Par Pacific Holdings, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; the filing also reports fourth-quarter results. Amounts are in U.S. dollars unless otherwise stated.
Business context and reporting period
Par Pacific operates refining, retail, and logistics businesses in Hawaii, Wyoming, Washington, and Idaho, and holds a 46% equity interest in Colorado natural-gas producer Laramie Energy. The company reported three operating segments: Refining, Retail, and Logistics.
In March 2018, Par acquired 33 retail outlets in Washington and Idaho for approximately $74.5 million. In December, it acquired certain Hawaii refinery assets for approximately $66.9 million, including cash and common stock. The Tacoma refinery acquisition closed on January 11, 2019, after year-end, for $326.7 million including working capital.
Financial and operating results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $3.411 billion | $2.443 billion |
| Operating income | $81.9 million | $94.0 million |
| Net income | $39.4 million | $72.6 million |
| Diluted earnings per share | $0.85 | $1.57 |
| Adjusted EBITDA (non-GAAP) | $132.1 million | $140.8 million |
| Cash from operating activities | $90.6 million | $106.5 million |
| Capital expenditures, excluding acquisitions | $48.4 million | $31.7 million |
Revenue rose approximately 40%, primarily reflecting higher crude prices and refining sales volumes, as well as the acquired Northwest retail business. Net income fell approximately 46%; management cited weaker Hawaii refining margins, a $10.5 million Tesoro earn-out settlement charge, higher acquisition and integration costs, lower Laramie equity earnings, and increased interest and depreciation. Approximate operating margin declined to 2.4% from 3.8%; net margin declined to 1.2% from 3.0%.
Segment operating income was $73.3 million in Refining (down from $86.0 million), $33.4 million in Logistics (roughly flat), and $37.2 million in Retail (up from $24.7 million). Refining was pressured by unfavorable Hawaii crude differentials and feedstock costs, partly offset by higher sales volumes, improved crack spreads, and lower RIN expense. Retail benefited from the acquired Northwest outlets and stronger prices and volumes.
Refining throughput averaged 91.3 thousand barrels per day, versus 89.2 thousand in 2017; refined-product sales averaged 100.3 thousand barrels per day, up from 90.7 thousand. The Singapore crack spread averaged $7.22 per barrel (2017: $7.18); the Wyoming 3-2-1 index averaged $22.69 (2017: $21.80).
Fourth-quarter 2018 revenue was $879.1 million, operating income $20.4 million, and net income $13.9 million. In fourth-quarter 2017, those figures were $663.1 million, $21.6 million, and $19.0 million, respectively.
Liquidity, debt, and cash flow
At December 31, 2018, cash and cash equivalents were $75.1 million, current assets $586.6 million, current liabilities $507.2 million, and long-term debt net of current maturities $392.6 million. The balance sheet also included $373.9 million of obligations under inventory financing agreements. The ABL revolver had no borrowings outstanding and a borrowing base of approximately $54.7 million; $13.5 million of letters of credit were outstanding.
Reported liquidity was $138.8 million at year-end and approximately $144.1 million at February 27, 2019. Operating cash flow declined to $90.6 million from $106.5 million. Investing cash outflow was $175.8 million, mainly for the retail and Hawaii asset acquisitions and capital spending; financing cash inflow was $41.9 million.
Year-end principal debt included $300 million of 7.75% secured notes due 2025 and $115 million of 5.00% convertible notes due 2021. For the January 2019 Tacoma acquisition, Par subsequently borrowed $250 million under a Goldman Sachs term loan and $45 million from Bank of Hawaii; the latter was due in full July 9, 2019. Management stated that expected operating cash flow and available capital resources should cover current capital, working-capital, and debt-service requirements for the next 12 months.
Outlook, risks, and unusual items
- Investment plans: The 2019 capital budget was $100–$110 million, including the Hawaii diesel hydrotreater, renewable-fuels handling and storage work at the Washington refinery, refinery turnaround preparation, and the Hawaii pipeline tie-in. The DHT project was estimated at $27 million, with startup expected in Q3 2019; it is intended to increase ULSD and jet-fuel production and support IMO 2020 compliance.
- Acquisition and operating outlook: Management expected throughput capacity to increase by approximately 80 thousand barrels per day in 2019 following the Hawaii expansion and Tacoma acquisition. The Tacoma assets began contributing only after the reporting year. Integration, financing, and operational performance remain important uncertainties.
- Regulatory exposure: Par estimated 2019 RIN costs of approximately $15.2 million, including the newly acquired Washington refinery. IMO 2020, renewable-fuel mandates, greenhouse-gas rules, and other environmental requirements could raise costs or affect product demand.
- Environmental obligations: Par had accrued $17.3 million for identified Wyoming refinery remediation components; some other costs remain unestimable. A replacement wastewater-treatment system was preliminarily estimated at $11.6 million. Additional wastewater penalties and pipeline integrity costs are possible. The company also remained subject to ongoing Hawaii consent-decree work.
- Leverage and financing: The post-year-end acquisition increased borrowings and floating-rate exposure. The short-dated $45 million Bank of Hawaii loan required refinancing or repayment by July 9, 2019. Debt covenants, restricted subsidiary distributions, and inventory-financing arrangements constrain financial flexibility.
- Market and operational risks: Earnings are sensitive to volatile crude and product prices, refining crack spreads, crude differentials, seasonal demand, refinery outages and turnarounds, transportation disruptions, and counterparty performance. Hawaii refinery union negotiations were ongoing after the collective bargaining agreement expired in January 2019.
- Other items: The company recorded a $10.5 million loss related to the Tesoro earn-out settlement. Approximately $1.5 billion of tax net operating loss carryforwards were reported, but substantially all deferred tax assets remained subject to a valuation allowance and usage depends on tax rules and ownership-change limitations. No cash dividends were anticipated in the near term.
Important facts for investors to verify
- Review the post-acquisition debt terms, refinancing or repayment of the $45 million Bank of Hawaii loan, covenants, and liquidity after the Tacoma acquisition.
- Assess Tacoma refinery integration, realized margins and throughput, and whether acquisition-related financing and costs match management’s expectations.
- Track Hawaii refining margins and crude differentials, 2019 RIN expense, and the expected timing, cost, and operating benefits of the DHT project and Hawaii pipeline tie-in.
- Monitor Wyoming environmental remediation estimates, wastewater-system costs, pipeline integrity spending, and the status of Hawaii consent-decree obligations.
- Compare reported GAAP earnings and operating cash flow with non-GAAP Adjusted EBITDA, including the effects of inventory financing, derivatives, and acquisition-related items.
- Confirm progress and costs for scheduled refinery turnarounds, union negotiations, and compliance with IMO 2020 and other fuel standards.