PAR PACIFIC HOLDINGS, INC. quarterly report, Q1 FY2019

Par Pacific Holdings, Inc. — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019. Par operates refining, retail and logistics businesses, with a 46% investment in Laramie Energy. Its three-refinery portfolio expanded when it acquired the Tacoma, Washington refinery and related logistics assets on January 11, 2019.

Financial performance

Metric	Q1 2019	Q1 2018
Revenue	$1.191 billion	$765.4 million
Operating income	$21.4 million	$27.7 million
Income (loss) before taxes	$(3.7) million	$15.2 million
Income tax benefit (expense)	$64.8 million	$(0.03) million
Net income	$61.1 million	$15.2 million
Diluted earnings per share	$1.14	$0.33
Adjusted EBITDA, non-GAAP	$47.6 million	$26.1 million
Adjusted net income, non-GAAP	$6.4 million	$8.2 million
Cash from (used in) operations	$(56.8) million	$12.6 million

Revenue increased 56%, largely reflecting the Washington acquisition and higher Hawaii sales volumes. Operating income declined despite higher revenue. The reported net income increase principally reflects a $65.4 million tax benefit from a partial release of the deferred-tax-asset valuation allowance following the acquisition; Par reported a pretax loss. Adjusted EBITDA increased, while adjusted net income declined. These are company-defined non-GAAP measures and are not substitutes for GAAP results.

Segment results: Refining operating income was $14.4 million versus $26.1 million; logistics operating income was $12.4 million versus $8.8 million; and retail operating income was $10.1 million versus $5.7 million. The Washington refinery contributed $245.8 million of revenue and a $3.1 million net loss for the period included in Par’s results; management attributed approximately $5.3 million of operating loss to the refinery segment. Hawaii refining adjusted gross margin per throughput barrel was $3.74 versus $5.20; Wyoming’s was $14.55 versus $13.96. Washington’s adjusted gross margin per barrel was $8.88 for its partial-quarter ownership period.

Balance sheet, debt and liquidity

• Cash and cash equivalents were $60.3 million at quarter-end, down from $75.1 million at December 31, 2018. Total assets were $2.648 billion and stockholders’ equity was $611.2 million.
• Long-term debt principal was $711.5 million; debt net of unamortized discount and financing costs was $676.8 million. Debt principal increased from $416.5 million at year-end, chiefly due to the $250 million Term Loan B used to finance the acquisition. The ABL revolver had no borrowings and a reported borrowing base of approximately $52.4 million.
• Inventory financing obligations were $629.1 million, compared with $373.9 million at year-end. These include financing arrangements supporting refinery crude and product inventories; they are distinct from the debt table.
• Par reported liquidity of $126.4 million, including $60.3 million cash, and stated it had access to the J. Aron deferred-payment arrangement and ABL facility. Management believed cash flows and available resources would cover capital expenditures, working capital and debt service for the next 12 months.
• Operating lease assets of $405.9 million and operating lease liabilities of $409.5 million were recognized following adoption of ASC 842 and the Washington acquisition.

Cash flow, investment and outlook

Operating cash use of $56.8 million reflected working-capital demands, including crude-oil supplier advances and higher receivables and inventory. Investing cash use was $288.7 million, principally the Washington acquisition and $17.9 million of capital expenditures. Financing provided $330.7 million, including borrowing proceeds and increased inventory-financing advances. Cash, cash equivalents and restricted cash ended the quarter at $61.0 million.

Management’s 2019 capital expenditure budget was $100 million to $110 million, including the Hawaii diesel hydrotreater project, Washington renewable-fuels processing and storage work, refinery turnaround preparation, Hawaii logistics tie-ins, maintenance and other projects. The filing gives no specific earnings or revenue guidance. Management said it believed liquidity was sufficient for the next 12 months, while noting that additional capital for significant business changes or refinancing might be sought and could not be assured on acceptable terms.

Material changes and notable items

• The $326.4 million Washington acquisition was completed in January, funded with cash, $250 million of Term Loan B borrowings, a $45 million Bank of Hawaii loan and approximately 2.4 million shares valued at $37.0 million. The purchase-price allocation remained preliminary.
• The $45 million Bank of Hawaii loan used at acquisition was repaid and replaced in March by a $45 million retail-property term loan secured by 21 Hawaii retail properties. This loan has floating-rate interest, a 2024 maturity and liquidity and property-related covenants.
• Q1 included $5.5 million of debt extinguishment and commitment costs, largely acquisition financing fees, and $2.9 million of acquisition and integration costs. Interest and financing costs rose to $18.7 million from $8.4 million.
• Commodity derivative fair-value movements were significant: the filing reports losses on J. Aron and MLC embedded repurchase-obligation derivatives. These accounting movements affected reported cost of revenues; Par uses non-GAAP adjustments for certain timing and valuation effects.
• Laramie Energy reported a $3.0 million net loss for the quarter; Par’s equity earnings were $0.3 million, down from $5.6 million. Par guarantees Laramie’s credit facility on a limited-recourse basis through a pledge of its subsidiary’s equity interest.

Risks, contingencies and controls

• Refining earnings, cash flow and liquidity are exposed to crude, feedstock, refined-product and RIN price volatility. Management estimated that a $1 per barrel change in average gross refining margins, based on quarterly throughput, would change annualized operating income by approximately $58.4 million. A 1% increase in applicable variable rates was estimated to increase annual cost of revenues and interest expense by approximately $3.1 million and $4.5 million, respectively. Par had not hedged interest-rate risk.
• Environmental compliance and remediation remain important exposures. The Wyoming refinery had $17.1 million accrued for identified remediation components; other elements were not reasonably estimable. A wastewater treatment replacement was estimated at approximately $11.6 million. Consent-decree work and changing emissions, fuel and IMO 2020 requirements may add costs or operating constraints.
• Two related Delta bankruptcy claims totaling approximately $22.4 million remained unresolved; Par had accrued approximately $0.5 million for claims considered probable and estimable. The filing also describes a United Steelworkers dispute and ongoing Wyoming environmental matters.
• Inventory financing, floating-rate debt, cross-default provisions, lender covenants and restrictions on subsidiary distributions constrain financial flexibility. Par reported compliance with debt covenants at March 31, 2019.
• Management reported effective disclosure controls as of March 31, 2019, and no material changes to risk factors from the 2018 Form 10-K.

Most important facts for investors to verify

• How much of reported net income and EPS reflects the one-time valuation-allowance release, versus recurring operating performance and cash generation.
• Whether the Washington refinery can improve from its initial operating loss, and whether acquisition synergies and the preliminary purchase-price allocation are realized as expected.
• The sustainability of refining and retail margins, including exposure to RIN obligations, commodity-price movements and the timing or availability of small-refinery exemptions.
• Working-capital requirements, inventory-financing balances and borrowing availability, particularly as the MLC intermediation agreement is scheduled to expire December 31, 2019.
• Debt service, floating-rate exposure, loan covenants and the company’s ability to fund its $100 million to $110 million capital budget while maintaining liquidity.
• Potential environmental remediation, consent-decree and Delta claim costs that are uncertain or not fully estimable.