10-Q 1 a2018093010q20180930.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
________________________________________________________________________________________________________________________
FORM 10-Q
________________________________________________________________________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from to

Commission File No. 001-36550
________________________________________________________________________________________________________________________
PAR PACIFIC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________________________________________________________________________
Delaware
84-1060803
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
825 Town & Country Lane, Suite 1500
 
Houston, Texas
77024
(Address of principal executive offices)
(Zip Code)
(281) 899-4800 
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
¨
 
Accelerated filer
ý
 
 
 
 
 
Non-accelerated filer
¨
 
Smaller reporting company
¨

 
 
 
 
 
 
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. Yes  ¨ No  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý

45,876,894 shares of Common Stock, $0.01 par value, were outstanding as of November 2, 2018.
 




PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS


The terms “Par,” “Company,” “we,” “our,” and “us” refer to Par Pacific Holdings, Inc. and its consolidated subsidiaries unless the context suggests otherwise.



PART I - FINANCIAL INFORMATION 
Item 1. FINANCIAL STATEMENTS
PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share and per share data)
 
September 30, 2018
 
December 31, 2017
ASSETS
 

 
 

Current assets
 
 
 

Cash and cash equivalents
$
87,734

 
$
118,333

Restricted cash
743

 
744

Total cash, cash equivalents, and restricted cash
88,477

 
119,077

Trade accounts receivable
133,026

 
121,831

Inventories
358,581

 
345,357

Prepaid and other current assets
10,239

 
17,279

Total current assets
590,323

 
603,544

Property and equipment
 
 
 

Property, plant, and equipment
588,255

 
529,238

Proved oil and gas properties, at cost, successful efforts method of accounting
400

 
400

Total property and equipment
588,655

 
529,638

Less accumulated depreciation and depletion
(105,888
)
 
(79,622
)
Property and equipment, net
482,767

 
450,016

Long-term assets
 
 
 

Investment in Laramie Energy, LLC
131,466

 
127,192

Intangible assets, net
24,611

 
26,604

Goodwill
153,397

 
107,187

Other long-term assets
23,919

 
32,864

Total assets
$
1,406,483

 
$
1,347,407

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 

Current liabilities
 
 
 

Obligations under inventory financing agreements
$
351,188

 
$
363,756

Accounts payable
68,592

 
52,543

Deferred revenue
8,493

 
9,522

Accrued taxes
14,409

 
17,687

Other accrued liabilities
45,905

 
27,444

Total current liabilities
488,587

 
470,952

Long-term liabilities
 
 
 

Long-term debt, net of current maturities
389,598

 
384,812

Common stock warrants
7,204

 
6,808

Long-term capital lease obligations
5,682

 
1,220

Other liabilities
38,006

 
35,896

Total liabilities
929,077

 
899,688

Commitments and contingencies (Note 12)


 


Stockholders’ equity
 
 


Preferred stock, $0.01 par value: 3,000,000 shares authorized, none issued

 

Common stock, $0.01 par value; 500,000,000 shares authorized at September 30, 2018 and December 31, 2017, 46,009,104 shares and 45,776,087 shares issued at September 30, 2018 and December 31, 2017, respectively
460

 
458

Additional paid-in capital
597,439

 
593,295

Accumulated deficit
(122,637
)
 
(148,178
)
Accumulated other comprehensive income
2,144

 
2,144

Total stockholders’ equity
477,406

 
447,719

Total liabilities and stockholders’ equity
$
1,406,483

 
$
1,347,407

 
See accompanying notes to the condensed consolidated financial statements.

1


PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Revenues
$
909,781

 
$
610,506

 
$
2,531,616

 
$
1,780,004




 
 
 
 
 
 
Operating expenses
 

 
 

 
 
 
 
Cost of revenues (excluding depreciation)
822,785

 
509,476

 
2,232,608

 
1,485,118

Operating expense (excluding depreciation)
54,905

 
51,718

 
158,975

 
153,741

Depreciation, depletion, and amortization
13,192

 
11,304

 
39,004

 
33,848

General and administrative expense (excluding depreciation)
11,871

 
11,292

 
35,981

 
34,688

Acquisition and integration expense
2,134

 

 
3,515

 
253

Total operating expenses
904,887

 
583,790

 
2,470,083

 
1,707,648




 
 
 
 
 
 
Operating income
4,894

 
26,716

 
61,533

 
72,356




 
 
 
 
 
 
Other income (expense)
 

 
 

 
 
 
 
Interest expense and financing costs, net
(10,425
)
 
(7,419
)
 
(29,346
)
 
(25,500
)
Loss on termination of financing agreements

 

 

 
(1,804
)
Other income, net
85

 
649

 
861

 
886

Change in value of common stock warrants
(1,067
)
 
(975
)
 
(396
)
 
(2,211
)
Change in value of contingent consideration

 

 
(10,500
)
 

Equity earnings from Laramie Energy, LLC
1,050

 
553

 
4,274

 
11,651

Total other income (expense), net
(10,357
)
 
(7,192
)
 
(35,107
)
 
(16,978
)



 
 
 
 
 
 
Income (loss) before income taxes
(5,463
)
 
19,524

 
26,426

 
55,378

Income tax expense
(359
)
 
(700
)
 
(885
)
 
(1,762
)
Net income (loss)
$
(5,822
)
 
$
18,824

 
$
25,541

 
$
53,616

 
 
 
 
 
 
 
 
Income (loss) per share


 


 
 
 
 
Basic
$
(0.13
)
 
$
0.41

 
$
0.55

 
$
1.16

Diluted
$
(0.13
)
 
$
0.41

 
$
0.55

 
$
1.16

Weighted-average number of shares outstanding
 

 
 

 
 
 
 
Basic
45,709

 
45,561

 
45,676

 
45,505

Diluted
45,709

 
51,992

 
45,721

 
45,527

 


 






See accompanying notes to the condensed consolidated financial statements.

2







PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 

 
 

Net income
$
25,541

 
$
53,616

Adjustments to reconcile net income to cash provided by operating activities:
 

 
 

Depreciation, depletion, and amortization
39,004

 
33,848

Loss on termination of financing agreements

 
1,804

Non-cash interest expense
5,358

 
6,189

Change in value of common stock warrants
396

 
2,211

Deferred taxes
839

 
462

Stock-based compensation
4,799

 
5,803

Unrealized loss on derivative contracts
8,105

 
557

Equity earnings from Laramie Energy, LLC
(4,274
)
 
(11,651
)
Net changes in operating assets and liabilities:
 

 
 

Trade accounts receivable
(12,819
)
 
12,070

Prepaid and other assets
1,868

 
46,747

Inventories
(8,994
)
 
(121,040
)
Obligations under inventory financing agreements
(43,250
)
 
89,549

Accounts payable and other accrued liabilities
35,327

 
(14,709
)
Net cash provided by (used in) operating activities
51,900

 
105,456

Cash flows from investing activities:
 

 
 

Acquisitions of businesses, net of cash acquired
(74,331
)
 

Capital expenditures
(30,198
)
 
(19,888
)
Proceeds from sale of assets
805

 
19

Net cash used in investing activities
(103,724
)
 
(19,869
)
Cash flows from financing activities:
 

 
 

Proceeds from borrowings
106,500

 
239,538

Repayments of borrowings
(114,926
)
 
(292,684
)
Net borrowings (repayments) on deferred payment arrangement
30,682

 
(1,493
)
Payment of deferred loan costs
(379
)
 
(50
)
Other financing activities, net
(653
)
 
(872
)
Net cash provided by (used in) financing activities
21,224

 
(55,561
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
(30,600
)
 
30,026

Cash, cash equivalents, and restricted cash at beginning of period
119,077

 
49,018

Cash, cash equivalents, and restricted cash at end of period
$
88,477

 
$
79,044

Supplemental cash flow information:
 

 
 

Net cash paid for:
 
 
 
Interest
$
(12,981
)
 
$
(15,168
)
Taxes
(48
)
 
(1,115
)
Non-cash investing and financing activities:
 

 
 

Accrued capital expenditures
$
4,048

 
$
4,469

 


See accompanying notes to the condensed consolidated financial statements.

3

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017




Note 1Overview
Par Pacific Holdings, Inc. and its wholly owned subsidiaries (“Par” or the “Company”) own, manage, and maintain interests in energy and infrastructure businesses. Currently, we operate in three primary business segments:
1) Refining - Our refinery in Kapolei, Hawaii, produces ultra-low sulfur diesel (“ULSD”), gasoline, jet fuel, marine fuel, low sulfur fuel oil (“LSFO”), and other associated refined products primarily for consumption in Hawaii. Our refinery in Newcastle, Wyoming, produces gasoline, ULSD, jet fuel, and other associated refined products that are primarily marketed in Wyoming and South Dakota.
2) Retail - Our retail outlets in Hawaii sell gasoline, diesel, and retail merchandise throughout the islands of Oahu, Maui, Hawaii, and Kauai. Our Hawaii retail network includes Hele and “76” branded retail sites, company-operated convenience stores, 7-Eleven operated convenience stores, other sites operated by third parties, and unattended cardlock stations. We recently completed the rebranding of 23 of our 34 company-operated convenience stores in Hawaii to “nomnom,” a new proprietary brand. Our retail outlets in Washington and Idaho sell gasoline, diesel, and retail merchandise and operate under the “Cenex®” and “Zip Trip®” brand names.
3) Logistics - We own and operate terminals, pipelines, a single-point mooring (“SPM”), and trucking operations to distribute refined products throughout the islands of Oahu, Maui, Hawaii, Molokai, and Kauai. In addition, we own and operate a crude oil pipeline gathering system, a refined products pipeline, storage facilities, and loading racks in Wyoming. We also own and operate a jet fuel storage facility and pipeline that serve the Ellsworth Air Force Base in South Dakota.
As of September 30, 2018, we owned a 39.1% equity investment in Laramie Energy, LLC (“Laramie Energy”); see Note 18—Subsequent Events for further information. Laramie Energy is focused on producing natural gas in Garfield, Mesa, and Rio Blanco Counties, Colorado.
Our Corporate and Other reportable segment includes administrative costs and several small non-operated oil and gas interests that were owned by our predecessor.
Note 2Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The condensed consolidated financial statements include the accounts of Par and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain amounts previously reported in our condensed consolidated financial statements for prior periods have been reclassified to conform with the current presentation.
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Form 10-Q, and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. The condensed consolidated financial statements contained in this report include all material adjustments of a normal recurring nature that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the complete fiscal year or for any other period. The condensed consolidated balance sheet as of December 31, 2017 was derived from our audited consolidated financial statements as of that date. These condensed consolidated financial statements should be read together with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.
Use of Estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. Actual amounts could differ from these estimates.
Inventories
Beginning in 2018, Inventories also include Renewable Identification Numbers (“RINs”). RINs are stated at the lower of cost or net realizable value. The net cost of RINs is recognized within Cost of revenues (excluding depreciation) in our condensed consolidated statements of operations.

4

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



Cost Classifications
Cost of revenues (excluding depreciation) includes the hydrocarbon-related costs of inventory sold, transportation costs of delivering product to customers, crude oil consumed in the refining process, costs to satisfy our RINs obligations, and certain hydrocarbon fees and taxes. Cost of revenues (excluding depreciation) also includes the unrealized gains (losses) on derivatives and inventory valuation adjustments. Certain direct operating expenses related to our logistics segment are also included in Cost of revenues (excluding depreciation).
Operating expense (excluding depreciation) includes direct costs of labor, maintenance and services, energy and utility costs, property taxes, and environmental compliance costs as well as chemicals and catalysts and other direct operating expenses.
The following table summarizes depreciation expense excluded from each line item in our condensed consolidated statements of operations (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Cost of revenues
 
$
1,620

 
$
1,568

 
$
4,866

 
$
4,510

Operating expense
 
7,155

 
5,523

 
20,560

 
16,701

General and administrative expense
 
1,297

 
610

 
3,345

 
1,981

Recent Accounting Pronouncements
There have been no developments to recent accounting pronouncements, including the expected dates of adoption and estimated effects on our financial condition, results of operations, and cash flows, from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017, except for the following:
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02” or “ASC Topic 842”). ASU 2016-02 requires lessees to recognize all leases, including operating leases, on the balance sheet as a right-of-use asset or lease liability, unless the lease is a short-term lease. ASU 2016-02 also requires additional disclosures regarding leasing arrangements. In January 2018, the FASB issued ASU No. 2018-01 (“ASU 2018-01”), which clarifies the related transition and accounting for land easements. In July 2018, the FASB issued ASU No. 2018-11 (“ASU 2018-11”), which allows for an option to apply the transition provisions of ASC Topic 842 at the adoption date versus at the earliest comparative period presented in the financial statements and an optional practical expedient that permits lessors to not separate non-lease components from the associated lease component if certain conditions are met. These three ASUs and other amendments and technical corrections to ASC Topic 842 are effective for interim periods and fiscal years beginning after December 15, 2018, and early application is permitted. We will adopt ASC Topic 842 on January 1, 2019 using the modified retrospective approach. We also plan to apply certain practical expedients that allow us, among other things, not to reassess lease contracts that commenced prior to the effective date. We are in the process of determining the impact this guidance will have on our financial condition, results of operations, and cash flows. We have formally established a working group to assess the amended lease guidance in ASC Topic 842, including its impact on our business processes, accounting systems, controls, and financial statement disclosures. As part of our evaluation, the working group is reviewing existing lease contracts and other arrangements that may include an embedded lease. Our existing lease contracts include leases related to retail facilities, railcars, barges, and other facilities used in the storage, transportation, and sale of crude oil and refined products. The adoption of ASC Topic 842 will have a material impact on our consolidated financial statements, primarily due to the recognition of right-of-use assets and lease liabilities on our consolidated balance sheet. The new standard will also require additional disclosures for financing and operating leases.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02”). This ASU permits entities to elect to reclassify to retained earnings the stranded effects in Accumulated Other Comprehensive Income related to the changes in the statutory tax rate that were charged to income from continuing operations under the requirements of FASB ASC Topic 740, “Income Taxes.” The guidance in ASU 2018-02 is effective for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. Management is still evaluating the effects of the available adoption methods and has not yet determined which method will be elected.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13”). This ASU amends, adds, and removes certain disclosure requirements under FASB

5

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



ASC Topic 820 “Fair Value Measurement.” The guidance in ASU 2018-13 is effective for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of ASU 2018-13 on our disclosures.
In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14”). This ASU amends, adds, and removes certain disclosure requirements under FASB ASC Topic 715 “CompensationRetirement Benefits.” The guidance in ASU 2018-14 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of ASU 2018-14 on our disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (ASU 2018-15”). This ASU requires entities to account for implementation costs incurred in a cloud computing agreement that is a service contract under the guidance in FASB ASC Topic 350, “Goodwill and Intangible Assets,” which results in a capitalized and amortizable intangible asset instead of expensing such costs as required under the current guidance. The guidance in ASU 2018-15 is effective for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of ASU 2018-15 on our financial condition, results of operations, and cash flows.
Accounting Principles Adopted
On January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended by other ASUs issued since May 2014 (“ASU 2014-09” or “ASC Topic 606”), using the modified retrospective method as permitted. Under this method, the cumulative effect of initially applying ASU 2014-09 is recognized as an adjustment to the opening balance of retained earnings (or accumulated deficit) and revenues reported in the periods prior to the date of adoption are not changed. Because the adoption of ASU 2014-09 did not have a material impact on the amount or timing of revenues recognized for the sale of refined products, we did not make such an adjustment to retained earnings. Please read Note 5—Revenue Recognition for further information.
On January 1, 2018, we adopted ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) and ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). The primary purpose of ASU 2016-15 was to reduce the diversity in practice relating to eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. ASU 2016-18 required that an entity include restricted cash and restricted cash equivalents within its statement of cash flows and in the reconciliation to the statement of operations. As the new guidance must be applied using a retrospective transition method, we have also retrospectively revised the comparative period statement of cash flows to reflect the adoption of these ASUs. The adoption of these ASUs did not have a material impact on our financial condition, results of operations, or cash flows.
On January 1, 2018, we adopted ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). This ASU updated the definition of a business combination and provided a framework for determining whether a transaction involves an asset or a business. The adoption of this ASU changed the policy under which we perform our assessments and accounting for future acquisition or disposal transactions, including the Northwest Retail Acquisition and Hawaii Refinery Expansion. Please read Note 4—Acquisitions for further information.
On January 1, 2018, we adopted ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). This ASU required entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented. In addition, the ASU required entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines. As the other components of our net benefit cost are not material, we have not retrospectively revised our comparative periods presented in the statement of operations.
On January 1, 2018, we adopted ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). The primary purpose of this ASU was to reduce the diversity in practice and cost and complexity in applying the guidance in Topic 718 related to the change to terms or conditions of a share-based payment award. The adoption of ASU 2017-09 did not have a material impact on our financial condition, results of operations, or cash flows.

6

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”). Under ASU 2018-05, an entity would estimate, to the extent possible, the impacts of the Tax Cut and Jobs Act enacted on December 22, 2017 (“U.S. tax reform”) and then adjust the estimates when better information is available or the amount becomes determinable over something similar to the measurement period under business combination guidance. This ASU was effective upon issuance. As of September 30, 2018, we believe the impacts of the U.S. tax reform have been reasonably estimated and recorded within our condensed consolidated financial statements.
Note 3Investment in Laramie Energy, LLC
As of September 30, 2018, we had a 39.1% ownership interest in Laramie Energy; see Note 18—Subsequent Events for further information. Laramie Energy is focused on producing natural gas in Garfield, Mesa, and Rio Blanco Counties, Colorado. On February 28, 2018, Laramie Energy closed on a purchase and contribution agreement with an unaffiliated third party that contributed all of its oil and gas properties located in the Piceance Basin and a $20.0 million cash payment, collectively with a fair market value of $28.1 million, into Laramie Energy in exchange for 70,227 of Laramie Energy’s newly issued Class A Units. The unaffiliated third party also contributed a $3.5 million cash payment for asset reclamation liabilities related to the properties conveyed. As a result of this transaction, our ownership interest in Laramie Energy decreased from 42.3% to 39.1%.
Laramie Energy has a $400 million revolving credit facility with a borrowing base currently set at $250 million that is secured by a lien on its natural gas and crude oil properties and related assets. As of September 30, 2018, the balance outstanding on the revolving credit facility was approximately $193.5 million. We are guarantors of Laramie Energy’s credit facility, with recourse limited to the pledge of our equity interest of our wholly owned subsidiary, Par Piceance Energy Equity, LLC. Under the terms of its credit facility, Laramie Energy is generally prohibited from making future cash distributions to its owners, including us.
The change in our equity investment in Laramie Energy is as follows (in thousands):
 
Nine Months Ended September 30, 2018
Beginning balance
$
127,192

Equity earnings from Laramie Energy
782

Accretion of basis difference
3,492

Ending balance
$
131,466

Summarized financial information for Laramie Energy is as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
Current assets
$
18,910

 
$
18,757

Non-current assets
796,316

 
720,444

Current liabilities
37,187

 
42,149

Non-current liabilities
288,965

 
237,497

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Natural gas and oil revenues
$
58,557

 
$
38,141

 
$
151,988

 
$
114,178

Income (loss) from operations
6,152

 
133

 
11,642

 
(162
)
Net (loss) income
(152
)
 
(1,838
)
 
(1,708
)
 
18,102

Laramie Energy’s net loss for the three and nine months ended September 30, 2018 includes $20.7 million and $52.7 million of depreciation, depletion, and amortization (“DD&A”) and $3.2 million and $6.7 million of unrealized losses on derivative instruments, respectively. Laramie Energy’s net income (loss) for the three and nine months ended September 30, 2017 includes $12.3 million and $38.1 million of DD&A and $2.3 million and $35.2 million of unrealized gains on derivative instruments, respectively.
At September 30, 2018 and December 31, 2017, our equity in the underlying net assets of Laramie Energy exceeded the carrying value of our investment by approximately $60.0 million and $67.2 million, respectively. This difference arose due to lack of control and marketability discounts and an other-than-temporary impairment of our equity investment in Laramie Energy in

7

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



2015. We attributed this difference to natural gas and crude oil properties and are amortizing the difference over 15 years based on the estimated timing of production of proved reserves.
Note 4Acquisitions
Northwest Retail Acquisition
On January 9, 2018, we entered into an Asset Purchase Agreement with CHS, Inc. to acquire twenty-one (21) owned retail gasoline, convenience store facilities and twelve (12) leased retail gasoline, convenience store facilities, all at various locations in Washington and Idaho (collectively, “Northwest Retail”). On March 23, 2018, we completed the acquisition for cash consideration of approximately $75 million (the “Northwest Retail Acquisition”).
As part of the Northwest Retail Acquisition, Par and CHS, Inc. entered into a multi-year branded petroleum marketing agreement for the continued supply of Cenex®-branded refined products to the acquired Cenex® Zip Trip convenience stores. In addition, the parties also entered into a multi-year supply agreement pursuant to which Par will supply refined products to CHS, Inc. within the Rocky Mountain and Pacific Northwest markets.
We accounted for the acquisition of Northwest Retail as a business combination whereby the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. Goodwill recognized in the transaction was attributable to opportunities expected to arise from combining our operations with Northwest Retail and utilization of our net operating loss carryforwards, as well as trade names and other intangible assets that do not qualify for separate recognition. Goodwill recognized as a result of the Northwest Retail Acquisition is expected to be deductible for income tax reporting purposes.
A summary of the preliminary fair value of the assets acquired and liabilities assumed is as follows (in thousands):
Cash
$
200

Inventories
4,138

Prepaid and other current assets
243

Property, plant, and equipment
30,230

Goodwill (1)
46,210

Accounts payable and other current liabilities
(759
)
Long-term capital lease obligations
(5,244
)
Other non-current liabilities
(487
)
Total
$
74,531

________________________________________________________
(1) The total goodwill balance of $46.2 million was allocated to our retail segment.
We have recorded a preliminary estimate of the fair value of the assets acquired and liabilities assumed and expect to finalize the purchase price allocation during the fourth quarter of 2018. During the three months ended September 30, 2018, the purchase price allocation was adjusted to record a decrease of $3.3 million to intangible assets and a decrease of $0.8 million to other non-current liabilities. Goodwill increased $2.5 million as a result of these adjusting entries recorded during the three months ended September 30, 2018
We incurred $0.6 million of acquisition costs related to the Northwest Retail Acquisition for the nine months ended September 30, 2018. These costs are included in Acquisition and integration expense on our condensed consolidated statement of operations. No acquisition costs related to the Northwest Retail Acquisition were incurred during the three months ended September 30, 2018.
Hawaii Refinery Expansion
On August 29, 2018, following IES Downstream, LLC’s (“IES”) announcement to cease refining operations, we entered into a Topping Unit Purchase Agreement with IES to purchase certain of IES’s refining units and related assets plus certain hydrocarbon and non-hydrocarbon inventory (collectively, the “Hawaii Refinery Expansion”). We agreed to purchase the assets for a purchase price of $45 million, payable in $30 million in cash and 860,502 shares of our common stock at closing. The purchase price will be adjusted by the value of the inventory at closing, with the adjustment for the non-hydrocarbon inventory to be paid

8

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



for by the issuance of up to 286,834 additional shares. The Hawaii Refinery Expansion is expected to close before the end of the fourth quarter of 2018 and is subject to certain closing conditions.
Note 5Revenue Recognition
On January 1, 2018, we adopted ASU 2014-09 (ASC Topic 606) using the modified retrospective method applied to all contracts that were not completed as of January 1, 2018. As such, the comparative financial information for prior periods has not been adjusted and continues to be reported under FASB ASC Topic 605, “Revenue Recognition.” We did not identify any significant differences in our existing revenue recognition policies that require modification under the new standard; therefore, we did not recognize a cumulative adjustment on opening equity as of January 1, 2018.
As of September 30, 2018 and December 31, 2017, receivables from contracts with customers were $116.2 million and $112.3 million, respectively. Our refining segment recognizes deferred revenues when cash payments are received in advance of delivery of products to the customer. Deferred revenue was $8.5 million and $9.5 million as of September 30, 2018 and December 31, 2017, respectively. We have elected to apply a practical expedient not to disclose the value of unsatisfied performance obligations for contracts with an original expected duration of less than one year.
Refining and Retail
Our refining and retail segment revenues are primarily associated with the sale of refined products. We recognize revenues upon delivery of refined products to a customer, which is the point in time at which title and risk of loss is transferred to the customer. The refining segment’s contracts with its customers state the terms of the sale, including the description, quantity, delivery terms, and price of each product sold. Payments from customers are generally due in full within 2 to 30 days of product delivery or invoice date.
We account for certain transactions on a net basis under FASB ASC Topic 845, “Nonmonetary Transactions.” These transactions include nonmonetary crude oil and refined product exchange transactions, certain crude oil buy/sell arrangements, and sale and purchase transactions entered into with the same counterparty that are deemed to be in contemplation with one another.
Upon adoption of ASC Topic 606, we made an accounting policy election to apply the sales tax practical expedient, whereby all taxes assessed by a governmental authority that are both imposed on and concurrent with a revenue-producing transaction and collected from our customers will be recognized on a net basis within Cost of revenues (excluding depreciation). This change in our accounting policy did not have a material impact on our condensed consolidated financial information for the three and nine months ended September 30, 2018.
Logistics
We recognize transportation and storage fees as services are provided to a customer. Substantially all of our logistics revenues represent intercompany transactions that are eliminated in consolidation.
The following table provides information about disaggregated revenue by major product line and includes a reconciliation of the disaggregated revenue with reportable segments (in thousands):
Three Months Ended September 30, 2018
 
Refining
 
Logistics
 
Retail
Product or service:
 
 
 
 
 
 
Gasoline
 
$
260,392

 
$

 
$
89,358

Distillates (1)
 
466,148

 

 
11,282

Other refined products (2)
 
124,051

 

 

Merchandise
 

 

 
24,330

Transportation and terminalling services
 

 
30,660

 

Total segment revenues
 
$
850,591

 
$
30,660

 
$
124,970


9

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



Nine Months Ended September 30, 2018
 
Refining
 
Logistics
 
Retail
Product or service:
 
 
 
 
 
 
Gasoline
 
$
755,523

 
$

 
$
232,314

Distillates (1)
 
1,318,645

 

 
29,403

Other refined products (2)
 
317,094

 

 

Merchandise
 

 

 
61,536

Transportation and terminalling services
 

 
95,016

 

Total segment revenues
 
$
2,391,262

 
$
95,016

 
$
323,253

_______________________________________________________
(1)
Distillates primarily include diesel and jet fuel.
(2)
Other refined products include fuel oil, gas oil, and naphtha.
Note 6Inventories
Inventories at September 30, 2018 consisted of the following (in thousands):
 
Titled Inventory
 
Supply and Offtake Agreements (1)
 
Total
Crude oil and feedstocks
$
10,632

 
$
107,396

 
$
118,028

Refined products and blendstock
78,600

 
132,613

 
211,213

Warehouse stock and other (2)
29,340

 

 
29,340

Total
$
118,572

 
$
240,009

 
$
358,581

Inventories at December 31, 2017 consisted of the following (in thousands):
 
Titled Inventory
 
Supply and Offtake Agreements (1)
 
Total
Crude oil and feedstocks
$
93,970

 
$
56,014

 
$
149,984

Refined products and blendstock
63,505

 
108,917

 
172,422

Warehouse stock and other
22,951

 

 
22,951

Total
$
180,426

 
$
164,931

 
$
345,357

________________________________________________________
(1)
Please read Note 8—Inventory Financing Agreements for further information.
(2)
Includes $6.0 million of RINs and environmental credits.
As of September 30, 2018 and December 31, 2017, there was no reserve for the lower of cost or net realizable value of inventory.
Note 7Prepaid and Other Current Assets
Prepaid and other current assets at September 30, 2018 and December 31, 2017 consisted of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Collateral posted with broker for derivative instruments
$
2,969

 
$
215

Prepaid insurance
109

 
7,547

Derivative assets
554

 
4,296

Other
6,607

 
5,221

Total
$
10,239

 
$
17,279


10

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



Note 8Inventory Financing Agreements
Supply and Offtake Agreements
On June 1, 2015, we entered into several agreements with J. Aron & Company (“J. Aron”) to support the operations of our Hawaii refinery (the “Supply and Offtake Agreements”). On May 8, 2017, we and J. Aron amended the Supply and Offtake Agreements and extended the term through May 31, 2021 with a one-year extension option upon mutual agreement of the parties. As part of this amendment, J. Aron may enter into agreements with third parties whereby J. Aron will remit payments to these third parties for refinery procurement contracts for which we will become immediately obligated to reimburse J. Aron. As of September 30, 2018, we had no obligations due to J. Aron under this letter of credit agreement. On December 21, 2017, in connection with the issuance of the 7.75% Senior Secured Notes, we amended and restated the Supply and Offtake Agreements to update the terms of the collateral and include minimum liquidity requirements. On June 27, 2018, we and J. Aron amended the Supply and Offtake Agreements to increase the amount that we may defer under the deferred payment arrangement. Prior to June 27, 2018, we had the right to defer payments owed to J. Aron up to the lesser of $125 million or 85% of eligible accounts receivable and inventory. Effective June 27, 2018, we have the right to defer payments owed to J. Aron up to the lesser of $165 million or 85% of eligible accounts receivable and inventory.
During the term of the Supply and Offtake Agreements, we and J. Aron will identify mutually acceptable contracts for the purchase of crude oil from third parties. Per the Supply and Offtake Agreements, J. Aron will provide up to 94 thousand barrels per day of crude oil to our Hawaii refinery. Additionally, we agreed to sell and J. Aron agreed to buy, at market prices, refined products produced at our Hawaii refinery. We will then repurchase the refined products from J. Aron prior to selling the refined products to our retail operations or to third parties. The agreements also provide for the lease of crude oil and certain refined product storage facilities to J. Aron. Following the expiration or termination of the Supply and Offtake Agreements, we are obligated to purchase the crude oil and refined product inventories then owned by J. Aron and located at the leased storage facilities at then-current market prices.
Though title to the crude oil and certain refined product inventories resides with J. Aron, the Supply and Offtake Agreements are accounted for similar to a product financing arrangement; therefore, the crude oil and refined products inventories will continue to be included on our condensed consolidated balance sheets until processed and sold to a third party. Each reporting period, we record a liability in an amount equal to the amount we expect to pay to repurchase the inventory held by J. Aron based on current market prices.
For the three and nine months ended September 30, 2018, we incurred approximately $5.0 million and $15.8 million in handling fees related to the Supply and Offtake Agreements, respectively, which is included in Cost of revenues (excluding depreciation) on our condensed consolidated statements of operations. For the three and nine months ended September 30, 2017, we incurred approximately $3.4 million and $9.8 million in handling fees related to the Supply and Offtake Agreements, respectively. For the three and nine months ended September 30, 2018, Interest expense and financing costs, net on our condensed consolidated statements of operations includes approximately $1.3 million and $3.3 million of expenses related to the Supply and Offtake Agreements, respectively. For the three and nine months ended September 30, 2017, Interest expense and financing costs, net on our condensed consolidated statements of operations includes approximately $0.8 million and $2.3 million of expenses related to the Supply and Offtake Agreements, respectively.
The Supply and Offtake Agreements also include a deferred payment arrangement (“Deferred Payment Arrangement”) whereby we can defer payments owed under the agreements up to the lesser of $165 million or 85% of the eligible accounts receivable and inventory. Upon execution of the Supply and Offtake Agreements, we paid J. Aron a deferral arrangement fee of $1.3 million. The deferred amounts under the Deferred Payment Arrangement bear interest at a rate equal to three-month LIBOR plus 3.75% per annum. We also agreed to pay a deferred payment availability fee equal to 0.75% of the unused capacity under the Deferred Payment Arrangement. Amounts outstanding under the Deferred Payment Arrangement are included in Obligations under inventory financing agreements on our condensed consolidated balance sheets. Changes in the amount outstanding under the Deferred Payment Arrangement are included within Cash flows from financing activities on the condensed consolidated statements of cash flows. As of September 30, 2018 and December 31, 2017, the capacity of the Deferred Payment Arrangement was $101.7 million and $83.1 million, respectively. As of September 30, 2018 and December 31, 2017, we had $71.8 million and $41.1 million outstanding, respectively.
Under the Supply and Offtake Agreements, we pay or receive certain fees from J. Aron based on changes in market prices over time. In February 2016, we fixed the market fee for the period from December 1, 2016 through May 31, 2018 for $14.6 million to be settled in eighteen equal monthly payments. In 2017, we fixed the market fee for the period from June 1, 2018 through May 2021 for an additional $2.2 million. The receivable from J. Aron was recorded as a reduction to our Obligations under inventory

11

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



financing agreements pursuant to our Master Netting Agreement. As of September 30, 2018 and December 31, 2017, the receivable was $2.2 million and $7.1 million, respectively.
The agreements also provide us with the ability to economically hedge price risk on our inventories and crude oil purchases. Please read Note 10—Derivatives for further information.
Note 9Debt
The following table summarizes our outstanding debt (in thousands):
 
September 30, 2018
 
December 31, 2017
5.00% Convertible Senior Notes due 2021
$
115,000

 
$
115,000

7.75% Senior Secured Notes due 2025
300,000

 
300,000

ABL Credit Facility

 

Principal amount of long-term debt
415,000

 
415,000

Less: unamortized discount and deferred financing costs
(25,402
)
 
(30,188
)
Total debt, net of unamortized discount and deferred financing costs
389,598

 
384,812

Less: current maturities

 

Long-term debt, net of current maturities
$
389,598

 
$
384,812

Our debt is subject to various affirmative and negative covenants. As of September 30, 2018, we were in compliance with all debt covenants. Under the ABL Credit Facility and the indenture governing the 7.75% Senior Secured Notes, our subsidiaries are restricted from paying dividends or making other equity distributions, subject to certain exceptions.
7.75% Senior Secured Notes Due 2025
On December 21, 2017, Par Petroleum, LLC and Par Petroleum Finance Corp. (collectively, the “Issuers”), both our wholly owned subsidiaries, completed the issuance and sale of $300 million in aggregate principal amount of 7.75% Senior Secured Notes in a private placement under Rule 144A and Regulation S of the Securities Act of 1933, as amended. The net proceeds of $289.2 million (net of financing costs and original issue discount of 1%) from the sale were used to repay our previous credit facilities and the forward sale agreement with J. Aron and for general corporate purposes.
The 7.75% Senior Secured Notes bear interest at a rate of 7.750% per year beginning December 21, 2017 (payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2018) and will mature on December 15, 2025.
ABL Credit Facility
On December 21, 2017, in connection with the issuance of the 7.75% Senior Secured Notes, Par Petroleum, LLC, Par Hawaii Inc., Mid Pac Petroleum, LLC (“Mid Pac”), HIE Retail, LLC, Hermes Consolidated, LLC, and Wyoming Pipeline Company (collectively, the “ABL Borrowers”), entered into a Loan and Security Agreement dated as of December 21, 2017 (the “ABL Credit Facility”) with certain lenders and Bank of America, N.A., as administrative agent and collateral agent. The ABL Credit Facility provides for a revolving credit facility that provides for revolving loans and for the issuance of letters of credit (the “ABL Revolver”). On July 24, 2018, we amended the ABL Credit Facility to increase the maximum principal amount at any time outstanding of the ABL Revolver by $10 million to $85 million, subject to a borrowing base. The ABL Revolver had no outstanding balance as of September 30, 2018 and a borrowing base of approximately $67.3 million at September 30, 2018.
5.00% Convertible Senior Notes Due 2021
As of September 30, 2018, the outstanding principal amount of the 5.00% Convertible Senior Notes was $115.0 million, the unamortized discount and deferred financing cost was $15.9 million, and the carrying amount of the liability component was $99.1 million.
Cross Default Provisions
Included within each of our debt agreements are customary cross default provisions that require the repayment of amounts outstanding on demand unless the triggering payment default or acceleration is remedied, rescinded, or waived. As of September 30, 2018, we were in compliance with all of our debt agreements.

12

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



Guarantors
In connection with our shelf registration statement on Form S-3, which was filed with the Securities and Exchange Commission (“SEC”) on September 2, 2016 and declared effective on September 16, 2016 (“Registration Statement”), we may sell non-convertible debt securities and other securities in one or more offerings with an aggregate initial offering price of up to $750.0 million. Any non-convertible debt securities issued under the Registration Statement may be fully and unconditionally guaranteed (except for customary release provisions), on a joint and several basis, by some or all of our subsidiaries, other than subsidiaries that are “minor” within the meaning of Rule 3-10 of Regulation S-X (the “Guarantor Subsidiaries”). We have no “independent assets or operations” within the meaning of Rule 3-10 of Regulation S-X and certain of the Guarantor Subsidiaries may be subject to restrictions on their ability to distribute funds to us, whether by cash dividends, loans, or advances.
Note 10Derivatives
Commodity Derivatives
We utilize crude oil commodity derivative contracts to manage our price exposure in our inventory positions, future purchases of crude oil, future purchases and sales of refined products, and crude oil consumption in our refining process. The derivative contracts that we execute to manage our price risk include exchange traded futures, options, and over-the-counter (“OTC”) swaps. Our futures, options, and OTC swaps are marked-to-market and changes in the fair value of these contracts are recognized within Cost of revenues (excluding depreciation) on our condensed consolidated statements of operations.
We are obligated to repurchase the crude oil and refined products from J. Aron at the termination of the Supply and Offtake Agreements. We have determined that this obligation contains an embedded derivative, similar to forward purchase contracts of crude oil and refined products. As such, we have accounted for this embedded derivative at fair value with changes in the fair value recorded in Cost of revenues (excluding depreciation) on our condensed consolidated statements of operations. We are required under the Supply and Offtake Agreements to hedge the time spread between the period of crude oil cargo pricing and the month of delivery for certain crude oil purchases. We utilize OTC swaps to accomplish this.
We have entered into forward purchase contracts for crude oil and forward purchases and sales contracts of refined products. We elect the normal purchases normal sales (“NPNS”) exception for all forward contracts that meet the definition of a derivative and are not expected to net settle. Any gains and losses with respect to these forward contracts designated as NPNS are not reflected in earnings until the delivery occurs.
We elect to offset fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement. Our condensed consolidated balance sheets present derivative assets and liabilities on a net basis. Please read Note 11—Fair Value Measurements for the gross fair value and net carrying value of our derivative instruments. Our cash margin that is required as collateral deposits cannot be offset against the fair value of open contracts except in the event of default.
At September 30, 2018, our open commodity derivative contracts represented:
OTC swap purchases of 181 thousand barrels that economically hedge our crude oil and refined products month-end target volumes related to our Supply and Offtake Agreements;
futures sales contracts of 125 thousand barrels that economically hedge our jet fuel inventory;
OTC swap sales of 250 thousand barrels that economically hedge our refined products exports;
futures purchases contracts of 305 thousand barrels that economically hedge our sales of refined products; and
option collars of 60 thousand barrels per month and OTC swaps of 15 thousand barrels per month, both through December 2018, that economically hedge our internally consumed fuel.
Interest Rate Derivatives
We are exposed to interest rate volatility in our ABL Revolver and in the Supply and Offtake Agreements. We utilize interest rate swaps to manage our interest rate risk. As of September 30, 2018, we had locked in an average fixed rate of 0.97% in exchange for a floating interest rate indexed to the three-month LIBOR on an aggregate notional amount of $100 million. The interest rate swap matures in February 2019. In February 2018, we terminated a separate $100 million floating interest rate swap originally maturing in March 2021, which resulted in a realized gain of $3.7 million.
Our 5.00% Convertible Senior Notes include a redemption option and a related make-whole premium which represent an embedded derivative that is not clearly and closely related to the 5.00% Convertible Senior Notes. As such, we have accounted for this embedded derivative at fair value with changes in the fair value recorded in Interest expense and financing costs, net, on

13

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



our condensed consolidated statements of operations. As of September 30, 2018, this embedded derivative was deemed to have a de minimis fair value.
The following table provides information on the fair value amounts (in thousands) of these derivatives as of September 30, 2018 and December 31, 2017 and their placement within our condensed consolidated balance sheets.
 
Balance Sheet Location
 
September 30, 2018
 
December 31, 2017
 
 
 
Asset (Liability)
Commodity derivatives (1)
Prepaid and other current assets
 
$

 
$
2,814

Commodity derivatives
Other accrued liabilities
 
(2,073
)
 
(39
)
J. Aron repurchase obligation derivative
Obligations under inventory financing agreements
 
(8,752
)
 
(19,564
)
Interest rate derivatives
Prepaid and other current assets
 
554

 
1,482

Interest rate derivatives
Other long-term assets
 

 
2,328

_________________________________________________________
(1)
Does not include cash collateral of $3.0 million and $0.2 million recorded in Prepaid and other current assets and $7.0 million and $7.0 million in Other long-term assets as of September 30, 2018 and December 31, 2017, respectively.
The following table summarizes the pre-tax gains (losses) recognized in Net income (loss) on our condensed consolidated statements of operations resulting from changes in fair value of derivative instruments not designated as hedges charged directly to earnings (in thousands):
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Statement of Operations Location
 
2018
 
2017
 
2018
 
2017
Commodity derivatives
Cost of revenues (excluding depreciation)
 
$
(2,842
)
 
$
3,657

 
$
843

 
$
26

J. Aron repurchase obligation derivative
Cost of revenues (excluding depreciation)
 
(4,330
)
 
(24,041
)
 
10,812

 
(4,995
)
Interest rate derivatives
Interest expense and financing costs, net
 
(21
)
 
148

 
1,277

 
(477
)
Note 11Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Common Stock Warrants
As of September 30, 2018 and December 31, 2017, we had 354,350 common stock warrants outstanding. We estimate the fair value of our outstanding common stock warrants using the difference between the strike price of the warrant and the market price of our common stock, which is a Level 3 fair value measurement. As of September 30, 2018 and December 31, 2017, the warrants had a weighted-average exercise price of $0.09 and $0.09 and a remaining term of 3.92 years and 4.67 years, respectively.
The estimated fair value of the common stock warrants was $20.33 and $19.21 per share as of September 30, 2018 and December 31, 2017, respectively.
Derivative Instruments
We utilize crude oil commodity derivative contracts to manage our price exposure to our inventory positions, future purchases of crude oil, future purchases and sales of refined products, and cost of crude oil consumed in the refining process. We utilize interest rate swaps to manage our interest rate risk.
We classify financial assets and liabilities according to the fair value hierarchy. Financial assets and liabilities classified as Level 1 instruments are valued using quoted prices in active markets for identical assets and liabilities. These include our exchange traded futures. Level 2 instruments are valued using quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. Our Level 2 instruments include OTC swaps and options. These commodity derivatives are valued using market quotations from independent price reporting agencies and commodity exchange price curves that are corroborated with market data. Level 3 instruments are valued using significant unobservable inputs that are not supported by sufficient market activity. The valuation of our J. Aron repurchase obligation derivative

14

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



requires that we make estimates of the prices and differentials assuming settlement at the end of the reporting period; therefore, it is classified as a Level 3 instrument. We do not have other commodity derivatives classified as Level 3 at September 30, 2018 or December 31, 2017. Please read Note 10—Derivatives for further information on derivatives.
Financial Statement Impact
Fair value amounts by hierarchy level as of September 30, 2018 and December 31, 2017 are presented gross in the tables below (in thousands):
 
September 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Gross Fair Value
 
Effect of Counter-Party Netting
 
Net Carrying Value on Balance Sheet (1)
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
1,056

 
$
13,675

 
$

 
$
14,731

 
$
(14,731
)
 
$

Interest rate derivatives

 
554

 

 
554

 

 
554

Total
$
1,056

 
$
14,229

 
$

 
$
15,285

 
$
(14,731
)
 
$
554

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Common stock warrants
$

 
$

 
$
(7,204
)
 
$
(7,204
)
 
$

 
$
(7,204
)
Commodity derivatives
(2,801
)
 
(14,003
)
 

 
(16,804
)
 
14,731

 
(2,073
)
J. Aron repurchase obligation derivative

 

 
(8,752
)
 
(8,752
)
 

 
(8,752
)
Total
$
(2,801
)
 
$
(14,003
)
 
$
(15,956
)
 
$
(32,760
)
 
$
14,731

 
$
(18,029
)
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Gross Fair Value
 
Effect of Counter-Party Netting
 
Net Carrying Value on Balance Sheet (1)
Assets
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
557

 
$
21,907

 
$

 
$
22,464

 
$
(19,650
)
 
$
2,814

Interest rate derivatives

 
3,810

 

 
3,810

 

 
3,810

Total
$
557

 
$
25,717

 
$

 
$
26,274

 
$
(19,650
)
 
$
6,624

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Common stock warrants
$

 
$

 
$
(6,808
)
 
$
(6,808
)
 
$

 
$
(6,808
)
Commodity derivatives
(596
)
 
(19,093
)
 

 
(19,689
)
 
19,650

 
(39
)
J. Aron repurchase obligation derivative

 

 
(19,564
)
 
(19,564
)
 

 
(19,564
)
Total
$
(596
)
 
$
(19,093
)
 
$
(26,372
)
 
$
(46,061
)
 
$
19,650

 
$
(26,411
)
_________________________________________________________
(1)
Does not include cash collateral of $10.0 million and $7.2 million as of September 30, 2018 and December 31, 2017, respectively, included within Prepaid and other current assets and Other long-term assets on our condensed consolidated balance sheets.

15

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



A roll forward of Level 3 financial instruments measured at fair value on a recurring basis is as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Balance, at beginning of period
$
(10,559
)
 
$
(7,324
)
 
$
(26,372
)
 
$
(25,134
)
Settlements

 

 

 

Total unrealized income (loss) included in earnings
(5,397
)
 
(25,016
)
 
10,416

 
(7,206
)
Balance, at end of period
$
(15,956
)
 
$
(32,340
)
 
$
(15,956
)
 
$
(32,340
)
The carrying value and fair value of long-term debt and other financial instruments as of September 30, 2018 and December 31, 2017 are as follows (in thousands):
 
September 30, 2018
 
Carrying Value
 
Fair Value
5.00% Convertible Senior Notes due 2021 (1) (3)
$
99,145

 
$
148,793

7.75% Senior Secured Notes due 2025 (1)
290,453

 
299,250

Common stock warrants (2)
7,204

 
7,204

 
December 31, 2017
 
Carrying Value
 
Fair Value
5.00% Convertible Senior Notes due 2021 (1) (3)
$
95,486

 
$
149,007

7.75% Senior Secured Notes due 2025 (1)
289,326

 
300,423

Common stock warrants (2)
6,808

 
6,808

_________________________________________________________
(1)
The fair values measurements of the 5.00% Convertible Senior Notes and the 7.75% Senior Secured Notes are considered Level 2 measurements as discussed below.
(2)
The fair value of the common stock warrants is considered a Level 3 measurement in the fair value hierarchy.
(3)
The carrying value of the 5.00% Convertible Senior Notes excludes the fair value of the equity component, which was classified as equity upon issuance.
The fair value of the 5.00% Convertible Senior Notes was determined by aggregating the fair value of the liability and equity components of the notes. The fair value of the liability component of the 5.00% Convertible Senior Notes was determined using a discounted cash flow analysis in which the projected interest and principal payments were discounted at an estimated market yield for a similar debt instrument without the conversion feature. The equity component was estimated based on the Black-Scholes model for a call option with strike price equal to the conversion price, a term matching the remaining life of the 5.00% Convertible Senior Notes, and an implied volatility based on market values of options outstanding as of September 30, 2018. The fair value of the 5.00% Convertible Senior Notes is considered a Level 2 measurement in the fair value hierarchy.
The fair value of the 7.75% Senior Secured Notes was determined using a market approach based on quoted prices. Because the 7.75% Senior Secured Notes may not be actively traded, the inputs used to measure the fair value are classified as Level 2 inputs within the fair value hierarchy.
The fair value of all non-derivative financial instruments recorded in current assets, including cash and cash equivalents, restricted cash, and trade accounts receivable, and current liabilities, including accounts payable, approximate their carrying value due to their short-term nature.
Note 12Commitments and Contingencies
In the ordinary course of business, we are a party to various lawsuits and other contingent matters. We establish accruals for specific legal matters when we determine that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. It is possible that an unfavorable outcome of one or more of these lawsuits or other contingencies could have a material impact on our financial condition, results of operations, or cash flows.

16

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



Tesoro Earn-out Dispute
On June 17, 2013, a wholly owned subsidiary of Par entered into a membership interest purchase agreement with Tesoro Corporation (“Tesoro,” which changed its name to Andeavor Corporation before being purchased by Marathon Petroleum Company in October 2018), pursuant to which the Par subsidiary purchased all of the issued and outstanding membership interests in Tesoro Hawaii, LLC. Tesoro Hawaii, LLC was initially renamed Hawaii Independent Energy, LLC, and subsequently renamed Par Hawaii Refining, LLC (“PHR”). The cash consideration for the acquisition was subject to an earn-out provision during the years 2014-2016, subject to, among other things, an annual earn-out cap of $20 million and an overall cap of $40 million. During 2016, we paid Tesoro a total of $16.8 million to settle the 2014 and 2015 earn-out periods. Tesoro disputed our calculation of the 2015 and 2016 earn-out amounts and asserted that it was entitled to an additional earn-out amount of $4.3 million for the 2015 earn-out period and a total earn-out amount of $8.3 million for the 2016 earn-out period. On March 22, 2018, Tesoro agreed to settle the earn-out dispute and release and discharge any related claims in exchange for our payment of $10.5 million.
Mid Pac Earn-out and Indemnity Dispute
Pursuant to a Stock Purchase Agreement dated August 3, 2011 and amended October 25, 2011 (the “SPA”), Mid Pac purchased all the issued and outstanding stock of Inter Island Petroleum, Inc. (“Inter Island”) from Brian J. and Wendy Barbata (collectively, the “Barbatas”). The SPA provided for an earn-out payment to be made to the Barbatas in an amount equal to four times the amount by which the average of Inter Island’s earnings before interest, taxes, depreciation, and amortization during the relevant earn-out period exceeded $3.5 million. The earn-out payment was capped at a maximum of $4.5 million. Mid Pac contended that there were no amounts owed to the Barbatas for the earn-out period, while the Barbatas contended they were entitled to $4.5 million. In June 2018, Mid Pac and the Barbatas agreed to settle the earn-out dispute and release and discharge any related claims in exchange for our payment of $350 thousand and our assumption of up to an aggregate $300 thousand of certain environmental monitoring and remediation obligations.
United Steelworkers Union Dispute
A portion of our employees at the Hawaii refinery are represented by the United Steelworkers Union (“USW”). On March 23, 2015, the union ratified a four-year extension of the collective bargaining agreement. On January 13, 2016, the USW filed a claim against PHR before the United States National Labor Relations Board (the “NLRB”) alleging a refusal to bargain collectively and in good faith. On March 29, 2016, the NLRB deferred final determination on the USW charge to the grievance/arbitration process under the extant collective bargaining agreement. Arbitration was commenced and concluded on October 1, 2018, with the arbitrator taking the matter under advisement thereafter. PHR denies the USW’s allegations and intends to vigorously defend itself in connection with such claim in the grievance/arbitration process and any subsequent proceeding before the NLRB.
Environmental Matters
Like other petroleum refiners and exploration and production companies, our operations are subject to extensive and periodically-changing federal and state environmental regulations governing air emissions, wastewater discharges, and solid and hazardous waste management activities. Many of these regulations are becoming increasingly stringent and the cost of compliance can be expected to increase over time.
Periodically, we receive communications from various federal, state, and local governmental authorities asserting violations of environmental laws and/or regulations. These governmental entities may also propose or assess fines or require corrective actions for these asserted violations. We intend to respond in a timely manner to all such communications and to take appropriate corrective action. Except as disclosed below, we do not anticipate that any such matters currently asserted will have a material impact on our financial condition, results of operations, or cash flows.
Our Hawaii refinery and our Wyoming refinery were each granted a one-year small refinery exemption for the year 2017 from the U.S. Environmental Protection Agency (“EPA”). Owing primarily to the receipt of these small refinery exemptions, our net income for the three and nine months ended September 30, 2018 includes $3.3 million of RINs expense and $7.5 million of RINs benefit, respectively.
Wyoming refinery
Our Wyoming refinery is subject to a number of consent decrees, orders, and settlement agreements involving the EPA and/or the Wyoming Department of Environmental Quality, some of which date back to the late 1970s and several of which remain in effect, requiring further actions at the Wyoming refinery. The largest cost component arising from these various decrees relates to the investigation, monitoring, and remediation of soil, groundwater, surface water, and sediment contamination associated with the facility’s historic operations. Investigative work by Wyoming Refining and negotiations with the relevant agencies as to remedial

17

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



approaches remain ongoing on a number of aspects of the contamination, meaning that investigation, monitoring, and remediation costs are not reasonably estimable for some elements of these efforts. As of September 30, 2018, we have accrued $17.5 million for the well-understood components of these efforts based on current information, approximately one-third of which we expect to incur in the next five years and the remainder to be incurred over approximately 30 years.
Additionally, we believe the Wyoming refinery will need to modify or close a series of wastewater impoundments in the next several years and replace those impoundments with a new wastewater treatment system. Based on current information, reasonable estimates we have received suggest costs of approximately $11.6 million to design and construct a new wastewater treatment system.
Finally, among the various historic consent decrees, orders, and settlement agreements into which Hermes Consolidated LLC, and its wholly owned subsidiary, Wyoming Pipeline Company (collectively, “WRC” or “Wyoming Refining”) have entered, there are several penalty orders associated with exceedances of permitted limits by the Wyoming refinery’s wastewater discharges. Although the frequency of these exceedances has declined over time, Wyoming Refining may become subject to new penalty enforcement action in the next several years, which could involve penalties in excess of $100 thousand.
Regulation of Greenhouse Gases
The EPA regulates greenhouse gases (“GHG”) under the federal Clean Air Act (“CAA”). New construction or material expansions that meet certain GHG emissions thresholds will likely require that, among other things, a GHG permit be issued in accordance with the federal CAA regulations and we will be required, in connection with such permitting, to undertake a technology review to determine appropriate controls to be implemented with the project in order to reduce GHG emissions.
Furthermore, the EPA is currently developing refinery-specific GHG regulations and performance standards that are expected to impose GHG emission limits and/or technology requirements. These control requirements may affect a wide range of refinery operations. Any such controls could result in material increased compliance costs, additional operating restrictions for our business, and an increase in the cost of the products we produce, which could have a material adverse effect on our financial condition, results of operations, or cash flows.
On September 29, 2015, the EPA announced a final rule updating standards that control toxic air emissions from petroleum refineries, addressing, among other things, flaring operations, fenceline air quality monitoring, and additional emission reductions from storage tanks and delayed coking units. Affected existing sources will be required to comply with the new requirements no later than 2018, with certain refiners required to comply earlier depending on the relevant provision and refinery construction date. We do not anticipate that compliance with this rule will have a material impact on our financial condition, results of operations, or cash flows.
In 2007, the State of Hawaii passed Act 234, which required that GHG emissions be rolled back on a statewide basis to 1990 levels by the year 2020. Although delayed, the Hawaii Department of Health has issued regulations that would require each major facility to reduce CO2 emissions by 16% by 2020 relative to a calendar year 2010 baseline (the first year in which GHG emissions were reported to the EPA under 40 CFR Part 98). Those rules are pending final approval by the Hawaii State Government. The Hawaii refinery’s capacity to reduce fuel use and GHG emissions is limited. However, the state’s pending regulation allows, and the Hawaii refinery expects to be able to demonstrate, that additional reductions are not cost-effective or necessary in light of the state’s current GHG inventory and future year projections. The pending regulation allows for “partnering” with other facilities (principally power plants) that have already dramatically reduced greenhouse emissions or are on schedule to reduce CO2 emissions in order to comply with the state’s Renewable Portfolio Standards.
Fuel Standards
In 2007, the U.S. Congress passed the Energy Independence and Security Act of 2007 (the “EISA”) that, among other things, set a target fuel economy standard of 35 miles per gallon for the combined fleet of cars and light trucks in the U.S. by model year 2020 and contained a second Renewable Fuel Standard (the “RFS2”). In August 2012, the EPA and National Highway Traffic Safety Administration jointly adopted regulations that establish an average industry fuel economy of 54.5 miles per gallon by model year 2025. The RFS2 requires an increasing amount of renewable fuel usage, up to 36 billion gallons by 2022. In the near term, the RFS2 will be satisfied primarily with fuel ethanol blended into gasoline. The RFS2 may present production and logistics challenges for both the renewable fuels and petroleum refining and marketing industries in that we may have to enter into arrangements with other parties or purchase credits from the EPA to meet our obligations to use advanced biofuels, including biomass-based diesel and cellulosic biofuel, with potentially uncertain supplies of these new fuels.
In October 2010, the EPA issued a partial waiver decision under the CAA to allow for an increase in the amount of ethanol permitted to be blended into gasoline from 10% (“E10”) to 15% (“E15”) for 2007 and newer light duty motor vehicles. In January

18

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



2011, the EPA issued a second waiver for the use of E15 in vehicles model years 2001-2006. There are numerous issues, including state and federal regulatory issues, that need to be addressed before E15 can be marketed on a large scale for use in traditional gasoline engines. Consequently, unless either the state or federal regulations are revised, RINs will be required to fulfill the federal mandate for renewable fuels.
In March 2014, the EPA published a final Tier 3 gasoline standard that lowers the allowable sulfur level in gasoline to 10 parts per million (“ppm”) and also lowers the allowable benzene, aromatics, and olefins content of gasoline, with the most recent rulemaking addressing certain technical corrections and clarifications effective June 21, 2016. The effective date for the new standard was January 1, 2017, however, approved small volume refineries have until January 1, 2020 to meet the standard. As noted above, our refineries were granted small volume refinery status by the EPA for 2017.
There will be compliance costs and uncertainties regarding how we will comply with the various requirements contained in the EISA and other fuel-related regulations. Along with credit and trading options, potential capital upgrades for the Hawaii and Wyoming refineries are being evaluated. We may also experience a decrease in demand for refined petroleum products due to an increase in combined fleet mileage or due to refined petroleum products being replaced by renewable fuels.
Environmental Agreement
On September 25, 2013, Par Petroleum, LLC (formerly Hawaii Pacific Energy, a wholly owned subsidiary of Par created for purposes of the PHR acquisition), Tesoro, and PHR entered into an Environmental Agreement (“Environmental Agreement”) that allocated responsibility for known and contingent environmental liabilities related to the acquisition of PHR, including the Consent Decree as described below.
Consent Decree
On July 18, 2016, PHR and subsidiaries of Tesoro entered into a consent decree with the EPA, the U.S. Department of Justice (“DOJ”), and other state governmental authorities concerning alleged violations of the federal CAA related to the ownership and operation of multiple facilities owned or formerly owned by Tesoro and its affiliates (“Consent Decree”), including our Hawaii refinery. As a result of the Consent Decree, PHR expanded its previously-announced 2016 Hawaii refinery turnaround to undertake additional capital improvements to reduce emissions of air pollutants and to provide for certain nitrogen oxide and sulfur dioxide emission controls and monitoring and to install certain lock detection and repair equipment required by the Consent Decree. Although the turnaround was completed during the third quarter of 2016, work related to the Consent Decree is ongoing. This work subjects us to risks associated with engineering, procurement, and construction of improvements and repairs to our facilities and related penalties and fines to the extent applicable deadlines under the Consent Decree are not satisfied, as well as risks related to the performance of equipment required by, or affected by, the Consent Decree. Each of these risks could have a material adverse effect on our business, financial condition, or results of operations.
Tesoro is responsible under the Environmental Agreement for directly paying, or reimbursing PHR, for all reasonable third-party capital expenditures incurred pursuant to the Consent Decree to the extent related to acts or omissions prior to the date of the closing of the PHR acquisition. Tesoro is obligated to pay all applicable fines and penalties related to the Consent Decree. Through September 30, 2018, Tesoro has reimbursed us for $12.2 million of the total capital expenditures of $13.1 million incurred in connection with the Consent Decree. Net capital expenditures and reimbursements related to the Consent Decree for the nine months ended September 30, 2018 and 2017 are presented within Capital expenditures on our condensed consolidated statement of cash flows for the related periods.
Indemnification
In addition to its obligation to reimburse us for capital expenditures incurred pursuant to the Consent Decree, Tesoro agreed to indemnify us for claims and losses arising out of related breaches of Tesoro’s representations, warranties, and covenants in the Environmental Agreement, certain defined “corrective actions” relating to pre-existing environmental conditions, third-party claims arising under environmental laws for personal injury or property damage arising out of or relating to releases of hazardous materials that occurred prior to the date of the closing of the PHR acquisition, any fine, penalty, or other cost assessed by a governmental authority in connection with violations of environmental laws by PHR prior to the date of the closing of the PHR acquisition, certain groundwater remediation work, fines, or penalties imposed on PHR by the Consent Decree related to acts or omissions of Tesoro prior to the date of the closing of the PHR acquisition, and claims and losses related to the Pearl City Superfund Site.
Tesoro’s indemnification obligations are subject to certain limitations as set forth in the Environmental Agreement. These limitations include a deductible of $1 million and a cap of $15 million for certain of Tesoro’s indemnification obligations related

19

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



to certain pre-existing conditions, as well as certain restrictions regarding the time limits for submitting notice and supporting documentation for remediation actions.
Recovery Trusts
We emerged from the reorganization of Delta Petroleum Corporation (“Delta”) on August 31, 2012 (“Emergence Date”), when the plan of reorganization (“Plan”) was consummated. On the Emergence Date, we formed the Delta Petroleum General Recovery Trust (“General Trust”). The General Trust was formed to pursue certain litigation against third parties, including preference actions, fraudulent transfer and conveyance actions, rights of setoff and other claims, or causes of action under the U.S. Bankruptcy Code and other claims and potential claims that Delta and its subsidiaries (collectively, “Debtors”) hold against third parties. On February 27, 2018, the Bankruptcy Court entered its final decree closing the Chapter 11 bankruptcy cases of Delta and the other Debtors, discharging the trustee for the General Trust, and finding that all assets of the General Trust were resolved, abandoned, or liquidated and have been distributed in accordance with the requirements of the Plan. In addition, the final decree required the Company or the General Trust, as applicable, to maintain the current accruals owed on account of the remaining claims of the U.S. Government and Noble Energy, Inc.
As of September 30, 2018, two related claims totaling approximately $22.4 million remained to be resolved and we have accrued approximately $0.5 million representing the estimated value of claims remaining to be settled which are deemed probable and estimable at period end.
One of the two remaining claims was filed by the U.S. Government for approximately $22.4 million relating to ongoing litigation concerning a plugging and abandonment obligation in Pacific Outer Continental Shelf Lease OCS-P 0320, comprising part of the Sword Unit in the Santa Barbara Channel, California. The second unliquidated claim, which is related to the same plugging and abandonment obligation, was filed by Noble Energy Inc., the operator and majority interest owner of the Sword Unit. We believe the probability of issuing stock to satisfy the full claim amount is remote, as the obligations upon which such proof of claim is asserted are joint and several among all working interest owners and Delta, our predecessor, only owned an approximate 3.4% aggregate working interest in the unit.
The settlement of claims is subject to ongoing litigation and we are unable to predict with certainty how many shares will be required to satisfy all claims. Pursuant to the Plan, allowed claims were settled at a ratio of 54.4 shares per $1,000 of claim.
Note 13Stockholders’ Equity
Incentive Plan 
The following table summarizes our compensation costs recognized in General and administrative expense (excluding depreciation) and Operating expense (excluding depreciation) under the Amended and Restated Par Pacific Holdings, Inc. 2012 Long-term Incentive Plan and Stock Purchase Plan (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Restricted Stock Awards
$
955

 
$
967

 
$
2,734

 
$
3,482

Restricted Stock Units
235

 
127

 
605

 
364

Stock Option Awards
506

 
583

 
1,460

 
1,957

During the three and nine months ended September 30, 2018, we granted 9 thousand and 252 thousand shares of restricted stock and restricted stock units with a fair value of approximately $0.2 million and $4.4 million, respectively. As of September 30, 2018, there were approximately $6.7 million of total unrecognized compensation costs related to restricted stock awards and restricted stock units, which are expected to be recognized on a straight-line basis over a weighted-average period of 2.6 years.
During the nine months ended September 30, 2018, we granted 252 thousand stock option awards with a weighted-average exercise price of $17.34 per share. No stock option awards were granted during the three months ended September 30, 2018. As of September 30, 2018, there were approximately $3.6 million of total unrecognized compensation costs related to stock option awards, which are expected to be recognized on a straight-line basis over a weighted-average period of 2.6 years.
During the nine months ended September 30, 2018, we granted 49 thousand performance restricted stock units to executive officers. No performance restricted stock units were granted for the three months ended September 30, 2018. These performance restricted stock units had a fair value of approximately $0.8 million and are subject to certain annual performance targets as defined

20

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



by our Board of Directors. As of September 30, 2018, there were approximately $1.0 million of total unrecognized compensation costs related to the performance restricted stock units, which are expected to be recognized on a straight-line basis over a weighted-average period of 2.1 years.
Note 14Income (Loss) per Share
Basic income (loss) per share is computed by dividing net income (loss) by the sum of the weighted-average number of common shares outstanding and the weighted-average number of shares issuable under the common stock warrants, representing 354 thousand shares during the three and nine months ended September 30, 2018 and 354 thousand shares during the three and nine months ended September 30, 2017, respectively. The common stock warrants are included in the calculation of basic income (loss) per share because they are issuable for minimal consideration. The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
(5,822
)
 
$
18,824

 
$
25,541

 
$
53,616

Less: Undistributed income allocated to participating securities (1)

 
238

 
361

 
685

Net income (loss) attributable to common stockholders
(5,822
)
 
18,586

 
25,180

 
52,931

Plus: Net income effect of convertible securities

 
2,566

 

 

Numerator for diluted income (loss) per common share
$
(5,822
)
 
$
21,152

 
$
25,180

 
$
52,931

 
 
 
 
 
 
 
 
Basic weighted-average common stock shares outstanding
45,709

 
45,561

 
45,676

 
45,505

Plus: dilutive effects of common stock equivalents (2)

 
6,431

 
45

 
22

Diluted weighted-average common stock shares outstanding
45,709

 
51,992

 
45,721

 
45,527

 
 
 
 
 
 
 
 
Basic income (loss) per common share
$
(0.13
)
 
$
0.41

 
$
0.55

 
$
1.16

Diluted income (loss) per common share 
$
(0.13
)
 
$
0.41

 
$
0.55

 
$
1.16

________________________________________________________
(1)
Participating securities include restricted stock that has been issued but has not yet vested.
(2)
Entities with a net loss from continuing operations are prohibited from including potential common shares in the computation of diluted per share amounts. We have utilized the basic shares outstanding to calculate both basic and diluted loss per share for the three months ended September 30, 2018.
For the nine months ended September 30, 2018, our calculation of diluted shares outstanding excluded 33 thousand shares of unvested restricted stock and 1.3 million stock options. For the three and nine months ended September 30, 2017, our calculation of diluted shares outstanding excluded 31 thousand and 83 thousand shares of unvested restricted stock and 1.3 million and 1.5 million stock options, respectively.
As discussed in Note 9—Debt, we have the option of settling the 5.00% Convertible Senior Notes in cash or shares of common stock, or any combination thereof, upon conversion. For the three and nine months ended September 30, 2018 and September 30, 2017, diluted income (loss) per share was determined using the if-converted method. Our calculation of diluted shares outstanding for each of the three and nine months ended September 30, 2018 and the nine months ended September 30, 2017 excluded 6.4 million common stock equivalents, as the effect would be anti-dilutive.
Note 15Income Taxes
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future results of operations, and tax planning strategies in making this assessment. Based upon the level of historical taxable income, significant book losses during recent prior periods, and projections for future results of operations over the periods in which the deferred tax assets are deductible, among other factors,

21

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



management continues to conclude that we did not meet the “more likely than not” requirement in order to recognize deferred tax assets and a valuation allowance has been recorded for substantially all of our net deferred tax assets at September 30, 2018.
During the three and nine months ended September 30, 2018 and 2017, no adjustments were recognized for uncertain tax positions.
As of December 31, 2017, we had approximately $1.6 billion in net operating loss carryforwards (“NOL carryforwards”); however, we currently have a valuation allowance against this and substantially all of our other deferred taxed assets. We will continue to assess the realizability of our deferred tax assets based on consideration of actual and projected operating results and tax planning strategies. If sufficient positive evidence of improving actual operating results becomes available, the amount of the deferred tax asset considered more likely than not to be recognized would be increased with a corresponding reduction in income tax expense in the period recorded.
Our net taxable income must be apportioned to various states based upon the income tax laws of the states in which we derive our revenue. Our NOL carryforwards will not always be available to offset taxable income apportioned to the various states. The states from which our refining, retail, and logistics revenues are derived are not the same states in which our NOLs were incurred; therefore, we expect to incur state tax liabilities on the net income of our refining, retail, and logistics operations.
Note 16Segment Information
We report the results for the following four business segments: (i) Refining, (ii) Retail, (iii) Logistics, and (iv) Corporate and Other. Beginning in the first quarter of 2018, the results of operations of Northwest Retail are included in our retail segment.
Summarized financial information concerning reportable segments consists of the following (in thousands):
Three Months Ended September 30, 2018
 
Refining
 
Logistics
 
Retail
 
Corporate, Eliminations and Other (1)
 
Total
Revenues
 
$
850,591

 
$
30,660

 
$
124,970

 
$
(96,440
)
 
$
909,781

Cost of revenues (excluding depreciation)
 
805,051

 
18,384

 
95,968

 
(96,618
)
 
822,785

Operating expense (excluding depreciation)
 
36,766

 
1,663

 
16,476

 

 
54,905

Depreciation, depletion, and amortization
 
8,336

 
1,654

 
1,876

 
1,326

 
13,192

General and administrative expense (excluding depreciation)
 

 

 

 
11,871

 
11,871

Acquisition and integration expense
 

 

 

 
2,134

 
2,134

Operating income (loss)
 
$
438

 
$
8,959

 
$
10,650

 
$
(15,153
)
 
$
4,894

Interest expense and financing costs, net
 
 
 
 
 
 
 
 
 
(10,425
)
Other income, net
 
 
 
 
 
 
 
 
 
85

Change in value of common stock warrants
 
 
 
 
 
 
 
 
 
(1,067
)
Equity earnings from Laramie Energy, LLC
 
 
 
 
 
 
 
 
 
1,050

Loss before income taxes
 
 
 
 
 
 
 
 
 
(5,463
)
Income tax expense
 
 
 
 
 
 
 
 
 
(359
)
Net loss
 
 
 
 
 
 
 
 
 
$
(5,822
)
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
5,332

 
$
4,501

 
$
1,425

 
$
1,283

 
$
12,541


22

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



Three Months Ended September 30, 2017
 
Refining
 
Logistics
 
Retail
 
Corporate, Eliminations and Other (1)
 
Total
Revenues
 
$
578,511

 
$
31,838

 
$
83,682

 
$
(83,525
)
 
$
610,506

Cost of revenues (excluding depreciation)
 
513,664

 
15,857

 
63,175

 
(83,220
)
 
509,476

Operating expense (excluding depreciation)
 
36,126

 
4,029

 
11,563

 

 
51,718

Depreciation, depletion, and amortization
 
7,390

 
1,602

 
1,471

 
841

 
11,304

General and administrative expense (excluding depreciation)
 

 

 

 
11,292

 
11,292

Operating income (loss)
 
$
21,331

 
$
10,350

 
$
7,473

 
$
(12,438
)
 
$
26,716

Interest expense and financing costs, net
 
 
 
 
 
 
 
 
 
(7,419
)
Other income, net
 
 
 
 
 
 
 
 
 
649

Change in value of common stock warrants
 
 
 
 
 
 
 
 
 
(975
)
Equity earnings from Laramie Energy, LLC
 
 
 
 
 
 
 
 
 
553

Income before income taxes
 
 
 
 
 
 
 
 
 
19,524

Income tax expense
 
 
 
 
 
 
 
 
 
(700
)
Net income
 
 
 
 
 
 
 
 
 
$
18,824

 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
3,171

 
$
2,606

 
$
811

 
$
1,523

 
$
8,111

________________________________________________________
(1)
Includes eliminations of intersegment revenues and cost of revenues of $96.4 million and $83.4 million for the three months ended September 30, 2018 and 2017, respectively.
Nine Months Ended September 30, 2018
 
Refining
 
Logistics
 
Retail
 
Corporate, Eliminations and Other (1)
 
Total
Revenues
 
$
2,391,262

 
$
95,016

 
$
323,253

 
$
(277,915
)
 
$
2,531,616

Cost of revenues (excluding depreciation)
 
2,204,634

 
57,775

 
248,328

 
(278,129
)
 
2,232,608

Operating expense (excluding depreciation)
 
108,862

 
5,870

 
44,239

 
4

 
158,975

Depreciation, depletion, and amortization
 
24,173

 
4,969

 
6,441

 
3,421

 
39,004

General and administrative expense (excluding depreciation)
 

 

 

 
35,981

 
35,981

Acquisition and integration expense
 

 

 

 
3,515

 
3,515

Operating income (loss)
 
$
53,593

 
$
26,402

 
$
24,245

 
$
(42,707
)
 
$
61,533

Interest expense and financing costs, net
 
 
 
 
 
 
 
 
 
(29,346
)
Other income, net
 
 
 
 
 
 
 
 
 
861

Change in value of common stock warrants
 
 
 
 
 
 
 
 
 
(396
)
Change in value of contingent consideration
 
 
 
 
 
 
 
 
 
(10,500
)
Equity earnings from Laramie Energy, LLC
 
 
 
 
 
 
 
 
 
4,274

Income before income taxes
 
 
 
 
 
 
 
 
 
26,426

Income tax expense
 
 
 
 
 
 
 
 
 
(885
)
Net income
 
 
 
 
 
 
 
 
 
$
25,541

 
 
 
 
 
 
 
 
 
 

Capital expenditures
 
$
15,359

 
$
9,050

 
$
2,520

 
$
3,269

 
$
30,198




23

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



Nine Months Ended September 30, 2017
 
Refining
 
Logistics
 
Retail
 
Corporate, Eliminations and Other (1)
 
Total
Revenues
 
$
1,685,341

 
$
91,456

 
$
243,711

 
$
(240,504
)
 
$
1,780,004

Cost of revenues (excluding depreciation)
 
1,493,472

 
46,982

 
184,916

 
(240,252
)
 
1,485,118

Operating expense (excluding depreciation)
 
107,237

 
12,675

 
33,829

 

 
153,741

Depreciation, depletion, and amortization
 
22,243

 
4,613

 
4,377

 
2,615

 
33,848

General and administrative expense (excluding depreciation)
 

 

 

 
34,688

 
34,688

Acquisition and integration expense
 

 

 

 
253

 
253

Operating income (loss)
 
$
62,389

 
$
27,186

 
$
20,589

 
$
(37,808
)
 
$
72,356

Interest expense and financing costs, net
 
 
 
 
 
 
 
 
 
(25,500
)
Loss on termination of financing agreement
 
 
 
 
 
 
 
 
 
(1,804
)
Other income, net
 
 
 
 
 
 
 
 
 
886

Change in value of common stock warrants
 
 
 
 
 
 
 
 
 
(2,211
)
Equity earnings from Laramie Energy, LLC
 
 
 
 
 
 
 
 
 
11,651

Income before income taxes
 
 
 
 
 
 
 
 
 
55,378

Income tax expense
 
 
 
 
 
 
 
 
 
(1,762
)
Net income
 
 
 
 
 
 
 
 
 
$
53,616

 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
5,495

 
$
5,345

 
$
4,434

 
$
4,614

 
$
19,888

________________________________________________________ 
(1)
Includes eliminations of intersegment revenues and cost of revenues of $277.3 million and $241.5 million for the nine months ended September 30, 2018 and 2017, respectively.
Note 17Related Party Transactions
Equity Group Investments (“EGI”) - Service Agreement
On September 17, 2013, we entered into a letter agreement (“Services Agreement”) with Equity Group Investments (“EGI”), an affiliate of Zell Credit Opportunities Fund, LP (“ZCOF”), which owns 10% or more of our common stock directly or through affiliates. Pursuant to the Services Agreement, EGI agreed to provide us with ongoing strategic, advisory, and consulting services that may include (i) advice on financing structures and our relationship with lenders and bankers, (ii) advice regarding public and private offerings of debt and equity securities, (iii) advice regarding asset dispositions, acquisitions, or other asset management strategies, (iv) advice regarding potential business acquisitions, dispositions, or combinations involving us or our affiliates, or (v) such other advice directly related or ancillary to the above strategic, advisory, and consulting services as may be reasonably requested by us.
EGI does not receive a fee for the provision of the strategic, advisory, or consulting services set forth in the Services Agreement, but may be periodically reimbursed by us, upon request, for (i) travel and out-of-pocket expenses, provided that, in the event that such expenses exceed $50 thousand in the aggregate with respect to any single proposed matter, EGI will obtain our consent prior to incurring additional costs, and (ii) provided that we provide prior consent to their engagement with respect to any particular proposed matter, all reasonable fees and disbursements of counsel, accountants, and other professionals incurred in connection with EGI’s services under the Services Agreement. In consideration of the services provided by EGI under the Services Agreement, we agreed to indemnify EGI for certain losses relating to or arising out of the Services Agreement or the services provided thereunder.
The Services Agreement has a term of one year and will be automatically extended for successive one-year periods unless terminated by either party at least 60 days prior to any extension date. There were no significant costs incurred related to this agreement during the three and nine months ended September 30, 2018 or 2017.
Legal Settlement
In April 2018, the Company received $0.8 million from a stockholder in settlement of a third-party claim for recovery of short-swing profits under Section 16(b) of the Securities Exchange Act of 1934, as amended.


24

PAR PACIFIC HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Interim Periods Ended September 30, 2018 and 2017



Note 18Subsequent Events
Laramie Energy Unit Repurchase
On October 18, 2018, Laramie Energy repurchased 138,795 of its Class A Units from certain unitholders for an aggregate purchase price of $14.8 million. As a result of this transaction, our ownership interest in Laramie Energy increased from 39.1% to 46.0%.
Second Amendment to ABL Loan Facility
On October 16, 2018, we amended certain defined terms in the ABL Credit Facility in connection with a property purchase transaction and a refinancing transaction related to our retail business segment in Hawaii.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a growth-oriented company headquartered in Houston, Texas, that manages and maintains interests in energy and infrastructure businesses. We were created through the successful reorganization of Delta in August 2012. The reorganization converted approximately $265 million of unsecured debt to equity and allowed us to preserve significant tax attributes.
Our business is organized into three primary operating segments:
1) Refining - Our refinery in Kapolei, Hawaii, produces ULSD, gasoline, jet fuel, marine fuel, LSFO, and other associated refined products primarily for consumption in Hawaii. Our refinery in Newcastle, Wyoming, produces gasoline, ULSD, jet fuel, and other associated refined products that are primarily marketed in Wyoming and South Dakota.
2) Retail - Our retail outlets in Hawaii sell gasoline, diesel, and retail merchandise throughout the islands of Oahu, Maui, Hawaii, and Kauai. Our Hawaii retail network includes Hele and “76” branded retail sites, company-operated convenience stores, 7-Eleven operated convenience stores, other sites operated by third parties, and unattended cardlock locations. We recently completed the rebranding of 23 of our 34 company-operated convenience stores in Hawaii to “nomnom,” a new proprietary brand. Our retail outlets in Washington and Idaho sell gasoline, diesel, and retail merchandise and operate under the “Cenex®” and “Zip Trip®” brand names.
3) Logistics - We own and operate terminals, pipelines, an SPM, and trucking operations to distribute refined products throughout the islands of Oahu, Maui, Hawaii, Molokai, and Kauai. In addition, we own and operate a crude oil pipeline gathering system, a refined products pipeline, storage facilities, and loading racks in Wyoming. We also own and operate a jet fuel storage facility and pipeline that serve the Ellsworth Air Force Base in South Dakota.
As of September 30, 2018, we owned a 39.1% equity investment in Laramie Energy; see Note 18—Subsequent Events for further information. Laramie Energy is focused on producing natural gas in Garfield, Mesa, and Rio Blanco Counties, Colorado.
We have four reportable segments: (i) Refining, (ii) Retail, (iii) Logistics, and (iv) Corporate and Other. Beginning in the first quarter of 2018, the results of operations of Northwest Retail are included in our retail segment. Our Corporate and Other reportable segment includes administrative costs and several small non-operated oil and gas interests that were owned by our predecessor. Please read Note 16—Segment Information to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for detailed information on our operating results by segment.
Results of Operations
Three months ended September 30, 2018 compared to the three months ended September 30, 2017
Net Income (Loss). Our financial performance for the third quarter 2018 was primarily impacted by declining crack spreads and unfavorable crude differentials at our Hawaii refinery, partially offset by an increase in refined product sales volumes. Our net income (loss) decreased from net income of $18.8 million for the three months ended September 30, 2017 to a net loss of $5.8 million for the three months ended September 30, 2018. Other factors impacting our results period over period include increased interest expense and financing costs, net, and acquisition and integration expense.
Adjusted EBITDA and Adjusted Net Income (Loss). For the three months ended September 30, 2018, Adjusted EBITDA was $27.1 million compared to $45.1 million for the three months ended September 30, 2017. The change was primarily related

25


to declining crack spreads, unfavorable crude differentials, and the impact of Hurricane Lane at our Hawaii refinery at our Hawaii refinery, partially offset by an increase in refined product sales volumes.
For the three months ended September 30, 2018, Adjusted Net Income was $5.5 million compared to $25.2 million for the three months ended September 30, 2017. The change was primarily related to the same factors described above for the decrease in Adjusted EBITDA as well as higher interest expense and financing costs, net.
Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017
Net Income (Loss). During 2018, our financial performance was primarily driven by a $10.5 million non-recurring charge related to the Tesoro earn-out settlement, declining crack spreads, and unfavorable crude differentials at our Hawaii refinery, partially offset by an increase in total refined product sales volumes, improved crack spreads at our Wyoming refinery, and a decrease in RINs expense of approximately $22.0 million. Our net income decreased from $53.6 million for the nine months ended September 30, 2017 to $25.5 million for the nine months ended September 30, 2018. Other factors impacting our results period over period include higher DD&A and a decrease in our Equity earnings (losses) from Laramie Energy.
Adjusted EBITDA and Adjusted Net Income (Loss). For the nine months ended September 30, 2018, Adjusted EBITDA was $89.7 million compared to $107.0 million for the nine months ended September 30, 2017. The change was primarily related to declining crack spreads and unfavorable crude differentials at our Hawaii refinery, partially offset by an increase in total refined product sales volumes, improved crack spreads at our Wyoming refinery, and a decrease in RINs expense of approximately $22.0 million.
For the nine months ended September 30, 2018, Adjusted Net Income was approximately $27.2 million compared to $42.7 million for the nine months ended September 30, 2017. The change was primarily related to the same factors described above for the decrease in Adjusted EBITDA. Other factors impacting our results period over period include higher DD&A and interest expense and financing costs, net, and Equity losses from Laramie Energy excluding our share of Laramie’s unrealized gain (loss) on derivatives.
The following tables summarize our consolidated results of operations for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017 (in thousands). The following should be read in conjunction with our condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report.
 
Three Months Ended September 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change(1)
Revenues
$
909,781

 
$
610,506

 
$
299,275

 
49
 %
Cost of revenues (excluding depreciation)
822,785

 
509,476

 
313,309

 
61
 %
Operating expense (excluding depreciation)
54,905

 
51,718

 
3,187

 
6
 %
Depreciation, depletion, and amortization
13,192

 
11,304

 
1,888

 
17
 %
General and administrative expense (excluding depreciation)
11,871

 
11,292

 
579

 
5
 %
Acquisition and integration expense
2,134

 

 
2,134

 
NM

Total operating expenses
904,887

 
583,790

 
 
 


Operating income
4,894

 
26,716

 
 
 


Other income (expense)
 
 
 
 
 
 


Interest expense and financing costs, net
(10,425
)
 
(7,419
)
 
(3,006
)
 
(41
)%
Other income, net
85

 
649

 
(564
)
 
(87
)%
Change in value of common stock warrants
(1,067
)
 
(975
)
 
(92
)
 
(9
)%
Equity earnings from Laramie Energy, LLC
1,050

 
553

 
497

 
90
 %
Total other income (expense), net
(10,357
)
 
(7,192
)
 
 
 


Income (loss) before income taxes
(5,463
)
 
19,524

 
 
 


Income tax expense
(359
)
 
(700
)
 
341

 
49
 %
Net income (loss)
$
(5,822
)
 
$
18,824

 
 
 



26


 
Nine Months Ended September 30,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change(1)
Revenues
$
2,531,616

 
$
1,780,004

 
$
751,612

 
42
 %
Cost of revenues (excluding depreciation)
2,232,608

 
1,485,118

 
747,490

 
50
 %
Operating expense (excluding depreciation)
158,975

 
153,741

 
5,234

 
3
 %
Depreciation, depletion, and amortization
39,004

 
33,848

 
5,156

 
15
 %
General and administrative expense (excluding depreciation)
35,981

 
34,688

 
1,293

 
4
 %
Acquisition and integration expense
3,515

 
253

 
3,262

 
1,289
 %
Total operating expenses
2,470,083

 
1,707,648

 
 
 
 
Operating income
61,533

 
72,356

 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Interest expense and financing costs, net
(29,346
)
 
(25,500
)
 
(3,846
)
 
(15
)%
Loss on termination of financing agreements

 
(1,804
)
 
1,804

 
100
 %
Other income, net
861

 
886

 
(25
)
 
(3
)%
Change in value of common stock warrants
(396
)
 
(2,211
)
 
1,815

 
82
 %
Change in value of contingent consideration
(10,500
)
 

 
(10,500
)
 
NM

Equity earnings from Laramie Energy, LLC
4,274

 
11,651

 
(7,377
)
 
(63
)%
Total other income (expense), net
(35,107
)
 
(16,978
)
 
 
 
 
Income before income taxes
26,426

 
55,378

 
 
 
 
Income tax expense
(885
)
 
(1,762
)
 
877

 
50
 %
Net income
$
25,541

 
$
53,616

 
 
 
 
________________________________________________________
(1) NM - Not meaningful
The following tables summarize our operating income (loss) by segment for the three and nine months ended September 30, 2018 and 2017 (in thousands). The following should be read in conjunction with our condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report.
Three months ended September 30, 2018
 
Refining
 
Logistics
 
Retail
 
Corporate, Eliminations and Other (1)
 
Total
Revenues
 
$
850,591

 
$
30,660

 
$
124,970

 
$
(96,440
)
 
$
909,781

Cost of revenues (excluding depreciation)
 
805,051

 
18,384

 
95,968

 
(96,618
)
 
822,785

Operating expense (excluding depreciation)
 
36,766

 
1,663

 
16,476

 

 
54,905

Depreciation, depletion, and amortization
 
8,336

 
1,654

 
1,876

 
1,326

 
13,192

General and administrative expense (excluding depreciation)
 

 

 

 
11,871

 
11,871

Acquisition and integration expense
 

 

 

 
2,134

 
2,134

Operating income (loss)
 
$
438

 
$
8,959

 
$
10,650

 
$
(15,153
)
 
$
4,894


27


Three months ended September 30, 2017
 
Refining
 
Logistics
 
Retail
 
Corporate, Eliminations and Other (1)
 
Total
Revenues
 
$
578,511

 
$
31,838

 
$
83,682

 
$
(83,525
)
 
$
610,506

Cost of revenues (excluding depreciation)
 
513,664

 
15,857

 
63,175

 
(83,220
)
 
509,476

Operating expense (excluding depreciation)
 
36,126

 
4,029

 
11,563

 

 
51,718

Depreciation, depletion, and amortization
 
7,390

 
1,602

 
1,471

 
841

 
11,304

General and administrative expense (excluding depreciation)
 

 

 

 
11,292

 
11,292

Operating income (loss)
 
$
21,331

 
$
10,350

 
$
7,473

 
$
(12,438
)
 
$
26,716

________________________________________________________
(1)
Includes eliminations of intersegment Revenues and Cost of revenues (excluding depreciation) of $96.4 million and $83.4 million for the three months ended September 30, 2018 and 2017, respectively.
Nine months ended September 30, 2018
 
Refining
 
Logistics
 
Retail
 
Corporate, Eliminations and Other (1)
 
Total
Revenues
 
$
2,391,262

 
$
95,016

 
$
323,253

 
$
(277,915
)
 
$
2,531,616

Cost of revenues (excluding depreciation)
 
2,204,634

 
57,775

 
248,328

 
(278,129
)
 
2,232,608

Operating expense (excluding depreciation)
 
108,862

 
5,870

 
44,239

 
4

 
158,975

Depreciation, depletion, and amortization
 
24,173

 
4,969

 
6,441

 
3,421

 
39,004

General and administrative expense (excluding depreciation)
 

 

 

 
35,981

 
35,981

Acquisition and integration expense
 

 

 

 
3,515

 
3,515

Operating income (loss)
 
$
53,593

 
$
26,402

 
$
24,245

 
$
(42,707
)
 
$
61,533

Nine months ended September 30, 2017
 
Refining
 
Logistics
 
Retail
 
Corporate, Eliminations and Other (1)
 
Total
Revenues
 
$
1,685,341

 
$
91,456

 
$
243,711

 
$
(240,504
)
 
$
1,780,004

Cost of revenues (excluding depreciation)
 
1,493,472

 
46,982

 
184,916

 
(240,252
)
 
1,485,118

Operating expense (excluding depreciation)
 
107,237

 
12,675

 
33,829

 

 
153,741

Depreciation, depletion, and amortization
 
22,243

 
4,613

 
4,377

 
2,615

 
33,848

General and administrative expense (excluding depreciation)
 

 

 

 
34,688

 
34,688

Acquisition and integration expense
 

 

 

 
253

 
253

Operating income (loss)
 
$
62,389

 
$
27,186

 
$
20,589

 
$
(37,808
)
 
$
72,356

________________________________________________________
(1)
Includes eliminations of intersegment Revenues and Cost of revenues (excluding depreciation) of $277.3 million and $241.5 million for the nine months ended September 30, 2018 and 2017, respectively.

28


Below is a summary of key operating statistics for the refining segment for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Total Refining Segment
 
 
 
 
 
 
 
Feedstocks Throughput (Mbpd)
88.6

 
90.3

 
90.8

 
90.1

Refined product sales volume (Mbpd)
99.9

 
91.8

 
99.2

 
91.2

 
 
 
 
 
 
 
 
Hawaii Refinery
 
 
 
 
 
 
 
Feedstocks Throughput (Mbpd)
71.5

 
73.8

 
73.8

 
74.4

Source of Crude Oil:
 
 
 
 
 
 
 
North America
15.3
%
 
14.8
%
 
29.6
%
 
24.4
%
Latin America
%
 
%
 
%
 
0.1
%
Africa
31.8
%
 
29.1
%
 
32.7
%
 
23.1
%
Asia
38.1
%
 
23.6
%
 
23.0
%
 
24.3
%
Middle East
14.8
%
 
32.5
%
 
14.7
%
 
28.1
%
Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
 
Yield (% of total throughput)
 
 
 
 
 
 
 
Gasoline and gasoline blendstocks
26.0
%
 
28.8
%
 
27.4
%
 
27.9
%
Distillate
49.9
%
 
47.2
%
 
48.6
%
 
47.1
%
Fuel oils
16.0
%
 
15.6
%
 
16.3
%
 
16.1
%
Other products
4.8
%
 
5.1
%
 
4.5
%
 
5.7
%
Total yield
96.7
%
 
96.7
%
 
96.8
%
 
96.8
%
 
 
 
 
 
 
 
 
Refined product sales volume (Mbpd)
 
 
 
 
 
 
 
On-island sales volume
75.3

 
63.7

 
72.2

 
62.1

Exports sale volume
8.3

 
11.2

 
9.9

 
12.7

Total refined product sales volume
83.6

 
74.9

 
82.1

 
74.8

 
 
 
 
 
 
 
 
4-1-2-1 Singapore Crack Spread ($ per barrel) (1)
$
7.81

 
$
8.20

 
$
6.87

 
$
7.30

4-1-2-1 Mid Pacific Crack Spread ($ per barrel) (1)
8.93

 
9.94

 
8.01

 
8.67

Mid Pacific Crude Oil Differential ($ per barrel) (2)
0.34

 
(0.33
)
 
(0.03
)
 
(0.71
)
Operating income (loss) per bbl ($/throughput bbl)
(2.16
)
 
0.91

 
0.94

 
2.05

Adjusted Gross Margin per bbl ($/throughput bbl) (3)
3.66

 
6.32

 
4.74

 
6.39

Production costs per bbl ($/throughput bbl) (4)
3.97

 
3.69

 
3.72

 
3.66

DD&A per bbl ($/throughput bbl)
0.66

 
0.63

 
0.68

 
0.64


29


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Wyoming Refinery
 
 
 
 
 
 
 
Feedstocks Throughput (Mbpd)
17.1

 
16.5

 
17.0

 
15.7

Yield (% of total throughput)
 
 
 
 
 
 
 
Gasoline and gasoline blendstocks
47.7
%
 
50.5
%
 
48.2
%
 
51.2
%
Distillate
46.0
%
 
43.4
%
 
46.3
%
 
43.1
%
Fuel oil
2.1
%
 
2.7
%
 
1.8
%
 
2.6
%
Other products
1.7
%
 
1.6
%
 
1.3
%
 
1.6
%
Total yield
97.5
%
 
98.2
%
 
97.6
%
 
98.5
%
 
 
 
 
 
 
 
 
Refined product sales volume (Mbpd)
16.3

 
16.9

 
17.1

 
16.4

 
 
 
 
 
 
 
 
Wyoming 3-2-1 Index (5)
$
26.25

 
$
25.29

 
$
22.34

 
$
21.11

Operating income (loss) per bbl ($/throughput bbl)
9.32

 
9.97

 
7.45

 
4.82

Adjusted Gross Margin per bbl ($/throughput bbl) (3)
17.95

 
18.67

 
16.35

 
14.03

Production costs per bbl ($/throughput bbl) (4)
6.10

 
6.67

 
6.63

 
7.07

DD&A per bbl ($/throughput bbl)
2.54

 
2.03

 
2.28

 
2.13

________________________________________________________
(1)
The profitability of our Hawaii business is heavily influenced by crack spreads in both the Singapore and U.S. West Coast markets. These markets reflect the closest liquid market alternatives to source refined products for Hawaii. We believe the Singapore and Mid Pacific crack spreads (or four barrels of Brent crude oil converted into one barrel of gasoline, two barrels of distillate (diesel and jet fuel) and one barrel of fuel oil) best reflect a market indicator for our Hawaii operations. The Mid Pacific crack spread is calculated using a ratio of 80% Singapore and 20% San Francisco indexes.
(2)
Weighted-average differentials, excluding shipping costs, of a blend of crude oils with an API of 31.98 and sulfur weight percentage of 0.65% that is indicative of our typical crude oil mix quality compared to Brent crude oil.
(3)
Please see discussion of Adjusted Gross Margin below. We calculate Adjusted Gross Margin per barrel by dividing Adjusted Gross Margin by total refining throughput.
(4)
Management uses production costs per barrel to evaluate performance and compare efficiency to other companies in the industry. There is a variety of ways to calculate production costs per barrel; different companies within the industry calculate it in different ways. We calculate production costs per barrel by dividing all direct production costs, which include the costs to run the refinery including personnel costs, repair and maintenance costs, insurance, utilities, and other miscellaneous costs, by total refining throughput. Our production costs are included in Operating expense (excluding depreciation) on our condensed consolidated statement of operations, which also includes costs related to our bulk marketing operations.
(5)
The profitability of our Wyoming refinery is heavily influenced by crack spreads in nearby markets. We believe the Wyoming 3-2-1 Index is the best market indicator for our operations in Wyoming. The Wyoming 3-2-1 Index is computed by taking two parts gasoline and one part distillate (ultra-low sulfur diesel) as created from three barrels of West Texas Intermediate Crude Oil (“WTI”). Pricing is based 50% on applicable product pricing in Rapid City, South Dakota, and 50% on applicable product pricing in Denver, Colorado.

30


Below is a summary of key operating statistics for the retail and logistics segments for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Retail Segment
 
 
 
 
 
 
 
Retail sales volumes (thousands of gallons) (1)
32,217

 
24,064

 
85,896

 
69,868

 
 
 
 
 
 
 
 
Logistics Segment
 
 
 
 
 
 
 
Pipeline throughput (Mbpd)
 
 
 
 
 
 
 
Crude oil pipelines
88.0

 
82.3

 
88.3

 
86.5

Refined product pipelines
82.9

 
85.0

 
84.4

 
86.7

Total pipeline throughput
170.9

 
167.3

 
172.7

 
173.2

________________________________________________________
(1)
Retail sales volumes for the three and nine months ended September 30, 2018, includes the 92 days and 192 days of retail sales volumes from Northwest Retail since acquisition on March 23, 2018, respectively.
Non-GAAP Performance Measures
Management uses certain financial measures to evaluate our operating performance that are considered non-GAAP financial measures. These measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP and our calculations thereof may not be comparable to similarly titled measures reported by other companies.
Adjusted Gross Margin
Adjusted Gross Margin is defined as (i) operating income (loss) plus operating expense (excluding depreciation); depreciation, depletion, and amortization; inventory valuation adjustments (which adjusts for timing differences to reflect the economics of our inventory financing agreements, including lower of cost or net realizable value adjustments, the impact of the embedded derivative repurchase obligation, and purchase price allocation adjustments); and unrealized losses (gains) on derivatives or (ii) revenues less cost of revenues (excluding depreciation) less inventory valuation adjustments and unrealized losses (gains) on derivatives. We define cost of revenues (excluding depreciation) as the hydrocarbon-related costs of inventory sold, transportation costs of delivering product to customers, crude oil consumed in the refining process, costs to satisfy our RINs obligations, and certain hydrocarbon fees and taxes. Cost of revenues (excluding depreciation) also includes the unrealized gains (losses) on derivatives and inventory valuation adjustments that we exclude from Adjusted Gross Margin.
Management believes Adjusted Gross Margin is an important measure of operating performance and uses Adjusted Gross Margin per barrel to evaluate operating performance and compare profitability to other companies in the industry and to industry benchmarks. Management believes Adjusted Gross Margin provides useful information to investors because it eliminates the gross impact of volatile commodity prices and adjusts for certain non-cash items and timing differences created by our inventory financing agreements and lower of cost or net realizable value adjustments to demonstrate the earnings potential of the business before other fixed and variable costs, which are reported separately in Operating expense (excluding depreciation) and Depreciation, depletion, and amortization.
Adjusted Gross Margin should not be considered an alternative to operating income (loss), net cash flows from operating activities, or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted Gross Margin presented by other companies may not be comparable to our presentation since each company may define this term differently as they may include other manufacturing costs and depreciation expense in cost of revenues.

31


The following tables present a reconciliation of Adjusted Gross Margin to the most directly comparable GAAP financial measure, operating income (loss), on a historical basis, for selected segments, for the periods indicated (in thousands):
Three months ended September 30, 2018
Refining
 
Logistics
 
Retail
Operating income
$
438

 
$
8,959

 
$
10,650

Operating expense (excluding depreciation)
36,766

 
1,663

 
16,476

Depreciation, depletion, and amortization
8,336

 
1,654

 
1,876

Inventory valuation adjustment
3,944

 

 

Unrealized loss on derivatives
2,858

 

 

Adjusted Gross Margin
$
52,342

 
$
12,276

 
$
29,002

Three months ended September 30, 2017
Refining
 
Logistics
 
Retail
Operating income
$
21,331

 
$
10,350

 
$
7,473

Operating expense (excluding depreciation)
36,126

 
4,029

 
11,563

Depreciation, depletion, and amortization
7,390

 
1,602

 
1,471

Inventory valuation adjustment
9,423

 

 

Unrealized gain on derivatives
(3,033
)
 

 

Adjusted Gross Margin
$
71,237

 
$
15,981

 
$
20,507

Nine months ended September 30, 2018
Refining

Logistics

Retail
Operating income
$
53,593

 
$
26,402

 
$
24,245

Operating expense (excluding depreciation)
108,862


5,870


44,239

Depreciation, depletion, and amortization
24,173


4,969


6,441

Inventory valuation adjustment
(20,034
)
 

 

Unrealized loss on derivatives
4,849





Adjusted Gross Margin
$
171,443


$
37,241


$
74,925

Nine months ended September 30, 2017
Refining
 
Logistics
 
Retail
Operating income
$
62,389

 
$
27,186

 
$
20,589

Operating expense (excluding depreciation)
107,237

 
12,675

 
33,829

Depreciation, depletion, and amortization
22,243

 
4,613

 
4,377

Inventory valuation adjustment
(1,989
)
 

 

Unrealized loss on derivatives
79

 

 

Adjusted Gross Margin
$
189,959

 
$
44,474

 
$
58,795

Adjusted Net Income (Loss) and Adjusted EBITDA
Adjusted Net Income (Loss) is defined as Net income (loss) excluding changes in the value of contingent consideration and common stock warrants, acquisition and integration expense, unrealized (gains) losses on derivatives, loss on termination of financing agreements, release of tax valuation allowance, inventory valuation adjustment, severance costs, impairment expense, and (gain) loss on sale of assets. Beginning in 2018, Adjusted Net Income (Loss) also excludes Par’s share of Laramie Energy’s unrealized loss (gain) on derivatives. The exclusion of Par’s share of Laramie Energy’s unrealized loss (gain) on derivatives from Adjusted Net Income (Loss) is consistent with our treatment of Par’s unrealized (gains) losses on derivatives, which are also excluded from Adjusted Net Income (Loss). We have recast the non-GAAP information for the three and nine months ended September 30, 2017 to conform to the current period presentation.

32


Adjusted EBITDA is Adjusted Net Income (Loss) excluding interest expense and financing costs, taxes, DD&A, and, beginning in 2018, equity losses (earnings) from Laramie Energy, excluding Par’s share of unrealized loss (gain) on derivatives. We believe Adjusted Net Income (Loss) and Adjusted EBITDA are useful supplemental financial measures that allow investors to assess:
The financial performance of our assets without regard to financing methods, capital structure, or historical cost basis;
The ability of our assets to generate cash to pay interest on our indebtedness; and
Our operating performance and return on invested capital as compared to other companies without regard to financing methods and capital structure.
Adjusted Net Income (Loss) and Adjusted EBITDA should not be considered in isolation or as a substitute for operating income (loss), net income (loss), cash flows provided by operating, investing, and financing activities, or other income or cash flow statement data prepared in accordance with GAAP. Adjusted Net Income (Loss) and Adjusted EBITDA presented by other companies may not be comparable to our presentation as other companies may define these terms differently.
The following table presents a reconciliation of Adjusted Net Income (Loss) and Adjusted EBITDA to the most directly comparable GAAP financial measure, Net income (loss), on a historical basis for the periods indicated (in thousands):
 
Three Months Ended September 30,

Nine Months Ended September 30,
 
2018

2017

2018

2017
Net income (loss)
$
(5,822
)
 
$
18,824

 
$
25,541

 
$
53,616

Inventory valuation adjustment
3,944

 
9,423

 
(20,034
)
 
(1,989
)
Unrealized loss (gain) on derivatives
2,858

 
(3,033
)
 
4,849

 
79

Acquisition and integration expense
2,134

 

 
3,515

 
253

Loss on termination of financing agreement

 

 

 
1,804

Change in value of common stock warrants
1,067

 
975

 
396

 
2,211

Change in value of contingent consideration

 

 
10,500

 

Severance costs

 

 

 
1,595

Par’s share of Laramie Energy’s unrealized loss (gain) on derivatives (1)
1,271

 
(997
)
 
2,440

 
(14,914
)
Adjusted Net Income (2)
5,452

 
25,192

 
27,207

 
42,655

Depreciation, depletion, and amortization
13,192

 
11,304

 
39,004

 
33,848

Interest expense and financing costs, net
10,425

 
7,419

 
29,346

 
25,500

Equity losses (earnings) from Laramie Energy, LLC, excluding Par’s share of unrealized loss (gain) on derivatives
(2,321
)
 
444

 
(6,714
)
 
3,263

Income tax expense
359

 
700

 
885

 
1,762

Adjusted EBITDA
$
27,107


$
45,059

 
$
89,728

 
$
107,028

________________________________________
(1)
Included in Equity earnings (losses) from Laramie Energy, LLC on our condensed consolidated statements of operations.
(2)
For the three and nine months ended September 30, 2018 and 2017, there was no tax valuation allowance release, impairment expense, or (gain) loss on sale of assets.

33


Factors Impacting Segment Results
Three months ended September 30, 2018 compared to the three months ended September 30, 2017
Refining. Operating income for our refining segment was $0.4 million for the three months ended September 30, 2018, a decrease of $20.9 million compared to operating income of $21.3 million for the three months ended September 30, 2017. The decrease in profitability was primarily driven by lower crack spreads, unfavorable crude differentials, and the impact of Hurricane Lane at our Hawaii refinery, partially offset by an increase in crack spreads at our Wyoming refinery. The Wyoming 3-2-1 Index increased from $25.29 per barrel in the third quarter of 2017 to $26.25 per barrel in the third quarter of 2018. The combined Mid Pacific crack spread decreased from $10.27 per barrel in the third quarter of 2017 to $8.59 per barrel in the third quarter of 2018. Other factors that had a favorable impact on our operating income period over period include an increase in total refined product sales volumes, including record high on-island sales in Hawaii of 75.3 thousand barrels per day, and a decrease in RINs expense of approximately $3.7 million.
Logistics. Operating income for our logistics segment was $9.0 million for the three months ended September 30, 2018, a decrease of $1.4 million compared to operating income of $10.4 million for the three months ended September 30, 2017. The decrease in profitability is primarily due to a decrease in barge revenues as a result of lower throughput volume and average prices per throughput barrel, partially offset by an increase in trucking volumes.
Retail. Operating income for our retail segment was $10.7 million for the three months ended September 30, 2018, an increase of $3.2 million compared to operating income of $7.5 million for the three months ended September 30, 2017. The increase in operating income was primarily due to an increase in gross margin and higher sales volumes of 34%, primarily due to the acquisition of Northwest Retail.
Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017
Refining. Operating income for our refining segment was $53.6 million for the nine months ended September 30, 2018, a decrease of $8.8 million compared to operating income of $62.4 million for the nine months ended September 30, 2017. The decrease in profitability was primarily driven by lower crack spreads and unfavorable crude differentials at our Hawaii refinery, partially offset by improved crack spreads at our Wyoming refinery. The combined Mid Pacific crack spread decreased 14% from $9.38 per barrel for the nine months ended September 30, 2017 to $8.04 per barrel for the nine months ended September 30, 2018. The Wyoming Index increased 6% from $21.11 per barrel for the nine months ended September 30, 2017 to $22.34 per barrel for the nine months ended September 30, 2018. Other contributing factors include an increase in total refined product sales volumes, including higher on-island sales in Hawaii, and a decrease in RINs expense of approximately $22.0 million.
Logistics. Operating income for our logistics segment was $26.4 million for the nine months ended September 30, 2018, a decrease of $0.8 million compared to operating income of $27.2 million for the nine months ended September 30, 2017. The decrease in profitability is primarily due to a decrease in barge revenues as a result of lower throughput volume and average prices per throughput barrel, partially offset by an increase in trucking volumes.
Retail. Operating income for our retail segment was $24.2 million for the nine months ended September 30, 2018, an increase of $3.6 million compared to operating income of $20.6 million for the nine months ended September 30, 2017. The increase in profitability is primarily due to an increase in gross margins and an increase in sales volumes of 23% primarily due to the acquisition of Northwest Retail.
Adjusted Gross Margin
Three months ended September 30, 2018 compared to the three months ended September 30, 2017
Refining. For the three months ended September 30, 2018, our refining Adjusted Gross Margin was approximately $52.3 million, a decrease of $18.9 million compared to $71.2 million for the three months ended September 30, 2017. The decrease was primarily due to lower crack spreads, unfavorable crude differentials, and the impact of Hurricane Lane at our Hawaii refinery, partially offset by an increase in crack spreads at our Wyoming refinery. The combined Mid Pacific crack spread decreased 16% from $10.27 per barrel during the three months ended September 30, 2017 to $8.59 per barrel during the three months ended September 30, 2018. The Wyoming 3-2-1 Index increased from $25.29 per barrel in the third quarter of 2017 to $26.25 per barrel in the third quarter of 2018. Other contributing factors include an increase in total refined product sales volumes, including record high on-island sales in Hawaii, and a decrease in RINs expense of approximately $3.7 million.
Logistics. For the three months ended September 30, 2018, our logistics Adjusted Gross Margin was approximately $12.3 million, a decrease of $3.7 million compared to $16.0 million for the three months ended September 30, 2017. The decrease was primarily driven by a decrease in barge revenues as a result of lower throughput volume and average prices per throughput barrel, partially offset by an increase in trucking volumes.

34


Retail. For the three months ended September 30, 2018, our retail Adjusted Gross Margin was approximately $29.0 million, an increase of $8.5 million when compared to $20.5 million for the three months ended September 30, 2017. The increase was primarily due to an increase in gross margin and higher sales volumes of 34%, primarily due to the acquisition of Northwest Retail.
Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017
Refining. For the nine months ended September 30, 2018, our refining Adjusted Gross Margin was approximately $171.4 million, a decrease of $18.6 million compared to $190.0 million for the nine months ended September 30, 2017. The decrease in profitability was primarily driven by lower crack spreads and crude differentials at our Hawaii refinery, partially offset by improved crack spreads at our Wyoming refinery. The combined Mid Pacific crack spread decreased 14% from $9.38 per barrel for the nine months ended September 30, 2017 to $8.04 per barrel for the nine months ended September 30, 2018. The Wyoming Index increased 6% from $21.11 per barrel for the nine months ended September 30, 2017 to $22.34 per barrel for the nine months ended September 30, 2018. Other factors that had a favorable impact on our operating income period over period include an increase in total refined product sales volumes, including higher on-island sales in Hawaii, and a decrease in RINs expense of approximately $22.0 million.
Logistics. For the nine months ended September 30, 2018, our logistics Adjusted Gross Margin was approximately $37.2 million, a decrease of $7.3 million compared to $44.5 million for the nine months ended September 30, 2017. The decrease was primarily driven by a decline in barge revenues as a result of lower throughput volume and average prices per throughput barrel, partially offset by an increase in trucking volumes.
Retail. For the nine months ended September 30, 2018, our retail Adjusted Gross Margin was approximately $74.9 million, an increase of $16.1 million when compared to approximately $58.8 million for the nine months ended September 30, 2017. The increase was primarily due to an increase in gross margin and higher sales volumes of 23%, primarily due to the acquisition of Northwest Retail.
Discussion of Consolidated Results
Three months ended September 30, 2018 compared to the three months ended September 30, 2017
Revenues. For the three months ended September 30, 2018, revenues were $909.8 million, a $299.3 million increase compared to $610.5 million for the three months ended September 30, 2017. The increase was primarily due to an increase of $262.1 million in third-party refining segment revenue, which was driven by higher crude oil prices and a 9% increase in refined product sales volumes. Brent crude oil prices averaged $75.93 per barrel during the third quarter of 2018 compared to $52.14 per barrel during the third quarter of 2017. Revenues in our retail segment increased $41.3 million primarily driven by the acquisition of Northwest Retail.
Cost of Revenues (Excluding Depreciation). For the three months ended September 30, 2018, cost of revenues (excluding depreciation) was $822.8 million, a $313.3 million increase compared to $509.5 million for the three months ended September 30, 2017. The increase was primarily driven by higher crude oil prices as discussed above and a 9% increase in refined product sales volumes, partially offset by a decrease in RINs expense of approximately $3.7 million. Cost of revenues (excluding depreciation) in our retail segment increased $32.8 million primarily driven by the acquisition of Northwest Retail.
Operating Expense (Excluding Depreciation). For the three months ended September 30, 2018, operating expense (excluding depreciation) was approximately $54.9 million, a $3.2 million increase when compared to $51.7 million for the three months ended September 30, 2017. The increase was primarily driven by operating expenses related to the Northwest Retail assets, acquired on March 23, 2018.
Depreciation, Depletion, and Amortization. For the three months ended September 30, 2018, DD&A was approximately $13.2 million, an increase of $1.9 million compared to $11.3 million for the three months ended September 30, 2017. The increase was primarily due to approximately $1.5 million of accelerated depreciation resulting from changes in the estimated useful lives of certain refinery equipment, storage tanks, and leasehold improvements. Other factors that contributed to the increase were the acquisition of Northwest Retail on March 23, 2018 and a higher depreciable asset base.

35


General and Administrative Expense (Excluding Depreciation).  For the three months ended September 30, 2018, general and administrative expense (excluding depreciation) was approximately $11.9 million, which is relatively consistent with when compared to $11.3 million for the three months ended September 30, 2017.
Acquisition and Integration Expense.  For the three months ended September 30, 2018, we incurred approximately $2.1 million of expenses related to acquisition costs primarily associated with the Hawaii Refinery Expansion. No such costs were incurred during the three months ended September 30, 2017.
Interest Expense and Financing Costs, Net. For the three months ended September 30, 2018, our interest expense and financing costs were approximately $10.4 million, an increase of $3.0 million when compared to $7.4 million for the three months ended September 30, 2017. The increase was primarily due to higher interest expense and financing costs of $6.3 million related to the 7.75% Senior Secured Notes issued and ABL Revolver entered into in December 2017 and a $0.6 million increase in interest expense and financing costs associated with our Supply and Offtake Agreements, partially offset by lower interest expense and financing costs of $4.2 million related to the debt and credit agreements terminated in June and December 2017.
Change in Value of Common Stock Warrants. For the three months ended September 30, 2018, the change in value of common stock warrants resulted in a loss of approximately $1.1 million, a change of $0.1 million when compared to a loss of approximately $1.0 million for the three months ended September 30, 2017. For the three months ended September 30, 2018, our stock price increased from $17.38 per share as of June 30, 2018 to $20.40 per share as of September 30, 2018, which resulted in an increase in the fair value of the common stock warrants. During the three months ended September 30, 2017, our stock price increased from $18.04 per share as of June 30, 2017 to $20.80 per share as of September 30, 2017, which resulted in an increase in the fair value of the common stock warrants.
Equity Earnings (Losses) From Laramie Energy. For the three months ended September 30, 2018, equity earnings from Laramie Energy were approximately $1.1 million, an increase of $0.5 million compared to equity earnings of $0.6 million for the three months ended September 30, 2017. The change in equity earnings was primarily due to higher sales volumes during the three months ended September 30, 2018, partially offset by an increase in Laramie’s loss on derivative instruments compared to the same period in 2017. In addition, our ownership percentage decreased from 42.3% to 39.1% on February 28, 2018 due to an investment made by a third party.
Income Taxes. For the three months ended September 30, 2018, we recorded income tax expense of $359 thousand primarily due to deferred federal taxes for the period. For the three months ended September 30, 2017, we recorded income tax expense of $700 thousand related primarily to alternative minimum tax.
Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017
Revenues. For the nine months ended September 30, 2018, revenues were $2.5 billion, a $0.7 billion increase compared to $1.8 billion for the nine months ended September 30, 2017. The increase was primarily due to an increase of $679.3 million in third-party revenues at our refining segment primarily as a result of higher crude oil prices and refined product sales volumes. Average Brent prices increased from $52.56 per barrel in the nine months ended September 30, 2017 to $72.73 per barrel in the nine months ended September 30, 2018. Refined product sales volumes increased 9% from 91.2 Mbpd in the nine months ended September 30, 2017 to 99.2 Mbpd in the nine months ended September 30, 2018. Revenues in our retail segment increased $79.6 million primarily driven by the acquisition of Northwest Retail.
Cost of Revenues (Excluding Depreciation). For the nine months ended September 30, 2018, cost of revenues (excluding depreciation) was $2.2 billion, a $0.7 billion increase compared to $1.5 billion for the nine months ended September 30, 2017. The increase was primarily due to higher crude oil prices and refined product sales volumes at our refining segment as discussed above, partially offset by a reduction of RINs expense. Cost of revenues (excluding depreciation) in our retail segment increased $63.4 million primarily driven by the acquisition of Northwest Retail.
Operating Expense (Excluding Depreciation). For the nine months ended September 30, 2018, operating expense (excluding depreciation) was approximately $159.0 million, an increase of $5.3 million compared to $153.7 million for the nine months ended September 30, 2017. The increase was primarily due to operating expenses related to the Northwest Retail assets, acquired on March 23, 2018.
Depreciation, Depletion, and Amortization. For the nine months ended September 30, 2018, DD&A was approximately $39.0 million, an increase of $5.2 million when compared to $33.8 million for the nine months ended September 30, 2017. The increase was primarily due to approximately $3.2 million of accelerated depreciation resulting from changes in the estimated useful lives of certain refinery equipment, storage tanks, and leasehold improvements. Other factors that contributed to the increase were higher depreciable asset base, including the Northwest Retail acquisition.

36


General and Administrative Expense (Excluding Depreciation). For the nine months ended September 30, 2018, general and administrative expense (excluding depreciation) was approximately $36.0 million, which is relatively consistent with $34.7 million for the nine months ended September 30, 2017.
Acquisition and Integration Expense. For the nine months ended September 30, 2018, we incurred approximately $3.5 million of expenses primarily related to acquisition and integration costs for the Northwest Retail Acquisition and the Hawaii Refinery Expansion. For the nine months ended September 30, 2017, we incurred approximately $0.3 million of integration costs related to the Wyoming Refining acquisition completed in July 2016.
Interest Expense and Financing Costs, Net. For the nine months ended September 30, 2018, our interest expense and financing costs were approximately $29.3 million, an increase of $3.8 million when compared to $25.5 million for the nine months ended September 30, 2017. The increase was primarily due to higher interest expense and financing costs of $19.0 million related to the 7.75% Senior Secured Notes issued in December 2017 and a $1.1 million increase in interest expense and financing costs associated with our Supply and Offtake Agreements, partially offset by lower interest expense and financing costs of $14.9 million related to the debt and credit agreements terminated in December 2017 and a net increase on gains on interest rate derivatives of $1.8 million.
Change in Value of Common Stock Warrants. For the nine months ended September 30, 2018, the change in value of common stock warrants resulted in a loss of approximately $0.4 million, a change of $1.8 million when compared to a loss of $2.2 million for the nine months ended September 30, 2017. For the nine months ended September 30, 2018, our stock price increased from $19.28 per share as of December 31, 2017 to $20.40 per share as of September 30, 2018, which resulted in an increase in the fair value of the common stock warrants. During the nine months ended September 30, 2017, our stock price increased from $14.54 per share on December 31, 2016 to $20.80 per share on September 30, 2017, which resulted in an increase in the value of the common stock warrants.
Change in Value of Contingent Consideration. For the nine months ended September 30, 2018, the change in the value of our contingent consideration liability resulted in a loss of $10.5 million as a result of the settlement agreement reached with Tesoro. For the nine months ended September 30, 2017, there was no change in value of our contingent consideration liability. Please read Note 12—Commitments and Contingencies for more information.
Loss on Termination of Financing Agreements. For the nine months ended September 30, 2017, our loss on termination of financing agreements was approximately $1.8 million and represents the acceleration of deferred amortization costs in connection with the termination of the Delayed Draw Term Loan and Bridge Loan Credit Agreement during the second quarter of 2017. No such loss was incurred for the nine months ended September 30, 2018.
Equity Earnings (Losses) From Laramie Energy. For the nine months ended September 30, 2018, equity earnings from Laramie Energy were approximately $4.3 million, a decrease of $7.4 million compared to equity earnings of $11.7 million for the nine months ended September 30, 2017. The change was primarily due to a decrease in Laramie’s gain on derivative instruments, partially offset by higher sales volumes during the nine months ended September 30, 2018 compared to the same period in 2017. In addition, our ownership percentage decreased from 42.3% to 39.1% on February 28, 2018 due to an investment made by a third party.
Income Taxes. For the nine months ended September 30, 2018, we recorded income tax expense of $885 thousand primarily due to deferred federal taxes for the period. For the nine months ended September 30, 2017, we recorded income tax expense of $1.8 million primarily due to alternative minimum tax expense.
Consolidating Condensed Financial Information
On December 21, 2017, Par Petroleum, LLC (the “Issuer”) issued its 7.75% Senior Secured Notes due 2025 in a private offering under Rule 144A and Regulation S of the Securities Act. The notes were co-issued by Par Petroleum Finance Corp., which has no independent assets or operations. The notes are guaranteed on a senior unsecured basis only as to payment of principal and interest by Par Pacific Holdings, Inc. (the “Parent”) and are guaranteed on a senior secured basis by all of the subsidiaries of Par Petroleum, LLC (other than Par Petroleum Finance Corp.).
The following supplemental condensed consolidating financial information reflects (i) the Parent’s separate accounts, (ii) Par Petroleum, LLC and its consolidated subsidiaries’ accounts, (iii) the accounts of subsidiaries of the Parent that are not guarantors of the 7.75% Senior Secured Notes and consolidating adjustments and eliminations, and (iv) the Parent’s consolidated accounts for the dates and periods indicated. For purposes of the following condensed consolidating information, the Parent’s investment in its subsidiaries is accounted for under the equity method of accounting (dollar amounts in thousands).

37


 
As of September 30, 2018
 
Parent Guarantor
 
Issuer
 
Non-Guarantor Subsidiaries and Eliminations
 
Par Pacific Holdings, Inc. and Subsidiaries
ASSETS
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
46,943

 
$
40,594

 
$
197

 
$
87,734

Restricted cash
743

 

 

 
743

Trade accounts receivable

 
132,358

 
668

 
133,026

Inventories

 
358,581

 

 
358,581

Prepaid and other current assets
2,683

 
7,905

 
(349
)
 
10,239

Due from related parties
21,377

 
19,909

 
(41,286
)
 

Total current assets
71,746

 
559,347

 
(40,770
)
 
590,323

Property and equipment
 
 
 
 
 
 
 

Property, plant, and equipment
18,546

 
569,709

 

 
588,255

Proved oil and gas properties, at cost, successful efforts method of accounting

 

 
400

 
400

Total property and equipment
18,546

 
569,709

 
400

 
588,655

Less accumulated depreciation and depletion
(8,427
)
 
(97,176
)
 
(285
)
 
(105,888
)
Property and equipment, net
10,119

 
472,533

 
115

 
482,767

Long-term assets
 
 
 
 
 
 
 

Investment in Laramie Energy, LLC

 

 
131,466

 
131,466

Investment in subsidiaries
608,907

 

 
(608,907
)
 

Intangible assets, net

 
24,611

 

 
24,611

Goodwill

 
150,799

 
2,598

 
153,397

Other long-term assets
3,580

 
20,339

 

 
23,919

Total assets
$
694,352

 
$
1,227,629

 
$
(515,498
)
 
$
1,406,483

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 

Current liabilities
 
 
 
 
 
 
 

Obligations under inventory financing agreements
$

 
$
351,188

 
$

 
$
351,188

Accounts payable
4,524

 
62,587

 
1,481

 
68,592

Advances from customers

 
8,493

 

 
8,493

Accrued taxes
37

 
14,372

 

 
14,409

Other accrued liabilities
5,989

 
41,653

 
(1,737
)
 
45,905

Due to related parties
98,218

 

 
(98,218
)
 

Total current liabilities
108,768

 
478,293

 
(98,474
)
 
488,587

Long-term liabilities
 
 
 
 
 
 
 

Long-term debt, net of current maturities
99,145

 
290,453

 

 
389,598

Common stock warrants
7,204

 

 

 
7,204

Long-term capital lease obligations
559

 
5,123

 

 
5,682

Other liabilities
1,270

 
41,505

 
(4,769
)
 
38,006

Total liabilities
216,946

 
815,374

 
(103,243
)
 
929,077

Commitments and contingencies
 
 
 
 
 
 
 
Stockholders’ equity
 
 
 
 
 
 
 
Preferred stock, $0.01 par value: 3,000,000 shares authorized, none issued

 

 

 

Common stock, $0.01 par value; 500,000,000 shares authorized and 46,009,104 shares issued
460

 

 

 
460

Additional paid-in capital
597,439

 
345,825

 
(345,825
)
 
597,439

Accumulated earnings (deficit)
(122,637
)
 
63,456

 
(63,456
)
 
(122,637
)
Accumulated other comprehensive income
2,144

 
2,974

 
(2,974
)
 
2,144

Total stockholders’ equity
477,406

 
412,255

 
(412,255
)
 
477,406

Total liabilities and stockholders’ equity
$
694,352

 
$
1,227,629

 
$
(515,498
)
 
$
1,406,483


38


 
As of December 31, 2017
 
Parent Guarantor
 
Issuer
 
Non-Guarantor Subsidiaries and Eliminations
 
Par Pacific Holdings, Inc. and Subsidiaries
ASSETS
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
65,615

 
$
51,429

 
$
1,289

 
$
118,333

Restricted cash
744

 

 

 
744

Trade accounts receivable

 
120,032

 
1,799

 
121,831

Inventories

 
345,072

 
285

 
345,357

Prepaid and other current assets
11,768

 
7,115

 
(1,604
)
 
17,279

Due from related parties
8,113

 
32,171

 
(40,284
)
 

Total current assets
86,240

 
555,819

 
(38,515
)
 
603,544

Property and equipment
 
 
 
 
 
 
 

Property, plant, and equipment
15,773

 
513,307

 
158

 
529,238

Proved oil and gas properties, at cost, successful efforts method of accounting

 

 
400

 
400

Total property and equipment
15,773

 
513,307

 
558

 
529,638

Less accumulated depreciation and depletion
(6,226
)
 
(73,029
)
 
(367
)
 
(79,622
)
Property and equipment, net
9,547

 
440,278

 
191

 
450,016

Long-term assets
 
 
 
 
 
 
 

Investment in Laramie Energy, LLC

 

 
127,192

 
127,192

Investment in subsidiaries
552,748

 

 
(552,748
)
 

Intangible assets, net

 
26,604

 

 
26,604

Goodwill

 
104,589

 
2,598

 
107,187

Other long-term assets
1,976

 
30,888

 

 
32,864

Total assets
$
650,511

 
$
1,158,178

 
$
(461,282
)
 
$
1,347,407

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 

Current liabilities
 
 
 
 
 
 
 

Obligations under inventory financing agreements
$

 
$
363,756

 
$

 
$
363,756

Accounts payable
4,510

 
46,273

 
1,760

 
52,543

Advances from customers

 
9,522

 

 
9,522

Accrued taxes

 
20,227

 
(2,540
)
 
17,687

Other accrued liabilities
12,913

 
14,420

 
111

 
27,444

Due to related parties
82,524

 

 
(82,524
)
 

Total current liabilities
99,947

 
454,198

 
(83,193
)
 
470,952

Long-term liabilities
 
 
 
 
 
 
 

Long-term debt, net of current maturities
95,486

 
289,326

 

 
384,812

Common stock warrants
6,808

 

 

 
6,808

Long-term capital lease obligations
551

 
669

 

 
1,220

Other liabilities

 
41,253

 
(5,357
)
 
35,896

Total liabilities
202,792

 
785,446

 
(88,550
)
 
899,688

Commitments and contingencies
 
 
 
 
 
 
 
Stockholders’ equity
 
 
 
 
 
 
 
Preferred stock, $0.01 par value: 3,000,000 shares authorized, none issued

 

 

 

Common stock, $0.01 par value; 500,000,000 shares authorized and 45,776,087 shares issued
458

 

 

 
458

Additional paid-in capital
593,295

 
345,825

 
(345,825
)
 
593,295

Accumulated earnings (deficit)
(148,178
)
 
23,933

 
(23,933
)
 
(148,178
)
Accumulated other comprehensive income
2,144

 
2,974

 
(2,974
)
 
2,144

Total stockholders’ equity
447,719

 
372,732

 
(372,732
)
 
447,719

Total liabilities and stockholders’ equity
$
650,511

 
$
1,158,178

 
$
(461,282
)
 
$
1,347,407



39


 
Three Months Ended September 30, 2018
 
Parent Guarantor
 
Issuer
 
Non-Guarantor Subsidiaries and Eliminations
 
Par Pacific Holdings, Inc. and Subsidiaries
Revenues
$
22

 
$
909,749

 
$
10

 
$
909,781

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Cost of revenues (excluding depreciation)

 
822,785

 

 
822,785

Operating expense (excluding depreciation)

 
54,905

 

 
54,905

Depreciation, depletion, and amortization
1,268

 
11,915

 
9

 
13,192

General and administrative expense (excluding depreciation)
5,296

 
6,499

 
76

 
11,871

Acquisition and integration expense
2,134

 

 

 
2,134

Total operating expenses
8,698

 
896,104

 
85

 
904,887

 
 
 
 
 
 
 
 
Operating income (loss)
(8,676
)
 
13,645

 
(75
)
 
4,894

 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Interest expense and financing costs, net
(2,726
)
 
(7,699
)
 

 
(10,425
)
Other income (expense), net
121

 
(36
)
 

 
85

Change in value of common stock warrants
(1,067
)
 

 

 
(1,067
)
Equity earnings (losses) from subsidiaries
6,574

 

 
(6,574
)
 

Equity earnings from Laramie Energy, LLC

 

 
1,050

 
1,050

Total other income (expense), net
2,902

 
(7,735
)
 
(5,524
)
 
(10,357
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
(5,774
)
 
5,910

 
(5,599
)
 
(5,463
)
Income tax benefit (expense)
(48
)
 
(1,400
)
 
1,089

 
(359
)
Net income (loss)
$
(5,822
)
 
$
4,510

 
$
(4,510
)
 
$
(5,822
)
 
 
 
 
 
 
 
 
Adjusted EBITDA
$
(5,153
)
 
$
32,326

 
$
(66
)
 
$
27,107


40


 
Three Months Ended September 30, 2017
 
Parent Guarantor
 
Issuer
 
Non-Guarantor Subsidiaries and Eliminations
 
Par Pacific Holdings, Inc. and Subsidiaries
Revenues
$

 
$
610,665

 
$
(159
)
 
$
610,506

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Cost of revenues (excluding depreciation)

 
510,304

 
(828
)
 
509,476

Operating expense (excluding depreciation)

 
50,768

 
950

 
51,718

Depreciation, depletion, and amortization
624

 
10,492

 
188

 
11,304

General and administrative expense (excluding depreciation)
4,489

 
6,852

 
(49
)
 
11,292

Total operating expenses
5,113

 
578,416

 
261

 
583,790

 
 
 
 
 
 
 
 
Operating income (loss)
(5,113
)
 
32,249

 
(420
)
 
26,716

 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Interest expense and financing costs, net
(2,589
)
 
(4,830
)
 

 
(7,419
)
Loss on termination of financing agreements

 

 

 

Other income (expense), net
502

 
48

 
99

 
649

Change in value of common stock warrants
(975
)
 

 

 
(975
)
Equity earnings (losses) from subsidiaries
26,999

 

 
(26,999
)
 

Equity earnings from Laramie Energy, LLC

 

 
553

 
553

Total other income (expense), net
23,937

 
(4,782
)
 
(26,347
)
 
(7,192
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
18,824

 
27,467

 
(26,767
)
 
19,524

Income tax benefit (expense)

 
(17,284
)
 
16,584

 
(700
)
Net income (loss)
$
18,824

 
$
10,183

 
$
(10,183
)
 
$
18,824

 
 
 
 
 
 
 
 
Adjusted EBITDA
$
(3,987
)
 
$
49,179

 
$
(133
)
 
$
45,059



41


 
Nine Months Ended September 30, 2018
 
Parent Guarantor
 
Issuer
 
Non-Guarantor Subsidiaries and Eliminations
 
Par Pacific Holdings, Inc. and Subsidiaries
Revenues
$
22

 
$
2,531,056

 
$
538

 
$
2,531,616

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Cost of revenues (excluding depreciation)

 
2,232,288

 
320

 
2,232,608

Operating expense (excluding depreciation)

 
158,971

 
4

 
158,975

Depreciation, depletion, and amortization
3,245

 
35,730

 
29

 
39,004

General and administrative expense (excluding depreciation)
15,677

 
20,074

 
230

 
35,981

Acquisition and integration expense
3,314

 
201

 

 
3,515

Total operating expenses
22,236

 
2,447,264

 
583

 
2,470,083

 
 
 
 
 
 
 
 
Operating income (loss)
(22,214
)
 
83,792

 
(45
)
 
61,533

 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Interest expense and financing costs, net
(8,066
)
 
(21,280
)
 

 
(29,346
)
Other income (expense), net
944

 
(71
)
 
(12
)
 
861

Change in value of common stock warrants
(396
)
 

 

 
(396
)
Change in value of contingent consideration

 
(10,500
)
 

 
(10,500
)
Equity earnings (losses) from subsidiaries
55,321

 

 
(55,321
)
 

Equity earnings from Laramie Energy, LLC

 

 
4,274

 
4,274

Total other income (expense), net
47,803

 
(31,851
)
 
(51,059
)
 
(35,107
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
25,589

 
51,941

 
(51,104
)
 
26,426

Income tax benefit (expense)
(48
)
 
(12,417
)
 
11,580

 
(885
)
Net income (loss)
$
25,541

 
$
39,524

 
$
(39,524
)
 
$
25,541

 
 
 
 
 
 
 
 
Adjusted EBITDA
$
(14,711
)
 
$
104,467

 
$
(28
)
 
$
89,728



42


 
Nine Months Ended September 30, 2017
 
Parent Guarantor
 
Issuer
 
Non-Guarantor Subsidiaries and Eliminations
 
Par Pacific Holdings, Inc. and Subsidiaries
Revenues
$

 
$
1,779,174

 
$
830

 
$
1,780,004

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Cost of revenues (excluding depreciation)

 
1,485,048

 
70

 
1,485,118

Operating expense (excluding depreciation)

 
152,791

 
950

 
153,741

Depreciation, depletion, and amortization
1,974

 
31,310

 
564

 
33,848

General and administrative expense (excluding depreciation)
14,372

 
20,142

 
174

 
34,688

Acquisition and integration expense
253

 

 

 
253

Total operating expenses
16,599

 
1,689,291

 
1,758

 
1,707,648

 
 
 
 
 
 
 
 
Operating income (loss)
(16,599
)
 
89,883

 
(928
)
 
72,356

 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Interest expense and financing costs, net
(11,102
)
 
(14,398
)
 

 
(25,500
)
Loss on termination of financing agreements
(1,804
)
 

 

 
(1,804
)
Other income (expense), net
614

 
130

 
142

 
886

Change in value of common stock warrants
(2,211
)
 

 

 
(2,211
)
Equity earnings (losses) from subsidiaries
84,718

 

 
(84,718
)
 

Equity earnings from Laramie Energy, LLC

 

 
11,651

 
11,651

Total other income (expense), net
70,215

 
(14,268
)
 
(72,925
)
 
(16,978
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
53,616

 
75,615

 
(73,853
)
 
55,378

Income tax benefit (expense)

 
(32,424
)
 
30,662

 
(1,762
)
Net income (loss)
$
53,616

 
$
43,191

 
$
(43,191
)
 
$
53,616

 
 
 
 
 
 
 
 
Adjusted EBITDA
$
(12,558
)
 
$
119,808

 
$
(222
)
 
$
107,028



43


Non-GAAP Financial Measures
Adjusted EBITDA for the supplemental consolidating condensed financial information, which is segregated at the “Parent Guarantor,” “Issuer,” and “Non-Guarantor Subsidiaries and Eliminations” levels, is calculated in the same manner as for the Par Pacific Holdings, Inc. Adjusted EBITDA calculations. See “Results of OperationsNon-GAAP Performance MeasuresAdjusted Net Income (Loss) and Adjusted EBITDA” above.
The following tables present a reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measure, net income (loss), on a historical basis for the periods indicated (in thousands):
 
Three Months Ended September 30, 2018
 
Parent Guarantor
 
Issuer
 
Non-Guarantor Subsidiaries and Eliminations
 
Par Pacific Holdings, Inc. and Subsidiaries
Net income (loss)
$
(5,822
)
 
$
4,510

 
$
(4,510
)
 
$
(5,822
)
Inventory valuation adjustment

 
3,944

 

 
3,944

Unrealized loss (gain) on derivatives

 
2,858

 

 
2,858

Acquisition and integration expense
2,134

 

 

 
2,134

Change in value of common stock warrants
1,067

 

 

 
1,067

Pars share of Laramie Energys unrealized loss (gain) on derivatives (1)

 

 
1,271

 
1,271

Depreciation, depletion, and amortization
1,268

 
11,915

 
9

 
13,192

Interest expense and financing costs, net
2,726

 
7,699

 

 
10,425

Equity losses (earnings) from Laramie Energy, LLC, excluding Pars share of unrealized loss (gain) on derivatives

 

 
(2,321
)
 
(2,321
)
Equity losses (income) from subsidiaries
(6,574
)
 

 
6,574

 

Income tax expense (benefit)
48

 
1,400

 
(1,089
)
 
359

Adjusted EBITDA
$
(5,153
)
 
$
32,326

 
$
(66
)
 
$
27,107

 
Three Months Ended September 30, 2017
 
Parent Guarantor
 
Issuer
 
Non-Guarantor Subsidiaries and Eliminations
 
Par Pacific Holdings, Inc. and Subsidiaries
Net income (loss)
$
18,824

 
$
10,183

 
$
(10,183
)
 
$
18,824

Inventory valuation adjustment

 
9,423

 

 
9,423

Unrealized loss (gain) on derivatives

 
(3,033
)
 

 
(3,033
)
Change in value of common stock warrants
975

 

 

 
975

Pars share of Laramie Energys unrealized loss (gain) on derivatives (1)

 

 
(997
)
 
(997
)
Depreciation, depletion, and amortization
624

 
10,492

 
188

 
11,304

Interest expense and financing costs, net
2,589

 
4,830

 

 
7,419

Equity losses (earnings) from Laramie Energy, LLC, excluding Pars share of unrealized loss (gain) on derivatives

 

 
444

 
444

Equity losses (income) from subsidiaries
(26,999
)
 

 
26,999

 

Income tax expense (benefit)

 
17,284

 
(16,584
)
 
700

Adjusted EBITDA
$
(3,987
)
 
$
49,179

 
$
(133
)
 
$
45,059

 


44


 
Nine Months Ended September 30, 2018
 
Parent Guarantor
 
Issuer
 
Non-Guarantor Subsidiaries and Eliminations
 
Par Pacific Holdings, Inc. and Subsidiaries
Net income (loss)
$
25,541

 
$
39,524

 
$
(39,524
)
 
$
25,541

Inventory valuation adjustment

 
(20,034
)
 

 
(20,034
)
Unrealized loss (gain) on derivatives

 
4,849

 

 
4,849

Acquisition and integration expense
3,314

 
201

 

 
3,515

Change in value of common stock warrants
396

 

 

 
396

Change in value of contingent consideration

 
10,500

 

 
10,500

Pars share of Laramie Energys unrealized loss (gain) on derivatives (1)

 

 
2,440

 
2,440

Depreciation, depletion, and amortization
3,245

 
35,730

 
29

 
39,004

Interest expense and financing costs, net
8,066

 
21,280

 

 
29,346

Equity losses (earnings) from Laramie Energy, LLC, excluding Pars share of unrealized loss (gain) on derivatives

 

 
(6,714
)
 
(6,714
)
Equity losses (income) from subsidiaries
(55,321
)
 

 
55,321

 

Income tax expense (benefit)
48

 
12,417

 
(11,580
)
 
885

Adjusted EBITDA
$
(14,711
)
 
$
104,467

 
$
(28
)
 
$
89,728

 
Nine Months Ended September 30, 2017
 
Parent Guarantor
 
Issuer
 
Non-Guarantor Subsidiaries and Eliminations
 
Par Pacific Holdings, Inc. and Subsidiaries
Net income (loss)
$
53,616

 
$
43,191

 
$
(43,191
)
 
$
53,616

Inventory valuation adjustment

 
(1,989
)
 

 
(1,989
)
Unrealized loss (gain) on derivatives

 
79

 

 
79

Acquisition and integration expense
253

 

 

 
253

Loss on termination of financing agreements
1,804

 

 

 
1,804

Change in value of common stock warrants
2,211

 

 

 
2,211

Severance costs
1,200

 
395

 

 
1,595

Pars share of Laramie Energys unrealized loss (gain) on derivatives (1)

 

 
(14,914
)
 
(14,914
)
Depreciation, depletion, and amortization
1,974

 
31,310

 
564

 
33,848

Interest expense and financing costs, net
11,102

 
14,398

 

 
25,500

Equity losses (earnings) from Laramie Energy, LLC, excluding Par’s share of unrealized loss (gain) on derivatives

 

 
3,263

 
3,263

Equity losses (income) from subsidiaries
(84,718
)
 

 
84,718

 

Income tax expense (benefit)

 
32,424

 
(30,662
)
 
1,762

Adjusted EBITDA
$
(12,558
)
 
$
119,808

 
$
(222
)
 
$
107,028

________________________________________
(1)
Included in Equity earnings (losses) from Laramie Energy, LLC on our condensed consolidated statements of operations.
Liquidity and Capital Resources
Our liquidity and capital requirements are primarily a function of our debt maturities and debt service requirements, fixed capacity payments and contractual obligations, capital expenditures, and working capital needs. Examples of working capital needs include purchases and sales of commodities and associated margin and collateral requirements, facility maintenance costs, and other costs such as payroll. Our primary sources of liquidity are cash flows from operations, cash on hand, amounts available under our credit agreements, and access to capital markets.

45


Our liquidity position as of September 30, 2018 was $184.9 million and consisted of $137.2 million at Par Petroleum, LLC and subsidiaries, $47.5 million at Par Pacific Holdings, and $0.2 million at all our other subsidiaries. Our consolidated liquidity position as of November 2, 2018 was $182.1 million. The change in our liquidity position from September 30, 2018 to November 2, 2018 was primarily attributable to changes in working capital.
As of September 30, 2018, we had access to the J. Aron Deferred Payment Arrangement, the ABL Credit Facility, and cash on hand of $87.7 million. In addition, we have the Supply and Offtake Agreements with J. Aron, which are used to finance the majority of the inventory at our Hawaii refinery. Generally, the primary uses of our capital resources have been in the operations of our refining and retail segments, payments related to acquisitions, and to repay or refinance indebtedness.
We believe our cash flows from operations and available capital resources will be sufficient to meet our current capital expenditures, working capital, and debt service requirements for the next 12 months. We may seek to raise additional debt or equity capital to fund any other significant changes to our business or to refinance existing debt. We cannot offer any assurances that such capital will be available in sufficient amounts or at an acceptable cost.
We may from time to time seek to retire or repurchase our outstanding 5.00% Convertible Senior Notes or 7.75% Senior Secured Notes through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material.
Cash Flows
The following table summarizes cash activities for the nine months ended September 30, 2018 and 2017 (in thousands):
 
Nine Months Ended September 30,
 
2018
 
2017
Net cash provided by (used in) operating activities
$
51,900

 
$
105,456

Net cash used in investing activities
(103,724
)
 
(19,869
)
Net cash provided by (used in) financing activities
21,224

 
(55,561
)
Net cash provided by operating activities was approximately $51.9 million for the nine months ended September 30, 2018, which resulted from net income of approximately $25.5 million, non-cash charges to operations of approximately $54.2 million, and net cash used for changes in operating assets and liabilities of approximately $27.9 million. The change in our operating assets and liabilities for the nine months ended September 30, 2018 is primarily due to a decrease in our Obligations under inventory financing agreements driven by the timing of crude oil purchases and deliveries. Net cash provided by operating activities was approximately $105.5 million for the nine months ended September 30, 2017, which resulted from net income of approximately $53.6 million, non-cash charges to operations of approximately $39.2 million, and net cash provided by changes in operating assets and liabilities of approximately $12.6 million.
For the nine months ended September 30, 2018, net cash used in investing activities was approximately $103.7 million and primarily related to $74.3 million for the Northwest Retail Acquisition and additions to property and equipment totaling approximately $30.2 million. Net cash used in investing activities was approximately $19.9 million for the nine months ended September 30, 2017 and related to additions to property and equipment.
Net cash provided by financing activities for the nine months ended September 30, 2018 was approximately $21.2 million, which consisted primarily of net debt repayments of approximately $8.4 million and net borrowings associated with the J. Aron deferred payment of approximately $30.7 million. Net cash used in financing activities for the nine months ended September 30, 2017 was approximately $55.6 million, which consisted primarily of net debt repayments from borrowings of approximately $53.2 million and net repayments of the J. Aron deferred payment arrangement of $1.5 million.
Capital Expenditures
Our capital expenditures for the nine months ended September 30, 2018 totaled approximately $30.2 million and were primarily related to the first phase of our hydrotreater construction at our Hawaii refinery, other refinery facilities and equipment at both refineries, and scheduled maintenance. Our capital expenditure budget for 2018 ranges from $50 million to $55 million and primarily relates to annual maintenance costs and growth projects at our refining and retail segments, including the first phase of our hydrotreater construction to increase ultra-low sulfur distillate production capacity at our Hawaii refinery and expansion projects at our Wyoming refinery.

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We also continue to seek strategic investments in business opportunities, but the amount and timing of those investments are not predictable.
Commitments and Contingencies
Supply and Offtake Agreements. On June 1, 2015, we entered into the Supply and Offtake Agreements with J. Aron to support the operations of our Hawaii refinery. On May 8, 2017, we and J. Aron amended the Supply and Offtake Agreements and extended the term through May 31, 2021 with a one-year extension option upon mutual agreement of the parties. The Supply and Offtake Agreements were amended and restated on December 21, 2017 in connection with the issuance of the 7.75% Senior Secured Notes and the entry into the ABL Credit Facility. On June 27, 2018, we and J. Aron amended the Supply and Offtake Agreements to increase the amount that we may defer under the deferred payment arrangement. Please read Note 8—Inventory Financing Agreements for more information.
Consent Decree. On July 18, 2016, PHR and subsidiaries of Tesoro entered into a consent decree with the EPA, the DOJ, and other state governmental authorities concerning alleged violations of the federal CAA related to the ownership and operation of multiple facilities owned or formerly owned by Tesoro and its affiliates (“Consent Decree”), including our Hawaii refinery. As a result of the Consent Decree, PHR expanded its previously-announced 2016 Hawaii refinery turnaround to undertake additional capital improvements to reduce emissions of air pollutants, to provide for certain nitrogen oxide and sulfur dioxide emission controls and monitoring and to install certain leak detection and repair equipment required by the Consent Decree. Although the turnaround was completed during the third quarter of 2016, work related to the Consent Decree is ongoing.
Tesoro is responsible under the Environmental Agreement for directly paying, or reimbursing PHR, for all reasonable third-party capital expenditures incurred pursuant to the Consent Decree to the extent related to acts or omissions prior to the date of the closing of the PHR acquisition. Tesoro is obligated to pay all applicable fines and penalties related to the Consent Decree. Please read Note 12—Commitments and Contingencies for more information.
Wyoming refinery. Our Wyoming refinery is subject to a number of consent decrees, orders, and settlement agreements involving the EPA and/or the Wyoming Department of Environmental Quality, some of which date back to the late 1970s and several of which remain in effect, requiring further actions at the Wyoming refinery. Please read Note 12—Commitments and Contingencies for more information.

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Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q may constitute “forward-looking” statements as defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (“PSLRA”) or in releases made by the SEC, all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties, and other important factors including, without limitation, our beliefs with regard to available capital resources, our beliefs regarding the likelihood or impact of any potential fines or penalties and of the fair value of certain assets, and our expectations with respect to laws and regulations, including environmental regulations and related compliance costs and any fines or penalties related thereto, including potential fines and penalties related to Wyoming Refining; our expectations regarding the sufficiency of our cash flows and liquidity; our expectations regarding anticipated capital improvements and the timing and cost of work that remains to be completed related to the Consent Decree; our expectations regarding the impact of the adoption of certain accounting standards; our beliefs as to the impact of changes to inputs regarding the valuation of our stock warrants, as well as our estimates regarding the fair value of such warrants and certain indebtedness; estimated costs to settle claims from the Delta bankruptcy; the estimated value of, and our ability to settle, legal claims remaining to be settled against third parties; our expectations regarding the closing of the Hawaii Refinery Expansion, including the timing of closing and the anticipated synergies and other benefits thereof; our expectations regarding certain tax liabilities and debt obligations; our expectations and estimates regarding our Supply and Offtake Agreements; management’s assumptions about future events; our ability to raise additional debt or equity capital; our ability to make strategic investments in business opportunities; and the estimates, assumptions and projections regarding future financial condition, results of operations, liquidity, and cash flows. These and other forward-looking statements could cause the actual results, performance, or achievements of Par and its subsidiaries to differ materially from any future results, performance, or achievements expressed or implied by such forward-looking statements. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “may,” “will,” “would,” “could,” “should,” “seeks,” or “scheduled to,” or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act, and the PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws.
The forward-looking statements contained in this Quarterly Report on Form 10-Q are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control, including those set out in our most recent Annual Report on Form 10-K and this Quarterly Report on Form 10-Q under “Risk Factors.”
In addition, management’s assumptions about future events may prove to be inaccurate. All readers are cautioned that the forward-looking statements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance; and we cannot assure any reader that such statements will be realized or that the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to factors described above and under Critical Accounting Policies and Risk Factors included in our most recent Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q. All forward-looking statements speak only as of the date they are made. We do not intend to update or revise any forward-looking statements as a result of new information, future events, or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
Our earnings, cash flow, and liquidity are significantly affected by commodity price volatility. Our Revenues fluctuate with refined product prices and our Cost of revenues (excluding depreciation) fluctuates with movements in crude oil and feedstock prices. Assuming all other factors remain constant, a $1 per barrel change in average gross refining margins, based on our throughput for the three months ended September 30, 2018 of 89 thousand barrels per day, would change annualized operating income by approximately $31.9 million. This analysis may differ from actual results.
In order to manage commodity price risks, we utilize exchange-traded futures, options, and OTC swaps to manage commodity price risks associated with:
the price for which we sell our refined products;
the price we pay for crude oil and other feedstocks;
our crude oil and refined products inventory; and
our fuel requirements for our Hawaii refinery.

48


We are required under the Supply and Offtake Agreements to hedge the time spread between the period of crude oil cargo pricing and the month of delivery for certain crude oil purchases. We manage this exposure by entering into swaps with J. Aron. Please read Note 8—Inventory Financing Agreements for more information.
All of our futures and OTC swaps are executed to economically hedge our physical commodity purchases, sales, and inventory. Our open futures and OTC swaps expire at various dates through February 28, 2019. At September 30, 2018, these open commodity derivative contracts represent:
OTC swap purchases of 181 thousand barrels that economically hedge our crude oil and refined products month-end target inventory under our Supply and Offtake Agreements;
futures sales contracts of 125 thousand barrels that economically hedge our jet fuel inventory;
OTC swap sales of 250 thousand barrels that economically hedge our refined products exports;
futures purchases contracts of 305 thousand barrels that economically hedge our sales of refined products; and
option collars of 60 thousand barrels per month and OTC swaps of 15 thousand barrels per month, both through December 2018, that economically hedge our internally consumed fuel.
Based on our net open positions at September 30, 2018, a $1 change in the price of crude oil, assuming all other factors remain constant, would result in a change of approximately $0.2 million to the fair value of these derivative instruments and Cost of revenues (excluding depreciation).
Our predominant variable operating cost is the cost of fuel consumed in the refining process, which is included in Cost of revenues (excluding depreciation) on our condensed consolidated statements of operations. Assuming normal operating conditions, we consume approximately 72 thousand barrels per day of crude oil during the refining process at our Hawaii refinery. We internally consume approximately 3% of this throughput in the refining process, which is accounted for as a fuel cost. We have economically hedged our internally consumed fuel cost at our Hawaii refinery by purchasing option collars and swaps. These option collars have a weighted-average strike price ranging from a floor of $37.49 per barrel to a ceiling of $68.33 per barrel. The OTC swaps have a weighted-average price of $46.45. We do not economically hedge our internally consumed fuel cost at our Wyoming refinery.
Compliance Program Price Risk
We are exposed to market risks related to the volatility in the price of RINs required to comply with the Renewable Fuel Standard. Our RINs volume obligation is based on a percentage of our Hawaii and Wyoming refineries’ non-renewable gasoline and diesel fuels. The EPA sets the percentage annually. To the degree we are unable to blend the required amount of biofuels to satisfy our RINs obligation, we must purchase RINs on the open market. To mitigate the impact of this risk on our results of operations and cash flows, we may purchase RINs when the price of these instruments is deemed favorable. Some of these contracts are derivative instruments, however, we elect the normal purchases normal sales exception and do not record these contracts at their fair values.
Interest Rate Risk
As of September 30, 2018, we had no outstanding debt that was subject to floating interest rates. We had interest rate exposure in connection with our liability under the J. Aron Supply and Offtake Agreements for which we pay a charge based on three-month LIBOR. An increase of 1% in the variable rate on our indebtedness, after considering the instruments subject to minimum interest rates, would result in an increase to our Cost of revenues (excluding depreciation) and Interest expense and financing costs, net, of approximately $3.0 million and $0.5 million per year, respectively.
We utilize interest rate swaps to manage our interest rate risk. As of September 30, 2018, we had locked in a fixed rate of 0.97% in exchange for a floating interest rate indexed to the three-month LIBOR on an aggregate notional amount of $100 million. The interest rate swap matures in February 2019. In February 2018, we terminated a separate $100 million floating interest rate swap originally maturing in March 2021, which resulted in a realized gain of $3.7 million.
Credit Risk
We are subject to risk of losses resulting from nonpayment or nonperformance by our counterparties. We will continue to closely monitor the creditworthiness of customers to whom we grant credit and establish credit limits in accordance with our credit policy.

49


Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this Quarterly Report on Form 10-Q, as of September 30, 2018, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2018, these disclosure controls and procedures were effective and designed to ensure that the information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized, and reported on a timely basis and accumulated and reported to management as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control over Financial Reporting
There were no changes during the quarter ended September 30, 2018 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financing reporting.
PART II – OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of our business. Please read Note 12—Commitments and Contingencies to our condensed consolidated financial statements for more information.
Item 1A. RISK FACTORS
We are subject to certain risks. For a discussion of these risks, see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017. Except as set forth below, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K.
The pending Hawaii Refinery Expansion may not close as anticipated.
The Hawaii Refinery Expansion is expected to close in the fourth quarter of 2018, subject to the satisfaction of certain closing conditions. If these conditions are not satisfied or waived, the Hawaii Refinery Expansion will not be consummated. Certain of the conditions that remain to be satisfied include, but are not limited to:
the continued accuracy of the representations and warranties contained in the Hawaii Refinery Expansion purchase agreement;
the performance by each party of its obligations under the Hawaii Refinery Expansion purchase agreement;
the absence of any decree, order, injunction, ruling, or judgment that prohibits the Hawaii Refinery Expansion or makes the Hawaii Refinery Expansion unlawful;
the absence of a material adverse effect with respect to the assets to be acquired in the Hawaii Refinery Expansion;
the separation by IES of the refining units that it is retaining at its Hawaii refinery from the assets to be acquired in the Hawaii Refinery Expansion; and
the execution of certain agreements related to the consummation of the Hawaii Refinery Expansion.
In addition, we and IES can mutually agree to terminate the Hawaii Refinery Expansion purchase agreement without completing the Hawaii Refinery Expansion. Further, we or IES can unilaterally terminate the Hawaii Refinery Expansion purchase agreement without the other party’s agreement and without completing the Hawaii Refinery Expansion upon the occurrence of certain events.
We cannot assure you that the pending Hawaii Refinery Expansion will close on our expected timeframe, or at all, or close without material adjustment. 

50


We may fail to successfully integrate the assets to be acquired in the Hawaii Refinery Expansion with our existing business in a timely manner, which could have a material adverse effect on our business, financial condition, results of operations, or cash flows, or we may fail to realize all of the expected benefits of the Hawaii Refinery Expansion, which could negatively impact our future results of operations.
Integration of the assets to be acquired in the Hawaii Refinery Expansion with our existing business will be a complex, time-consuming, and costly process. A failure to successfully integrate the assets with our existing business in a timely manner may have a material adverse effect on our business, financial condition, results of operations, or cash flows. The difficulties of combining the assets with our existing operations include, among other things:
the operational complexities associated with us operating the assets to be acquired in the Hawaii Refinery Expansion and IES operating the related logistics assets as separate business operations when they were previously integrated as a single business operation;
integrating personnel from diverse business backgrounds and organizational cultures;
the diversion of management’s attention from other business concerns;
an inability to complete other internal growth projects and/or acquisitions; and
difficulties integrating the assets with our other assets in Hawaii.
If we consummate the Hawaii Refinery Expansion and if any of these risks or unanticipated liabilities or costs were to materialize, then any desired benefits of the Hawaii Refinery Expansion may not be fully realized, if at all, and our future results of operations could be negatively impacted. In addition, the assets to be acquired in the Hawaii Refinery Expansion may actually perform at levels below the forecasts we used to evaluate the assets, due to factors that are beyond our control. If the assets perform at levels below the forecasts we used to evaluate the assets, then our future results of operations could be negatively impacted.
Flaws in our ongoing due diligence in connection with the assets to be acquired in the Hawaii Refinery Expansion could have a significant negative effect on our financial condition and results of operations.
We conducted limited due diligence in connection with the Hawaii Refinery Expansion prior to signing the purchase agreement with respect thereto and are continuing to conduct due diligence during the period between the signing and closing of the Hawaii Refinery Expansion. Intensive due diligence is time consuming and expensive due to the operations, accounting, finance, and legal professionals who must be involved in the due diligence process and the fact that such efforts do not always lead to a consummated transaction. Diligence may not reveal all material issues that may affect the assets to be acquired in the Hawaii Refinery Expansion. In addition, factors outside of our control may later arise. If, during the due diligence process, we fail to identify issues specific to the assets, we may be forced to later write down or write off assets, restructure our operations, or incur impairment or other charges that could result in other reporting losses. We cannot assure you that we will not have to take write-downs or write-offs in connection with the acquisitions of certain of the assets and assumption of certain liabilities of the assets to be acquired in the Hawaii Refinery Expansion, which could have a negative effect on our financial condition and results of operations following closing.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Dividends
We have not paid dividends on our common stock and we do not expect to do so in the foreseeable future. In addition, under the ABL Credit Facility and the indenture governing the 7.75% Senior Secured Notes, our subsidiaries are restricted from paying dividends or making other equity distributions, subject to certain exceptions.

51


Stock Repurchases    
The following table sets forth certain information with respect to repurchases of our common stock during the quarter ended September 30, 2018:
Period
Total number of shares (or units) purchased (1)
 
Average price paid per share (or unit)
 
Total number of shares (or units) purchased as part of publicly announced plans or programs
 
Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
July 1 - July 31, 2018
3,396

 
$
17.29

 

 

August 1 - August 31, 2018
1,510

 
17.29

 

 

September 1 - September 30, 2018
8,670

 
20.34

 

 

Total
13,576

 
$
19.24

 

 

________________________________________________
(1) All shares repurchased were surrendered by employees to pay taxes withheld upon the vesting of restricted stock awards.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. MINE SAFETY DISCLSOURE
Not applicable.
Item 5. OTHER INFORMATION
In response to the comments received from the staff of the SEC, the Company is supplementing certain disclosures to provide additional information in Item 2, Properties, of its Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “2017 Form 10-K”) with respect to internal controls over reserve estimates, proved undeveloped reserves, and drilling activity included.
As the updated disclosures relate only to Item 2, Properties, of the 2017 Form 10-K, the previously issued consolidated financial statements and footnotes to the 2017 Form 10-K are unchanged. These updated disclosures do not amend or otherwise update any other information in the 2017 Form 10-K and do not reflect events occurring after the filing of the 2017 Form 10-K or update those disclosures affected by subsequent events. Accordingly, these updated disclosures should be read in conjunction with the 2017 Form 10-K and with our subsequent filings with the SEC. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the 2017 Form 10-K. The revised disclosures are presented below.
Internal Controls Over Reserve Estimates, Technical Qualifications, and Technologies Used
Our policies regarding internal controls require our reserve estimates to be prepared in compliance with the SEC definitions and guidance by an independent third-party reserve engineering firm. These reserve estimates are reviewed and approved by our recently formed reserves committee, which ensures that our reserves estimates and related disclosures are prepared in compliance with SEC definitions and guidance taking into consideration recent developments, including the impact of changes in commodity price and drilling and transportation costs, drilling and completion technological innovations, the evaluation of reasons for historically low conversion rates in recent years for previous proved undeveloped reserves, and deviations from previously sanctioned development plans for such reserves.
Our reserves committee comprises the following members: our Chief Executive Officer, our Chief Financial Officer, our General Counsel and Secretary, our Chief Accounting Officer, our Associate General Counsel, our Director of Financial Reporting, and a mergers and acquisitions analyst with a background in the oil and gas industry. The reserves committee also consults with representatives from our independent reserve engineering firm. In addition, with respect to the reserves that we own indirectly through Laramie Energy, our Chief Executive Officer and our Chief Financial Officer participate in Laramie Energy’s board of

52


managers meetings (which generally occur at least quarterly) as our appointees to Laramie Energy’s board of managers under the Laramie Energy limited liability company agreement. Together with the other members of our reserves committee, our Chief Executive Officer and our Chief Financial Officer review Laramie Energy’s development plan and related capital expenditures and meet regularly with Laramie Energy’s management in connection with our review of the development and classification of such reserves to ensure that such reserves are prepared in compliance with the SEC definitions and guidance. Under the Laramie Energy limited liability company agreement, Laramie Energy is required to provide to us certain reports and other information on a monthly, quarterly, and annual basis, including monthly and quarterly reports with respect to drilling and completion activities and a comparison of budgeted amounts for such month or quarter to the actual results of operations for such month or quarter (with a written explanation of any material variances). This information allows our reserves committee to monitor Laramie Energy’s development activities and to evaluate any deviations from Laramie Energy’s development plan to ensure compliance with the SEC definitions and guidance. The reserves committee also utilizes the information received from Laramie Energy to provide feedback to Laramie Energy (through Laramie Energy’s board of managers, if necessary) with respect to such development activities. The enhanced scrutiny and evaluation of Laramie Energy’s development plan by our reserves committee, supported by access to information required by Laramie Energy’s organizational documents and our ability to provide feedback to Laramie Energy at the highest organizational level, ensure that our reserves estimates and related disclosures are prepared in compliance with SEC definitions and guidance.
As we do not operate our interests in our natural gas and crude oil assets, we do not have an internal reserve engineering staff and do not prepare any internal reserve estimates. William Monteleone, our Chief Financial Officer and the chair of our reserves committee, reviews the independence and professional qualifications of the third-party engineering firms we engage with the other members of our reserves committee. He also supervises the submission of technical and financial data to third-party engineering firms and reviews the prepared reports with the other members of our reserves committee. Mr. Monteleone has more than nine years of experience in senior financial positions in the oil and gas industry. The reserves estimates shown herein have been independently evaluated by Netherland, Sewell & Associates, Inc. (“NSAI”), a worldwide leader of petroleum property analysis for industry and financial organizations and government agencies. NSAI was founded in 1961 and performs consulting petroleum engineering services under Texas Board of Professional Engineers Registration No. F-2699. Within NSAI, the technical persons primarily responsible for preparing the estimates set forth in the NSAI reserves report incorporated herein are Mr. Benjamin W. Johnson and Mr. John G. Hattner. Mr. Johnson, a Licensed Professional Engineer in the State of Texas (No. 124738), has been practicing consulting petroleum engineering at NSAI since 2007 and has over two years of prior industry experience. He graduated from Texas Tech University in 2005 with a Bachelor of Science Degree in Petroleum Engineering. Mr. Hattner, a Licensed Professional Geoscientist in the State of Texas, Geophysics (License No. 559), has been practicing consulting petroleum geoscience at NSAI since 1991 and has over 11 years of prior industry experience. He graduated from University of Miami, Florida, in 1976 with a Bachelor of Science Degree in Geology; from Florida State University in 1980 with a Master of Science Degree in Geological Oceanography; and from Saint Mary’s College of California in 1989 with a Master of Business Administration Degree. Both technical principals meet or exceed the education, training, and experience requirements set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers; both are proficient in judiciously applying industry standard practices to engineering and geoscience evaluations as well as applying SEC and other industry reserves definitions and guidelines. The professional qualifications of the individuals at NSAI who were responsible for overseeing the preparation of our reserve estimates as of December 31, 2017 have been filed as part of Exhibit 99.1 to this Annual Report on Form 10-K.
A variety of methodologies were used to determine our proved reserve estimates. The principal methodologies employed are decline curve analysis, analog type curve analysis, log analysis, and analogy. Some combination of these methods is used to determine reserve estimates in substantially all of our fields.
Proved Undeveloped Reserves
All of our proved undeveloped reserves at December 31, 2017 are held through our minority equity ownership in Laramie Energy. The following table provides information regarding changes in our share of Laramie Energys proved undeveloped reserves for the year ended December 31, 2017.

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Gas
 
Oil
 
NGLs
 
Total
 
(MMcf)
 
(Mbbl)
 
(Mbbl)
 
(MMcfe)
Proved undeveloped reserves at December 31, 2016 (1)
150,302

 
451

 
4,195

 
178,181

Revisions of previous estimates
(13,152
)
 
55


(732
)
 
(17,216
)
Extensions and discoveries

 

 

 

Acquisitions

 

 

 

Conversion to proved developed reserves
(18,572
)
 
(57
)
 
(550
)
 
(22,215
)
Proved undeveloped reserves at December 31, 2017
118,578

 
449

 
2,913

 
138,750

_______________________________________________
(1)
We have revised our previously disclosed proved undeveloped reserves quantities as of December 31, 2016 to reflect the removal of Laramie Energys proved undeveloped locations scheduled for completion more than 5 years from initial booking that were classified as proved undeveloped reserves as of December 31, 2016. For additional information, please read Note 23—Supplemental Oil and Gas Disclosures (Unaudited) to our consolidated financial statements under Item 8 of this Form 10-K.
As of December 31, 2017, our share of Laramie Energy’s proved undeveloped reserves totaled 138,750 MMcfe, an approximate 22% decrease from proved undeveloped reserves at December 31, 2016. The decrease in our share of Laramie Energy’s proved undeveloped reserves was due to the following:
During the year ended December 31, 2017, Laramie Energy expended approximately $23.3 million in connection with the development of its proved undeveloped reserves to convert 30 locations to proved developed reserves on original three column spacing per section as discussed in “Drilling Activity” below. Our share of Laramie’s proved undeveloped reserves converted to proved developed reserves during 2017 was 22,215 MMcfe. While the total number of proved undeveloped locations converted to proved developed reserves during 2017 was substantially consistent with Laramie Energy’s original development plan (the “2017 development plan”), of the 30 locations converted to proved developed locations in 2017, only 9 were originally scheduled to be completed in 2017, and the remaining 21 were accelerated into 2017. This is primarily due to Laramie Energy renegotiating its gathering and processing contract with its primary gathering and processing counterparty (the “Gathering Contract”) in January 2017, and modifying its development schedule to take advantage of cost reductions with respect to certain locations covered by the Gathering Contract. The 21 locations that were accelerated in 2017 were added to the 2017 development plan because they are covered by the Gathering Contract. During 2017, Laramie Energy also converted 30,362 MMcfe of probable reserves from 44 locations to proved developed reserves. Laramie Energy added these locations to the 2017 development plan because they are covered by the Gathering Contract. Four of these 44 locations representing 2,730 MMcfe of reserves were originally scheduled as proved undeveloped reserves within the 2016 year end development plan based upon three column spacing per section. During 2017, Laramie Energy shifted, based upon technological innovations in the field, to two column spacing per section and converted these four locations to proved developed reserves. We considered these locations as conversions from probable reserves to proved developed reserves during the year. In July 2017, while preparing proved undeveloped reserve locations necessary to fulfill its minimum volume commitment owed to Occidental Petroleum Corporation (“Occidental”) in connection with certain acreage acquired from Occidental in March 2016, Laramie Energy experienced a drilling pad failure that affected two drilling pad sites and resulted in the rescheduling of the drilling of 27 locations from 2017 to 2018. These locations were subsequently drilled and completed in early 2018.
With respect to the development plan for 2018, Laramie Energy finalized the locations necessary to take advantage of cost reductions covered by the Gathering Contract as well as to satisfy the minimum volume commitment owed to Occidental, resulting in the addition of 32 locations and 11,882 MMcfe of proved undeveloped reserves at year-end 2017. A net 6 locations and 8,908 MMcfe of proved undeveloped reserves were added in connection with Laramie Energy’s shift to two column spacing in acreage acquired from Occidental in March 2016. 40 locations and 22,485 MMcfe were added that were drilled but not completed as of such time and previously categorized as probable reserves. 45 locations and 28,508 MMcfe were added due to proximity to the water treatment facility discussed in “Drilling Activity” below, while 27 locations and 15,071 MMcfe were dropped due to their distance from the water treatment facility. An additional 124 locations and 71,819 MMcfe were dropped in favor of other locations due to their proximity to infrastructure and ability to satisfy contractual obligations in the Gathering Contract.
In recognition of Laramie Energy’s historically low conversion rate, the potential impact of recent commodity price volatility, and Par’s position as an equity interest owner without control of Laramie Energy’s operations, Par has

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decided to base its determination of Laramie Energy’s proved undeveloped reserves at year end 2017 on only a two year drilling and three year completion time horizon. Members of our reserves committee met regularly with Laramie Energy’s management to finalize our determination of proved undeveloped reserves at year end 2017. The negative revisions of 17,216 MMcfe to our share of Laramie Energy’s proved undeveloped reserves during 2017 are primarily related to the change in Par’s booking policy.
Laramie Energy expects to expend approximately $101.8 million and $73.1 million to convert approximately 122 and 60 proved undeveloped locations to proved developed reserves in 2018 and 2019, respectively. Through March 6, 2018, Laramie Energy had already drilled 25 and completed 22 of the proved undeveloped locations included in the 2017 reserve report.
As of December 31, 2017, Laramie Energy had no proved undeveloped reserves that are expected to remain undeveloped for five years or more after booking as proved reserves.
Drilling Activity
Laramie Energy is currently running one drilling rig performing multi-well pad drilling in the Mesaverde Formation. Due to the emergence and further refinement of certain technological innovations in completion techniques such as low-cost proppantless fracturing, or “sandless fracing,” Laramie Energy is utilizing enhanced frac design to reduce the overall number of wells required to drain the same proven undeveloped acreage. As a result, Laramie Energy adjusted its development well pattern from three to two column spacing per section in 2017 to account for these improvements. This drilling pattern is intended to more efficiently develop the same sections, acreage, and reserves as were targeted in prior development plans with fewer wells per section. Our current development plan is designed to take advantage of the improved efficiencies provided by this drilling pattern as well as cost reductions provided by the Gathering Contract described above and a $17.6 million water gathering, treating, storage, and redelivery system completed by Laramie Energy in 2017 (the “water treatment facility”). During 2017, drill times averaged 4.9 days per well, or 6.3 wells per month, and the typical pad contained 16-24 wells, depending on the well spacing being utilized on the pad.
Laramie Energy completed 74 natural gas wells during the year ended December 31, 2017 that were drilled during 2017 and prior years. Laramie Energy drilled no exploratory wells and 124 development wells during 2017. As of December 31, 2017, Laramie Energy had drilled but not completed 59 natural gas development wells.
During 2016, Laramie Energy completed 56 natural gas wells that were drilled during 2016 and prior years. During 2015, Laramie Energy completed 24 natural gas wells that were drilled during 2015 and prior years. The operators of our other natural gas and oil interests in Colorado and New Mexico did not drill any exploratory or development wells during 2017, 2016, and 2015.



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Item 6. EXHIBITS

2.1
 
 
2.2
 
 
2.3
 
 
2.4
 
 
2.5
 
 
2.6
 
 
2.7
 
 
2.8
 
 
2.9
 
 
2.10
 
 
3.1
 
 
3.2
 
 
4.1
 
 
4.2
 
 
4.3
 
 
4.4
 
 

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4.5
 
 
4.6
 
 
4.7
 
 
4.8
 
 
4.9
 
 
4.10
 
 
4.11
 
 
4.12
 
 
4.13
 
 
4.14
 
 
4.15
 
 
4.16
 
 
4.17
 
 
10.1
 
 
10.2
 
 
10.3
 
 
10.4
 
 
31.1
 
 
31.2
 
 
32.1
 
 

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32.2
 
 
101.INS
XBRL Instance Document.**
 
 
101.SCH
XBRL Taxonomy Extension Schema Documents.**
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.**
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.**
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.**
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.**
*     Filed herewith.
**    These interactive data files are furnished and deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
@    Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish supplementally a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.
#     Confidential treatment has been requested for portions of this exhibit. Omissions are designated with brackets containing asterisks. As part of our confidential treatment request, a complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange of Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
PAR PACIFIC HOLDINGS, INC.
(Registrant)
 
 
 
 
 
 
By:
/s/ William Pate
 
 
 
 
William Pate
 
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
 
 
By:
/s/ William Monteleone
 
 
 
 
William Monteleone
 
 
 
 
Chief Financial Officer
 
 

Date: November 7, 2018



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