventory-financing capacity and refinancing or repayment requirements, including the December 2019 expiration of the Washington intermediation agreement.
Monitor refinery margins, derivative and inventory valuation effects, floating-rate exposure, and potential impairment of the Laramie investment.
Track capital spending against the $100–$110 million 2019 budget and evaluate environmental remediation, wastewater-project and evolving fuel-regulation costs.