Notes to Consolidated Financial Statements
(Unaudited)
(1) Reorganization under Chapter 11
In December 2011, Delta Petroleum Corporation (“Delta”) and its subsidiaries Amber Resources Company of Colorado, DPCA, LLC, Delta Exploration Company, Inc., Delta Pipeline, LLC, DLC, Inc., CEC, Inc. and Castle Texas Production Limited Partnership filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). In January 2012, Castle Exploration Company, Inc., a subsidiary of Delta Pipeline, LLC, also filed a voluntary petition under Chapter 11 in the Bankruptcy Court. Delta and its subsidiaries included in the bankruptcy petitions are collectively referred to as the “Debtors.”
In December 2011, the Debtors filed a motion requesting an order to approve matters relating to a proposed sale of Delta’s assets, including bidding procedures, establishment of a sale auction date and establishment of a sale hearing date. In January 2012, the Bankruptcy Court issued an order approving these matters. In March 2012, Delta announced that it was seeking court approval to amend the bidding procedures for its upcoming auction to allow bids relating to potential plans of reorganization as well as asset sales. On March 22, 2012, the Bankruptcy Court approved the revised procedures.
Following the auction, the Debtors obtained approval from the Bankruptcy Court to proceed with Laramie Energy II, LLC (“Laramie”) as the sponsor of a plan of reorganization (the “Plan of Reorganization” or the “Plan”) by which Laramie and Delta intended to form a new joint venture called Piceance Energy, LLC (“Piceance Energy”). In June 2012, Delta entered into a Contribution Agreement (the “Contribution Agreement”) with Piceance Energy and Laramie to effect the transactions contemplated by the Plan.
On June 4, 2012, the Debtors filed a disclosure statement relating to the Plan of Reorganization. The Plan was confirmed on August 15, 2012 and was declared effective on August 31, 2012 (the “Emergence Date”). On the Emergence Date, Delta consummated the transaction contemplated by the Contribution Agreement and each of Delta and Laramie contributed to Piceance Energy their respective assets in the Piceance Basin. Piceance Energy is owned 66.66% by Laramie and 33.34% by Delta (referred to after the closing of the transaction as “Successor”). At the closing, Piceance Energy entered into a new credit agreement, borrowed $100 million under that agreement, and distributed approximately $72.6 million net of settlements to the Company and approximately $24.9 million to Laramie. The Company used its distribution to pay bankruptcy expenses and to repay its secured debt. The Company also entered into a new credit facility and borrowed $13 million under that facility at closing, and used those funds primarily to pay bankruptcy claims and expenses.
On the Emergence Date, Delta also amended and restated its certificate of incorporation and bylaws and changed its name to Par Petroleum Corporation (“Par”). The amended and restated certificate of incorporation contains restrictions that render void certain transfers of the Company stock that involve a holder of five percent or more of its shares. The purpose of this provision is to preserve certain of the Company’s tax attributes including net operating loss carryforwards that the Company believes may have value. Under the amended and restated bylaws, the Company’s board of directors has five members, each of whom was appointed by its stockholders pursuant to a Stockholders’ Agreement entered into on the Emergence Date.
Following the reorganization, Par retained its interest in the Point Arguello Unit offshore California and other miscellaneous assets and certain tax attributes, including significant net operating loss carryforwards. Based upon the Plan as confirmed by the Bankruptcy Court, Delta’s creditors were issued approximately 147.7 million shares of common stock, and Delta’s former stockholders received no consideration under the Plan.
Contemporaneously with the consummation of the Contribution Agreement, the Company, through a wholly-owned subsidiary, entered into a Limited Liability Company Agreement with Laramie that governs the operations of Piceance Energy (the “LLC Agreement”).
In addition, Laramie and Piceance Energy entered into a Management Services Agreement pursuant to which Laramie provides certain services to Piceance Energy for a fee of $650,000 per month.
(2) Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Par Petroleum Corporation and its consolidated subsidiaries. All
inter-company balances and transactions have been eliminated in consolidation. At September 30, 2013, the majority of our natural gas and oil activities were conducted through partnerships and joint ventures. We will include our proportionate share of assets, liabilities, revenues and expenses from these entities in our consolidated financial statements. We do not have any off-balance sheet financing arrangements (other than operating leases) or any unconsolidated special purpose entities.
Our wholly owned primary subsidiaries include Par Piceance Energy, LLC, which owns our investment in Piceance Energy (see Note 3), Texadian Energy, Inc. (formerly known as SEACOR Energy Inc. (“Texadian”)), which we acquired on December 31, 2012 (see Note 4) and Hawaii Pacific Energy, LLC (“Hawaii Pacific Energy”) which acquired all of the outstanding membership interests of Hawaii Independent Energy, LLC (formerly known as Tesoro Hawaii, LLC (“HIE”)), on September 25, 2013 (see Note 4).
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q. Some information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), have been condensed or omitted pursuant to the Securities and Exchange Commission’s (“SEC”) rules and regulations. In our opinion, all adjustments, consisting only of normal recurring accruals, considered necessary to state fairly the information in our unaudited condensed consolidated financial statements have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the complete fiscal year. As a result, these unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto previously filed with our Annual Report on Form 10-K for the year ended December 31, 2012.
Fresh Start Accounting and the Effects of the Plan
As required by U.S. GAAP, effective as of August 31, 2012, Par adopted fresh start accounting following the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 852 “Reorganizations” (“ASC 852”). Fresh start accounting results in us becoming a new entity for financial reporting purposes. Accordingly, our consolidated financial statements for periods prior to August 31, 2012 reflect the operations of Delta prior to reorganization (hereinafter also referred to as “Predecessor”) and are not comparable to the consolidated financial statements presented on or after August 31, 2012. Accordingly, certain disclosures relating to the Predecessor’s financial statements for the two and eight months ended August 31, 2012 have been omitted. Fresh start accounting was required upon emergence from Chapter 11 because (i) holders of voting shares immediately before confirmation of the Plan received less than 50% of the emerging entity and (ii) the reorganization value of our assets immediately before confirmation of the Plan was less than our post-petition liabilities and allowed claims. Fresh start accounting results in a new basis of accounting and reflects the allocation of our estimated fair value to underlying assets and liabilities.
Cash Equivalents
We consider all highly liquid investments with maturities at date of acquisition of three months or less to be cash equivalents.
Restricted Cash
As of September 30, 2013, restricted cash totaled approximately $1.7 million and consisted of approximately $720,000 designated to settle bankruptcy matters that is not available for operating activities (see Note 8) and approximately $1.0 million held at a commercial bank to support a letter of credit facility related to our acquisition of HIE. At December 31, 2012, restricted cash totaled approximately $24.0 million, including amounts held at a commercial bank to support a letter of credit facility totaling approximately $19.0 million (see Note 6) and approximately $4.8 million designated to settle bankruptcy matters. During the nine months ended September 30, 2013, the $19.0 million of restricted cash supporting a letter of credit facility was released to us and was made available for general corporate purposes.
Trade Receivables
Texadian’s customers primarily included major independent refining and marketing companies. HIE’s receivables include receivables from the sale of refined products and proprietary credit card receivables from sales at its retail locations. Customers are required to pay in advance or are granted credit on a short-term basis when credit risks are considered acceptable. We routinely review our trade receivables and make provisions for doubtful accounts based on existing customer and economic conditions; however, those provisions are estimates and actual results could differ from those estimates and those differences may be material. Trade receivables that are deemed uncollectible are removed from accounts receivable and from the allowance for doubtful accounts when collection efforts have been unsuccessful. As of September 30, 2013, we had no significant allowance for doubtful accounts. Several of Texadian’s physical purchases and sales are with the same counterparty and are settled on a net basis and therefore Texadian’s receivables are recorded net of any corresponding payables. Additionally, we provide an accrual for natural gas and oil sales using the sales method by
estimating natural gas and oil volumes and prices for months in which revenues have not been received using production and pricing information provided by the operator.
Refined Product Exchanges
As further described in Note 4, HIE has entered into supply and exchange contracts whereby it agrees to deliver a particular quantity and quality of refined products at a specified location and date to a particular counterparty and to receive from the same counterparty a particular quantity and quality of refined products at a specified location on the same or another specified date. The exchange receipts and deliveries are nonmonetary transactions that are settled in kind on a volumetric basis, with the exception of associated grade or location differentials that are settled in cash each month. These transactions are not recorded as revenue because they involve the exchange of refined product inventories held for sale in the ordinary course of business to facilitate sales to customers. The exchange transactions are recognized at the carrying amount of the inventory transferred plus or minus any cash settlement due to grade or location differentials.
Inventories
Texadian’s inventories, which consist of in-transit oil, are stated at the lower of cost or market. We record impairments, as needed, to adjust the carrying amount of inventories to the lower of cost or market.
HIE acquires substantially all of its crude oil from Barclays Bank PLC (“Barclays”) under supply and exchange agreements as described in Note 4. Legal title to the crude oil is held by Barclays and the crude oil is stored in HIE’s storage tanks for the benefit of Barclays pursuant to a storage agreement until it is needed for further use in the refining process. At that time, certain nominated volumes are drawn out of the storage tanks and purchased by us. After processing and subject to the supply and exchange agreements described in Note 4, Barclays takes title to the refined products when the refined products enters the tanks which are then stored in HIE’s storage tanks until sold at HIE’s retail locations or to third parties. We record the inventory owned by Barclays on our behalf as inventory with a corresponding accrued liability on our balance sheet because we maintain the risk of loss until the refined products are sold to third parties. Inventories are stated at the lower of cost or market. We use last-in, first-out as the primary method to determine the cost of crude oil and refined product inventories in our refining and retail segments. We value merchandise along with spare parts, materials and supplies at average cost.
Investment in Unconsolidated Affiliate
Investments in operating entities where we have the ability to exert significant influence, but do not control the operating and financial policies, are accounted for using the equity method. Our share of net income (loss) of these entities is recorded as income (loss) from unconsolidated affiliates in the consolidated statements of operations.
Our investment in unconsolidated affiliates consisted of our ownership interest in Piceance Energy (see Note 3).
Assets Held for Sale
As of December 31, 2012, we classified our compressors as held for sale, which were recorded at the lower of cost or estimated net realizable value. On February 20, 2013, these compressors were sold for approximately $2.9 million resulting in a gain of $50,000.
Property and Equipment
We account for our natural gas and oil exploration and development activities using the successful efforts method of accounting. Under such method, costs of productive exploratory wells, development dry holes and productive wells and undeveloped leases are capitalized. Natural gas and oil lease acquisition costs are also capitalized. Exploration costs, including personnel costs, certain geological or geophysical expenses and delay rentals for natural gas and oil leases, are charged to expense as incurred. Exploratory drilling costs are initially capitalized, then evaluated quarterly and charged to expense if and when the well is determined not to have found reserves in commercial quantities. The sale of a partial interest in a proved property is accounted for as a cost recovery and no gain or loss is recognized as long as this treatment does not significantly affect the units-of-production amortization rate. A gain or loss is recognized for all other sales of producing properties.
Unproved properties with significant acquisition costs are assessed quarterly on a property-by-property basis and any impairment in value is charged to expense. If the unproved properties are determined to be productive, the related costs are transferred to proved oil and natural gas properties and are depleted. Proceeds from sales of partial interests in unproved leases are accounted for as a recovery of cost without recognizing any gain or loss until all costs have been recovered.
Depreciation, depletion and amortization of capitalized acquisition, exploration and development costs is computed using the units-of-production method by individual fields (common reservoirs) using proved producing natural gas and oil reserves amortized as the related reserves are produced. Associated leasehold costs are depleted using the unit-of-production method based
on total proved natural gas and oil reserves amortized as the related reserves are produced.
HIE’s operations, especially those of the refining segment, are highly capital intensive. The refinery consists of a series of interconnected, highly integrated and interdependent crude oil processing facilities and supporting logistical infrastructure, and these units are regularly improved. We plan for these improvements by developing a multi-year capital program that is updated and revised based on changing internal and external factors.
We capitalize the cost of additions, major improvements and modifications to property, plant and equipment. The cost of repairs and normal maintenance of property, plant and equipment is expensed as incurred. Major improvements and modifications of property, plant and equipment are those expenditures that either extend the useful life, increase the capacity or improve the operating efficiency of the asset, or improve the safety of our operations. We compute depreciation of property, plant and equipment using the straight-line method, based on the estimated useful life of each asset. The useful lives range from 8 to 47 years for refining assets, 3 to 30 years for logistics assets, 14 to 18 years for retail assets, 3 to 7 years for corporate assets and 3 for software. We record property under capital leases at the lower of the present value of minimum lease payments using our incremental borrowing rate or the fair value of the leased property at the date of lease inception. We depreciate leasehold improvements and property acquired under capital leases over the shorter of the lease term or the economic life of the asset.
Goodwill and Other Intangible Assets
We recorded goodwill as a result of our acquisitions of Texadian and have preliminarily recognized goodwill with the acquisition of HIE. Goodwill was attributable to opportunities expected to arise from combining our operations with Texadian’s and HIE’s, and specifically utilization of our net operating loss carryforwards, as well as other intangible assets that do not qualify for separate recognition. In addition, as a result of our acquisitions of Texadian and HIE, we recorded certain other identifiable intangible assets. These intangible assets include relationships with suppliers and shippers, favorable railcar leases, trade names and trademarks. These intangible assets will be amortized over their estimated useful lives on a straight line basis.
Impairment of Goodwill and Long-Lived Assets
Goodwill is not amortized, but is tested for impairment. We assess the recoverability of the carrying value of goodwill during the fourth quarter of each year or whenever events or changes in circumstances indicate that the carrying amount of the goodwill of a reporting unit may not be fully recoverable. We first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Qualitative factors assessed for the reporting unit would include the competitive environments and financial performance of the reporting unit. If the qualitative assessment indicates that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, a two-step quantitative test is required. If required, we will review the carrying value of the net assets of the reporting unit to the estimated fair value of the reporting unit, based upon a multiple of estimated earnings. If the carrying value exceeds the estimated fair value of the reporting unit, an
impairment indicator exists and an estimate of the impairment loss is calculated. The fair value calculation uses Level 3 (see Note 7) inputs and includes multiple assumptions and estimates, including the projected cash flows and discount rates applied. Changes in these assumptions and estimates could result in a goodwill impairment that could materially adversely impact our financial position or results of operations.
We evaluate the carrying value of our intangible assets when impairment indicators are present or when circumstances indicate that impairment may exist under authoritative guidance. When we believe impairment indicators may exist, projections of the undiscounted future cash flows associated with the use of and eventual disposition of the intangible assets are prepared. If the projections indicate that their carrying values are not recoverable, we reduce the carrying values to fair value. These impairment tests are heavily influenced by assumptions and estimates that are subject to change as additional information becomes available.
Our natural gas and oil assets, including our investment in our unconsolidated affiliate, are reviewed for impairment quarterly or when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Estimates of expected future cash flows represent our best estimate based on reasonable and supportable assumptions and projections.
For proved properties, if the expected future cash flows exceed the carrying value of the asset, no impairment is recognized. If the carrying value of the asset exceeds the expected future cash flows, an impairment exists and is measured by the excess of the carrying value over the estimated fair value of the asset. Any impairment provisions recognized are permanent and may not be restored in the future.
We assess proved properties on an individual field basis for impairment each quarter when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. For proved properties, the review consists of a comparison of the carrying value of the asset with the asset’s expected future undiscounted cash flows without interest costs.
For unproved properties, the need for an impairment charge is based on our plans for future development and other activities impacting the life of the property and our ability to recover our investment. When we believe the costs of the unproved property are no longer recoverable, an impairment charge is recorded based on the estimated fair value of the property.
We review property, plant and equipment and other long-lived assets whenever events or changes in business circumstances indicate the net book values of the assets may not be recoverable. Impairment is indicated when the undiscounted cash flows estimated to be generated by those assets are less than the assets’ net book value. If this occurs, an impairment loss is recognized for the difference between the fair value and net book value. Factors that indicate potential impairment include: a significant decrease in the market value of the asset, operating or cash flow losses associated with the use of the asset and a significant change in the asset’s physical condition or use.
Asset Retirement Obligations
An asset retirement obligation (“ARO”) is an estimated liability for the cost to retire a tangible asset. Our AROs arise from plugging and abandonment liabilities for our natural gas and oil wells, as well as AROs arising from HIE’s refinery and retail operations. We record AROs at fair value in the period in which we have a legal obligation, whether by government action or contractual arrangement, to incur these costs and can make a reasonable estimate of the fair value of the liability. AROs are calculated based on the present value of the estimated removal and other closure costs using our credit-adjusted risk-free rate. When the liability is initially recorded, we capitalize the cost by increasing the book value of the related long-lived tangible asset. The liability is accreted to its estimated settlement value and the related capitalized cost is depreciated over the asset’s useful life. We recognize a gain or loss at settlement for any difference between the settlement amount and the recorded liability, which is recorded as a loss on asset disposals and impairments in our statements of consolidated operations. We estimate settlement dates by considering our past practice, industry practice, management’s intent and estimated economic lives.
We cannot currently estimate the fair value for certain AROs associated with HIE primarily because we cannot estimate settlement dates (or range of dates) associated with these assets. These AROs include hazardous materials disposal (such as petroleum manufacturing by-products, chemical catalysts, and sealed insulation material containing asbestos), and removal or dismantlement requirements associated with the closure of our refining facility, terminal facilities or pipelines, including the demolition or removal of certain major processing units, buildings, tanks, pipelines or other equipment..
Environmental Matters
We capitalize environmental expenditures that extend the life or increase the capacity of facilities as well as expenditures that prevent environmental contamination. We expense costs that relate to an existing condition caused by past operations and that do not contribute to current or future revenue generation. We record liabilities when environmental assessments and/or remedial efforts are probable and can be reasonably estimated. Cost estimates are based on the expected timing and extent of remedial actions required by governing agencies, experience gained from similar sites for which environmental assessments or remediation have been completed and the amount of our anticipated liability considering the proportional liability and financial abilities of other responsible parties. Usually, the timing of these accruals coincides with the completion of a feasibility study or our commitment to a formal plan of action. Estimated liabilities are not discounted to present value and environmental expenses are recorded primarily in operating expenses in our statements of consolidated operations.
Derivatives and Other Financial Instruments
We may periodically enter into commodity price risk transactions to manage our exposure to natural gas and oil price volatility. These transactions may take the form of non-exchange traded fixed price forward contracts and exchange traded futures contracts, collar agreements, swaps or options. The purpose of the transactions will be to provide a measure of stability to our cash flows in an environment of volatile commodity prices.
Texadian enters into fixed-price forward purchase and sale contracts for crude oil. The contracts typically contain settlement provisions in the event of a failure of either party to fulfill its commitments under the contract. Texadian’s policy is to fulfill or accept the physical delivery of the product, even if shipment is delayed, and it will not net settle. Should Texadian not designate a contract as a normal purchase or normal sale or should a scheduled delivery under the terms of contract not occur, then these exceptions may require the recording of the contract as a derivative. If derivative accounting treatment is required then these
contracts would be recorded at fair value as either an asset or a liability and marked to market each reporting period with changes in fair value being charged to earnings. As of September 30, 2013, we have elected the normal purchase normal sale exemption for these contracts. As such, we did not recognize the unrealized gains or losses related to these contracts in our consolidated financial statements. As of December 31, 2012, we did not elect this exemption for Texadian’s open contracts that were settled in the first quarter of 2013.
In addition, from time to time we may have other financial instruments, such as warrants or embedded debt features, that may be classified as liabilities when either (a) the holders possess rights to net cash settlement, (b) physical or net equity settlement is not in our control, or (c) the instruments contain other provisions that cause us to conclude that they are not indexed to our equity. Such instruments are initially recorded at fair value and subsequently adjusted to fair value at the end of each reporting period through earnings.
As a part of the Plan of Reorganization, we issued warrants (see Note 6) that are not considered to be indexed to our equity. Accordingly, these warrants are accounted for as liabilities. In addition, our delayed draw term loan facility contains certain puts that are required to be accounted for as embedded derivatives. The warrant liabilities and embedded derivatives are accounted for at fair value with changes in fair value reported in earnings.
The carrying value of trade accounts receivable and accounts payable approximates fair value due to their short term nature. Our
long-term debt is recorded on the amortized cost basis. We estimate our long term debt’s fair value to be approximately $61.3 million at September 30, 2013 using a discounted cash flow analysis and an estimate of the current yield 5.7% by reference to market interest rates for term debt of comparable companies which is considered to be a Level 3 fair value measurement (see Note 7).
Accrued Settlement Claims
As of September 30, 2013, we have accrued approximately $6.4 million relating to claims resulting from our bankruptcy (see Note 8). Professional fees relating to the settlement of bankruptcy claims are charged to earnings in the period incurred.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in the results of operations in the period that includes the enactment date. The realizability of deferred tax assets is evaluated quarterly based on a “more likely than not” standard, and to the extent this threshold is not met, a valuation allowance is recorded.
We recognize in the financial statements the impact of an uncertain tax position only if it is more likely than not of being sustained upon examination by the relevant taxing authority based on the technical merits of the position. As a general rule, our open years for Internal Revenue Service (“IRS”) examination purposes are 2010, 2011, and 2012. However, since we have net operating loss carryforwards, the IRS has the ability to make adjustments to items that originate in a year otherwise barred by the statute of limitations under Section 6501 of the Internal Revenue Code of 1986, as amended (the “Code”), in order to re-determine tax for an open year to which those items are carried. Therefore, in a year in which a net operating loss deduction is claimed, the IRS may examine the year in which the net operating loss was generated and adjust it accordingly for purposes of assessing additional tax in the year the net operating loss deductions was claimed. Any penalties or interest as a result of an examination will be recorded in the period assessed.
We expect to incur state income tax liabilities as a result of HIE’s and Texadian’s operations. They operate in states where we have no net operating loss carryovers available to offset taxable income generated within those states. Accordingly, we have accrued state income tax expense of approximately $0 and $650,000 for the three and nine months ended September 30, 2013, respectively.
Stock Based Compensation
We recognize the cost of share based payments over the period the employee provides service, generally the vesting period, and includes such costs in general and administrative expense in the statements of operations. The fair value of equity instruments issued to employees is measured on the grant date and recognized over the service period on a straight-line basis.
Revenue Recognition
Natural Gas and Oil
Revenues are recognized when title to the products transfers to the purchaser. We follow the “sales method” of accounting for our natural gas and oil revenue and recognize sales revenue on all natural gas or oil sold to our purchasers, regardless of whether the sales are proportionate to our ownership in the property. A liability is recognized only to the extent that we have an imbalance on a specific property greater than the expected remaining proved reserves. As of September 30, 2013, our aggregate natural gas and oil imbalances were not material to our consolidated financial statements.
Marketing and Transportation
We recognize revenue when it is realized or realizable and earned. Revenue is realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed or determinable, and collectability is reasonably assured. Revenue that does not meet these criteria is deferred until the criteria are met.
Texadian earns revenues from the sale and transportation of oil and the rental of rail cars. Accordingly, revenues and related costs from sales of oil are recorded when title transfers to the buyer. Transportation revenues are recognized when title passes to the customer, which is when risk of ownership transfers to the purchaser, and physical delivery occurs. Revenues from the rental of railcars are recognized ratably over the lease periods.
Refining and Retail
HIE recognizes revenues upon delivery of goods or services to a customer. For goods, this is the point at which title is transferred and when payment has either been received or collection is reasonably assured. Revenues for services are recorded when the services have been provided. We record certain transactions in cost of sales in our statements of consolidated operations on a net basis. These transactions include nonmonetary crude oil and refined product exchange transactions used to optimize our refinery supply, and sale and purchase transactions entered into with the same counterparty that are deemed to be in contemplation with one another. We include transportation fees charged to customers in revenues in our statements of consolidated operations, while the related transportation costs are included in cost of sales or operating expenses. Federal excise and state motor fuel taxes, which are remitted to governmental agencies through our refining segment and collected from customers in our retail segment, are included in both revenues and cost of sales in our statements of consolidated operations
Other Income
For the nine months ended September 30, 2013, other income totaled approximately $797,000 and consists primarily of a state tax refund totaling approximately $483,000 and a legal settlement of approximately $200,000.
Foreign Currency Transactions
We may, on occasion, enter into transactions denominated in currencies other than our functional currency (“U.S. $”). Gains and losses resulting from changes in currency exchange rates between the functional currency and the currency in which a transaction is denominated are included in foreign currency gains or losses, net in the accompanying consolidated statements of operations in the period in which the currency exchange rates change.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include fair value of assets and liabilities recorded under fresh start accounting, fair value of assets and liabilities recorded under purchase accounting, natural gas and oil reserves, bad debts, depletion and impairment of natural gas and oil properties, income taxes and the valuation allowances related to deferred tax assets, derivatives, asset retirement obligations, contingencies and litigation accruals. Actual results could differ from these estimates.
(3) Investments in Piceance Energy
We account for our 33.34% ownership interest in Piceance Energy using the equity method of accounting because we are able to exert significant influence, but do not control the operating and financial policies, and as a result, we do not meet the accounting
criteria which require us to consolidate the joint venture. The LLC Agreement provides that its sole manager may make a written capital call such that each member shall make additional capital contributions up to an aggregate combined total capital contribution of $60 million ($20 million to our interest), if approved by a majority of its board. If any member does not fund its share of the capital call, its interest may be reduced or diluted by the amount of the shortfall. In addition, Piceance Energy has a $400 million secured revolving credit facility secured by a lien on its natural gas and oil properties and related assets with a borrowing base currently set at $140 million. As of September 30, 2013, the balance outstanding on the revolving credit facility was approximately $90.0 million. We are guarantors of Piceance Energy’s credit facility, with recourse limited to the pledge of our equity interests of Par Piceance Energy. Under the terms of its credit facility, Piceance Energy is generally prohibited from making future cash distributions to its owners, including us.
Piceance Energy holds various commodity hedging instruments to mitigate a portion of the effect of natural gas and oil price fluctuations. The contracts are in the form of costless collars of 15,000 MMBtu/day with floors of an average of $3.37 and ceilings of an average of $4.28 with 5,000 MMBtu/day through March 2014 and 10,000 MMBtu/day through September 2014, and as well as swaps of 10,000 MMBtu/day for an average price of $3.46 through September 2014. Piceance Energy also holds natural gas gathering and processing contracts for a fixed rate expiring on various dates beginning in 2017 through 2032. Some of our contracts require a minimum throughput commitment.
The change in our equity investment in Piceance Energy is as follows:
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Three
Months
Ended
September 30,
2013
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Nine
Months
Ended
September 30,
2013
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(in thousands)
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$
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103,815
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$
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104,434
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Income (loss) from unconsolidated affiliates
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(907
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)
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(1,772
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)
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Capitalized drilling costs obligation paid
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15
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261
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$
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102,923
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$
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102,923
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Summarized balance sheet information and our share of the equity investment are as follows:
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September 30, 2013
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100%
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Our Share
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(Unaudited)
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(in thousands)
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Assets
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Prepaids and other assets
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Natural gas and oil property, successful efforts method of accounting
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Other real estate and land
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Office furniture and equipment
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Less: accumulated depletion, depreciation and amortization
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
|
|
|
|
|
|
Deferred issue costs and other assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
|
|
|
100%
|
|
|
Our Share
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
5,023
|
|
|
$
|
1,675
|
|
|
Natural gas and oil sales payable
|
|
|
11,041
|
|
|
|
3,681
|
|
|
Derivative liabilities
|
|
|
542
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
16,606
|
|
|
|
5,537
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable
|
|
|
90,000
|
|
|
|
30,006
|
|
|
Asset retirement obligations
|
|
|
2,959
|
|
|
|
987
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
92,959
|
|
|
|
30,993
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
109,565
|
|
|
|
36,530
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity
|
|
|
|
|
|
|
|
|
|
Members’ equity
|
|
|
365,046
|
|
|
|
121,706
|
|
|
Accumulated deficit
|
|
|
(9,291
|
)
|
|
|
(3,098
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members’ equity
|
|
|
355,755
|
|
|
|
118,608
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members’ equity
|
|
$
|
465,320
|
|
|
$
|
155,138
|
|
At September 30, 2013, our members’ equity in the underlying net assets of Piceance Energy exceeded the carrying value of our investment recorded on our consolidated balance sheet by approximately $15.7 million. We attribute this difference, which is expected to be permanent, to lack of control and marketability discounts.
Summarized income statement information and our share for the period for which our investment was accounted for under the equity method is as follows:
|
|
|
Three Months Ended
September 30, 2013
|
|
|
|
|
100%
|
|
|
Our Share
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(in thousands)
|
|
Natural gas, oil and natural gas liquids revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas and oil operating expenses
|
|
|
|
|
|
|
|
|
Depletion, depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and debt issue costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2013
|
|
|
|
|
100%
|
|
|
Our Share
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(in thousands)
|
|
Natural gas, oil and natural gas liquids revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas and oil operating expenses
|
|
|
|
|
|
|
|
|
Depletion, depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and debt issue costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) Acquisitions
Texadian Energy, Inc. (formerly known as SEACOR Energy Inc.)
On December 31, 2012, we acquired Texadian, an indirect wholly-owned subsidiary of SEACOR Holdings Inc., for $14.0 million plus estimated net working capital of approximately $4.0 million at closing resulting in approximately $18.0 million of cash paid at closing. Texadian operates an oil transportation, distribution and marketing business with significant logistics capabilities. We acquired Texadian in furtherance of our growth strategy that focuses on the acquisition of income producing businesses. The purchase price for the acquisition was funded with a combination of cash and additional borrowings under the Tranche B Loan (see Note 6).
The purchase was accounted for as a business combination in accordance with ASC 805 whereby the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. Goodwill is defined in ASC 805 as the future economic benefit of other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is attributable to opportunities expected to arise from combining our operations with Texadian’s, and specifically utilization of our net operating loss carryforwards, as well as other intangible assets that do not qualify for separate recognition. In addition, we recorded certain other identifiable intangible assets. These include relationships with suppliers and shippers and favorable railcar leases. These intangible assets will be amortized over their estimated useful lives on a straight line basis, which approximates their consumptive life.
A summary of the fair value of the assets acquired and liabilities assumed is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Net non cash working capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, net of cash acquired
|
|
|
|
|
None of the goodwill or intangible assets are expected to be deductible for income tax reporting purposes.
The results of operations of Texadian are included in our consolidated statement of operations beginning January 1, 2013. We have not presented pro forma results for Predecessor periods as the entities are not comparable.
Hawaii Independent Energy, LLC (formerly known as Tesoro Hawaii, LLC)
On June 17 , 2013 (the “Execution Date”),
our wholly-owned subsidiary, Hawaii Pacific Energy,
entered into a membership interest purchase agreement (the “Purchase Agreement”) with Tesoro Corporation, (the “Seller”) and solely for the purpose set forth in the Purchase Agreement, Tesoro Hawaii, LLC (“Tesoro Hawaii”). Pursuant to the Purchase Agreement, on September 25, 2013 (the “Effective Date”), Hawaii Pacific Energy purchased from the Seller all of the issued and outstanding units representing the membership interests in Tesoro Hawaii (the “Purchased Units”), and indirectly thereby also acquired Tesoro Hawaii’s wholly owned subsidiary, Smiley’s Super Service, Inc. Tesoro Hawaii owns and operates (i) a petroleum refinery located at the Campbell Industrial Park in Kapolei, Hawaii (the “Refinery”), (ii) certain pipeline assets, floating pipeline mooring equipment, and refined products terminals, and (iii) retail assets selling fuel products and merchandise on the islands of Oahu, Maui and Hawaii. Following the acquisition, Tesoro Hawaii was renamed Hawaii Independent Energy, LLC (“HIE”).
Hawaii Pacific Energy purchased the Purchased Units for $75.0 million plus or minus adjustments for net working capital, plus adjustments for inventories at closing and plus certain contingent earnout payments of up to $40.0 million. The earnout payments, if any, are to be paid annually following each of the three calendar years beginning January 1, 2014 through the year ending December 31, 2016, in an amount equal to 20% of the consolidated annual gross margin of HIE in excess of $165.0 million during such calendar years, with an annual cap of $20.0 million. In the event that the Refinery ceases operations or in the event Hawaii Pacific Energy disposes of any facility used in the acquired business, Hawaii Pacific Energy's obligation to make earnout payments could be modified and/or accelerated as provided in the Purchase Agreement. The purchase price was paid with a portion of the net proceeds from the sale of the shares of our common stock in a private transaction, amounts received pursuant to the Supply and Exchange Agreements as described below and the ABL Facility (see Note 6).
Prior to the Execution Date, the Seller had commenced activities to shutdown the Refinery and to convert it into an import terminal. The Purchase Agreement contains certain pre-closing covenants, including covenants related to the startup of operations at the Refinery (the “Refinery Startup Activities”). The expenses associated with the Refinery Startup Activities were approximately $28.0 million (the “Startup Expenses”). Pursuant to the terms of the Purchase Agreement, Hawaii Pacific Energy made an initial deposit of $15.0 million for the Startup Expenses on the Execution Date. The next $5.0 million of Startup Expenses were borne by the Seller, with all Startup Expenses in excess of $20.0 million borne by Hawaii Pacific Energy. Due to the Startup Expenses exceeding $20.0 million, Hawaii Pacific Energy made an additional deposit of $7.0 million for the Startup Expenses on August 5, 2013. In addition, Hawaii Pacific Energy funded $2.3 million on July 23, 2013 for a major overhaul of a gas turbine engine used in the operations of the refinery's steam cogeneration. These amounts are considered as additional consideration for the Purchased Units.
Supply and Exchange Agreements
On September 25, 2013 and in connection with the acquisition by Hawaii Pacific Energy of the Purchased Units, HIE entered into the following agreements with Barclays Bank PLC, a public limited company organized under the laws of England and Wales (“Barclays”): (i) a framework agreement (the “Framework Agreement”) to which Hawaii Pacific Energy is also a party; (ii) a 2002 ISDA Master Agreement, including the Schedule thereto, the Oil Annex incorporated therein, the 1994 Credit Support Annex (New York law), the Initial Crude Purchase Confirmation, the Initial Product Purchase Confirmation, the Crude Oil Supply Master Confirmation, the Oil Products Exchange Master Confirmation, the Products Offtake Master Confirmation and the Confirmation of Forward Purchase Agreement for Refined Products (collectively, the “ISDA Agreement”); (iii) a storage and services agreement (the “Storage and Services Agreement”); and (iv) an agency and advisory agreement (the “Advisory Agreement” and, collectively with the Framework Agreement, ISDA Agreement and Storage and Services Agreement, the “Supply and Exchange Agreements”).
Pursuant to the Supply and Exchange Agreements, Barclays purchased the crude oil and refined product inventory owned by HIE on the Effective Date, and following the Effective Date, will (A) provide crude oil supply and intermediation arrangements to meet the processing needs of HIE’s petroleum refinery located at the Campbell Industrial Park in Kapolei, Hawaii (the “Refinery”), (B) provide a refined product exchange mechanism to HIE permitting it to flow volumes of refined product through Barclay’s inventory, and (C) store its crude oil and refined product inventory at the terminals and related facilities owned and operated by HIE.
Set forth below are certain of the additional material terms of the Supply and Exchange Agreements:
Term
: The Supply and Exchange Agreements will remain in effect for three years following the Effective Date, subject to HIE’s right to extend the term for two additional one-year terms.
Covenants
: The Supply and Exchange Agreements require HIE and Hawaii Pacific Energy to comply with various affirmative and negative covenants affecting their respective businesses and operations, including compliance by HIE with a minimum liquidity requirement.
Exclusivity
: During the term of the Supply and Exchange Agreements, HIE agrees not to purchase crude oil from any party other than Barclays, except for purchases of an amount and grade of crude oil roughly equivalent to that set forth in a transaction supplement pursuant to the ISDA Agreement that has been rejected by Barclays three consecutive times.
Collateral
: All obligations arising under the Supply and Exchange Agreements are secured by a lien in favor of Wells Fargo Bank, N.A., as collateral agent for Barclays (in such capacity, the “Inventory Agent”), on substantially all of HIE’s assets, including, but not limited to, the Refinery and all of its accounts receivable, facilities, real property and improvements, pursuant to an inventory first lien security agreement (the “Inventory Security Agreement”), an inventory second lien security agreement (the “Inventory Second Lien Security Agreement”) and a first lien mortgage (the “Inventory Mortgage”). The rights and remedies of the Inventory Agent, and the priority of the Inventory Agent’s security interest in the collateral, are subject to an intercreditor agreement dated as of the Effective Date (the “HIE Intercreditor Agreement”), among Barclays, the Inventory Agent, Deutsche Bank AG New York Branch, acting as collateral agent under the ABL Facility (as defined below) and as administrative agent under the ABL Facility, and Hawaii Pacific Energy and HIE, as grantors. In addition, pursuant to the ISDA Agreement, HIE may be required to provide additional credit support to Barclays in the form of cash, letters of credit and/or negotiable debt obligations of the U.S. Treasury Department.
Guaranty and Pledge by Hawaii Pacific Energy
: Hawaii Pacific Energy has granted a security interest in favor of the Inventory Agent in all of the membership interests Hawaii Pacific Energy owns in HIE (the “Inventory Pledged Collateral”) pursuant to a Membership Interests First Lien Pledge Agreement in favor of the Inventory Agent (the “Inventory Pledge Agreement”). The obligations of HIE under the Supply and Exchange Agreements are guaranteed by Hawaii Pacific Energy, however, the recourse of the Inventory Agent under Hawaii Pacific Energy’s guaranty is limited to the Inventory Pledged Collateral plus certain fees and expenses specified therein to the extent incurred by Barclays or the Inventory Agent in connection with the enforcement or protection of their rights thereunder. The rights and remedies of the Inventory Agent, and the priority of the Inventory Agent’s security interest in the Inventory Pledged Collateral, are subject to the HIE Intercreditor Agreement.
The purchase of the purchased units was accounted for as a business combination in accordance with ASC 805 whereby the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. Goodwill is defined in ASC 805 as the future economic benefit of other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is attributable to opportunities expected to arise from combining our operations with HIE’s, and specifically utilization of our net operating loss carryforwards, as well as other intangible assets that do not qualify for separate recognition. In addition, we recorded certain other identifiable intangible assets. These include trade names and trademarks. These intangible assets will be amortized over their estimated useful lives on a straight line basis, which approximates their consumptive life.
The purchase price allocation is tentative and preliminary. We may have material changes to working capital, goodwill and various other assets and liabilities as better information becomes available in the fourth quarter.
A summary of the preliminary estimated fair value of the assets acquired and liabilities assumed is as follows (in thousands):
Property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration liability
|
|
|
|
|
Other noncurrent liabilities
|
|
|
|
|
|
|
|
|
|
|
Total, net of cash acquired
|
|
|
|
|
The acquisition was partially funded from net proceeds totaling approximately $384.9 million from the Supply and Exchange Agreements described above. We incurred approximately $1.0 million of expense associated with the acquisition. The results of operations of HIE are included in our consolidated statement of operations beginning September 25, 2013. We have not presented pro forma results for Predecessor periods as those Predecessor periods are not comparable to the current periods.
(5) Inventories
Inventories at September 30, 2013 consist of the following:
|
|
|
Titled Inventory
|
|
|
Supply and Exchange Agreements
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined products and blend stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse stock and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6) Debt
Delayed Draw Term Loan Credit Agreement
Pursuant to the Plan, on the Emergence Date, we and certain of our subsidiaries (the “Guarantors” and, together with the Company, the “Loan Parties”) entered into a Delayed Draw Term Loan Credit Agreement (the “Loan Agreement”) with Jefferies Finance LLC, as administrative agent (the “Agent”) for the lenders party thereto from time to time, including WB Delta, Ltd., Waterstone Offshore ER Fund, Ltd., Prime Capital Master SPC, GOT WAT MAC Segregated Portfolio, Waterstone Market Neutral MAC51, Ltd., Waterstone Market Neutral Master Fund, Ltd., Waterstone MF Fund, Ltd., Nomura Waterstone Market Neutral Fund, ZCOF Par Petroleum Holdings, L.L.C. and Highbridge International, LLC (collectively, the “Lenders”), pursuant to which the Lenders agreed to extend credit to us in the form of term loans (each, a “Loan” and collectively, the “Loans”) of up to $30.0 million. We borrowed $13.0 million on the Emergence Date in order to, along with the proceeds from the Contribution Agreement; (i) repay the loans and obligations due under the Predecessor’s secured debtor-in-possession credit facility, and (ii) pay allowed but unpaid administrative expenses to the Debtors related to the Plan. During the nine months ended September 30, 2013, we borrowed an additional $17.0 million for general corporate use. As of September 30, 2013, we have no capacity for future borrowings under this Loan Agreement.
Below are certain of the material terms of the Loan Agreement:
Interest
. At our election, any Loans will bear interest at a rate equal to 9.75% per annum payable either (i) in cash, quarterly, in arrears at the end of each calendar quarter or (ii) in-kind, accruing quarterly. In addition, all repayments made under the Loan Agreement will be charged a minimum of a 3% repayment premium. Accordingly, we will accrue amounts due for the minimum repayment premium over the term of loan using the effective interest method.
At any time after an event of default under the Loan Agreement has occurred and is continuing, (i) all outstanding obligations will, to the extent permitted by applicable law, bear interest at a rate per annum equal to 11.75% and (ii) all interest accrued and accruing will be payable in cash on demand.
Prepayment
. We may prepay Loans at any time, in any amount. Such prepayment is to include all accrued and unpaid interest on the portion of the obligations being prepaid through the prepayment date. If at any time within the twelve months following the Emergence Date, we prepay the obligations due, in whole, but not in part, then in addition to the repayment of 100% of the principal amount of the obligations being prepaid plus accrued and unpaid interest thereon, we are required to pay the interest that would have accrued on the prepaid amount through the first anniversary of the Emergence Date plus a 6% prepayment premium.
In addition to the above described prepayment premium, we will pay an additional repayment premium equal to the percentage of the principal repaid during the following periods:
|
Period
|
|
Repayment
Premium
|
|
From the Emergence Date through the first anniversary of the Emergence Date
|
|
|
|
|
From the day after the first anniversary of the Emergence Date through the second anniversary of the Emergence Date
|
|
|
|
|
We are also required to make certain mandatory repayments after certain dispositions of property, debt issuances, and joint venture distributions from Piceance Energy, casualty events and equity issuances, in each case subject to customary reinvestment provisions. These mandatory repayments are subject to the prepayment premiums described above.
The contingent repayments described above are required to be accounted for as an embedded derivative. The estimated fair value of the embedded derivative at issuance was approximately $65,000 and was recorded as a derivative liability with the offset to debt discount. Subsequent changes in fair value are reflected in earnings (see Note 7).
Collateral
. The Loans and all obligations arising under the Loan Agreement are secured by (i) a perfected, first-priority security interest in all of our assets other than our equity interest in Piceance Energy held by Par Piceance Energy Equity, LLC, one of our wholly owned subsidiaries (“Par Piceance Energy Equity”) , pursuant to a pledge and security agreement made by us and certain of our subsidiaries in favor of the Agent, and (ii) a perfected, second-lien security interest in our equity interest in Piceance Energy held by Par Piceance Energy Equity, pursuant to a pledge agreement by Par Piceance Energy Equity in favor of the Agent. The priority of the Lenders’ security interest in our assets is specified in that certain intercreditor agreement (the “Intercreditor Agreement”), among JPMorgan Chase Bank, N.A., as administrative agent for the First Priority Secured Parties (as defined in the Intercreditor Agreement), the Agent, as administrative agent for the Second Priority Secured Parties (as defined in the Intercreditor Agreement), the Company and Par Piceance Energy Equity.
Guaranty
. All of our obligations under the Loan Agreement are unconditionally guaranteed by the Guarantors.
Fees and Commissions
. We agreed to pay the Agent an annual nonrefundable administrative fee that was earned in full on the Emergence Date. In addition, we agreed to pay the Lenders a nonrefundable closing fee that was earned in full on the Emergence Date.
Warrants
. As consideration for granting the Loans, we have also issued warrants to the Lenders to purchase shares of our common stock as described under “– Warrant Issuance Agreement” below.
Term
. All loans and all other obligations outstanding under the Loan Agreement are payable in full on August 31, 2016.
Covenants
. The Loan Agreement has no financial covenants that we are required to comply with; however, it does require us to comply with various affirmative and negative covenants affecting our business and operations with which we were in compliance at September 30, 2013.
Amendment to the Loan Agreement
On December 28, 2012, in order to fund a portion of the purchase price for our acquisition of Texadian Energy, the Loan Parties entered into an amendment to the Loan Agreement with the Agent and the Lenders, pursuant to which certain lenders (the “Tranche B Lenders”) agreed to extend additional borrowings to us (the “Tranche B Loan”). The total commitment of the Tranche B Loan of $35.0 million was drawn at closing. In addition to funding a portion of the purchase price of the acquisition of Texadian, the Tranche B Loan provided cash collateral for a Letter of Credit Facility with Compass Bank (as described below). The Tranche B Loan was refinanced and replaced on July 24, 2013 by the New Tranche B Loan (as described below).
On April 19, 2013, we entered into a Fourth Amendment to our Loan Agreement.
Set forth below are certain material terms of the Fourth Amendment:
Lender Consent to Compressor Disposition
. The Lenders agreed that, in connection with the previous sale of our natural gas compressor assets held for sale (see Note 2) (a) 50% of the net cash proceeds are to be applied to pay (i) first, an amendment fee and (ii) second, to repay the Tranche B Loan in accordance with each Tranche B Lender’s pro rata share, and (ii) 50% of the net cash proceeds are to be retained by us and used for general corporate purposes.
Collateral
. The Lenders agreed to the release of their liens and security interests on the assets of Texadian, including a release of any lien on the equity interests of Texadian pledged by us, and a release of Texadian from its guarantee under the Loan Agreement, if necessary. Such releases will only be made in connection with the closing of a definitive trade finance credit facility by Texadian and is subject in all respects to the satisfaction of the conditions to release described in the Fourth Amendment.
Mandatory Prepayment
. Net cash proceeds of asset dispositions (other than as a result of a casualty), debt issuances and equity issuances can no longer be invested by us, and must be used to prepay the Loan Agreement, other than net cash proceeds from asset sales for fair market value resulting in no more than $150,000 in net cash proceeds per disposition (or series of related dispositions) and less than $300,000 in aggregate net cash proceeds before the Maturity Date.
Maturity Date
. The Lenders agreed to extend the maturity date of the Tranche B Loan to December 31, 2013.
With the execution of the Fourth Amendment, we repaid approximately $1.3 million of the Tranche B Loan.
On June 4, 2013, we entered into a Fifth Amendment to our Loan Agreement allowing us to form a subsidiary, Hawaii Pacific Energy, in furtherance of our acquisition of HIE.
On June 12, 2013, we entered into a Sixth Amendment to our Loan Agreement.
Set forth below are certain material terms of the Sixth Amendment:
Pledge of Equity Interests
. We are expressly permitted to pledge our equity interests in Texadian to secure the loans and other obligations of Texadian and Texadian Canada under the Uncommitted Credit Agreement (as described below).
Capital Contributions
. We are permitted to make up to an aggregate amount of $5 million of capital contributions and/or loans to Texadian per year.
In connection with Hawaii Pacific Energy's entry into the Purchase Agreement, on June 17, 2013, we entered into a Seventh Amendment to the Loan Agreement.
Set forth below are certain of the material terms of the Seventh Amendment:
Lender Consent to Purchase Agreement
. The Lenders consented to the execution of the Purchase Agreement by Hawaii Pacific Energy, and the performance of Hawaii Pacific Energy's obligations thereunder.
Lender Consent to Refinery Startup Reimbursement
. The Lenders consented to the payment by Hawaii Pacific Energy of a cash deposit of up to $25 million, in addition to the reimbursement obligations specified in the Purchase Agreement in connection with the Refinery Startup Activities.
Lender Consent to the Consummation of the Acquisition of HIE
. The Lenders consented to our use of any advance under the Loan Agreement to consummate the acquisition of HIE pursuant to the Purchase Agreement.
Lender Consent to Purchase Agreement Guaranty
. The Lenders consented to the execution of our guaranty of certain obligations under the Purchase Agreement.
On June 24, 2013, we entered into an Eighth Amendment to our Loan Agreement, pursuant to which the Lenders agreed to refinance and replace the Tranche B Loan outstanding immediately prior to the Eighth Amendment with new Tranche B Loans in the aggregate principal amount of $65.0 million (the “New Tranche B Loans”). The proceeds from the New Tranche B Loans were applied to prepay in full the Existing Tranche B Loans, to make payments due under the Purchase Agreement, to consummate acquisitions permitted under the Loan Agreement and for working capital and general corporate purposes.
Set forth below are certain of the material terms of the New Tranche B Loans:
Interest
. The New Tranche B Loans will bear interest (a) through September 29, 2013 at a rate equal to 9.75% per annum payable, at our election, either (i) in cash or (ii) in-kind, and (b) from and after September 29, 2013, at a rate equal to 14.75% per annum payable either (i) in cash or (ii) in-kind.
At any time after an event of default has occurred and is continuing, (i) all outstanding obligations will, to the extent permitted by applicable law, bear interest at a rate per annum equal to 2% plus the rate otherwise applicable and (ii) all interest accrued and accruing will be payable in cash on demand.
Prepayment
. We may prepay the New Tranche B Loans at any time, provided that any prepayment is in an integral multiple of $100,000 and not less than $100,000 or, if less, the outstanding principal amount of the New Tranche B Loans. Amounts to be applied to prepayment of New Tranche B Loans shall be applied (i) first, towards payment of interest then outstanding and fees then due, and (ii) second, towards payment of principal then outstanding.
Collateral
. The New Tranche B Loans are secured by a lien on substantially all of our assets and our subsidiaries, excluding Texadian, Texadian Energy Canada Limited (“Texadian Canada”), certain of our immaterial subsidiaries, and Hawaii Pacific Energy and its subsidiaries.
Guaranty
. All our obligations under the New Tranche B Loans are unconditionally guaranteed by the Guarantors.
Fees and Commissions
. We agreed to pay the New Tranche B Lenders a nonrefundable exit fee equal to 2.5% of the aggregate amount of the New Tranche B Loans. The exit fee is earned in full and payable on the maturity date of the Tranche B Loans or, if earlier, the date on which the New Tranche B Loans are paid in full. Accordingly, we will accrete amounts due for the nonrefundable exit fee over the term of loan using the effective interest method.
Maturity Date
. The New Tranche B Loans mature and are payable in full on August 31, 2016.
On September 25, 2013 and in connection with the acquisition of HIE, we entered into a Tenth Amendment to our Loan Agreement pursuant to which the Lenders (i) consented to the consummation of the transactions contemplated by the Purchase Agreement and the use of a portion of the proceeds from the sale of our common stock in a private transaction to fund a portion of the consideration in connection with the transactions contemplated by the Purchase Agreement and for certain other purposes, (ii) provided certain other consents in connection with the transactions contemplated by the Purchase Agreement, (iii) increased the interest rate applicable to certain of the loans, and (iv) amended certain provisions of the Loan Agreement and the other loan documents in connection with the consummation of the transactions contemplated by the Purchase Agreement and the sale of our common stock.
The consent provided by the Lenders was conditioned on, among other things, (A) the repayment in full of the New Tranche B Loans owing to all Lenders except for ZCOF Par Petroleum Holdings, L.L.C., and a partial repayment of the New Tranche B Loans owing to ZCOF Par Petroleum Holdings, L.L.C. from the proceeds from the sale of our common stock and (B) the proceeds from the sale of our common stock being used to consummate the transactions contemplated by the Purchase Agreement.
Set forth below are certain of the additional material terms of the Tenth Amendment:
Interest
: The term loans (other than the New Tranche B Loans that remain outstanding following the repayment described above) under the Loan Agreement will bear interest (a) from September 25, 2013 through October 31, 2013, at a rate equal to 9.75% per annum payable, at the election of the Company, either (i) in cash or (ii) in-kind, and (b) from and after November 1, 2013, at a rate equal to 14.75% per annum payable either (i) in cash or (ii) in-kind.
At any time after an event of default has occurred and is continuing, (i) all outstanding obligations will, to the extent permitted by applicable law, bear interest at a rate per annum equal to 2% plus the rate otherwise applicable and (ii) all interest accrued and accruing will be payable in cash on demand.
The New Tranche B Loans will bear interest (a) from June 24, 2013 through October 31, 2013, at a rate equal to 9.75% per annum payable, at the election of the Company, either (i) in cash or (ii) in-kind, and (b) from and after November 1, 2013, at a rate equal to 14.75% per annum payable either (i) in cash or (ii) in-kind.
ABL Facility
On September 25, 2013 and in connection with the with the acquisition of HIE, HIE and its subsidiary (the “ABL Borrowers”) and Hawaii Pacific Energy entered into an ABL credit agreement (the “ABL Facility”) with Deutsche Bank AG New York Branch, as administrative agent and ABL loan collateral agent (in such capacities, the “ABL Agent”) for the lenders party thereto from time to time, including Deutsche Bank AG New York Branch (collectively, the “ABL Lenders”), pursuant to which the ABL Lenders agreed to provide the ABL Borrowers with a senior secured revolving credit facility of up to $125.0 million under which the ABL Borrowers may borrow amounts from time to time based on the available borrowing base as determined in accordance with the ABL Facility. The ABL Facility also allows the ABL Borrowers to use up to $50 million of availability under the ABL Facility for the issuances of letters of credit. The ABL Borrowers borrowed $15 million on September 25, 2013 under the ABL Facility in order to, in part, (i) fund the purchase price under the Purchase Agreement, and (ii) provide working capital to the ABL Borrowers. The proceeds from any future amounts borrowed pursuant to the ABL Facility will be used for general corporate purposes and to fund the working capital of the ABL Borrowers.
Set forth below are certain of the material terms of the ABL Facility:
Interest
: Outstanding balances on the ABL Facility bear interest at the base rate specified below (“Base Rate”) plus a margin (based on a sliding scale of 1.00% to 1.50% depending on the borrowing base usage) or the adjusted LIBO rate specified below (“LIBO Rate”) plus a margin (based on a sliding scale of 2.00% to 2.50% depending on the borrowing base usage). Notwithstanding the foregoing, for the remainder of the current fiscal year of the ABL Borrowers, the margin will be 1.25% for Base Rate loans and 2.25% for LIBO Rate loans. The Base Rate is equal to the highest of (i) the prime lending rate of the ABL Agent, (ii) the Federal Funds Rate plus 0.5% per annum, and (iii) the LIBO Rate for a LIBO Rate loan denominated in dollars with a one-month interest period commencing on such day plus 1.00%. The LIBO Rate for a particular interest period is equal to the rate determined by the ABL Agent at approximately 11:00 a.m. (London time) on the date that is two business days prior to the commencement of the particular interest period by reference to the Reuters Screen LIBOR01 for deposits in dollars for a particular interest period.
Collateral
: The amounts borrowed pursuant the ABL Facility and all obligations arising under the ABL Facility are secured by a lien in favor of the ABL Agent on substantially all of HIE’s assets, including, but not limited to, accounts receivable, inventory that we own, the Refinery and all of its facilities, real property and improvements, pursuant to an ABL loan second lien security agreement, an ABL loan first lien security agreement and a second lien mortgage. The rights and remedies of the ABL Agent and ABL Lenders and the priority of the ABL Agent’s security interest in the collateral are subject to the HIE Intercreditor Agreement.
Guaranty and Pledge by HPE
: Hawaii Pacific Energy has granted a security interest in favor of the ABL Agent in all of the membership interests Hawaii Pacific Energy owns in HIE (the “ABL Pledged Collateral”) pursuant to a Membership Interests Second Lien Pledge Agreement in favor of ABL Agent. The obligations of the ABL Borrowers under the ABL Facility are guaranteed by Hawaii Pacific Energy, however, the recourse of the ABL Agent under Hawaii Pacific Energy’s guaranty is limited to the ABL Pledged Collateral plus certain fees and expenses specified therein to the extent incurred by Barclays or the Inventory Agent in connection with the enforcement or protection of their rights thereunder. The rights and remedies of the ABL Agent, and the priority of the ABL Agent’s security interest in the ABL Pledged Collateral, are subject to the HIE Intercreditor Agreement.
Fees and Commissions
: The ABL Borrowers agreed to pay commitment fees for the ABL Facility equal to 0.375% if the borrowing base usage is greater than 50% and 0.500% if the borrowing base usage is less than or equal to 50%. Outstanding letters of credit will be charged a participation fee at a per annum rate equal to the margin applicable to LIBO Rate loans, a facing fee and customary administrative fees.
Term
: All loans and other obligations outstanding under the ABL Facility are payable in full on September 25, 2017.
Covenants
: The ABL Facility requires HIE and its subsidiaries and Hawaii Pacific Energy to comply with various affirmative and negative covenants affecting its business and operations, including compliance by HIE in certain circumstances with a minimum ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”), as adjusted, to total fixed charges of 1.0 to 1.0.
Texadian Uncommitted Credit Agreement
On June 12, 2013, Texadian and its wholly owned subsidiary Texadian Canada entered into an uncommitted credit agreement with BNP Paribas, as the initial lender party thereto, and BNP Paribas, as the administrative agent and collateral agent for the lenders and as an issuing bank (the “Uncommitted Credit Agreement”). The Uncommitted Credit Agreement provides for loans and letters of credit, on an uncommitted and absolutely discretionary basis, in an aggregate amount at any one time outstanding not to exceed $50.0 million. Loans and letters of credit issued under the Uncommitted Credit Agreement are secured by a security interest in and lien on substantially all of Texadian’s assets, including, but not limited to, cash, accounts receivable, and inventory, a pledge by Texadian of 65% of its ownership interest in Texadian Canada, and a pledge by us of 100% of our ownership interest in Texadian. Texadian agreed to pay certain fees with respect to the loans and letters of credit made available to it under the Uncommitted Credit Agreement, including an up-front fee, an origination fee, a minimum compensation fee, a collateral audit fee, and fees with respect to letters of credit. The Uncommitted Credit Agreement requires Texadian to comply with various affirmative and negative covenants affecting its business, and Texadian must comply with certain financial maintenance covenants, including among other things, covenants regarding the minimum net working capital and minimum tangible net worth of Texadian. The Uncommitted Credit Facility does not permit, at any time, Texadian’s consolidated leverage ratio to be greater than 5.00 to 1.00 or its consolidated gross asset coverage to be equal to or less than zero. As of September 30, 2013, Texadian was in compliance with these covenants.
Letter of Credit Facility
On December 27, 2012, we entered into a letter of credit facility agreement with Compass Bank, as the lender (the “Compass Letter of Credit Facility”). The Compass Letter of Credit Facility, which matures on December 26, 2013, provides for a letter of credit facility in an aggregate principal amount of $30.0 million that is available for the issuance of cash-collateralized standby letters of credit for us or any of our subsidiaries’ account. Letters of credit issued under the Compass Letter of Credit Facility are secured by an amount of cash pledged and delivered by us to Compass equal to one hundred five percent (105%) of the undrawn amount of all outstanding letters of credit. We agreed to pay a letter of credit fee equal to one and one half percent (1.5%) per annum of the stated face amount of each letter of credit for the number of days such letter of credit is to remain outstanding plus standard and customary administrative fees. The Compass Letter of Credit Facility does not contain any financial covenants; however, it does require us to comply with various affirmative and negative covenants affecting our business and operations. The Compass Letter of Credit Facility was terminated on June 7, 2013.
In connection with the acquisition of Texadian, Compass Bank issued an Irrevocable Standby Letter of Credit in favor of SEACOR Holdings, Inc. in the amount of $11.71 million (the “Irrevocable Standby Letter of Credit”). The Irrevocable Standby Letter of Credit secured SEACOR Holdings, Inc. in the event that either of the following letters of credit is drawn: (i) the letter of credit issued by DNB Bank, ASA in favor of Suncor Energy Marketing Inc., with an original maturity date of February 5, 2013; or (ii) the letter of credit issued by DNB Bank, ASA in favor of Cenovus Energy Marketing Services Limited, with an original maturity date of February 5, 2013. Those letters of credit have been terminated and released.
Cross Default Provisions
Included within each of the Company’s debt agreements are customary cross default provisions that require the repayment of amounts outstanding on demand should an event of default occur and not be cured within the permitted grace period, if any.
Warrant Issuance Agreement
Pursuant to the Plan of Reorganization, on the Emergence Date, we issued to the Lenders warrants (the “Warrants”) to purchase up to an aggregate of 9,592,125 shares of our common stock (the “Warrant Shares”). In connection with the issuance of the Warrants, we also entered into a Warrant Issuance Agreement, dated as of the Emergence Date (the “Warrant Issuance Agreement”). Subject to the terms of the Warrant Issuance Agreement, the holders are entitled to purchase shares of common stock upon exercise of the Warrants at an exercise price of $0.01 per share of common stock (the “Exercise Price”), subject to certain adjustments from time to time as provided in the Warrant Issuance Agreement. The Warrants expire on the earlier of (i) August 31, 2022 or (ii) the occurrence of certain merger or consolidation transactions specified in the Warrant Issuance Agreement. A holder may exercise the Warrants by paying the applicable exercise price in cash or on a cashless basis.
The number of Warrant Shares issued on the Emergence Date was determined based on the number of shares of our common stock issued as allowed claims on or about the Emergence Date by the Bankruptcy Court pursuant to the Plan of Reorganization. The Warrant Issuance Agreement provides that the number of Warrant Shares and the Exercise Price shall be adjusted in the event that any additional shares of common stock or securities convertible into common stock (the “Unresolved Bankruptcy Shares”) are authorized to be issued under the Plan by the Bankruptcy Court after the Emergence Date as a result of any unresolved bankruptcy claims under the Plan. Upon each issuance of any Unresolved Bankruptcy Shares, the Exercise Price shall be reduced to an amount equal to the product obtained by multiplying (A) the Exercise Price in effect immediately prior to such issuance or sale, by (B) a fraction, the numerator of which shall be (x) 147,655,815 and (y) the denominator of which shall be the sum of (1) 147,655,815 and (2) and the number of additional Unresolved Bankruptcy Shares authorized for issuance under the Plan. Upon each such adjustment of the Exercise Price, the number of Warrant Shares shall be increased to the number of shares determined by multiplying (A) the number of Warrant Shares which could be obtained upon exercise of such Warrant immediately prior to such adjustment by (B) a fraction, the numerator of which shall be the Exercise Price in effect immediately prior to such adjustment and the denominator of which shall be the Exercise Price in effect immediately after such adjustment. In the event that any Lender or its affiliates fails to fund its pro rata portion of any Loans required to be made under the Loan Agreement, then the number of Warrant Shares exercisable under the Warrants held by such Lender will be reduced to an amount equal to the product of (i) the number of Warrant Shares initially exercisable under the Warrant held by the Lender and (ii) a fraction equal to one minus the quotient obtained by dividing (x) the amount of Loans previously made under the Loan Agreement by such Lender by (y) such Lender’s full commitment for Loans.
The Warrant Issuance Agreement includes certain restrictions on the transfer by holders of their Warrants, including, among others, that (i) the Warrants and the notes under the Loan Agreement are not detachable for transfer purposes, and for as long as obligations under the Loan Agreement are outstanding, the notes and Warrants may not be transferred separately, and (ii) in the event that any holder desires to transfer any pro rata portion of the notes and Warrants, then such holder must provide the other Lenders and/or holders of the Warrants with a right of first offer to make an election to purchase such offered notes and Warrants.
The number of shares of our common stock issuable upon exercise of the Warrants and the exercise prices of the Warrants will be adjusted in connection with certain issuances or sales of shares of the Company’s common stock and convertible securities, or any subdivision, reclassification or combinations of common stock. Additionally, in the case of any reclassification or capital reorganization of the capital stock of the Company, the holder of each Warrant outstanding immediately prior to the occurrence of such reclassification or reorganization shall have the right to receive upon exercise of the applicable Warrant, the kind and amount of stock, other securities, cash or other property that such holder would have received if such Warrant had been exercised.
From the Emergence Date through September 30, 2013, we issued an additional 2,232,934 Unresolved Bankruptcy Shares. This entitles the Lenders to receive an additional 145,057 Warrant Shares based on the formula described above increasing the total Warrant Shares to 9,737,182 at September 30, 2013.
Based on certain anti-dilution provisions in the Warrant Issuance Agreement, we have concluded that the Warrants are not indexed to our equity. Accordingly, on the Emergence Date we estimated the fair value of the Warrants on the date of grant to be approximately $6.6 million and recorded the estimated fair value of the Warrants as a derivative liability with the offset to debt discount. The debt discount will be amortized over the life of the Loan Agreement, using the effective interest method. Subsequent changes in the fair value of the Warrants are reflected in earnings (see Note 7).
Summary
Our debt at September 30, 2013 is as follows (in thousands):
Delayed Draw Term Loan Agreement, including interest in-kind
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New Tranche B Loan, including interest in-kind
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Less: unamortized debt discount – warrants and embedded derivative
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Total debt, net of unamortized debt discount
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Long term debt, net of current maturities and unamortized discount
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Interest and financing costs consists of the following:
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Three
Months Ended
September 30
,
2013
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Nine
Months Ended
September 30,
2013
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(in thousands)
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$
|
2,395
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$
|
5,196
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|
Amortization of debt discount relating to the warrants and embedded derivative
|
|
|
493
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|
|
|
1,372
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|
Accretion of 3% repayment premium on the Delayed Draw Term Loan Agreement
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|
|
24
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|
|
|
72
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|
Accretion of 5% exit fee on the Tranche B Loan
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|
|
—
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|
|
|
1,750
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|
Accretion of 2.5% exit fee on the New Tranche B Loan
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|
909
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|
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|
1,078
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|
Amortization of deferred loan costs
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|
|
35
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247
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79
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91
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Interest and financing costs, net
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$
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3,935
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$
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9,806
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(7) Fair Value Measurements
We follow accounting guidance which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and requires additional disclosures about fair value measurements. As required, we applied the following fair value hierarchy:
Level 1 – Assets or liabilities for which the item is valued based on quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Assets or liabilities valued based on observable market data for similar instruments.
Level 3 – Assets or liabilities for which significant valuation assumptions are not readily observable in the market; instruments valued based on the best available data, some of which is internally-developed, and considers risk premiums that a market participant would require.
The level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. Our policy is to recognize transfer in and/or out of fair value hierarchy as of the end of the reporting period for which the event or change in circumstances caused the transfer. We have consistently applied the valuation techniques discussed below for the periods presented. These valuation policies are determined by our Chief Financial Officer, with the assistance of third party experts as needed, and approved by our Chief Executive Officer. They are discussed with our Audit Committee as
deemed appropriate. Each quarter, our Chief Financial Officer and Chief Executive Officer update the inputs used in the fair value measurement and internally review the changes from period to period for reasonableness. We use data from peers as well as external sources in the determination of the volatility and risk free rates used in our fair value calculations. A sensitivity analysis is performed as well to determine the impact of inputs on the ending fair value estimate.
Assets and Liabilities Measure at Fair Value on a Nonrecurring Basis
Purchase Price Allocation of HIE –
The preliminary fair values of the assets acquired and liabilities assumed as a result of the HIE acquisition were estimated as of the date of the acquisition using the Level 3 valuation techniques described in notes (a) through (g) described below.
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Fair Value at
September 25, 2013
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Fair Value
Technique
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(in thousands)
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Property, plant and equipment
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Trade names and trade marks
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Contingent consideration liability
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Other noncurrent liabilities
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(a)
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Current assets acquired and liabilities assumed were recorded at their estimated fair value.
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(b)
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The estimated fair value of the property, plant and equipment was estimated using the cost approach. Under the cost approach, the total replacement cost of the property is determined based on industry sources with adjustments for regional factors. The total cost is then adjusted for depreciation based on the physical age of the assets and external obsolescence.
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(c)
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The estimated fair value of the land was estimated using the sales comparison approach. Under this approach, the sales prices of similar properties are adjusted to account for differences in land characteristics. We consider this to be a Level 3 fair value measurement.
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(d)
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The estimated fair value of the trade names and trademarks was estimated using a form of the income approach, the Relief from Royalty Method. Significant inputs used in this model include estimated revenue attributable to the trade names and trademarks and a royalty rate. An increase in the estimated revenue or royalty rate would result in an increase in the value attributable to the trade names and trademarks. We consider this to be a Level 3 fair value measurement.
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(e)
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The excess of the purchase price paid over the fair value of the identifiable assets acquired and liabilities assumed is allocated to goodwill.
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(f)
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The estimated fair value of the liability for contingent consideration was estimated using Monte Carlo Simulation. Significant inputs used in the model include estimated future gross margin, annual gross margin volatility and a present value factor. An increase in estimated future gross margin, volatility or the present value factor would result in an increase in the liability. We consider this to be a Level 3 fair value measurement.
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(g)
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Other noncurrent assets and liabilities are recorded at their estimated net present value as estimated by management.
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Assets and Liabilities Measure at Fair Value on a Recurring Basis
Derivative liabilities associated with our debt agreement
– Derivative liabilities include the Warrants and fair value is estimated using an income valuation technique a Monte Carlo Simulation analysis, which is considered to be Level 3 fair value measurement. Significant inputs used in the Monte Carlo Simulation Analysis include the stock price of $1.81 per share, initial exercise price $0.01, term of 8.92 years, risk free rate of 2.42%, and expected volatility of 72.5%. The expected volatility is based on the 10 year historical volatilities of comparable public companies. Based on the Monte Carlo Simulation Analysis, the estimated fair value of the Warrants was $1.79 per share, or approximately $17.4 million, as of September 30, 2013. Since the Warrants were in the money upon issuance, we do not believe that changes in the inputs to the Monte Carlo Simulation Analysis will have a significant impact to the value of the Warrants other than changes in the value of our common stock. Increases in the value of our common stock will directly be correlated to increases in the value of the Warrants. Likewise, a decrease in the value of our common stock will result in a decrease in the value of the Warrants.
In addition, our Loan Agreement contains mandatory repayments subject to premiums as set forth in the agreement. Factors such as the sale of assets, distributions from our investment in Piceance Energy, issuance of additional debt or issuance of additional equity may result in a mandatory prepayment. We consider the contingent prepayment feature to be an embedded derivative
which was bifurcated from the loan and accounted for as a derivative. The fair value of the embedded derivative is estimated using an income valuation technique and a crystal ball forecast. The fair value measurement is considered to be a Level 3 fair value measurement. We do not believe that changes to the inputs in the model would have a significant impact on the valuation of the embedded derivative, other than a change to the estimate of the probability that a triggering event would occur. An increase in the probability of a triggering event occurring would cause an increase in the fair value of the embedded derivative. Likewise, a decrease in the probability of a triggering event occurring would cause a decrease in the value of the embedded derivative. At September 30, 2013, we estimate the fair value of the embedded derivative to be $153,000 based on the probability of us repaying the loan prior to maturity.
Derivative instruments –
With the acquisition of Texadian, we assumed certain open positions consisting of non-exchange traded fixed price physical contracts. These contracts were not treated as normal purchase or normal sales contracts and changes in fair value were recorded in earnings. In addition, we had certain exchange traded oil contracts that settled during the period and had no open positions as of September 30, 2013. The fair value of our commodity derivatives is measured using the closing market price at the end of the reporting period obtained from the New York Mercantile Exchange and from third party broker quotes and pricing providers. As of September 30, 2013, we had no open positions relating to these non-exchange traded fixed price physical contracts except for contracts treated as normal purchase or normal sale contracts as discussed in our Summary of Significant Accounting Policies.
Contingent consideration liability
– As described in Note 4, the purchase price for our acquisition of HIE may be increased pursuant to an earn out provision. The initial value of the contingent consideration was estimated to be approximately $10.5 million as described in (f) above. The liability will be re-measured at the end of each reporting period using the valuation technique as described above. We do not believe that there has been a material change in the liability from September 25, 2013 through September 30, 2013.
Our liabilities measured at fair value on a recurring basis as of September 30, 2013 consist of the following (in thousands):
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Contingent consideration liability
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Location on
Consolidated
Balance Sheet
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Fair Value at
September 30, 2013
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(in thousands)
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Contingent consideration liability
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A rollforward of Level 3 derivative warrants and the embedded derivative measured at fair value using Level 3 on a reoccurring basis for the nine months ended September 30, 2013 is as follows (in thousands):
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Description
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Balance, at December 31, 2012
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Purchases, issuances, and settlements
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Total unrealized losses included in earnings
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Balance, at September 30, 2013
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The following table summarizes the pretax effect resulting from changes in fair value of derivative instruments charged directly to earnings (in thousands):
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For the three months ended September 30, 2013
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Income Statement Classification
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Gain (loss) recognized in income
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Derivatives not designated as hedges:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodities - exchange traded futures
|
|
|
|
|
|
Commodities - physical forward contracts
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2013
|
|
|
|
Income Statement Classification
|
|
Gain (loss) recognized in income
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodities - exchange traded futures
|
|
|
|
|
|
Commodities - physical forward contracts
|
|
|
|
|
|
(8) Commitments and Contingencies
Environmental Matters
Like other petroleum refiners, 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. Our policy is to accrue environmental and clean-up related costs of a non-capital nature when it is probable that a liability has been incurred and the amount can be reasonably estimated. Such estimates may be subject to revision in the future as regulations and other conditions change.
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. 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.
Hawaii Consent Decree
On September 25, 2013, Hawaii Pacific Energy, Tesoro and HIE entered into an Environmental Agreement (the “Environmental Agreement”), which allocated responsibility for known and contingent environmental liabilities relating to the acquisition of HIE, including the Consent Decree as described below.
Tesoro is currently negotiating a consent decree with the United States Environmental Protection Agency (“EPA”) and the United States Department of Justice concerning alleged violations of the federal Clean Air Act related to the ownership and operation of multiple facilities owned by Tesoro and its affiliates (the “Consent Decree”), including the Refinery. It is anticipated that the Consent Decree will be finalized sometime during the first quarter of 2014 and will require certain capital improvements to the Refinery to reduce emissions of air pollutants.
It is not possible at this time to estimate the cost of compliance with the ultimate decree. However, Tesoro is responsible under the Environmental Agreement for reimbursing HIE for all reasonable third party capital expenditures incurred for the construction, installation and commissioning of such capital projects and for the payment of any fines or penalties imposed on HIE arising from the Consent Decree to the extent related to acts or omission of Tesoro or HIE prior to the closing date of the Purchase Agreement (the “Closing Date”). Tesoro’s obligation to reimburse HIE for such fines and penalties is not subject to a monetary limitation; however, this obligation terminates on the third anniversary of the Closing Date.
Regulation of Greenhouse Gases
The EPA began regulating greenhouse gases in January 2011 under the Clean Air Act Amendment of 1990 (the “Clean Air Act”). Any new construction or material expansions will require that, among other things, a greenhouse gas permit be issued at either or both the state or federal level in accordance with the Clean Air Act regulations, and we will be required to undertake a technology review to determine appropriate controls to be implemented with the project in order to reduce greenhouse gas emissions. The determination would be on a case by case basis, and the EPA has provided only general guidance on which controls will be required or delegated to the states through State Implementation Plans.
Furthermore, the EPA is currently developing refinery-specific greenhouse gas regulations and performance standards that are expected to impose, on new and modified operations, greenhouse gas emission limits and/or technology requirements. These control requirements may affect a wide range of refinery operations but have not yet been delineated. Any such controls, however, could result in material increased compliance costs, additional operating restrictions for our business, and an increase in cost of the products we produce, which could have a material adverse effect on our financial position, results of operations, and liquidity.
In 2007, the State of Hawaii passed Act 34, which required that greenhouse gas emissions be rolled back on a state wide basis to 1990 levels by the year 2020. Although delayed by two years, the Hawaii Department of Health (“DOH”) is on schedule to finalize and issue regulations by the end of 2013 that would require each major facility to reduce CO2 emission by 16% by 2020 relative to calendar year 2010 baseline (the first year in which greenhouse gas was reported to the EPA under 40 CFR Part 98). The Refinery’s capacity to reduce fuel use and greenhouse gas emissions is limited. However, the state’s pending regulation allows, and the Refinery should be able to demonstrate, that additional reductions are not cost-effective or necessary in light of the state’s current greenhouse gas inventory and future year projection. The pending regulation allows for “partnering” with other facilities (principally power plants) which 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 (“EISA”) which, 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 United States 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 16.55 billion gallons of renewable fuel usage in 2013, increasing to 36.0 billion gallons by 2022. In the near term, the RSF2 will be satisfied primarily with fuel ethanol blended into gasoline. The RSF2 may present productions and logistic 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 Clean Air Act 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 2011, the EPA issued a second waiver for the use of E15 in vehicles model year 2001-2006. There are numerous issues, including state and federal regulatory issues, which need to be addressed before E15 can be marketed for use in traditional gasoline engines. Since April 2006, the State of Hawaii has required that a minimum of 9.2% ethanol be blended into at least 85% of the gasoline pool, but the regulation also limited the amount of ethanol to no more than 10%. Consequently, unless either the state or federal regulations are revised, qualified Renewable Identification Numbers (“RINS”) will be required to fulfill the federal mandate for renewable fuels.
In May 2013, the EPA published a proposed Tier 3 gasoline standard that would lower the allowable sulfur level in gasoline to 10 ppm, lower the standards for Reid vapor pressure, and also lower the allowable benzene, aromatics and olefins content of gasoline, while possibly increasing octane requirements. The proposed effective date for the new standard, January 1, 2017, gives refiners nation-wide little time to engineer, permit and implement substantial modifications. Along with credit and trading options, potential capital upgrades for the Refinery are being evaluated. The American Petroleum Institute and American Fuel and Petrochemical Association have already filed extensive comments and intend to challenge the proposed regulation.
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. We may 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.
Recovery Trusts
On the date we emerged from bankruptcy, or the Emergence Date, two trusts were formed, the Wapiti Recovery Trust (the “Wapiti Trust”) and the Delta Petroleum General Recovery Trust (the “General Trust,” and together with the Wapiti Trust, the “Recovery Trusts”). The Recovery Trusts were 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 the Debtors hold against third parties. The Recovery Trusts were funded with $1.0 million each pursuant to the Plan.
On September 19, 2012, the Wapiti Trust settled all causes of action against Wapiti Oil & Gas, LLC (“Wapiti Oil & Gas”). Wapiti Oil & Gas made a one-time cash payment in the amount of $1.5 million to the Wapiti Trust, as consideration for the release of claims against it. These proceeds were then distributed to us, along with funds remaining from the initial funding of the Wapiti Trust of approximately $1.0 million. Further distributions are not anticipated from the Wapiti Trust and the Wapiti Trust is anticipated to be liquidated during 2013.
The General Trust is pursuing all bankruptcy causes of action not otherwise vested in the Wapiti Trust, claim objections and resolutions, and all other responsibilities for winding-up the bankruptcy. The General Trust is overseen by a three person General Trust Oversight Board and our former Chief Executive Officer is the trustee. Costs, expenses and obligations incurred by the General Trust are charged against assets in the General Trust. To conduct its operations and fulfill its responsibilities under the Plan and the trust agreements, the recovery trustee may request additional funding from us. Any litigation pending at the time we emerged from Chapter 11 was transferred to the General Trust for resolution and settlement in accordance with the Plan and the order confirming the Plan. We are the beneficiary for each of the Recovery Trusts, subject to the terms of the respective trust agreements and the Plan. Since the Emergence Date, the General Trust has filed various claims and causes of action against third parties before the Bankruptcy Court, which actions are ongoing. Upon liquidation of the various claims and causes of action held by the General Trust, the proceeds, less certain administrative reserves and expenses, will be transferred to us. It is unknown at this time what proceeds, if any, we will realize from the General Trust’s litigation efforts.
From the Emergence Date through September 30, 2013, the Recovery Trusts have released approximately $5.2 million to us, which is available for our general use, due to a negotiated reduction in certain fees and claims associated with the bankruptcy, as well as a favorable variance in actual expenses versus budgeted expenses. The entire $5.2 million was released prior to December 31, 2012.
Shares Reserved for Unsecured Claims
The Plan provides that certain allowed general unsecured claims be paid with shares of our common stock. On the Emergence Date, 106 claims totaling approximately $73.7 million had been filed in the bankruptcy. Pursuant to the Plan, between the Emergence Date and December 31, 2012, the Recovery Trustee settled 25 claims with an aggregate face amount of $6.6 million for $258,905 in cash and 202,753 shares of common stock. Pursuant to the Plan, during the nine months ended September 30, 2013, the Recovery Trustee settled an additional 47 claims with an aggregate face amount of $17.5 million for approximately $2.7 million in cash and 2,013,773 shares of common stock.
As of September 30, 2013, it is estimated that a total of 34 claims totaling approximately $49.6 million remain to be resolved by the Recovery Trustee. The largest remaining proof of claim was filed by the US 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. 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 the Predecessor Company owned a 2.41934% working interest in the unit. In addition, litigation and/or settlement efforts are ongoing with other claim holders.
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 are settled at a ratio of 544 shares per $1,000 of claim. At September 30, 2013, we have reserved approximately $6.4 million representing the estimated value of claims remaining to be settled which are deemed probable and estimable at period end. A summary of claims is as follows:
|
|
|
Emergence-Date
August 31, 2012
|
|
|
From Emergence-Date through December 31, 2012
|
|
|
|
|
Filed Claims
|
|
|
Settled Claims
|
|
|
Remaining Filed
Claims
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration
|
|
|
|
|
|
|
|
|
|
|
Count
|
|
|
Amount
|
|
|
Count
|
|
|
Amount
|
|
|
Cash
|
|
|
Stock
|
|
|
Count
|
|
|
Amount
|
|
|
|
|
|
|
|
|
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|
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|
Macquarie Capital (USA) Inc.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swann and Buzzard Creek Royalty Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
For the Nine Months Ended September 30, 2013
|
|
|
|
Settled Claims
|
|
Remaining Filed
Claims
|
|
|
|
|
|
|
|
Consideration
|
|
|
|
|
|
|
|
Count
|
|
Amount
|
|
Cash
|
|
Stock
|
|
Count
|
|
Amount
|
|
|
|
|
1
|
|
$
|
—
|
|
$
|
—
|
|
|
—
|
|
|
2
|
|
$
|
22,364,000
|
|
|
|
|
19
|
|
|
12,694,596
|
|
|
339,588
|
|
|
1,614,988
|
|
|
—
|
|
|
—
|
|
Macquarie Capital (USA) Inc.
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
8,671,865
|
|
Swann and Buzzard Creek Royalty Trust
|
|
1
|
|
|
3,200,000
|
|
|
2,000,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
26
|
|
|
1,620,177
|
|
|
397,754
|
|
|
398,785
|
|
|
31
|
|
|
18,578,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
$
|
17,514,773
|
|
$
|
2,737,342
|
|
|
2,013,773
|
|
|
34
|
|
$
|
49,614,488
|
|
|
*
|
Includes reserve for contingent/unliquidated claims in the amount of $10 million.
|
Subsequent to September 30, 2013, the Recovery Trustee settled the Macquarie Capital (USA) Inc. claim for $2.5 million in cash. In addition, two claims with an aggregate face amount of approximately $678,000 were settled for $145,000 in cash and 46,935 shares of common stock.
HIE
Operating Leases
HIE has various cancellable and noncancellable operating leases related to land, vehicles, office and retail facilities and other facilities used in the storage, transportation and sale of crude oil and refined products. In general, these leases have remaining primary terms of up to 32 years and typically contain multiple renewal options.
The majority of the future lease payments relate to retail stations and facilities used in the storage, transportation and sale of crude oil and refined products. HIE has operating leases for most of our retail stations with primary terms of up to 32 years, and generally containing renewal options and escalation clauses. Leases for facilities used in the storage, transportation and sale of crude oil and refined products have various expiration dates extending to 2027.
Minimum annual lease payments extending to 2027, for operating leases to which HIE is legally obligated and having initial or remaining noncancellable lease terms in excess of one year are as follows (in thousands):
|
|
|
$
|
12,105
|
|
|
|
|
|
11,312
|
|
|
|
|
|
10,384
|
|
|
|
|
|
9,432
|
|
|
|
|
|
8,712
|
|
|
|
|
|
32,172
|
|
|
|
|
|
|
|
Total minimum rental payments
|
|
$
|
84,117
|
|
Capital Leases
HIE’s capital lease obligations relate primarily to the leases of five retail stations with initial terms of 17 years, with four 5-year renewal options. Minimum annual lease payments including interest, for capital leases are as follows (in thousands):
|
|
|
$
|
382
|
|
|
|
|
|
382
|
|
|
|
|
|
382
|
|
|
|
|
|
382
|
|
|
|
|
|
382
|
|
|
|
|
|
840
|
|
Total minimum lease payments
|
|
|
2,750
|
|
Less amount representing interest
|
|
|
968
|
|
|
|
|
|
|
|
Total minimum rental payments
|
|
$
|
1,782
|
|
Other
On April 22, 2013, Texadian entered into a terminaling and storage agreement whereby the operator will provide Texadian with storage facilities, access to a marine terminal and pipelines, and railcar offloading services. The initial term of the agreement is for a period of four years and Texadian’s minimum purchase commitment during the initial term is approximately $28.0 million.
As of September 30, 2013, Texadian had various agreements to lease railcars, inland river tank barges and towboats and other equipment. These leasing agreements have been classified as operating leases for financial reporting purposes and the related rental fees are charged to expense over the lease term as they become payable. Leases generally range in duration of five years or less and contain lease renewal options at fair value.
(9) Stockholders’ Equity
Common Stock
On September 13, 2013, we entered into the Common Stock Purchase Agreement pursuant to which we agreed to sell, contemporaneously with the consummation of the acquisition of HIE, shares of our common stock at a price of $1.39 per share (the “Shares”) in a private transaction (the “Stock Sale”). Certain purchasers, namely, ZCOF Par Petroleum Holdings, L.L.C., an affiliate of Zell Credit Opportunities Master Fund, L.P. (“ZCOF”), and affiliates of Whitebox Advisors, LLC (“Whitebox”), each owned 10% or more of the our common stock directly or through affiliates prior to the execution of the Common Stock Purchase Agreement and are deemed to be our affiliates as a result of such ownership. ZCOF and Whitebox have representatives on our board of directors.
On September 25, 2013, we completed the Stock Sale and issued 143,884,892 Shares. The Stock Sale resulted in aggregate gross proceeds to us of approximately $200.0 million. We did not engage any investment advisors with respect to the Stock Sale, and no finders’ fees or commissions will be paid to any party in connection therewith. The Shares have been issued and sold by us in a private placement transaction in reliance upon an exemption from registration pursuant to Regulation D under the Securities Act of 1933, as amended.
During the nine months ended September 30, 2013, we issued approximately 2,014,000 shares of our common stock for settlement of bankruptcy claims and approximately 3,129,000 shares of restricted and unrestricted common stock to certain key employees and directors.
Registration Rights Agreement
In connection with the closing of the sale of the Shares, we entered into a registration rights agreement (the “Registration Rights Agreement”), with the purchasers of the Shares. Under the Registration Rights Agreement, we agreed to file a registration statement relating to the Shares with the U.S. Securities and Exchange Commission within 60 days after the closing date of the sale which would be declared effective within 180 days of the closing date of the sale. We also agreed to use commercially reasonable efforts to keep the registration statement effective until the earliest to occur of (i) the disposition of all registrable securities, (ii) the availability under Rule 144 of the Securities Act of 1933, as amended, for each holder of registrable securities to immediately freely resell such registrable securities without volume restrictions or (iii) the third anniversary of the effective date of the registration statement.
The Registration Rights Agreement also provides the right for a holder or group of holders of more than $50 million of registrable securities to demand that we conduct an underwritten public offering of the registrable securities. However, the demanding holders are limited to a total of three such underwritten offerings, with no more than one demand request for an underwritten offering made in any 365 day period. Additionally, the Registration Rights Agreement contains customary indemnification rights and obligations for both us and the holders of registrable securities.
If the registration statement (i) is not filed with the SEC on or prior to the applicable deadline (ii) is not declared effective by the SEC prior to the applicable deadline, or (iii) does not remain effective for the applicable effectiveness period described above then from that date until cured, we must pay, as liquidated damages and not as a penalty, an amount in cash equal to 0.25% of the
purchaser’s allocated purchase price per calendar month, not to exceed 0.75% of the allocated purchase price. We will accrue an obligation for the Registration Rights Agreement when it is probable that an obligation has been incurred and the amount can be reasonably determined.
Incentive Plan
On December 20, 2012, our Board of Directors (the “Board”) approved the Par Petroleum Corporation 2012 Long Term Incentive Plan (the “Incentive Plan”). Under the Incentive Plan, the Board, or a committee of the Board, may issue up to 16 million shares of our common stock, or incentive stock options, nonstatutory stock options or restricted stock to our employee or directors, or other individuals providing services to us. In general, the terms of any award issue will be determined by the committee upon grant.
On December 31, 2012, a total of 2,191,834 shares of our restricted common stock were granted to members of the Board of Directors and certain key employees. During the nine months ended September 30, 2013, an additional 3,094,168 shares of our restricted stock were granted to certain key employees. Restricted stock granted to members of the Board vests in full after one year from the date of grant, while most restricted stock granted to employees vests on a pro-rata basis over five years. For the nine months ended September 30, 2013, the following activity occurred under our Incentive Plan:
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|
|
Shares
|
|
|
Weighted-
Average
Grant Date Fair
Value
|
|
|
|
|
|
|
|
|
|
Non vested balance, beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non vested balance, end of period
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2013, we recognized compensation costs of approximately $210,000 and $491,000, respectively, related to the restricted stock awards. As of September 30, 2013, there are approximately $6.3 million of total unrecognized compensation costs related to restricted stock awards, which are expected to be recognized on a straight-line basis over a weighted average period of 4.6 years. The grant date fair value was estimated using the previous 20 days average trading price of our common stock.
(10) Income Taxes
Under the Plan of Reorganization, our prepetition debt securities, primarily prepetition notes, were extinguished. Absent an exception, a debtor recognizes cancellation of debt income (“CODI”) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. Tax regulations provide that a debtor in a bankruptcy case may exclude CODI from income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is the adjusted issue price of any indebtedness discharged less the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued and (iii) the fair market value of any other consideration, including equity, issued. As a result of the market value of our equity upon emergence from Chapter 11 bankruptcy proceedings, we were able to retain a significant portion of our NOLs and other “Tax Attributes” after reduction of the Tax Attributes for CODI realized on emergence from Chapter 11 and certain prior interest payments on debt converted to equity. Our NOLs have been reduced by approximately $230 million of CODI as a result of emergence from Chapter 11.
Pursuant to the Plan, on the Emergence Date, the existing equity interests of the Predecessor were extinguished. New equity interests were issued to creditors in connection with the terms of the Plan, resulting in an ownership change as defined under Section 382 of the Code. Section 382 generally places a limit on the amount of net operating losses and other tax attributes arising before the change that may be used to offset taxable income after the ownership change. We believe however that we will qualify for an exception to the general limitation rules. This exception under Code Section 382(l)(5) provides for substantially less restrictive limitations on our net operating losses; however the net operating losses are eliminated should another ownership change occur within two years. Our amended and restated certificate of incorporation places restrictions upon the ability of the equity interest holders to transfer their ownership in us. These restrictions are designed to provide us with the maximum assurance
that another ownership change does not occur that could adversely impact our net operating loss carry forwards.
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 the current and prior periods, and projections for future results of operations over the periods in which the deferred tax assets are deductible, among other factors, management continues to conclude that we did not meet the “more likely than not” requirement of ASC 740 in order to recognize deferred tax assets and a valuation allowance has been recorded for the full amount of our net deferred tax assets at September 30, 2013.
During the three and nine month periods ended September 30, 2013, no adjustments were recognized for uncertain tax benefits.
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 carry forwards will not always be available to offset taxable income apportioned to the various states. The states from which Texadian’s revenues and HIE’s 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 Texadian’s and HIE’s operations. State income tax expense of approximately $0 and $650,000 was recognized for the three and nine months ending September 30, 2013, respectively.
During 2013 and thereafter, 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. Should actual operating results improve, the amount of the deferred tax asset considered more likely than not to be realizable could be increased.
(11) Earnings Per Share
Basic earnings per share (“EPS”) are computed by dividing net loss by the sum of the weighted average number of common shares outstanding, and the weighted average number of shares issuable under the Warrants, representing 9,737,182 shares (see Note 5 and 6). U.S. GAAP requires the inclusion of these Warrants in the calculation of basic EPS because they are issuable for minimal consideration. Non-vested restricted stock is excluded from the computation as these shares are not considered earned until vesting. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
|
|
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Successor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
Three Months
Ended
September 30,
2013
|
|
|
One Month
Ended
September 30
,
2012
|
|
|
Two Months
Ended
August 31,
2012
|
|
Net loss attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common stock outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: dilutive effects of common stock equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average common stock outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities excluded from the calculation of diluted shares outstanding include the following (in thousands):
|
|
|
Successor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
Three Months
Ended
September 30,
2013
|
|
|
One Month
Ended
September 30,
2012
|
|
|
Two Months
Ended
August 31,
2012
|
|
Stock issuable upon conversion of convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total potentially dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended
September 30,
2013
|
|
|
One Month
Ended
September 30,
2012
|
|
|
Eight Months
Ended
August 31,
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common stock outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: dilutive effects of common stock equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average common stock outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities excluded from the calculation of diluted shares outstanding include the following (in thousands):
|
|
|
Successor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
Nine Months
Ended
September 30,
2013
|
|
|
One Month
Ended
September 30
,
2012
|
|
|
Eight Months
Ended
August 31,
2012
|
|
Stock issuable upon conversion of convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total potentially dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
(12) Segment Information
Following our acquisitions of HIE and Texadian, we have four business segments, (i) natural gas and oil exploration and production, (ii) commodity transportation and marketing (iii) refining and (iv) retail. The retail segment is comprised of 31 retail locations that sell various refined products and merchandise to customers located across Oahu, Maui and Hawaii. Summarized financial information concerning reportable segments consists of the following (in thousands):
|
For the three months ended September 30, 2013:
|
|
Natural Gas
and Oil
Exploration
and
Production
|
|
|
Commodity
Transportation
and
Marketing
|
|
|
Refining
|
|
|
Retail
|
|
|
Trust
Litigation
and Settlements
|
|
|
Total
|
|
Sales and operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from unconsolidated affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital additions from acquisitions*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, amortization and accretion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2013:
|
|
Natural Gas
and Oil
Exploration
and
Production
|
|
|
Commodity
Transportation and
Marketing
|
|
|
Refining
|
|
|
Retail
|
|
|
Trust
Litigation
and
Settlements
|
|
|
Total
|
|
Sales and operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from unconsolidated affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital additions from acquisitions*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, amortization and accretion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Includes only amounts capitalized as property, plant and equipment from the acquisition of HIE.
At September 30, 2013, our reportable segment assets consisted of the following (in thousands):
|
|
|
Natural Gas
and Oil
Exploration
and
Production
|
|
|
Commodity
Transportation
and
Marketing
|
|
|
Refining
|
|
|
Retail
|
|
|
Trust Litigation and Settlements
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of reportable segment assets to our consolidated totals is as follows (in thousands):
|
|
|
September 30,
2013
|
|
Total assets for reportable segments
|
|
|
|
|
Cash and restricted cash not allocated to segments
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the comparable periods in 2012, 100% of our activities were natural gas and oil exploration and production so no comparable segment information has been provided.
(13) Related Party Transactions
Certain of our stockholders who are lenders under the Loan Agreement received Warrants exercisable for shares of common stock in connection with such loan (see Note 6).
On September 17, 2013 (but effective January 1, 2013), we entered into letter agreements (the “Services Agreements”) with Equity Group Investments, an affiliate of ZCOF (“EGI”), and Whitebox. Pursuant to the Services Agreements, EGI and Whitebox agreed to provide us with ongoing strategic, advisory and consulting services that may include, (i) advice on financing structures and our relationship with lenders and bankers, (ii) advice regarding public and private offerings of debt and equity securities, (iii) advice regarding asset dispositions, acquisitions or other asset management strategies, (iv) advice regarding potential business acquisitions, dispositions or combinations involving us or our affiliates, or (v) such other advice directly related or ancillary to the above strategic, advisory and consulting services as may be reasonably requested by us.
EGI and Whitebox will not receive a fee for the provision of the strategic, advisory or consulting services set forth in the Services Agreements, but may be periodically reimbursed by us, upon request, for (i) travel and out of pocket expenses, provided that in the event that such expenses exceed $50,000 in the aggregate with respect to any single proposed matter, EGI or Whitebox, as applicable, will obtain our consent prior to incurring additional costs, and (ii) provided that we provide prior consent to their engagement with respect to any particular proposed matter, all reasonable fees and disbursements of counsel, accountants and other professionals incurred in connection with EGI’s or Whitebox’s, as applicable, services under the Services Agreements. In consideration of the services provided by EGI and Whitebox unless the Services Agreements, we agreed to indemnity each of them for certain losses incurred by them relating to or arising out of the Services Agreements or the services provided thereunder.
The Services Agreements have a term of one year and will be automatically extended for successive one-year periods unless terminated, by either party, at least 60 days prior to any extension date.
