Welcome to the Par Petroleum Corporation Third Quarter 2014 Earnings Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that the conference is being recorded. And I will now turn the call over to Brice Tarzwell, Senior Vice President and Chief Legal Officer of Par Petroleum. Mr. Tarzwell, you may begin.

Good morning, and welcome to Par Petroleum's earnings call for the 3 and 9 months ended September 30, 2014. By now, everyone should have access to the earnings release for the third quarter. A copy of our earnings release was filed this morning with the SEC. We anticipate that a quarterly report on Form 10-Q will be filed later today. This call is being recorded and a replay will be available for 7 days. Before we begin, we'd like to remind everyone that comments made today by management may contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates and projections that involve significant risks and uncertainties, which could cause actual results to differ materially from the results discussed in these forward-looking statements. Information about the risk we face and the uncertainties associated with Par Petroleum's forward-looking statements can be found in the company's annual and quarterly reports filed with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statements. We next turn to our Chief Executive Officer, Will Monteleone. Will?

Thank you, Brice. Good morning, ladies and gentlemen. At this point, you should have our earnings release and slides. Our 10-Q will be filed later today. As communicated previously, 2014 was a transition and building year for the company, as we reestablished our presence in the Hawaii market, upgrade management information systems, create a team capable of executing on our business plan, and most importantly, position for a profitable 2015. I will reiterate our perspective shared on prior calls that on a normalized basis, we believe the Hawaii business, in the aggregate, can generate $2 to $4 per barrel of operating income per barrel throughput at the facility. Recapturing on island sales, much of which is already contracted for 2015, and improvements in the global crude markets underpin our outlook. In addition to the earnings release, we included several slides on key markets we would like to reference during the presentation. These slides reference benchmark crack spread indexes, as well as a history of Alaska North Slope pricing relative to Brent. I would emphasize the Singapore 4:1:2:1 slide as most relevant to the changing Hawaii marketplace. However, there are aspects of both the diesel and gasoline markets that still have West Coast pricing influences. We would currently suggest a 50% weighting to each as most representative of the Hawaii market environment. During the third quarter, we saw a steady improvements in overall market conditions from the June lows, as demonstrated by both the Singapore and San Francisco benchmarks. However, our results were negatively impacted by higher feedstock cost and operating expenses. As I referenced on our second quarter conference call, there is a lag in feedstock improvements flowing through our financials. To provide a sense of this, each crude cargo we consumed during the third quarter was committed to approximately…

[Operator Instructions] And we do have a question from Andrew Shapiro from Lawndale Capital Management.

What effects do you see, going forward, from Chevron's decision to sell the Kapolei refinery in Hawaii? Could this be an opportunity for Par to regain some of the business you lost to Chevron? Or do you see these things as independent of each other?

Andrew, from a policy standpoint, we really can't comment on the impacts or Chevron's intent, as it relates to the announcement they've made. What is in the public domain, at this juncture, is that they have retained an Investment Bank and they have commenced a potential sales process. And at this juncture, I think it's too early to speculate on what their ultimate position will be, based on the feedback they received from their sales process. But I will say that it's, as I've referenced previously, growing our on-island market share and reducing our exports is very important to the underlying profitability of our business.

Okay. And you have previously said that you were "aggressively pursuing other outlets for your products after the exploration and nonrenewal of the Hawaii energy contract", I mean, the Hawaii Electric contract. Can you update us on what avenues you are pursuing or what's available to you to pursue? And what success you've had and what plans you have going forward to make up for that lost business?

Sure. I think even including the loss of the Hawaii Electric Company contract, we still view that our on-island sales will be up over 10,000 barrels per day next year, which is over a 20% increase. So that's 1 part of the equation. The other part is the discussion about how we -- what alternatives we have for the bottom of the barrel. And as I've discussed on one of our prior calls, the alternatives that we have are to buy a more sour crude fleet or a heavier crude fleet, that would not produce low sulfur fuel oil and would be a cheaper feedstock alternative for us. And therefore, we would lower our overall feedstock costs, and ultimately, not be required to meet the stringent requirements necessary to produce low-sulfur fuel oil, which is a very difficult product to manufacture.

And our next question is from Bob Data [ph] from Parker Data [ph].

Could you help me out a little bit and address more from a 50,000-foot view of the Hawaii market, and just generally, with energy prices being as high as they are there, and I believe, for instance, kilowatt prices for energy are in the $0.40 range, whereas in the Midwest, they're in the $0.05 range? And it just appears that, that's driving a lot of renewables, both on the transportation and the energy side, and how it is that you talk about growth when it -- just going to Hawaii, and seeing all the wind, and the solar and all of that, and how that impacts your business going forward.

Sure. I mean, I think the overall renewable agenda that's been embraced by the state is clearly making inroads, especially on the electricity generation side. And ultimately, the state is looking at its policy feature and the need for having reliable infrastructure and generation capacity that isn't necessarily subject to whether the wind's blowing or whether the sun's shining. And so they still have a need for a base level of generation capacity that is going to be callable, regardless of the weather patterns. But I still believe that there's a need for ultimately some requirement for consistent generation capacity on the island. And as it relates to other renewable penetration, I still think, if you look at the IEA data on the island, you still have -- especially on Oahu, over 85% of total generation is still from fossil fuel.

Right. I guess what I'm saying, if I just also, as an analyst, see the other side of that, when you read about the biodiesel plant there and the other -- to meet the ongoing intermittency aspect of it. You see all the money that HECO or Hawaiian Electric is spending on storage, for example. It's these numbers are quite large, and I'm sure that the island or the energy policy there is to try to reduce their dependence on fossil fuels. And since you're the supplier of fossil fuels and I hear you saying that you plan to increase your sales, that runs contrary to what the state and what the electric companies say. So I'm trying to figure out who's telling the truth here.

Yes. I still think there is a need for transportation fuels on the island. And jet fuel is a primary requirement that I think -- despite where we sit from a technology standpoint, there has not been, I would say, a technology that's scalable, and at this point in time, to provide the volume of jet fuel that's necessary to feed both the military, as well as the tourism business in Hawaii. And then as it relates to the -- I'll say both the road diesel, as well as gasoline, there is a major requirement that still exists ultimately. And I think whether there is absolute growth in those markets is not necessarily what's relevant, but I think it's really regaining and reestablishing what our prior market presence was on the island rather than absolute volume growth in Hawaii that we're counting on.

[Operator Instructions] And we do have another question from Andrew Shapiro from Lawndale Capital.

You recently amended your credit agreement with BNP Paribas, I think, to increase your credit line from $50 million to $85 million until year end, at which time, I think the terms call for it to be reduced back down. Can you give us some color on why this was done and what the intended uses are for the money, and in light of I guess the delayed closing on the transaction, if it's tied to that, what the prospects are, I guess, of an extension and all?

Sure. So the BNP Paribas agreement is really used within our Texadian subsidiary. And the rationale for increasing that was, we have begun to acquire cargoes of Canadian crude and needed to expand the credit facility, and ultimately, expect to begin delivering additional Canadian barrels to Hawaii. And so the increase in that was really on a temporary basis to facilitate a cargo that we had identified. So -- and longer-term, I think we feel that we've established a good relationship with Paribas. I believe that we have avenues for growing the Texadian business, but will require additional capital. And most of the trade credit facilities tend to be shorter-term in nature rather than provided on a committed basis.

Okay. And in terms of you may be needing available additional capital and there are other plans to grow your pretax income to use up the huge NOL here, how much cash is left over from the rights offering? And more importantly, in your NOL change of control calculations, in light of the fact that the larger shareholders took down their pro rata share of new shares, approximately, because I know it's not so exact, what percentage of ownership shift is available in terms of raising new money to grow the company and make additional acquisitions of pretax income before you hit the wall with the NOL change of control tests?

Regarding the NOL, we still -- we closely manage that at the board level. And we feel like we have adequate dry powder within the changed percentage to facilitate our growth objectives. I think that it's an important fact that we do manage, and we are very closely monitoring it. But I think that almost under any circumstance that we're evaluating a reasonable sized acquisition, we feel like we've got enough dry powder to pursue it. As it relates to the -- yes, as it relates to -- I mean, the cash position today within the company or at least as of September 30 was roughly $97 million. And ultimately, we feel like we'll have adequate capital and liquidity in place to deal with the -- both closing of Mid Pac acquisition, as well as managing the business on a go-forward basis.

Okay. And with respect to the comment about the board's managing the level, you feel you have enough room and all, can you be a little more specific? Do you have 20% shift in control, 10% shift in control, something smaller, something larger? Just in general, where are we at?

Yes. I think it's difficult for us to be specific on that number, just given that it's something that I think is going to move. And I think I understand that that's something you'd like to know, but I think it's a something from a company policy standpoint that we shouldn't be disclosing.

That you shouldn't disclose the percentage of room left on your NOL?

I mean, ultimately, it's something that we need to manage as a board and disclosing it publicly isn't in the company's best interest.

Our next question is from Janet McGurty from Platts.

Could you just give me again the total outlook for throughput at your refinery that you gave earlier? I didn't catch it.

There's really no outlook provided. My comment was that the refinery ran well during September and that it's currently processing about 70,000 barrels per day.

Okay, great. Can I ask you, do you see the crude breakdown between heavy and sour staying the same? Or do you see that you're going to be running more heavy, I guess, using some Canadian barrels now?

I think our crude plate is really going to be dictated by market outlook and where prices are. Obviously, there's tremendous amount of change happening in the world today. We're seeing lighter grade become more competitively priced. And ultimately, we will make our decision based on our best alternative.

Okay. So are you still talking with Pemex? Are you still taking some valves from Mexico?

We still have ongoing dialogue with Pemex and are forming a good relationship with them.

Good. And this is my last question. Do you have anything planned for turnarounds in the end of this year or the early next year?

No.

The next question is from John Siegle [ph] from Highbridge.

A couple of questions. I guess I'm limited to a couple here. I wanted to touch back to the benefit that you articulated from the decline in crude. My understanding is that the crude that's going through the income statement today was crude that was purchased prior to the step down in Brent. Is that a fair statement?

It's really -- not necessarily the absolute price per se that was a step down, but it was really the differentials were put in place relatively 90 days prior.

Okay. And so you -- and then you had articulated that a $10 move in crude would be worth what to the company?

Basically $700,000 per month and a reduction in operating expenses, based on the fuel that we are consuming inside the plant to heat the units, as well as provide electricity and steam through our cogeneration units.

Got it. But that's not -- I guess I just wanted to make sure, that's $700,000 of sort of operating expense benefit. That doesn't capture the fact that, for instance, at least what we see on our Bloomberg screens, the crack spreads for most of your products are moving very much so in the company's favor. Is that right?

Yes. It's, as it relates specifically to our operating expenses, that we'd see that decline, and other changes in the market and some of the improvement in overall crack spreads that we are observing, kind of starting at a June low and moving up higher are in addition to that benefit we see from lower crude prices.

Okay. So you're talking about sort of an $8.4 million benefit on the OpEx side. Let me just ask one last question then on the crack spread side. And the reason I ask is because if I look at the way the securities are trading right now, there's trading as if Par is long oil, when at the end of the day, you're -- in many ways, you're short oil. So if you could at least give some color to how crack spreads that you're realizing in October, if you don't want to quantify it, but give some color at least directionally to whether or not they're improving the way a third-party would expect them to improve, based on what we're seeing in the markets.

I mean, I think on a macro level, the market shift that, I would say, began in July when you saw the Brent market shift from backwardation in the Contango, and you've seen lighter grades in the world that would trade at a substantial premium to Brent on a differential basis have begun to compress and that's giving us additional alternatives. Now my comment regarding the 90-day lag has to do with, if you roll back from the third quarter, best case scenario, the barrels that we consumed during September that we're rolling through our financial statement were fixed or committed to during the June time frame. So that was, frankly, quite a different period in time. And the reality is that, that blue [ph] shifts that are occurring are broadening our feedstock alternatives, and ultimately, that's a positive for us. As it relates to just the broader market in crack spreads that we're observing, if you look at the slides that were attached, you can see kind of a continued uptrend in the Singapore marketplace. And ultimately, as I referenced on prior calls, the Singapore jet crack spread is a particularly relevant index for us, given that we have a high concentration of jet fuel sales. And ultimately, in October and November, we've seen, I would say, improved levels from the June lows. But if you look at the history, it's not, I would say, at the very high end of what people have seen historically. So ultimately, that's a benefit for us at the moment. Does that help?

Just think, to understand. I mean from a third party's perspective, I think if I just look right now, it certainly helps but I see kind of a jet crack of candidly $18 on my screen. I see crack spreads that would suggest that the asset is now positioned to the extent that throughput is there, despite having to export some barrels off-island to generate real cash flow. So I guess the question I have is, can you give any color into the month of October, and whether or not you saw a change in the assets cash flow because I think it's more than just the differentials that you're discussing, right? It's also the actual spread itself between the refined product and the feedstock is blowing out to the assets favor.

I can't provide any specific commentary on October, but I will say that the market has continued to move in our favor from a overall available crack spread to us. And in general, the feedstock time frame that will begin to roll through our financials reflects a better period in time, because you start to get into the July time frame that I've previously referenced and you simultaneously get some of the benefit that I previously referenced on Alaska North Slope pricing, and the relationship between Alaska North Slope pricing on a seasonal basis to Brent. So you have both of those factors that are at play that were not applicable during the feedstock's running through our third quarter financial statements.

[Operator Instructions] And we do have a question from Adam Michael from Miller Tabak.

I was going to see if you could kind of walk through some of the uplift numbers one more time. I caught the 10,000-barrel a day uplift at $6 a barrel. And based on your comments, it sounds like that's going to be coming at the expense of -- maybe you'll produce less low sulfur fuel oil and more of the gasoline, jet fuel and diesel fuels. And I just wanted to try to understand the dynamic. And when I look at the operating loss for the quarter and if I pull out the onetime charges, it looks like it's minus about $2 a barrel, if I did my math right. And I think your goal is to get to $2 to $4 a barrel of operating income. Just what's the time frame on reaching that goal, and how do we get there, I guess?

Yes. I think the biggest piece of making the step-change improvement does start with the increase in on-island sales, and ultimately, a 20% increase is a material increase for us. And it is going to phase in, over time, based on the current contract arrangements. As we've referenced previously, the recently won Defense Logistics Agency or military contract kicks in in the fourth quarter. And then as we get into the Q1 of '15, we begin to see incremental volumes from initial gasoline customers. And ultimately, also, new jet sales start to flow through on a full year basis, as well as incremental diesel sales. So that 10,000 barrels a day is a big part of the overall story. And then ultimately, the feedstock question remains the next piece of the equation that drives improvement for us. And one of the things that's hard to necessarily quantify is that I think incremental gasoline sales, it opens up our crude options. We can buy lighter barrels that and have a home for the gasoline range molecules that we manufacture rather than exporting them. So ultimately, that's a major change in the available options that we have. And ultimately, the Alaska North Slope market continues to be a competitive alternative for us, challenging for us to make the low-sulfur fuel oil with Alaska North Slope crude, given its sulfur content. However, given its pricing, we are less sensitive to necessarily need to manufacture that product. So that's -- those 2 pieces move the needle for us as we look forward.

Okay. Yes, that's actually helpful. And if I'm kind of looking forward, I see throughput as trended around that 70,000 barrels-a-day level for the last 3 quarters. Is that a good level? That, call it, 73% utilization, is that a good level to model going forward?

Well, we certainly have capacity within the facility, and that's one of the major opportunities that exists for us, but we will balance and run at the most optimal level to meet our on-island requirements and ultimately balance our exports. So my current view would be that, that's a reasonable perspective, based on our current demand profile.

Okay. But it sounds like there's physically nothing that would limit you from increasing that utilization level, if market conditions warranted.

Correct.

And I'll turn it back over to Will for closing comments.

Great. In conclusion, the Hawaii business position is improving, based on additional on-island sales and general increases in opportunities for feedstocks in the Global Market. Piceance Energy continues to execute its strategy of developing its low cost natural gas assets. While the third quarter results were costly, our views regarding the earnings power of the Hawaii business remain at $2 to $4 a barrel of operating income per barrel throughput is an achievable steady state. As communicated on our prior conference calls, 2014 will be a year of transition and building for the company, as a foundation for earnings and cash flow growth are built for 2015 and beyond. Thank you, everybody.

Thank you, ladies and gentlemen. That concludes today's call. Thank you for participating. You may all disconnect at this time.