News Column

PAR PETROLEUM CORP/CO - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

June 2, 2014

We are a diversified energy company based in Houston, Texas created through the successful reorganization of Delta Petroleum Corporation in August 2012. The reorganization converted $265 million of unsecured debt to equity and allowed us to preserve significant tax attributes. We currently operate in three segments: refining, distribution and marketing



natural gas and oil operations

commodity marketing and logistics

Our refining, distribution and marketing segment owns and operates a refinery rated at 94 thousand barrels per day of throughput capacity in Kapolei, Hawaii, 2.4 million barrels of crude oil and feedstock storage and 2.5 million barrels of refined product storage. The refinery produces ultra-low sulfur diesel, gasoline, jet fuel, marine fuel and other associated refined products primarily for consumption in Hawaii. Our refinery logistics assets include five refined products terminals, 27 miles of pipelines, a single point mooring and other associated logistics assets. In addition, we distribute our products through 31 retail outlets located across the islands of Oahu, Maui and Hawaii. Results of operations in our refinery segment depend on favorable "crack spreads", or the difference between the price we pay for crude oil, sourced both domestically and internationally, and the prices we receive for our refined products, which are primarily determined by the local Hawaii market. Our natural gas and oil assets are non-operated and are concentrated in our 33.34% ownership of Piceance Energy, LLC ("Piceance Energy"), a joint venture entity operated by Laramie Energy II, LLC and focused on producing natural gas in Garfield and Mesa Counties, Colorado. In addition, we own non-operating interests in Colorado and offshore California, and an overriding royalty interest in New Mexico. Our interests are heavily weighted towards natural gas and natural gas liquids. Our commodity marketing and logistics segment focuses on sourcing, transporting, marketing and distributing crude oil from Canada and the Western U.S. to refining hubs in the Midwest, Gulf Coast and East Coast regions of the U.S. Our logistics capabilities consist of historical pipeline shipping status (giving us assured pipeline access), a leased rail car fleet and experience in contracted chartering of tugs and barges. We contract to provide logistics services for others and trade for our own account. Our success primarily depends on favorable spreads between the discounted crudes available from the Western U.S. and Canada and the prices we receive from our customers. On September 25, 2013, we acquired Hawaii Independent Energy, LLC ("HIE") (formerly known as Tesoro Hawaii, LLC; "Tesoro Hawaii") from Tesoro Corporation ("Tesoro"). As a result, our results of operations for any period after September 30, 2013 will not be comparable to any period before September 30, 2013. We continue to recognize our proportionate share of the earnings or losses of Piceance Energy, which are driven by drilling results and market prices. We also continue to reflect results of operations at Texadian, which are dependent primarily on marketing and transportation revenues. However, we anticipate our results of operations, capital and liquidity positions and the overall success of our business will depend, in large part, on the results of our refinery operations. The crack spread will be the primary driver of the refinery segment's results of operations and, therefore, of our own profitability. Overview During the three months ended March 31, 2014, we focused on integration efforts to build a platform for anticipated growth and to standardize processes and procedures. Integration efforts included developing internal staff, processes and systems to perform finance/accounting, tax, retail operations, information technology, environmental, health and safety, marine, human resources and other functions. A significant amount of these efforts involved preparing for exiting the transition services agreement we entered into with Tesoro in connection with the acquisition of HIE to provide certain transition services to us including finance, accounting, tax, retail operations, information technology and other services for a period of time (the "Transitions Service Agreement"). The exit from the Transition Service Agreement occurred on May 1, 2014. During the quarter, our efforts also focused on reducing our reliance on third party service providers. 15 --------------------------------------------------------------------------------



Results of Operations

Three Months Ended Three Months Ended Increase March 31, 2014 March 31, 2013 (Decrease) % Change Gross Margin Refining, distribution and $ - marketing $ 26,990 26,990 NM Commodity marketing and logistics 1,630 9,946 (8,316 ) (84 )% Natural gas and oil 1,542 1,560 (18 ) (1 )% Total gross margin 30,162 11,506 Operating expense, excluding depreciation, depletion and amortization expense 34,118 1,238 32,880 2,656 % Depreciation, depletion, and amortization 3,061 767 2,294 299 % General and administrative expense 4,934 6,625 (1,691 ) (26 )% Acquisition and integration costs 2,851 275 2,576 937 % Total operating expenses 44,964 8,905 Operating income (loss) (14,802 ) 2,601 Other income (expense) Interest expense and financing costs, net (3,507 ) (3,136 ) (371 ) 12 % Other income (expense), net (45 ) 729 (774 ) (106 )% Change in value of common stock warrants 1,577 (2,000 ) 3,577 (179 )% Change in value of contingent - consideration 2,465 2,465 NM Loss from Piceance Energy, LLC (221 ) (2,360 ) 2,139 (91 )% Total other expense, net 269 (6,767 ) Loss before income taxes (14,533 ) (4,166 ) Income tax expense (35 ) (650 ) 615 (95 )% Net loss $ (14,568 )$ (4,816 ) Non-GAAP Performance Measure Management uses gross margin to evaluate our operating performance. Gross margin is considered a non-GAAP financial measure. This measure should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with U.S. GAAP, and our calculations thereof may not be comparable to similarly entitled measures reported by other companies. Gross Margin Gross margin is defined as revenues less cost of revenues, excluding operating expenses and depreciation, depletion and amortization. We believe gross margin is an important measure of operating performance and provides useful information to investors because it eliminates the impact of volatile market prices on revenues and demonstrates the earnings potential of the business before other fixed and variable costs. In order to assess our operating performance, we compare our gross margin (revenue less cost of revenues) to industry gross margin benchmarks. 16 -------------------------------------------------------------------------------- Gross margin should not be considered an alternative to operating (loss) income, net cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Gross margin presented by other companies may not be comparable to our presentation since each company may define this term differently. The following table presents a reconciliation of gross margin to the most directly comparable GAAP financial measure, operating (loss) income, on a historical basis for the periods indicated: Three Months Ended Three Months Ended March 31, 2014 March 31, 2013 Gross Margin Refining, distribution and marketing $ 26,990 $ - Commodity marketing and logistics 1,630 9,946 Natural gas and oil 1,542 1,560 Total gross margin 30,162 11,506



Operating expense, excluding depreciation, depletion and amortization expense

33,094 - Lease operating expense 1,024 1,238 Depreciation, depletion, and amortization 3,061 767 General and administrative expense 4,934 6,625 Acquisition and integration costs 2,851 275 Total operating expenses 44,964 8,905 Operating (loss) income $ (14,802 ) $ 2,601 Three months ended March 31, 2014 compared to the three months ended March 31, 2013 The 2014 and 2013 periods lack comparability due to the acquisition of HIE effective September 25, 2013. Refining, Distribution and Marketing Gross Margin. For the three months ended March 31, 2014, our refining, distribution and marketing gross margin was approximately $27.0 million. There was no such gross margin for the three months ended March 31, 2013 due to HIE being acquired on September 25, 2013. Our gross margin for the refining, distribution and marketing segment has improved from our fourth quarter of 2013 results due to improvements in our crude procurement efforts. Commodity, Marketing and Logistics Gross Margin. For the three months ended March 31, 2014, our commodity, marketing and logistics gross margin was approximately $1.6 million, a decrease of $8.3 million when compared to $9.9 million for the three months ended March 31, 2013. The decrease is a result of lower trading differentials on heavy Canadian crude oil and timing of deliveries which deferred profits into the second quarter 2014. Operating Expense. For the three months ended March 31, 2014, operating expense was approximately $34.1 million, an increase of $32.9 million when compared to $1.2 million for the three months ended March 31, 2013 due to HIE being acquired on September 25, 2013. Depreciation, Depletion, and Amortization. For the three months ended March 31, 2014, depreciation, depletion, and amortization (DD&A) expense was approximately $3.1 million, an increase of $2.3 million compared to $767 thousand for the three months ended March 31, 2013. The increase is primarily due to the DD&A expense associated with HIE, which was acquired on September 25, 2013. General and Administrative Expense. For the three months ended March 31, 2014, general and administrative expense was approximately $4.9 million, a decrease of $1.7 million compared to $6.6 million for the three months ended March 31, 2013. The decrease is primarily due to a reduction in professional fees related to trust activity and no similar recurring activity in the current period. Acquisition and Integration Costs. For the three months ended March 31, 2014, acquisition and integration costs were approximately $2.9 million, an increase of $2.6 million compared to $0.3 million for the three months ended March 31, 2013. The increase is due to costs incurred to exit the Transition Services Agreement with Tesoro and further integration efforts associated with the HIE acquisition. Interest Expense and Financing Costs. For the three months ended March 31, 2014, our interest expense and financing costs were approximately $3.5 million, which was an increase of $0.4 million compared to $3.1 million for the three months 17 -------------------------------------------------------------------------------- ended March 31, 2013. The increase is primarily due to a higher amount of debt outstanding in the current period with lower effective interest rates. The prior period debt that carried higher effective interest rates was repaid during 2013 with proceeds from a private placement of common stock. Other income (expense), net. For the three months ended March 31, 2014, other expense was approximately $45 thousand, a decrease of $774 thousand compared to other income of $729 thousand for the three months ended March 31, 2013. Other income for the three months ended March 31, 2013 included a franchise tax refund and income from a legal settlement that were both nonrecurring. There were no individually significant items during the three months ended March 31, 2014. Change in Value of Common Stock Warrants. For the three months ended March 31, 2014, the change in value of common stock warrants resulted in a gain of approximately $1.6 million, a change of $3.6 million when compared to a loss of $2.0 million for the three months ended March 31, 2013. During the three months ended March 31, 2014, our stock price decreased which resulted in a decrease in the value of the common stock warrants. Conversely, our stock price increased during the three months ended March 31, 2013, which resulted in a loss as the value of the common stock warrants also increased. Change in Value of Contingent Consideration. For the three months ended March 31, 2014, the change in value of contingent consideration was approximately $2.5 million. The contingent consideration relates to the HIE Acquisition which occurred on September 25, 2013, and the change in our estimate of the obligation relates to an overall decrease in our expected cash flows related to HIE. Loss From Investment in Piceance Energy, LLC. For the three months ended March 31, 2014, our loss from Piceance Energy was approximately $0.2 million, a change of $2.1 million compared to a loss of $2.4 million for the three months ended March 31, 2013. The favorable change is due to higher realized natural gas sales prices. Income Taxes. For the three months ended March 31, 2014, we recorded approximately $35 thousand of state tax expense compared to state income tax expense of $650 thousand for the three months ended March 31, 2013. The decrease of approximately $615 thousand is primarily attributable to the decrease in commodity marketing and logistics operating income. We recorded no federal income tax benefit in any period presented as the federal benefit is offset by an equal change in our valuation allowance. Recent Events Agreement and Plan of Merger On June 2, 2014, we entered into an agreement and plan of merger (the "Merger Agreement") with Koko'oha Investments, Inc., a Hawaii corporation ("Koko'oha"), whereby we will acquire 100% of Koko'oha for $107 million, less estimated long-term liabilities, plus estimated merchandise and product inventory, subject to other adjustments as set forth in the Merger Agreement (the "Merger Consideration"). Koko'oha owns 100% of the outstanding membership interests of Mid Pac Petroleum, LLC, a Delaware limited liability company ("Mid Pac"), which is the exclusive licensee of the "76" brand in the State of Hawaii and owns or operates 80 retail sites, 22 of which are fee-owned, and 5 terminals, 2 of which are fee-owned, across Hawaii. The closing of the Merger Agreement is subject to the expiration or early termination of the waiting period under the Hart-Scott-Rodino Act and certain customary closing conditions, including obtaining necessary third party consents and approvals. Debt Financing Commitments In connection with the Merger Agreement, the Company executed the 12th Amendment to its Delayed Draw Term Loan Credit Agreement to increase the Tranche B Loan by $13.2 million to fund the deposit due upon signing the Merger Agreement and pay certain other fees and expenses. The amendment also reduces the interest rate on the Tranche B Loan. Additionally, the Company has received binding commitments to further expand the Tranche B Loan to an aggregate Term Loan amount of $50 million and to add a senior bridge facility of up to $75 million. The Tranche B Loan is anticipated to be used to fund future deposits under the Merger Agreement upon satisfaction of certain conditions and may be used to fund the Merger Consideration at closing. Liquidity and Capital Resources The following table summarizes our liquidity position as of May 27, 2014 and March 31, 2014 (in thousands): 18 --------------------------------------------------------------------------------

PAR PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements Refining, distribution and Commodity marketing marketing and logistics Other Total May 27, 2014 Cash and cash equivalents $ 22,869 $ 14,379 $ 3,269$ 40,517 Revolver availability - - - - ABL Facility 28,253 42,879 - 71,132 Total available liquidity $ 51,122 $ 57,258 $ 3,269$ 111,649 Refining, distribution and Commodity marketing marketing and logistics Other Total March 31, 2014 Cash and cash equivalents $ 3,205 $ 16,051 $ 1,422$ 20,678 Revolver availability 5,000 - - 5,000 ABL Facility 31,634 20,608 - 52,242 Total available liquidity $ 39,839 $ 36,659 $



1,422 $ 77,920

As of March 31, 2014, we have access to the HIE committed ABL Credit Agreement, the HIE-Retail committed Revolving Credit Agreement and the Texadian Uncommitted Credit Agreement, and cash of $20.7 million. In April 2014, we agreed to fund our share of a drilling program for Piceance Energy. We expect to contribute our proportionate part of the drilling program (or approximately $3.3 million) to Piceance Energy during the second or third quarter 2014. Cash Flows Three Months Ended March Three Month Ended 31, 2014 March 31, 2013 (in thousands) Net cash used in operating activities $ (7,892 ) $ (8,626 ) Net cash (used in) provided by investing activities $ (2,600 ) $ 2,622 Net cash (used in) provided by financing activities $ (6,891 )



$ 14,500

Net cash used in operating activities was approximately $7.9 million for the three months ended March 31, 2014 which resulted from a net loss of approximately $14.6 million offset by non-cash charges to operations of approximately $1.9 million and net cash used for changes in operating assets and liabilities of approximately $4.8 million. Net cash used by operating activities for the three months ended March 31, 2013 was approximately $8.6 million which resulted from a net loss of approximately $4.8 million offset by non-cash charges to operations of approximately $8.2 million and net cash used for changes in operating assets and liabilities of approximately $13.3 million. Additionally, there was $1.3 million in cash used to pay professional fees that was funded from restricted cash. For the three months ended March 31, 2014, net cash used in investing activities was approximately $2.6 million and primarily related to additions to property and equipment totaling approximately $2.0 million and the HIE Acquisition working capital settlement totaling approximately $582 thousand. Net cash provided by investing activities was approximately $2.6 million in the three months ended March 31, 2013 and was primarily generated from the proceeds from assets held for sale. Net cash used in financing activities for the three months ended March 31, 2014 of approximately $6.9 million which primarily related to the repayment of debt. For the three months ended March 31, 2013, net cash provided by financing activities totaled $14.5 million resulting from $8 million in borrowings under our Delayed Draw Term Loan Credit Agreement and $6.5 million from the release of restricted cash that was previously used to secure a letter of credit. The borrowings under our former Delayed Draw Term Loan Credit Agreement were used for general corporate purposes. Capital Expenditures Our capital expenditures for the three months ended March 31, 2014 totaled approximately $2.0 million and were primarily related to information technology and software to establish our accounting system for the assets acquired in the HIE Acquisition as we prepared to exit the Transition Services Agreement which we exited on May 1, 2014. 19 --------------------------------------------------------------------------------

PAR PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements For the year ending December 31, 2014, we expect to incur approximately $19 million of capital expenditures, of which approximately $16 million is associated with sustaining the operations of our refinery and approximately $3 million of software and information technology as part of our HIE integration efforts. Additional capital may be required to maintain our interests at our Point Arguello Unit offshore California, but this is currently inestimable. Furthermore, in April 2014, we agreed to fund our share of a drilling program for Piceance Energy. We expect to contribute approximately $3.3 million to Piceance Energy during the second or third quarter 2014. We also continue to seek strategic investments in business opportunities, but the amount and timing of those investments are not predictable. We believe our cash flows from operations and available capital resources will be sufficient to meet our current capital expenditure, working capital and debt service requirements for the next 12 months. We will require additional capital resources to fund the Merger Consideration or other any other significant changes to our business. We cannot offer any assurance that such capital will be available in sufficient amounts or at an acceptable cost. Commitments and Contingencies HIE entered into several agreements with Barclays Bank PLC ("Barclays"), referred to collectively as the Supply and Exchange Agreements, on September 25, 2013 in connection with the acquisition of HIE. Please read Note 6-Supply and Exchange Agreements for further discussion. For a discussion of other Commitments and Contingencies, please read Note 9-Commitments and Contingencies. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not required. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures In connection with the preparation of this Quarterly Report on Form 10-Q, as of March 31, 2014, an evaluation was performed under the supervision and with the participation of the Company's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 15d-15(e) under the Exchange Act. In performing this evaluation, management reviewed the selection, application and monitoring of our historical accounting policies. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2014, these disclosure controls and procedures were not effective and not designed to ensure that the information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized and reported on a timely basis, due to the existence of material weaknesses identified as of December 31, 2013 as discussed below. Prior to December 31, 2011, the Company filed for voluntary bankruptcy and during the duration of the proceedings, our ability to maintain effective internal control over financial reporting was weakened due to a high amount of turnover of our accounting staff. As of August 31, 2012, the Company emerged from bankruptcy and replaced the operations and financial reporting functions with a new accounting group. In December 2012 and September 2013, we completed acquisitions which significantly increased the size of the Company and its resource requirements. Due to our rapid growth, there has been a heavy reliance on external service providers and contractors, particularly in the accounting department. During the fourth quarter of 2013, management performed a comprehensive assessment of the design and operating effectiveness of internal control over financial reporting. In performing the assessment, management considered the number of late adjustments and corrections to the consolidated financial statements, concluding that a material weakness existed in the Company's internal control over financial reporting. In connection with the restatement of the Company's audited financial statements for the year ended December 31, 2013, management updated the Company's assessment of its internal control over financial reporting. When updating its assessment, management concluded that the Company had an additional material weakness because it did not have appropriate controls in place to ensure inventory measurements were calculated correctly. Based upon this additional material weakness, management concluded that the Company did not maintain effective internal control over financial reporting as of March 31, 2014. Changes in Internal Control over Financial Reporting During the quarter ended March 31, 2014, we have made the following changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financing reporting: 20 --------------------------------------------------------------------------------



hired a corporate controller and additional accounting personnel;

implemented a new consolidation system;

implemented and improved analytical tools related to our financial results;

reduced the reliance on third party contractors to perform critical tasks;

established inventory reporting guidelines and policies to ensure inventory quantities will be reported on a consistent basis; and increased oversight of work performed by contractors to the extent contractors continue to be used. We are continuing our efforts to strengthen the control environment; however our remediation efforts are not yet complete. Therefore, management has concluded that a material weakness exists in the Company's internal control over financial reporting. 21



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