Company Quick10K Filing
Quick10K
Par Pacific Holdings
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$17.20 49 $849
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-02-21 Regulation FD, Exhibits
8-K 2019-01-09 Enter Agreement, M&A, Off-BS Arrangement, Sale of Shares, Regulation FD, Exhibits
8-K 2018-12-19 Enter Agreement, Sale of Shares, Regulation FD, Other Events, Exhibits
8-K 2018-12-12 Officers, Regulation FD, Exhibits
8-K 2018-12-10 Enter Agreement, Exhibits
8-K 2018-12-06 Other Events, Exhibits
8-K 2018-11-26 Enter Agreement, Sale of Shares, Regulation FD, Exhibits
8-K 2018-11-07 Regulation FD, Exhibits
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-08-29 Enter Agreement, Sale of Shares, Regulation FD, Exhibits
8-K 2018-08-08 Regulation FD, Exhibits
8-K 2018-08-07 Earnings, Exhibits
8-K 2018-07-26 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-07-19 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-05-14 Shareholder Vote
8-K 2018-05-08 Earnings, Exhibits
8-K 2018-03-26 Regulation FD, Exhibits
8-K 2018-03-23 Other Events, Regulation FD, Exhibits
8-K 2018-03-06 Officers
8-K 2018-03-05 Earnings, Exhibits
8-K 2018-02-14 Regulation FD, Exhibits
8-K 2018-01-09 Enter Agreement, Regulation FD, Exhibits
PE Parsley Energy
MGY Magnolia Oil & Gas
GPOR Gulfport Energy
DNR Denbury Resources
MCF Contango Oil & Gas
LONE Lonestar Resources
AREX Approach Resources
MVO MV Oil Trust
DWSN Dawson Geophysical
ECT ECA Marcellus Trust I
PARR 2018-09-30
Part I - Financial Information
Item 1. Financial Statements
Note 1-Overview
Note 2-Summary of Significant Accounting Policies
Note 3-Investment in Laramie Energy, Llc
Note 4-Acquisitions
Note 5-Revenue Recognition
Note 6-Inventories
Note 7-Prepaid and Other Current Assets
Note 8-Inventory Financing Agreements
Note 9-Debt
Note 10-Derivatives
Note 11-Fair Value Measurements
Note 12-Commitments and Contingencies
Note 13-Stockholders' Equity
Note 14-Income (Loss) per Share
Note 15-Income Taxes
Note 16-Segment Information
Note 17-Related Party Transactions
Note 18-Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclsoure
Item 5. Other Information
Item 6. Exhibits
EX-10.1 a20180930ex101ctr-eagletop.htm
EX-10.2 a20180930ex102laramieunitp.htm
EX-10.3 a20180930ex103ablamendment2.htm
EX-10.4 a20180930ex104laramiefourt.htm
EX-31.1 a20180930ex311-wp20180930.htm
EX-31.2 a20180930ex312-wm20180930.htm
EX-32.1 a20180930ex321-wp20180930.htm
EX-32.2 a20180930ex322-wm20180930.htm

Par Pacific Holdings Earnings 2018-09-30

PARR 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

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