PAR PACIFIC HOLDINGS, INC. annual report, FY2017

Par Pacific Holdings, Inc. — FY 2017 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; quarterly figures are unaudited. Par operates refining, retail and logistics businesses in Hawaii and Wyoming, and holds an equity investment in Colorado natural-gas producer Laramie Energy. Wyoming Refining was included for all of 2017, versus only from July 14 in 2016, affecting year-over-year comparability.

Financial and operating performance

Metric	FY 2017	FY 2016
Revenue	$2.443 billion	$1.865 billion
Operating income (loss)	$94.0 million	$(16.5) million
Net income (loss)	$72.6 million	$(45.8) million
Diluted EPS	$1.57	$(1.08)
Net cash from (used in) operating activities	$106.5 million	$(23.9) million
Capital expenditures	$31.7 million	$24.8 million

Operating margin was approximately 3.8% in 2017, compared with approximately negative 0.9% in 2016.
Adjusted EBITDA, a non-GAAP measure, was $140.8 million versus $33.5 million; Adjusted Net Income was $82.8 million versus an Adjusted Net Loss of $49.7 million.
Refining segment operating income was $86.0 million, versus a $7.8 million loss. Hawaii and Wyoming throughput averaged 73.7 thousand and 15.5 thousand barrels per day, respectively. The Mid-Pacific crack spread averaged $8.45 per barrel, up from $4.96; Wyoming’s 3-2-1 index averaged $21.80, versus $16.27 for its partial 2016 ownership period.
Retail operating income rose to $24.7 million from $22.2 million; retail fuel volumes increased 2%. Logistics operating income rose to $34.0 million from $21.4 million.
Fourth-quarter 2017 revenue was $663.1 million, operating income $21.6 million and net income $19.0 million.
Cash and cash equivalents were $118.3 million at year-end. Current assets were $603.5 million and current liabilities $471.0 million. Management reported liquidity of $209.0 million, including cash and available borrowing capacity.
Year-end debt carrying value was $384.8 million; principal was $415.0 million, consisting of $300 million of 7.75% secured notes due 2025 and $115 million of 5.00% convertible notes due 2021. Separately, inventory-financing obligations were $363.8 million. The $75 million ABL facility was undrawn, with a $48.7 million borrowing base available. Interest expense and financing costs were $31.6 million.

Material changes versus the prior comparable period

Revenue increased about 31%, primarily from higher crude prices and a full year of Wyoming Refining. Management attributed the earnings turnaround chiefly to stronger refining crack spreads and Wyoming’s full-year contribution.
Operating cash flow improved by $130.4 million to $106.5 million. Working-capital movements included a $146.5 million increase in inventories, partly offset by a $143.0 million increase in inventory-financing obligations.
In December 2017, the company issued $300 million of 7.75% senior secured notes, using net proceeds principally to repay several credit facilities and the J. Aron forward sale. It also established the borrowing-base ABL facility. Financing-agreement termination costs contributed $8.6 million of expense.
Laramie Energy contributed $18.4 million of equity earnings, versus $22.4 million of equity losses in 2016, reflecting higher production and gas prices and derivative results. Par owned 42.3% at year-end; a February 2018 transaction reduced its interest to 39.14%.

Outlook, commentary, risks and unusual items

Management expected cash flows and available capital resources to cover current capital expenditures, working capital and debt service for the next 12 months. The 2018 capital-expenditure budget was $50–$55 million, including initial Hawaii hydrotreater work, retail investment and Wyoming refinery expansion projects.
A January 2018 agreement provides for a $70 million purchase, plus inventory, of 33 Cenex-branded retail sites in Washington and Idaho; closing was expected in the first quarter of 2018 and remained subject to customary conditions. The filing also describes related supply and branding agreements.
Refining results remain exposed to volatile crude prices, crack spreads, regional demand, refinery outages and transportation constraints. The Hawaii refinery depends on the J. Aron supply-and-offtake arrangement, extended through May 2021; termination could require repurchasing inventory at then-current market prices.
Environmental obligations include $18.2 million accrued for understood Wyoming refinery remediation components and a preliminary estimated $11.6 million for a replacement wastewater-treatment system. Some remediation elements are not reasonably estimable. Hawaii Consent Decree compliance is estimated at $30 million; Tesoro had reimbursed $12.1 million of $12.9 million incurred by year-end for covered capital expenditures. The company also reported an assessed $279,000 pipeline penalty, paid in January 2018.
Par incurred $17.0 million for RINs in 2017 across its two refineries and estimated approximately $7 million per refinery for 2018. Regulatory changes or higher credit prices could raise costs.
Tesoro disputed the company’s 2015 and 2016 acquisition earn-out calculations, claiming an additional $4.3 million and $8.3 million, respectively; Par disputed the claims. Other disclosed matters include a union bargaining dispute scheduled for arbitration and two predecessor-bankruptcy claims totaling about $22.4 million. Par accrued approximately $0.5 million for claims considered probable and estimable and said full settlement through stock issuance was remote.
The company reported approximately $1.6 billion of federal NOL carryforwards, but maintained a valuation allowance against substantially all deferred tax assets. The Tax Cuts and Jobs Act reduced the federal corporate tax rate and changed other tax rules; the overall effect was not yet clear.
Par revised its proved-undeveloped-reserve booking approach to a two-year drilling and three-year completion horizon, contributing to negative revisions. SEC staff comments concerning Laramie proved undeveloped reserves remained unresolved. Reserve estimates and Laramie’s development schedule are therefore important judgment areas.
Both refineries were scheduled for significant maintenance turnarounds in 2019–2020. Laramie’s credit facility generally restricts distributions to owners, limiting Par’s ability to receive cash from that investment.

Important facts investors should verify

Reconcile reported liquidity with the borrowing base, inventory-financing obligations, working-capital needs and the cash requirements of the planned CHS acquisition and 2018 capital program.
Review the maturity, conversion and dilution terms of the $115 million convertible notes, the 7.75% secured notes’ covenants, and collateral priorities under the notes, ABL facility and J. Aron agreements.
Track refinery margins, throughput, turnaround execution, Hawaii hydrotreater spending and the extent to which the 2017 earnings improvement reflects sustainable operating conditions.
Monitor Wyoming remediation accruals and wastewater-system estimates, Hawaii Consent Decree work and reimbursements, RIN expense, and the outcome of the Tesoro, union and bankruptcy-related matters.
Confirm CHS transaction closing, final consideration and integration results; assess the consequences of the reduced Laramie ownership interest and reserve-booking revisions, including resolution of SEC staff comments.