PAR PACIFIC HOLDINGS, INC. 10-K

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are a growth-oriented company based in Houston, Texas, that owns and operates market-leading energy and infrastructure businesses. For more information, please read “Part I –Item 1. — Business—Overview” of this Form 10-K. Recent Events Affecting Comparability of Periods COVID-19 Pandemic On March 11, 2020, the World Health Organization (“WHO”) declared that the worldwide spread and severity of a new coronavirus, referred to as COVID-19, was severe enough to be characterized as a pandemic. The spread of COVID-19, in conjunction with related government and other preventative measures taken to mitigate the spread of the virus, have caused severe disruptions in the worldwide economy, including the global demand for crude oil and refined products, the movement of people and goods in the United States, and the global supply chain for industrial and commercial production, all of which have in turn disrupted our businesses and operations. We continue to actively respond to the impacts that these matters are having on our business. We decreased throughput rates at our Hawaii and Wyoming refineries in response to reduced refined product demand, idled one of our Hawaii refineries, completed our turnaround in Hawaii later in 2020 than previously planned, and reduced the scope of our Washington turnaround scheduled in the first quarter of 2021. In addition, we adjusted production of certain refined products to meet the changing local demand profile. We continue to maintain an ample supply of refined products to meet the refined product needs in the regions in which we operate. On May 5, 2020, we announced that 29 employees were furloughed in response to the previously announced decline in throughput rates at our refineries in Kapolei, Hawaii, and our President and Chief Executive Officer and the independent members of the Company’s Board of Directors reduced their cash salaries by 75% through October 2020. In response to sustained decreased demand for refined products in Hawaii, we significantly reduced discretionary spending company-wide and, in early October 2020, we reduced headcount in our refining segment in Hawaii. In November 2020, we announced that we were taking additional measures to reduce our operating expenses. These measures include non-renewal of the leases of certain marine assets to more closely align our logistics capability with reduced demand. As of December 31, 2020, the Par West refinery had been idle for more than nine months due to the reduction in demand resulting from the COVID-19 global pandemic. Given the length of idle time and the high cost to restart the refinery and no current plans or timeline to do so, we recorded an impairment charge of $17.9 million to write off the corresponding assets and accumulated depreciation for all assets other than land that are not expected to be used as part of our ongoing refining operations in Hawaii. We have undertaken additional liquidity-enhancing measures, including deferring or delaying certain capital expenditures originally planned for 2020 and early 2021 related to turnaround activities at three of our refineries and, in early June 2020, accessing the capital markets to issue $105 million aggregate principal amount of senior secured notes due 2026. Interest rates associated with our inventory financing arrangements and borrowings under those inventory financing arrangements have also declined. In addition, we closed a sale-leaseback transaction on February 23, 2021, in which we sold twenty-one (21) retail convenience store/fuel station properties located in Hawaii (the “Sale-Leaseback Properties”). We also entered into a lease on the properties for fifteen (15) years, unless earlier terminated, with up to four 5-year renewal options. We anticipate that during the first quarter there will be a separate closing for one additional property, as provided under the Purchase Agreement. In total, the 22 properties are being sold for a gross purchase price of $116.1 million. We believe the steps we have taken have strengthened our ability to operate through current conditions. We also utilized some of the tax payment deferral opportunities and federal refund acceleration opportunities provided by the IRS, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), and various state-specific provisions. We continue to maintain existing processes and procedures including, but not limited to, processes and procedures around protection of our technology systems and proprietary data, even though a significant number of our employees are working from home. During this time of uncertainty, the health and wellbeing of our employees and customers are our top priorities as we continue navigating the challenges presented by the COVID-19 pandemic. The financial results contained in this Annual Report on Form 10-K reflect the reduced activity experienced in the second, third, and fourth quarters of 2020 in the regions in which we operate. The COVID-19 pandemic is ongoing and the impacts of the virus on people and businesses continue to evolve as of the date of this report. In Washington, for example, mandatory self-quarantine orders have been lifted and replaced by recommended self-quarantines for travelers arriving from areas of high COVID-19 activity. Beginning October 15, 2020, U.S. travelers to the state of Hawaii have an option to take a rapid COVID-19 test as an alternative to a 14-day quarantine if they test negative. The State of Hawaii has also begun to allow 36 visitors from Japan to enter the state with a recent negative COVID-19 test, and certain airlines have resumed scheduled flights between Japan and Hawaii. We continue to actively monitor the impact of the global situation on our people, operations, financial condition, liquidity, suppliers, customers, and industry. Due to the rapid development and fluidity of the situation, the full magnitude of the COVID-19 impact on our financial condition, future results of operations, and future cash flows and liquidity is uncertain and has been and may continue to be material. Washington Acquisition On January 11, 2019, we completed the Washington Acquisition for total consideration of $326.5 million, including acquired working capital, consisting of cash consideration of $289.5 million and approximately 2.4 million shares of our common stock with a fair value of $37.0 million issued to the seller of U.S. Oil. The results of operations for U.S. Oil were included in our refining and logistics segments commencing January 11, 2019. Please read Note 4—Acquisitions to our consolidated financial statements under Item 8 of this Form 10-K for more information. In connection with the consummation of the Washington Acquisition, we assumed the Washington Refinery Intermediation Agreement with MLC that provides a structured financing arrangement based on U.S. Oil’s crude oil and refined products inventories and associated accounts receivable. Please read Note 11—Inventory Financing Agreements to our consolidated financial statements under Item 8 of this Form 10-K for more information. Par West Acquisition On December 19, 2018, we completed the Par West Acquisition for approximately $66.9 million, net of a $4.3 million receivable related to net working capital adjustments. The purchase price consisted of $47.6 million in cash and approximately 1.1 million shares of our common stock with a fair value of $19.3 million. The results of operations of the acquired assets are included in our refining segment commencing December 19, 2018. In the first quarter of 2020, the Par West refinery was idled due to the reduction in demand resulting from the COVID-19 global pandemic’s effect on the economy. Please read Note 4—Acquisitions to our consolidated financial statements under Item 8 of this Form 10-K for more information. Northwest Retail Acquisition On March 23, 2018, we completed the Northwest Retail Acquisition for cash consideration of approximately $74.5 million. As part of the Northwest Retail Acquisition, Par and CHS, Inc. entered into a multi-year branded petroleum marketing agreement for the continued supply of Cenex®-branded refined products to the 33 acquired Cenex® Zip Trip retail outlets. The results of operations of Northwest Retail are included in our retail segment commencing March 23, 2018. Please read Note 4—Acquisitions to our consolidated financial statements under Item 8 of this Form 10-K for more information. A rebranding of those sites to our proprietary “nomnom” brand began in December 2020 and the rebranding of four sites was completed as of December 31, 2020. As these stores are rebranded, Par will begin self-supplying the fuel with equity barrels and/or unbranded fuels procured in the open market. Amended and Restated J. Aron Supply and Offtake Agreements On June 27, 2018, we and J. Aron amended the Supply and Offtake Agreements to increase the amount that we may defer under the deferred payment arrangement. Prior to June 27, 2018, we had the right to defer payments owed to J. Aron up to the lesser of $125 million or 85% of eligible accounts receivable and inventory. Effective June 27, 2018, we have the right to defer payments owed to J. Aron up to the lesser of $165 million or 85% of eligible accounts receivable and inventory. On December 5, 2018, we amended and restated the Supply and Offtake Agreements to account for additional processing capacity provided through the Par West Acquisition. Please read Note 11—Inventory Financing Agreements to our consolidated financial statements under Item 8 of this Form 10-K for more information. Other Factors Affecting Comparability of Prior Periods On January 1, 2019, we adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) , as amended by other ASUs issued through February 2019 (“ASU 2016-02” or “ASC 842”), using the modified retrospective transition method. Under this optional transition method, information presented prior to January 1, 2019 has not been restated and continues to be reported under the accounting standards in effect for the period. 37 Results of Operations Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 Net Income (Loss). Our net income decreased from $40.8 million for the year ended December 31, 2019 to a net loss of $409.1 million for the year ended December 31, 2020. The decrease in our net income (loss) was primarily driven by lower refining sales volumes and unfavorable crack spreads related to COVID-19 demand destruction, increased RINs expenses and derivative costs, goodwill and asset impairments of $85.8 million, and an unfavorable change in lower of cost and net realizable value adjustments, partially offset by cost reductions across our businesses in response to COVID-19 and higher retail fuel margins. In addition, we incurred an other-than-temporary impairment of $45.3 million related to our equity investment in Laramie Energy in 2020, as compared to an other-than-temporary impairment of $83.2 million in 2019. Other factors impacting our results period over period include a $49.0 million reduction in our income tax benefit and lower debt extinguishment and commitment costs. Adjusted EBITDA and Adjusted Net Income (Loss). For the year ended December 31, 2020, Adjusted EBITDA was a loss of $86.7 million compared to earnings of $258.8 million for the year ended December 31, 2019. The change was primarily related to lower refining sales volumes and unfavorable crack spreads related to COVID-19 demand destruction, partially offset by lower operating expense and higher retail fuel margins. For the year ended December 31, 2020, Adjusted Net Income (Loss) was a loss of $249.8 million compared to income of $90.2 million for the year ended December 31, 2019. The change was primarily related to the same factors described above for the decrease in Adjusted EBITDA and higher depreciation, depletion, and amortization (“DD&A”) due to recently completed capital projects, including turnaround projects, partially offset by a $4.6 million decrease in interest expense and financing costs and a $5.8 million decrease in our Equity losses from Laramie Energy, excluding our share of unrealized gains or losses on derivatives and excluding impairment changes associated with our investment in Laramie Energy. Year Ended December 31, 2019 Compared to Year Ended December 31, 2018 Net Income. Our net income increased from $39.4 million for the year ended December 31, 2018 to $40.8 million for the year ended December 31, 2019. The increase in our net income was primarily driven by the impact of the Washington Acquisition and a $69.7 million income tax benefit primarily associated with a partial release of our valuation allowance in connection with the Washington Acquisition. These increases were partially offset by non-cash impairment charges of $83.2 million related to our equity investment in Laramie Energy and our share of Laramie Energy’s asset impairment losses in excess of our basis difference and higher interest expense due primarily to increases in our outstanding indebtedness. Other factors impacting our results period over period include higher debt extinguishment and commitment costs associated with the Washington Acquisition and exchange of a portion of our outstanding 5.00% Convertible Senior Notes, partially offset by a $10.5 million charge related to the Tesoro earn-out settlement in 2018 that did not recur in 2019. Adjusted EBITDA and Adjusted Net Income. For the year ended December 31, 2019, Adjusted EBITDA was $258.8 million compared to $132.1 million for the year ended December 31, 2018. The change was primarily related to contributions provided by the Washington Acquisition, increased sales volumes at our Hawaii refineries, increased sales volume and favorable crude oil differentials and feedstock costs at our Wyoming refinery, and improved fuel margins in our Retail operations. These increases were partially offset by higher feedstock costs and unplanned maintenance at our Hawaii refineries. For the year ended December 31, 2019, Adjusted Net Income was approximately $90.2 million compared to income of $49.3 million for the year ended December 31, 2018. The change was primarily related to the same factors described above for the increase in Adjusted EBITDA as well as a $19.2 million decrease in our Equity earnings from Laramie Energy, excluding our share of unrealized gains or losses on derivatives and excluding impairment changes associated with our investment in Laramie Energy, an increase in DD&A primarily associated with assets acquired in connection with the Washington Acquisition, and increased interest expense and financing costs primarily related to the new Term Loan B Facility, the Washington Refinery Intermediation Agreement, and the Retail Property Term Loan. These increases were partially offset by a decrease in interest expense and financing costs due to the exchange of a portion of our outstanding 5.00% Convertible Senior Notes during 2019. 38 The following table summarizes our consolidated results of operations for the years ended December 31, 2020, 2019, and 2018 (in thousands). The following should be read in conjunction with our consolidated financial statements under Item 8 of this Annual Report on Form 10-K. Year Ended December 31, 2020 2019 2018 Revenues $ 3,124,870 $ 5,401,516 $ 3,410,728 Cost of revenues (excluding depreciation) 2,947,697 4,803,589 3,003,116 Operating expense (excluding depreciation) 277,427 312,899 215,284 Depreciation, depletion, and amortization 90,036 86,121 52,642 Impairment expense 85,806 — — General and administrative expense (excluding depreciation) 41,288 46,223 47,426 Acquisition and integration costs 614 4,704 10,319 Total operating expenses 3,442,868 5,253,536 3,328,787 Operating income (loss) (317,998) 147,980 81,941 Other income (expense) Interest expense and financing costs, net (70,222) (74,839) (39,768) Debt extinguishment and commitment costs — (11,587) (4,224) Other income, net 1,049 2,516 1,046 Change in value of common stock warrants 4,270 (3,199) 1,801 Change in value of contingent consideration — — (10,500) Equity earnings (losses) from Laramie Energy, LLC (46,905) (89,751) 9,464 Total other expense, net (111,808) (176,860) (42,181) Income (loss) before income taxes (429,806) (28,880) 39,760 Income tax benefit (expense) 20,720 69,689 (333) Net income (loss) $ (409,086) $ 40,809 $ 39,427 39 The following tables summarize our operating income (loss) by segment for the years ended December 31, 2020, 2019, and 2018 (in thousands). The following should be read in conjunction with our consolidated financial statements under Item 8 of this Annual Report on Form 10-K. Year ended December 31, 2020 Refining Logistics (1) Retail Corporate, Eliminations and Other (2) Total Revenues $ 2,886,701 $ 180,909 $ 363,713 $ (306,453) $ 3,124,870 Cost of revenues (excluding depreciation) 2,908,870 110,385 234,885 (306,443) 2,947,697 Operating expense (excluding depreciation) 199,738 13,581 64,108 — 277,427 Depreciation, depletion, and amortization 53,930 21,899 10,692 3,515 90,036 Impairment expense 55,989 — 29,817 — 85,806 General and administrative expense (excluding depreciation) — — — 41,288 41,288 Acquisition and integration costs — — — 614 614 Operating income (loss) $ (331,826) $ 35,044 $ 24,211 $ (45,427) $ (317,998) Year ended December 31, 2019 Refining Logistics (1) Retail Corporate, Eliminations and Other (2) Total Revenues $ 5,167,942 $ 199,226 $ 458,889 $ (424,541) $ 5,401,516 Cost of revenues (excluding depreciation) 4,783,747 112,124 332,302 (424,584) 4,803,589 Operating expense (excluding depreciation) 234,582 11,010 67,307 — 312,899 Depreciation, depletion, and amortization 55,832 17,017 10,035 3,237 86,121 General and administrative expense (excluding depreciation) — — — 46,223 46,223 Acquisition and integration costs — — — 4,704 4,704 Operating income (loss) $ 93,781 $ 59,075 $ 49,245 $ (54,121) $ 147,980 Year ended December 31, 2018 Refining Logistics (1) Retail Corporate, Eliminations and Other (2) Total Revenues $ 3,210,067 $ 125,743 $ 441,040 $ (366,122) $ 3,410,728 Cost of revenues (excluding depreciation) 2,957,995 77,712 333,664 (366,255) 3,003,116 Operating expense (excluding depreciation) 146,320 7,782 61,182 — 215,284 Depreciation, depletion, and amortization 32,483 6,860 8,962 4,337 52,642 General and administrative expense (excluding depreciation) — — — 47,426 47,426 Acquisition and integration costs — — — 10,319 10,319 Operating income (loss) $ 73,269 $ 33,389 $ 37,232 $ (61,949) $ 81,941 ________________________________________________________ (1) Our logistics operations consist primarily of intercompany transactions which eliminate on a consolidated basis. (2) Includes eliminations of intersegment Revenues and Cost of revenues (excluding depreciation) of $306.5 million, $424.5 million, and $365.5 million for the years ended December 31, 2020, 2019, and 2018, respectively. 40 Below is a summary of key operating statistics for the refining segment for the years ended December 31, 2020, 2019, and 2018: Year Ended December 31, 2020 2019 2018 Total Refining Segment Feedstocks Throughput (Mbpd) (1) (2) 124.1 163.8 91.3 Refined product sales volume (Mbpd) (1) (2) 136.7 176.8 100.3 Hawaii Refineries Combined Feedstocks Throughput (Mbpd) (2) 72.7 109.0 74.9 Par East Throughput (Mbpd) (2) 66.5 71.5 73.4 Par West Throughput (Mbpd) (2) 6.2 37.5 42.1 Yield (% of total throughput) Gasoline and gasoline blendstocks 24.6 % 23.0 % 27.1 % Distillates 42.2 % 44.4 % 47.4 % Fuel oils 29.5 % 20.3 % 17.8 % Other products (0.7) % 8.7 % 4.5 % Total yield 95.6 % 96.4 % 96.8 % Refined product sales volume (Mbpd) On-island sales volume 83.5 114.1 74.6 Exports sales volume 0.6 5.7 9.0 Total refined product sales volume 84.1 119.8 83.6 Adjusted Gross Margin per bbl ($/throughput bbl) (3) $ (1.63) $ 3.30 $ 5.37 Production costs per bbl ($/throughput bbl) (4) 4.03 3.25 3.65 DD&A per bbl ($/throughput bbl) 0.55 0.40 0.66 Washington Refinery Feedstocks Throughput (Mbpd) (1) 39.1 38.9 — Yield (% of total throughput) Gasoline and gasoline blendstocks 23.4 % 23.6 % — % Distillates 35.3 % 35.6 % — % Asphalt 18.8 % 18.9 % — % Other products 19.8 % 19.4 % — % Total yield 97.3 % 97.5 % — % Refined product sales volume (Mbpd) (1) 39.6 41.1 — Adjusted Gross Margin per bbl ($/throughput bbl) (3) $ 3.88 $ 11.26 $ — Production costs per bbl ($/throughput bbl) (4) 3.50 4.52 — DD&A per bbl ($/throughput bbl) 1.39 1.56 — 41 Year Ended December 31, 2020 2019 2018 Wyoming Refinery Feedstocks Throughput (Mbpd) 12.3 17.0 16.4 Yield (% of total throughput) Gasoline and gasoline blendstocks 49.2 % 49.6 % 49.5 % Distillates 45.2 % 44.5 % 45.8 % Fuel oil 1.9 % 1.7 % 1.6 % Other products 1.3 % 1.6 % 0.8 % Total yield 97.6 % 97.4 % 97.7 % Refined product sales volume (Mbpd) 13.0 17.0 16.7 Adjusted Gross Margin per bbl ($/throughput bbl) (3) $ 3.94 $ 18.82 $ 15.29 Production costs per bbl ($/throughput bbl) (4) 8.69 6.32 7.06 DD&A per bbl ($/throughput bbl) 4.34 2.93 2.39 Market Indices ($ per barrel) 3-1-2 Singapore Crack Spread (5) $ 3.15 $ 10.80 $ 10.90 Pacific Northwest 5-2-2-1 Index (6) 11.44 15.02 — Wyoming 3-2-1 Index (7) 17.80 24.90 22.69 Crude Oil Prices ($ per barrel) Brent $ 43.21 $ 64.19 $ 71.55 WTI 39.65 57.08 64.90 ANS 41.77 65.72 72.16 Bakken Clearbrook 37.19 56.04 62.36 WCS Hardisty 27.45 43.18 38.33 Brent M1-M3 (0.98) 1.00 0.37 ________________________________________________________ (1) Feedstocks throughput and sales volumes per day for the Washington refinery for the year ended December 31, 2019 are calculated based on the 355-day period for which we owned the Washington refinery in 2019. The amounts for the total refining segment represent the sum of the Hawaii, Washington, and Wyoming refineries’ throughput or sales volumes averaged over the years ended December 31, 2020, 2019, and 2018. (2) Feedstocks throughput and sales volumes per day for each of the Hawaii refineries for the year ended December 31, 2018 are calculated based on the 365-day period we owned the Par East refinery and the 13-day period for which we owned the Par West refinery. The amounts for the combined Hawaii refineries for the years ended December 31, 2020, 2019, and 2018 represent the sum of the Par East and Par West refineries’ throughput averaged over the respective years. (3) We calculate Adjusted Gross Margin per barrel by dividing Adjusted Gross Margin by total refining throughput. Adjusted Gross Margin for our Washington refinery is determined under the last-in, first-out (“LIFO”) inventory costing method. Adjusted Gross Margin for our other refineries is determined under the first-in, first-out (“FIFO”) inventory costing method. Please see discussion of Adjusted Gross Margin below. (4) Management uses production costs per barrel to evaluate performance and compare efficiency to other companies in the industry. There are a variety of ways to calculate production costs per barrel; different companies within the industry calculate it in different ways. We calculate production costs per barrel by dividing all direct production costs, which include the costs to run the refineries including personnel costs, repair and maintenance costs, insurance, utilities, and other miscellaneous costs, by total refining throughput. Our production costs are included in Operating expense (excluding depreciation) on our consolidated statement of operations, which also includes costs related to our bulk marketing operations. 42 (5) After completing the acquisition of Par West in December 2018, we began shifting our Hawaii production profile to supply the local utilities with low sulfur fuel oil and significantly reduced our high sulfur fuel oil yield. In 2020, following the implementation of IMO 2020, we established the 3-1-2 Singapore Crack Spread (or three barrels of Brent crude oil converted into one barrel of gasoline and two barrels of distillates (diesel and jet fuel)) as a new benchmark for our Hawaii operations. By removing the high sulfur fuel oil reference in the index, we believe the 3-1-2 Singapore Crack Spread is the most representative market indicator for our current operations in Hawaii. (6) We believe the Pacific Northwest 5-2-2-1 Index is the most representative market indicator for our operations in Tacoma, Washington. The Pacific Northwest 5-2-2-1 Index is computed by taking two parts gasoline (sub-octane), two parts middle distillates (ULSD and jet fuel), and one part fuel oil as created from five barrels of Alaskan North Slope (“ANS”) crude oil. The 2019 prices for the year ended December 31, 2019 represent the price averaged over the period from January 11, 2019 to December 31, 2019. (7) The profitability of our Wyoming refinery is heavily influenced by crack spreads in nearby markets. We believe the Wyoming 3-2-1 Index is the most representative market indicator for our operations in Wyoming. The Wyoming 3-2-1 Index is computed by taking two parts gasoline and one part distillates (ULSD) as created from three barrels of West Texas Intermediate Crude Oil (“WTI”). Pricing is based 50% on applicable product pricing in Rapid City, South Dakota, and 50% on applicable product pricing in Denver, Colorado. Below is a summary of key operating statistics for the retail segment for the years ended December 31, 2020, 2019, and 2018: Year Ended December 31, 2020 2019 2018 Retail Segment Retail sales volumes (thousands of gallons) (1) 102,798 125,313 116,715 ________________________________________________________ (1) Retail sales volumes for the year ended December 31, 2018, include 284 days of retail sales volumes from Northwest Retail since its acquisition on March 23, 2018. The 2020 and 2019 amounts represents the sum of the Hawaii and Northwest Retail sales volumes for the years ended December 31, 2020 and 2019. Non-GAAP Performance Measures Management uses certain financial measures to evaluate our operating performance that are considered non-GAAP financial measures. These measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP and our calculations thereof may not be comparable to similarly titled measures reported by other companies. Adjusted Gross Margin. Adjusted Gross Margin is defined as (i) operating income (loss) plus operating expense (excluding depreciation), impairment expense, inventory valuation adjustment (which adjusts for timing differences to reflect the economics of our inventory financing agreements, including lower of cost or net realizable value adjustments, the impact of the embedded derivative repurchase or terminal obligations, and purchase price allocation adjustments), depreciation, depletion, and amortization (“DD&A”); Renewable Identification Numbers (“RINs”) loss (gain) in excess of net obligation (which represents the income statement effect of reflecting our RINs liability on a net basis), and unrealized loss (gain) on derivatives or (ii) revenues less cost of revenues (excluding depreciation) plus inventory valuation adjustment, unrealized loss (gain) on derivatives, and RINs loss (gain) in excess of net obligation. We define cost of revenues (excluding depreciation) as the hydrocarbon-related costs of inventory sold, transportation costs of delivering product to customers, crude oil consumed in the refining process, costs to satisfy our RINs and environmental credit obligations, and certain hydrocarbon fees and taxes. Cost of revenues (excluding depreciation) also includes the unrealized gain (loss) on derivatives and the inventory valuation adjustment that we exclude from Adjusted Gross Margin. Beginning in 2020, Adjusted Gross Margin also includes the contango gains and backwardation losses associated with our Washington inventory and intermediation obligation. Prior to 2020, contango gains and backwardation (losses) captured by our Washington intermediation agreement were excluded from Adjusted Gross Margin (as part of the inventory valuation adjustment). This change to our non-GAAP information was made to reflect the favorable or unfavorable impact of the market structure on the profitability of our Washington refinery consistent with the presentation of such impacts on our other refineries. Also beginning in 2020, Adjusted Gross Margin excludes the LIFO layer liquidation impacts associated with our Washington inventory. We have recast the non-GAAP information for the year ended December 31, 2019 to conform to the current period presentation. Management believes Adjusted Gross Margin is an important measure of operating performance and uses Adjusted Gross Margin per barrel to evaluate operating performance and compare profitability to other companies in the industry and to 43 industry benchmarks. Management believes Adjusted Gross Margin provides useful information to investors because it eliminates the gross impact of volatile commodity prices and adjusts for certain non-cash items and timing differences created by our inventory financing agreements and lower of cost and net realizable value adjustments to demonstrate the earnings potential of the business before other fixed and variable costs, which are reported separately in Operating expense (excluding depreciation) and Depreciation, depletion, and amortization. Adjusted Gross Margin should not be considered an alternative to operating income (loss), cash flows from operating activities, or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted Gross Margin presented by other companies may not be comparable to our presentation since each company may define this term differently as they may include other manufacturing costs and depreciation expense in cost of revenues. The following tables present a reconciliation of Adjusted Gross Margin to the most directly comparable GAAP financial measure, operating income (loss), on a historical basis, for selected segments, for the periods indicated (in thousands): Year ended December 31, 2020 Refining Logistics Retail Operating income (loss) $ (331,826) $ 35,044 $ 24,211 Operating expense (excluding depreciation) 199,738 13,581 64,108 Depreciation, depletion, and amortization 53,930 21,899 10,692 Impairment expense 55,989 — 29,817 Inventory valuation adjustment 14,046 — — RINs loss in excess of net obligation 44,071 — — Unrealized gain on derivatives (4,804) — — Adjusted Gross Margin (1) $ 31,144 $ 70,524 $ 128,828 Year ended December 31, 2019 Refining Logistics Retail Operating income $ 93,781 $ 59,075 $ 49,245 Operating expense (excluding depreciation) 234,582 11,010 67,307 Depreciation, depletion, and amortization 55,832 17,017 10,035 Inventory valuation adjustment 11,938 — — RINs gain in excess of net obligation (3,398) — — Unrealized loss on derivatives 8,988 — — Adjusted Gross Margin (1) $ 401,723 $ 87,102 $ 126,587 Year ended December 31, 2018 Refining Logistics Retail Operating income $ 73,269 $ 33,389 $ 37,232 Operating expense (excluding depreciation) 146,320 7,782 61,182 Depreciation, depletion, and amortization 32,483 6,860 8,962 Inventory valuation adjustment (16,875) — — RINs loss in excess of net obligation 4,544 — — Unrealized gain on derivatives (1,497) — — Adjusted Gross Margin (1) $ 238,244 $ 48,031 $ 107,376 ________________________________________ (1) For the years ended December 31, 2020, 2019, and 2018, there was no LIFO liquidation adjustment. For the years ended December 31, 2019 and 2018, there was no impairment expense. Adjusted Net Income (Loss) and Adjusted EBITDA. Adjusted Net Income (Loss) is defined as Net income (loss) excluding changes in the value of contingent consideration and common stock warrants, acquisition and integration costs, unrealized (gain) loss on derivatives, debt extinguishment and commitment costs, increase in (release of) tax valuation allowance and other deferred tax items, inventory valuation adjustment, severance costs, impairment expense, (gain) loss on sale of assets, Par’s share of Laramie Energy’s unrealized loss (gain) on derivatives, RINs loss (gain) in excess of net obligation, and impairment expense associated with our investment in Laramie Energy and our share of Laramie Energy’s asset impairment losses in excess of our basis difference. Beginning in 2020, Adjusted Net Income (Loss) also includes the contango 44 gains and backwardation losses associated with our Washington inventory and intermediation obligation. Prior to 2020, contango gains and backwardation (losses) captured by our Washington intermediation agreement were excluded from Adjusted Net Income (Loss) (as part of the inventory valuation adjustment). This change to our non-GAAP information was made to reflect the favorable or unfavorable impact of the market structure on the profitability of our Washington refinery consistent with the presentation of such impacts on our other refineries. Also beginning in 2020, Adjusted Net Income (Loss) excludes the LIFO layer liquidation impacts associated with our Washington inventory. We have recast the non-GAAP information for the year ended December 31, 2019 to conform to the current period presentation. Adjusted EBITDA is Adjusted Net Income (Loss) excluding interest expense and financing costs, income taxes, DD&A, and equity losses (earnings) from Laramie Energy, excluding Par’s share of unrealized loss (gain) on derivatives, impairment of Par’s investment, and our share of Laramie Energy’s asset impairment losses in excess of our basis difference. We believe Adjusted Net Income (Loss) and Adjusted EBITDA are useful supplemental financial measures that allow investors to assess: • The financial performance of our assets without regard to financing methods, capital structure, or historical cost basis; • The ability of our assets to generate cash to pay interest on our indebtedness; and • Our operating performance and return on invested capital as compared to other companies without regard to financing methods and capital structure. Adjusted Net Income (Loss) and Adjusted EBITDA should not be considered in isolation or as a substitute for operating income (loss), net income (loss), cash flows provided by operating, investing, and financing activities, or other income or cash flow statement data prepared in accordance with GAAP. Adjusted Net Income (Loss) and Adjusted EBITDA presented by other companies may not be comparable to our presentation as other companies may define these terms differently. 45 The following table presents a reconciliation of Adjusted Net Income (Loss) and Adjusted EBITDA to the most directly comparable GAAP financial measure, net income (loss), on a historical basis for the periods indicated (in thousands): Year Ended December 31, 2020 2019 2018 Net income (loss) $ (409,086) $ 40,809 $ 39,427 Inventory valuation adjustment 14,046 11,938 (16,875) RINs loss (gain) in excess of net obligation 44,071 (3,398) 4,544 Unrealized loss (gain) on derivatives (4,804) 8,988 (1,497) Acquisition and integration costs 614 4,704 10,319 Debt extinguishment and commitment costs — 11,587 4,224 Changes in valuation allowance and other deferred tax items (1) (20,896) (68,792) (660) Change in value of common stock warrants (4,270) 3,199 (1,801) Change in value of contingent consideration — — 10,500 Severance costs 512 — — Impairment expense 85,806 — — Impairment of Investment in Laramie Energy, LLC (2) 45,294 83,152 — Par’s share of Laramie Energy’s unrealized loss (gain) on derivatives (2) (1,110) (1,969) 1,158 Adjusted Net Income (Loss) (3) (249,823) 90,218 49,339 Depreciation, depletion, and amortization 90,036 86,121 52,642 Interest expense and financing costs, net 70,222 74,839 39,768 Equity losses (earnings) from Laramie Energy, LLC, excluding Par’s share of unrealized loss (gain) on derivatives and impairment losses 2,721 8,568 (10,622) Income tax expense (benefit) 176 (897) 993 Adjusted EBITDA $ (86,668) $ 258,849 $ 132,120 ________________________________________________________ (1) Includes increases in (releases of) our valuation allowance associated with business combinations and changes in deferred tax assets and liabilities that are not offset by a change in the valuation allowance. These tax expenses (benefits) are included in Income tax expense (benefit) on our consolidated statements of operations. (2) Includes our share of Laramie Energy’s unrealized loss (gain) on derivatives, impairment losses on our investment in Laramie Energy, and our share of Laramie Energy’s asset impairment losses in excess of our basis difference. These impairment losses and our share of Laramie Energy’s unrealized loss (gain) on derivatives are included in Equity earnings (losses) from Laramie Energy, LLC on our consolidated statements of operations. (3) For the years ended December 31, 2020, 2019, and 2018, there was no (gain) loss on sale of assets or LIFO liquidation adjustment. Discussion of Operating Income (Loss) by Segment Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 Refining. Operating loss for our refining segment was $331.8 million for the year ended December 31, 2020, a decrease of $425.6 million compared to operating income of $93.8 million for the year ended December 31, 2019. The decrease in profitability was primarily driven by lower refining sales volumes at our Hawaii and Wyoming refineries related to COVID-19 demand destruction and turnarounds in both locations, unfavorable crude oil differentials and crack spreads, increased RINs expenses and derivative costs, goodwill impairment charges of $38.1 million, asset impairment charges of $17.9 million, and unfavorable lower of cost and net realizable value adjustments of $10.6 million, partially offset by improved energy-related cost of sales and operating expense reductions across our refineries in response to COVID-19. Logistics. Operating income for our logistics segment was $35.0 million for the year ended December 31, 2020, a decrease of $24.1 million compared to operating income of $59.1 million for the year ended December 31, 2019. The decrease is primarily due to a net 30% and 25% lower throughput across our Hawaii and Wyoming logistics assets, respectively, and 46 lower neighbor island sales in Hawaii related to COVID-19 demand destruction, major turnarounds in both locations, and higher DD&A, partially offset by a net 9% increase in throughput across our Washington logistics assets. Retail. Operating income for our retail segment was $24.2 million for the year ended December 31, 2020, a decrease of $25.0 million compared to operating income of $49.2 million for the year ended December 31, 2019. The decrease in profitability was primarily due to goodwill impairment charges of $29.8 million and an 18% decline in sales volumes, partially offset by an increase in fuel margins of 25% and operating expense reductions in response to the economic impacts of COVID-19 on our businesses. Year Ended December 31, 2019 Compared to Year Ended December 31, 2018 Refining. Operating income for our refining segment was $93.8 million for the year ended December 31, 2019, an increase of $20.5 million compared to operating income of $73.3 million for the year ended December 31, 2018. The increase in profitability was primarily driven by the contribution of the Washington Acquisition and favorable crude oil differentials and feedstock costs at our Wyoming refinery. The Washington refinery assets contributed operating income of approximately $53.3 million to the refining segment for the period from January 11, 2019 to December 31, 2019. The Wyoming 3-2-1 Index increased 10% from $22.69 per barrel for the year ended December 31, 2018 to $24.90 per barrel for the year ended December 31, 2019. These contributions were partially offset by unfavorable crude oil differentials, unplanned maintenance, and an increase in feedstock costs at our Hawaii refineries. The unplanned maintenance in Hawaii resulted in an increase of $2.6 million in operating expenses and approximately 11 lost throughput days within certain units at our Par East Hawaii refinery. Logistics. Operating income for our logistics segment was $59.1 million for the year ended December 31, 2019, an increase of $25.7 million compared to operating income of $33.4 million for the year ended December 31, 2018. The increase was primarily due to a contribution of $18.8 million from the logistics assets acquired in connection with the Washington Acquisition for the period from January 11, 2019 to December 31, 2019 and additional on-island sales through our logistics network. Retail. Operating income for our retail segment was $49.2 million for the year ended December 31, 2019, an increase of $12.0 million compared to operating income of $37.2 million for the year ended December 31, 2018. The increase in profitability was primarily due to an increase in fuel margins of 10% and an increase in sales volumes of 7%. Discussion of Adjusted Gross Margin by Segment Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 Refining . For the year ended December 31, 2020, our refining Adjusted Gross Margin was approximately $31.1 million, a decrease of $370.6 million compared to $401.7 million for the year ended December 31, 2019. The decrease in profitability was primarily driven by a 23% decline in sales volumes and declines in crack spreads. Adjusted gross margin for the Hawaii refineries decreased from $3.30 per barrel in 2019 to $(1.63) per barrel in 2020 primarily due to 30% lower sales volumes, an increase in RINs expenses, and unfavorable crude oil differentials. Adjusted gross margin for the Wyoming refinery decreased $14.88 per barrel primarily due to a 24% decline in sales volumes, an increase in RINs expenses, and a decrease in crack spreads. The decline in refining sales volumes in Hawaii and Wyoming was driven by COVID-19 demand destruction and turnarounds in both locations. Adjusted gross margin for the Washington refinery decreased $7.38 per barrel primarily due to unfavorable crack spreads and higher RINs expenses, partially offset by favorable derivative costs. Logistics. For the year ended December 31, 2020, our logistics Adjusted Gross Margin was approximately $70.5 million, a decrease of $16.6 million compared to $87.1 million for the year ended December 31, 2019. The decrease was primarily driven by a net 30% and 25% lower throughput across our Hawaii and Wyoming logistics assets, respectively, and lower neighbor island sales in Hawaii related to COVID-19 demand destruction and major turnarounds at both locations, partially offset by a net 9% increase in throughput across our Washington logistics assets. Retail. For the year ended December 31, 2020, our retail Adjusted Gross Margin was approximately $128.8 million, an increase of $2.2 million compared to $126.6 million for the year ended December 31, 2019. The increase was primarily due to a 25% increase in fuel margins, partially offset by a decline in sales volumes of 18% due to COVID-19 demand destruction. Year Ended December 31, 2019 Compared to Year Ended December 31, 2018 Refining . For the year ended December 31, 2019, our refining Adjusted Gross Margin was approximately $401.7 million, an increase of $163.5 million compared to $238.2 million for the year ended December 31, 2018. The increase in 47 profitability was primarily driven by the Washington refinery, which contributed Adjusted Gross Margin of $155.5 million to the refining segment for the period from January 11, 2019 to December 31, 2019. Other factors included increased sales volumes and favorable crude oil differentials and feedstock costs at our Wyoming refinery. The Wyoming 3-2-1 Index increased 10% from $22.69 per barrel for the year ended December 31, 2018 to $24.90 per barrel for the year ended December 31, 2019. These increases were partially offset by higher feedstock costs at our Hawaii refineries and unplanned maintenance at our Par East Hawaii refinery that resulted in approximately 11 lost throughput days within certain units. Logistics. For the year ended December 31, 2019, our logistics Adjusted Gross Margin was approximately $87.1 million, an increase of $39.1 million compared to $48.0 million for the year ended December 31, 2018. The increase was primarily driven by the contribution of the Washington assets and higher throughput in Hawaii due to the additional on-island sales through our logistics network. The Washington assets contributed Adjusted Gross Margin of $28.1 million to the logistics segment for the period from January 11, 2019 to December 31, 2019. Retail. For the year ended December 31, 2019, our retail Adjusted Gross Margin was approximately $126.6 million, an increase of $19.2 million compared to $107.4 million for the year ended December 31, 2018. The increase was primarily due to a 10% increase in fuel margins and higher sales volumes of 7%. Discussion of Consolidated Results Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 Revenues. For the year ended December 31, 2020, revenues were $3.1 billion, a $2.3 billion decrease compared to $5.4 billion for the year ended December 31, 2019. The decrease was primarily the result of a decrease of $2.2 billion in third-party revenues at our refining segment primarily as a result of decreases in Brent and WTI crude oil prices and lower sales volumes related to COVID-19 demand destruction. Refined product sales volumes decreased 23% from 176.8 Mbpd in the year ended December 31, 2019 to 136.7 Mbpd in the year ended December 31, 2020. Brent crude oil prices averaged $43.21 per barrel for the year ended December 31, 2020 compared to $64.19 per barrel for the year ended December 31, 2019, with similar decreases experienced for WTI crude oil prices. Revenues in our retail segment decreased $95.2 million primarily due to 18% declines in both sales volumes and fuel prices. Cost of Revenues (Excluding Depreciation). For the year ended December 31, 2020, cost of revenues (excluding depreciation), was $2.9 billion, a $1.9 billion decrease compared to $4.8 billion for the year ended December 31, 2019. The decrease was primarily due to the decreases in Brent and WTI crude oil prices and lower refining sales volumes discussed above. These decreases were partially offset by unfavorable crude oil differentials, higher RINs expenses, increased derivative costs, and an unfavorable lower of cost and net realizable value adjustment of $10.6 million. Cost of revenues at our retail segment decreased $97.4 million primarily due to lower fuel costs and an 18% decline in sales volumes. Operating Expense (Excluding Depreciation). For the year ended December 31, 2020, operating expense (excluding depreciation) was approximately $277.4 million, a decrease of $35.5 million compared to $312.9 million for the year ended December 31, 2019. The decrease was primarily due to lower utilities and repairs and maintenance expenses and COVID-19-related reductions in travel, employee costs, and the use of outside services. Depreciation, Depletion, and Amortization . For the year ended December 31, 2020, DD&A expense was approximately $90.0 million, an increase of $3.9 million compared to $86.1 million for the year ended December 31, 2019. The increase was primarily due to recently completed capital projects, including three turnarounds during 2019 and 2020 and our Washington renewables logistics project. Impairment Expense. During the year ended December 31, 2020, we recorded goodwill and asset impairment charges totaling $85.8 million related to our Refining and Retail segments. Please read Note 10—Goodwill and Intangible Assets and Note 8—Property, Plant, and Equipment and Impairment of Long-Lived Assets to our consolidated financial statements under Item 8 of this Form 10-K for further discussion on the goodwill impairment of $67.9 million and asset impairment of $17.9 million, respectively. There was no impairment expense for the year ended December 31, 2019. General and Administrative Expense (Excluding Depreciation). For the year ended December 31, 2020, general and administrative expense (excluding depreciation) was approximately $41.3 million, a decrease of $4.9 million compared to $46.2 million for the year ended December 31, 2019. The decrease was primarily due to COVID-19-related reductions in travel and employee costs and a reduction in the use of outside services. Acquisition and Integration Costs. For the year ended December 31, 2020, we incurred approximately $0.6 million of expenses primarily related to integration costs for the Washington Acquisition. For the year ended December 31, 2019, we 48 incurred approximately $4.7 million of expenses primarily related to acquisition and integration costs for the Washington and Par West Acquisitions. Please read Note 4—Acquisitions to our consolidated financial statements under Item 8 of this Form 10-K for more information. Interest Expense and Financing Costs, Net . For the year ended December 31, 2020, our interest expense and financing costs were approximately $70.2 million, a decrease of $4.6 million compared to $74.8 million for the year ended December 31, 2019. The decrease was primarily due to a $4.0 million decrease in due to the exchange of a portion of our outstanding 5.00% Convertible Senior Notes during 2019, a decrease of $4.7 million due to reduced borrowings under our inventory financing agreements, and a decrease of $4.3 million due to the reduced principal and lower variable interest rates on our Term Loan B Facility. These decreases were partially offset by interest expense of $8.1 million related to the 12.875% Senior Secured Notes issued in June 2020. Please read Note 11—Inventory Financing Agreements and Note 13—Debt to our consolidated financial statements under Item 8 of this Form 10-K for further discussion on our inventory financing and indebtedness, respectively. Change in Value of Common Stock Warrants . For the year ended December 31, 2020, the change in value of common stock warrants resulted in a gain of approximately $4.3 million, a change of $7.5 million compared to a loss of $3.2 million for the year ended December 31, 2019. During January and March 2020, one of our stockholders and its affiliates exercised the remaining 354,350 common stock warrants in exchange for 350,542 shares of common stock. We estimated the fair value of our outstanding common stock warrants and the income recognized upon exercise using the difference between the strike price of the warrant and the market price of our common stock. During the year ended December 31, 2019, our stock price increased from $14.18 per share on December 31, 2018 to $23.24 per share on December 31, 2019, which resulted in an increase in the value of the common stock warrants. Debt extinguishment and commitment costs. For the year ended December 31, 2019, our debt extinguishment and commitment costs were approximately $11.6 million and represent the commitment and other fees associated with the financing of the Washington Acquisition and the extinguishment costs associated with the exchange of a portion of our outstanding 5.00% Convertible Senior Notes. There were no debt extinguishment and commitment costs for the year ended December 31, 2020. Equity Losses from Laramie Energy, LLC . For the year ended December 31, 2020, equity losses from Laramie Energy were approximately $46.9 million, a difference of $42.9 million compared to equity losses of $89.8 million for the year ended December 31, 2019. During the years ended December 31, 2020 and 2019, we recorded other-than-temporary impairment charges of $45.3 million and $81.5 million related to our investment in Laramie Energy, respectively. As of June 30, 2020, we have discontinued the application of the equity method of accounting for our investment in Laramie Energy because the book value of such investment has been reduced to zero. Please read Note 3—Investment in Laramie Energy, LLC to our consolidated financial statements under Item 8 of this Form 10-K for more information. Income Taxes. For the year ended December 31, 2020, we recorded an income tax benefit of $20.7 million primarily driven by an increase in our net operating loss carryforwards that do not expire and the change in our indefinitely-lived goodwill due to the impairments. For the year ended December 31, 2019, we recorded an income tax benefit of $69.7 million primarily driven by a $64.2 million benefit associated with a partial release of our valuation allowance in connection with the Washington Acquisition. Year Ended December 31, 2019 Compared to Year Ended December 31, 2018 Revenues. For the year ended December 31, 2019, revenues were $5.4 billion, a $2.0 billion increase compared to $3.4 billion for the year ended December 31, 2018. The increase was primarily the result of the Washington Acquisition and increased sales volumes in Hawaii primarily related to the Par West Acquisition. The Washington Acquisition contributed third-party revenues of $1.2 billion for the period from January 11, 2019 to December 31, 2019. Refined product sales volumes in Hawaii increased 43% from 83.6 Mbpd in the year ended December 31, 2018 to 119.8 Mbpd in the year ended December 31, 2019 primarily due to the Par West Acquisition. These increases were partially offset by a decrease in Brent crude oil prices. Brent crude oil prices averaged $64.19 per barrel in the year ended December 31, 2019 compared to $71.55 per barrel in the year ended December 31, 2018, with similar decreases experienced for WTI crude oil prices. Revenues in our retail segment increased $17.9 million primarily due to higher sales volumes of 7%. Cost of Revenues (Excluding Depreciation). For the year ended December 31, 2019, cost of revenues (excluding depreciation), was $4.8 billion, a $1.8 billion increase compared to $3.0 billion for the year ended December 31, 2018. The increase was primarily due to the Washington Acquisition and a 43% increase in refined product sales volumes in Hawaii primarily due to the Par West Acquisition. The Washington Acquisition contributed cost of revenues of approximately 49 $1.0 billion for the period from January 11, 2019 to December 31, 2019. These increases were partially offset by the decrease in Brent crude oil prices as discussed above. Operating Expense (Excluding Depreciation). For the year ended December 31, 2019, operating expense (excluding depreciation) was approximately $312.9 million, an increase of $97.6 million compared to $215.3 million for the year ended December 31, 2018. The increase was primarily due to operating expenses related to the Washington Acquisition, Par West Acquisition, and Northwest Retail Acquisition. The Washington Acquisition contributed operating expenses of $62.3 million for the period from January 11, 2019 to December 31, 2019. The Par West Acquisition contributed operating expenses of $26.1 million for the year ended December 31, 2019. Northwest Retail contributed operating expenses of $20.0 million for the full year ended December 31, 2019, as compared to $15.0 million for the 284-day period of ownership from March 23, 2018 to December 31, 2018. The increase was also due to $2.6 million expenditures incurred in connection with unplanned maintenance at our Par East Hawaii refinery. Depreciation, Depletion, and Amortization . For the year ended December 31, 2019, DD&A expense was approximately $86.1 million, an increase of $33.5 million compared to $52.6 million for the year ended December 31, 2018. The increase was primarily due to DD&A on assets acquired as part of the Washington Acquisition and the accelerated depreciation of assets to be replaced during the 2020 Wyoming refinery turnaround. General and Administrative Expense (Excluding Depreciation). For the year ended December 31, 2019, general and administrative expense (excluding depreciation) was approximately $46.2 million, which is relatively consistent with expense of $47.4 million for the year ended December 31, 2018. Acquisition and Integration Costs. For the year ended December 31, 2019, we incurred approximately $4.7 million of expenses primarily related to acquisition and integration costs for the Washington Acquisition and the Par West Acquisition. For the year ended December 31, 2018, we incurred approximately $10.3 million of expenses primarily related to acquisition and integration costs for the Northwest Retail Acquisition, the Par West Acquisition, and the Washington Acquisition. Please read Note 4—Acquisitions to our consolidated financial statements under Item 8 of this Form 10-K for more information. Interest Expense and Financing Costs, Net . For the year ended December 31, 2019, our interest expense and financing costs were approximately $74.8 million, an increase of $35.0 million compared to $39.8 million for the year ended December 31, 2018. The increase was primarily due to interest expense and financing costs of $24.4 million related to the new Term Loan B Facility entered into on January 11, 2019, interest expense of $6.3 million on the Washington Refinery Intermediation Agreement, a net increase in our loss on interest rate derivatives of $2.8 million, and interest expense and financing costs of $2.5 million related to the Par Pacific Term Loan entered into on January 9, 2019 and replaced by the Retail Property Term Loan entered into on March 29, 2019. These increases were partially offset by a decrease in interest expense and financing costs of $1.7 million due to the exchange of a portion of our outstanding 5.00% Convertible Senior Notes during 2019. Please read Note 13—Debt to our consolidated financial statements under Item 8 of this Form 10-K for further discussion on our indebtedness. Change in Value of Common Stock Warrants . For the year ended December 31, 2019, the change in value of common stock warrants resulted in a loss of approximately $3.2 million, a change of $5.0 million compared to a gain of $1.8 million for the year ended December 31, 2018. For the year ended December 31, 2019, our stock price increased from $14.18 per share as of December 31, 2018 to $23.24 per share as of December 31, 2019, which resulted in an increase in the fair value of the common stock warrants. During the year ended December 31, 2018, our stock price decreased from $19.28 per share on December 31, 2017 to $14.18 per share on December 31, 2018, which resulted in a decrease in the value of the common stock warrants. Change in Value of Contingent Consideration . For the year ended December 31, 2018, the change in value of our contingent consideration liability resulted in a loss of $10.5 million as a result of the settlement agreement reached with Tesoro. For the year ended December 31, 2019, there were no such changes. Please read Note 17—Commitments and Contingencies to our consolidated financial statements under Item 8 of this Form 10-K for more information. Debt extinguishment and commitment costs. For the year ended December 31, 2019, our debt extinguishment and commitment costs were approximately $11.6 million and represent the commitment and other fees associated with the financing of the Washington Acquisition and the extinguishment costs associated with the exchange of a portion of our outstanding 5.00% Convertible Senior Notes. For the year ended December 31, 2018, our debt extinguishment and commitment costs were approximately $4.2 million and represent the commitment and other fees associated with the financing of the Washington Acquisition. 50 Equity Earnings (Losses) from Laramie Energy, LLC . For the year ended December 31, 2019, equity losses from Laramie Energy were approximately $89.8 million, a change of $99.3 million compared to equity earnings of $9.5 million for the year ended December 31, 2018. During the year ended December 31, 2019, we recorded an impairment charge of $81.5 million due to the significant decline in natural gas prices during the second quarter of 2019 and continued deterioration of prices in the third quarter of 2019. The remaining decrease was primarily due to Laramie Energy’s net loss associated with lower realized prices. Please read Note 3—Investment in Laramie Energy, LLC to our consolidated financial statements under Item 8 of this Form 10-K for more information. Income Taxes. For the year ended December 31, 2019, we recorded an income tax benefit of $69.7 million primarily driven by a $64.2 million benefit associated with a partial release of our valuation allowance in connection with the Washington Acquisition. For the year ended December 31, 2018, we recorded an income tax expense of $0.3 million, primarily due to deferred tax expense of $0.7 million, partially offset by current federal income tax benefit of $0.3 million. Deferred tax expense for the year ended December 31, 2018 included a benefit of $0.7 million related to the release of valuation allowance due to the impact of the U.S. tax reform legislation on the interest deduction limitation. Consolidating Condensed Financial Information On December 21, 2017, Par Petroleum, LLC (the “Issuer”) issued its 7.75% Senior Secured Notes due 2025 in a private offering under Rule 144A and Regulation S of the Securities Act. On January 11, 2019, the Issuers (defined below) entered into a term loan and guaranty agreement with Goldman Sachs Bank USA, as administrative agent, and the lenders party thereto with respect to a $250.0 million term loan (the “Term Loan B”). On June 5, 2020, the Issuers issued their 12.875% Senior Secured Notes due 2026 in a private offering under Rule 144A and Regulation S of the Securities Act. The 7.75% Senior Secured Notes, the Term Loan B, and the 12.875% Senior Secured Notes were co-issued by Par Petroleum Finance Corp. (together with the Issuer, the “Issuers”), which has no independent assets or operations. The 7.75% Senior Secured Notes, Term Loan B, and 12.875% Senior Secured Notes are guaranteed on a senior unsecured basis only as to payment of principal and interest by Par Pacific Holdings, Inc. (the “Parent”) and are guaranteed on a senior secured basis by all of the subsidiaries of Par Petroleum, LLC (other than Par Petroleum Finance Corp.). The following supplemental condensed consolidating financial information reflects (i) the Parent’s separate accounts, (ii) Par Petroleum, LLC and its consolidated subsidiaries’ accounts (which are all guarantors of the 7.75% Senior Secured Notes, Term Loan B, and 12.875% Senior Secured Notes), (iii) the accounts of subsidiaries of the Parent that are not guarantors of the 7.75% Senior Secured Notes, Term Loan B, or 12.875% Senior Secured Notes and consolidating adjustments and eliminations, and (iv) the Parent’s consolidated accounts for the dates and periods indicated. For purposes of the following condensed consolidating information, the Parent’s investment in its subsidiaries is accounted for under the equity method of accounting (dollar amounts in thousands). 51 As of December 31, 2020 Parent Guarantor Issuer and Subsidiaries Non-Guarantor Subsidiaries and Eliminations Par Pacific Holdings, Inc. and Subsidiaries ASSETS Current assets Cash and cash equivalents $ 480 $ 67,147 $ 682 $ 68,309 Restricted cash 330 1,670 — 2,000 Trade accounts receivable — 111,654 3 111,657 Inventories — 429,855 — 429,855 Prepaid and other current assets 16,983 7,171 494 24,648 Due from related parties 107,995 — (107,995) — Total current assets 125,788 617,497 (106,816) 636,469 Property, plant, and equipment Property, plant, and equipment 21,477 1,124,587 37,814 1,183,878 Less accumulated depreciation, depletion, and amortization (14,368) (233,927) (2,818) (251,113) Property, plant, and equipment, net 7,109 890,660 34,996 932,765 Long-term assets Operating lease right-of-use (“ROU”) assets 3,714 367,850 (14,398) 357,166 Investment in Laramie Energy, LLC — — — — Investment in subsidiaries 209,010 — (209,010) — Intangible assets, net — 18,892 — 18,892 Goodwill — 125,399 2,598 127,997 Other long-term assets 723 59,849 — 60,572 Total assets $ 346,344 $ 2,080,147 $ (292,630) $ 2,133,861 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Current maturities of long-term debt $ 47,301 $ 11,048 $ 1,584 $ 59,933 Obligations under inventory financing agreements — 423,686 — 423,686 Accounts payable 2,401 103,067 1,477 106,945 Deferred revenue — 4,083 — 4,083 Accrued taxes 49 27,371 20 27,440 Operating lease liabilities 750 60,449 (4,234) 56,965 Other accrued liabilities 10,907 190,031 (1,310) 199,628 Due to related parties 33,757 36,124 (69,881) — Total current liabilities 95,165 855,859 (72,344) 878,680 Long-term liabilities Long-term debt, net of current maturities — 608,353 40,307 648,660 Common stock warrants — — — — Finance lease liabilities 77 7,848 — 7,925 Operating lease liabilities 4,783 309,736 (10,164) 304,355 Other liabilities 45 87,382 (39,460) 47,967 Total liabilities 100,070 1,869,178 (81,661) 1,887,587 Commitments and contingencies Stockholders’ equity Preferred stock — — — — Common stock 540 — — 540 Additional paid-in capital 726,504 307,967 (307,967) 726,504 Accumulated earnings (deficit) (477,028) (94,086) 94,086 (477,028) Accumulated other comprehensive income (loss) (3,742) (2,912) 2,912 (3,742) Total stockholders’ equity 246,274 210,969 (210,969) 246,274 Total liabilities and stockholders’ equity $ 346,344 $ 2,080,147 $ (292,630) $ 2,133,861 52 As of December 31, 2019 Parent Guarantor Issuer and Subsidiaries Non-Guarantor Subsidiaries and Eliminations Par Pacific Holdings, Inc. and Subsidiaries ASSETS Current assets Cash and cash equivalents $ 6,309 $ 118,812 $ 894 $ 126,015 Restricted cash 743 1,670 — 2,413 Trade accounts receivable — 228,707 11 228,718 Inventories — 615,872 — 615,872 Prepaid and other current assets 12,325 46,470 361 59,156 Due from related parties 180,686 — (180,686) — Total current assets 200,063 1,011,531 (179,420) 1,032,174 Property, plant, and equipment Property, plant, and equipment 20,961 1,088,230 37,792 1,146,983 Less accumulated depreciation and depletion (12,117) (170,607) (2,316) (185,040) Property, plant, and equipment, net 8,844 917,623 35,476 961,943 Long-term assets Operating lease right-of-use (“ROU”) assets 4,276 434,909 (19,112) 420,073 Investment in Laramie Energy, LLC — — 46,905 46,905 Investment in subsidiaries 636,742 — (636,742) — Intangible assets, net — 21,549 — 21,549 Goodwill — 193,321 2,598 195,919 Other long-term assets 1,128 20,869 — 21,997 Total assets $ 851,053 $ 2,599,802 $ (750,295) $ 2,700,560 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Current maturities of long-term debt $ — $ 10,777 $ 1,520 $ 12,297 Obligations under inventory financing agreements — 656,162 — 656,162 Accounts payable 2,597 158,323 1,482 162,402 Deferred revenue — 7,905 — 7,905 Accrued taxes — 30,745 68 30,813 Operating lease liabilities 698 84,366 (5,065) 79,999 Other accrued liabilities 14,591 72,670 (2,517) 84,744 Due to related parties 125,778 101,936 (227,714) — Total current liabilities 143,664 1,122,884 (232,226) 1,034,322 Long-term liabilities Long-term debt, net of current maturities 44,783 513,145 41,706 599,634 Common stock warrants 8,206 — — 8,206 Finance lease liabilities 223 6,004 — 6,227 Operating lease liabilities 5,629 349,327 (14,047) 340,909 Other liabilities 306 120,001 (57,287) 63,020 Total liabilities 202,811 2,111,361 (261,854) 2,052,318 Commitments and contingencies Stockholders’ equity Preferred stock — — — — Common stock 533 — — 533 Additional paid-in capital 715,069 293,006 (293,006) 715,069 Accumulated earnings (deficit) (67,942) 194,023 (194,023) (67,942) Accumulated other comprehensive income (loss) 582 1,412 (1,412) 582 Total stockholders’ equity 648,242 488,441 (488,441) 648,242 Total liabilities and stockholders’ equity $ 851,053 $ 2,599,802 $ (750,295) $ 2,700,560 53 Year Ended December 31, 2020 Parent Guarantor Issuer and Subsidiaries Non-Guarantor Subsidiaries and Eliminations Par Pacific Holdings, Inc. and Subsidiaries Revenues $ — $ 3,124,870 $ — $ 3,124,870 Operating expenses Cost of revenues (excluding depreciation) — 2,947,697 — 2,947,697 Operating expense (excluding depreciation) — 282,159 (4,732) 277,427 Depreciation, depletion, and amortization 2,900 86,622 514 90,036 Impairment expense — 85,806 — 85,806 General and administrative expense (excluding depreciation) 11,097 30,191 — 41,288 Acquisition and integration costs — 614 — 614 Total operating expenses 13,997 3,433,089 (4,218) 3,442,868 Operating income (loss) (13,997) (308,219) 4,218 (317,998) Other income (expense) Interest expense and financing costs, net (4,982) (61,856) (3,384) (70,222) Other income (expense), net (3) 1,052 — 1,049 Change in value of common stock warrants 4,270 — — 4,270 Equity earnings (losses) from subsidiaries (394,197) — 394,197 — Equity earnings (losses) from Laramie Energy, LLC — — (46,905) (46,905) Total other income (expense), net (394,912) (60,804) 343,908 (111,808) Income (loss) before income taxes (408,909) (369,023) 348,126 (429,806) Income tax benefit (expense) (1) (177) 80,914 (60,017) 20,720 Net income (loss) $ (409,086) $ (288,109) $ 288,109 $ (409,086) Adjusted EBITDA $ (10,943) $ (80,457) $ 4,732 $ (86,668) ________________________________________________________ (1) The income tax benefit (expense) of the Parent Guarantor and Issuer and Subsidiaries is determined using the separate return method. The Non-Guarantor Subsidiaries and Eliminations column includes tax benefits recognized at the Par consolidated level that are primarily associated with changes to the consolidated valuation allowance and other deferred tax balances. 54 Year Ended December 31, 2019 Parent Guarantor Issuer and Subsidiaries Non-Guarantor Subsidiaries and Eliminations Par Pacific Holdings, Inc. and Subsidiaries Revenues $ — $ 5,401,446 $ 70 $ 5,401,516 Operating expenses Cost of revenues (excluding depreciation) — 4,803,589 — 4,803,589 Operating expense (excluding depreciation) — 315,659 (2,760) 312,899 Depreciation, depletion, and amortization 2,969 82,843 309 86,121 Loss (gain) on sale of assets, net — (37,382) 37,382 — General and administrative expense (excluding depreciation) 20,017 26,007 199 46,223 Acquisition and integration costs 28 4,676 — 4,704 Total operating expenses 23,014 5,195,392 35,130 5,253,536 Operating income (loss) (23,014) 206,054 (35,060) 147,980 Other income (expense) Interest expense and financing costs, net (9,952) (62,098) (2,789) (74,839) Debt extinguishment and commitment costs (6,091) (5,354) (142) (11,587) Other income (expense), net 2,303 213 — 2,516 Change in value of common stock warrants (3,199) — — (3,199) Equity earnings (losses) from subsidiaries 81,097 — (81,097) — Equity earnings (losses) from Laramie Energy, LLC — — (89,751) (89,751) Total other income (expense), net 64,158 (67,239) (173,779) (176,860) Income (loss) before income taxes 41,144 138,815 (208,839) (28,880) Income tax benefit (expense) (1) (335) (26,507) 96,531 69,689 Net income (loss) $ 40,809 $ 112,308 $ (112,308) $ 40,809 Adjusted EBITDA $ (17,714) $ 273,932 $ 2,631 $ 258,849 ________________________________________________________ (1) The income tax benefit (expense) of the Parent Guarantor and Issuer and Subsidiaries is determined using the separate return method. The Non-Guarantor Subsidiaries and Eliminations column includes tax benefits recognized at the Par consolidated level that are primarily associated with changes to the consolidated valuation allowance and other deferred tax balances. 55 Year Ended December 31, 2018 Parent Guarantor Issuer and Subsidiaries Non-Guarantor Subsidiaries and Eliminations Par Pacific Holdings, Inc. and Subsidiaries Revenues $ — $ 3,410,155 $ 573 $ 3,410,728 Operating expenses Cost of revenues (excluding depreciation) — 3,002,718 398 3,003,116 Operating expense (excluding depreciation) — 215,284 — 215,284 Depreciation, depletion, and amortization 4,092 48,513 37 52,642 General and administrative expense (excluding depreciation) 20,721 26,370 335 47,426 Acquisition and integration costs 10,118 201 — 10,319 Total operating expenses 34,931 3,293,086 770 3,328,787 Operating income (loss) (34,931) 117,069 (197) 81,941 Other income (expense) Interest expense and financing costs, net (10,867) (28,897) (4) (39,768) Debt extinguishment and commitment costs — (4,224) — (4,224) Other income (expense), net 1,155 (99) (10) 1,046 Change in value of common stock warrants 1,801 — — 1,801 Change in value of contingent consideration — (10,500) — (10,500) Equity earnings (losses) from subsidiaries 81,942 — (81,942) — Equity earnings (losses) from Laramie Energy, LLC — — 9,464 9,464 Total other income (expense), net 74,031 (43,720) (72,492) (42,181) Income (loss) before income taxes 39,100 73,349 (72,689) 39,760 Income tax benefit (expense) (1) 327 (15,567) 14,907 (333) Net income (loss) $ 39,427 $ 57,782 $ (57,782) $ 39,427 Adjusted EBITDA $ (19,566) $ 151,856 $ (170) $ 132,120 ________________________________________________________ (1) The income tax benefit (expense) of the Parent Guarantor and Issuer and Subsidiaries is determined using the separate return method. The Non-Guarantor Subsidiaries and Eliminations column includes tax benefits recognized at the Par consolidated level that are primarily associated with changes to the consolidated valuation allowance and other deferred tax balances. 56 Non-GAAP Financial Measures Adjusted EBITDA for the supplemental consolidating condensed financial information, which is segregated at the “Parent Guarantor,” “Issuer and Subsidiaries,” and “Non-Guarantor Subsidiaries and Eliminations” levels, is calculated in the same manner as for the Par Pacific Holdings, Inc. Adjusted EBITDA calculations. See “Results of Operations — Non-GAAP Performance Measures — Adjusted Net Income (Loss) and Adjusted EBITDA” above. The following tables present a reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial measure, net income (loss), on a historical basis for the periods indicated (in thousands): Year Ended December 31, 2020 Parent Guarantor Issuer and Subsidiaries Non-Guarantor Subsidiaries and Eliminations Par Pacific Holdings, Inc. and Subsidiaries Net income (loss) $ (409,086) $ (288,109) $ 288,109 $ (409,086) Inventory valuation adjustment — 14,046 — 14,046 RINs loss in excess of net obligation — 44,071 — 44,071 Unrealized loss (gain) on derivatives — (4,804) — (4,804) Acquisition and integration costs — 614 — 614 Changes in valuation allowance and other deferred tax items (1) — — (20,896) (20,896) Change in value of common stock warrants (4,270) — — (4,270) Severance costs 157 355 — 512 Impairment expense — 85,806 — 85,806 Impairments of Laramie Energy, LLC (2) — — 45,294 45,294 Par’s share of Laramie Energy’s unrealized gain on derivatives (2) — — (1,110) (1,110) Depreciation, depletion, and amortization 2,900 86,622 514 90,036 Interest expense and financing costs, net 4,982 61,856 3,384 70,222 Equity losses from Laramie Energy, LLC, excluding Par’s share of unrealized gain on derivatives and impairment losses — — 2,721 2,721 Equity losses (income) from subsidiaries 394,197 — (394,197) — Income tax expense (benefit) 177 (80,914) 80,913 176 Adjusted EBITDA $ (10,943) $ (80,457) $ 4,732 $ (86,668) ________________________________________________________ (1) Includes increases in (releases of) our valuation allowance associated with business combinations and changes in deferred tax assets and liabilities that are not offset by a change in the valuation allowance. These tax expenses (benefits) are included in Income tax expense (benefit) on our consolidated statements of operations. (2) Includes impairment losses on our investment in Laramie Energy and our share of Laramie Energy’s asset impairment losses in excess of our basis difference. These impairment losses and our share of Laramie Energy’s unrealized loss (gain) on derivatives are included in Equity earnings (losses) from Laramie Energy, LLC on our consolidated statements of operations. 57 Year Ended December 31, 2019 Parent Guarantor Issuer and Subsidiaries Non-Guarantor Subsidiaries and Eliminations Par Pacific Holdings, Inc. and Subsidiaries Net income (loss) $ 40,809 $ 112,308 $ (112,308) $ 40,809 Inventory valuation adjustment — 11,938 — 11,938 RINs gain in excess of net obligation — (3,398) — (3,398) Unrealized loss on derivatives — 8,988 — 8,988 Acquisition and integration costs 28 4,676 — 4,704 Debt extinguishment and commitment costs 6,091 5,354 142 11,587 Changes in valuation allowance and other deferred tax items (1) — — (68,792) (68,792) Change in value of common stock warrants 3,199 — — 3,199 Loss (gain) on sale of assets, net — (37,382) 37,382 — Impairments of Laramie Energy, LLC (2) — — 83,152 83,152 Par’s share of Laramie Energy’s unrealized gain on derivatives (2) — — (1,969) (1,969) Depreciation, depletion, and amortization 2,969 82,843 309 86,121 Interest expense and financing costs, net 9,952 62,098 2,789 74,839 Equity losses from Laramie Energy, LLC, excluding Par’s share of unrealized gain on derivatives and impairment losses — — 8,568 8,568 Equity losses (income) from subsidiaries (81,097) — 81,097 — Income tax expense (benefit) 335 26,507 (27,739) (897) Adjusted EBITDA $ (17,714) $ 273,932 $ 2,631 $ 258,849 ________________________________________________________ (1) Includes increases in (releases of) our valuation allowance associated with business combinations and changes in deferred tax assets and liabilities that are not offset by a change in the valuation allowance. These tax expenses (benefits) are included in Income tax expense (benefit) on our consolidated statements of operations. (2) Includes impairment losses on our investment in Laramie Energy and our share of Laramie Energy’s asset impairment losses in excess of our basis difference. These impairment losses and our share of Laramie Energy’s unrealized loss (gain) on derivatives are included in Equity earnings (losses) from Laramie Energy, LLC on our consolidated statements of operations. 58 Year Ended December 31, 2018 Parent Guarantor Issuer and Subsidiaries Non-Guarantor Subsidiaries and Eliminations Par Pacific Holdings, Inc. and Subsidiaries Net income (loss) $ 39,427 $ 57,782 $ (57,782) $ 39,427 Inventory valuation adjustment — (16,875) — (16,875) RINs loss in excess of net obligation — 4,544 — 4,544 Unrealized loss (gain) on derivatives — (1,497) — (1,497) Acquisition and integration costs 10,118 201 — 10,319 Debt extinguishment and commitment costs — 4,224 — 4,224 Increase in (release of) tax valuation allowance (1) — — (660) (660) Change in value of common stock warrants (1,801) — — (1,801) Change in value of contingent consideration — 10,500 — 10,500 Par’s share of Laramie Energy’s unrealized loss on derivatives (2) — — 1,158 1,158 Depreciation, depletion, and amortization 4,092 48,513 37 52,642 Interest expense and financing costs, net 10,867 28,897 4 39,768 Equity earnings from Laramie Energy, LLC, excluding Par’s share of unrealized loss (gain) on derivatives — — (10,622) (10,622) Equity losses (income) from subsidiaries (81,942) — 81,942 — Income tax expense (benefit) (327) 15,567 (14,247) 993 Adjusted EBITDA $ (19,566) $ 151,856 $ (170) $ 132,120 ________________________________________________________ (1) Includes increases in (releases of) our valuation allowance associated with business combinations and changes in deferred tax assets and liabilities that are not offset by a change in the valuation allowance. These tax expenses (benefits) are included in Income tax expense (benefit) on our consolidated statements of operations. (2) Includes impairment losses on our investment in Laramie Energy and our share of Laramie Energy’s asset impairment losses in excess of our basis difference. These impairment losses and our share of Laramie Energy’s unrealized loss (gain) on derivatives are included in Equity earnings (losses) from Laramie Energy, LLC on our consolidated statements of operations. Liquidity and Capital Resources Our liquidity and capital requirements are primarily a function of our debt maturities and debt service requirements and contractual obligations, capital expenditures, turnaround outlays, and working capital needs. Examples of working capital needs include purchases and sales of commodities and associated margin and collateral requirements, facility maintenance costs, and other costs such as payroll. Our primary sources of liquidity are cash flows from operations, cash on hand, amounts available under our credit agreements, and access to capital markets. Our liquidity position as of December 31, 2020 was $107.9 million and consisted of $106.7 million at Par Petroleum, LLC and subsidiaries, $0.5 million at Par Pacific Holdings, and $0.7 million at all our other subsidiaries. As of December 31, 2020, we had access to the J. Aron Deferred Payment Arrangement, the ABL Credit Facility, the MLC receivable advances, and cash on hand of $68.3 million. In addition, we have the Supply and Offtake Agreements with J. Aron and the Washington Refinery Intermediation Agreement, which are used to finance the majority of the inventory at our Hawaii and Washington refineries, respectively. Generally, the primary uses of our capital resources have been in the operations of our refining and retail segments, payments related to acquisitions, and to repay or refinance indebtedness. We believe our cash flows from operations and available capital resources will be sufficient to meet our current capital and turnaround expenditures, working capital, and debt service requirements for the next 12 months. We may seek to raise additional debt or equity capital to fund any other significant changes to our business or to refinance existing debt. We cannot offer any assurances that such capital will be available in sufficient amounts or at an acceptable cost. 59 On February 23, 2021, we closed on the sale and leaseback of twenty-one (21) of our retail properties in Hawaii for an aggregate cash purchase price of approximately $109.4 million (the “Sale-Leaseback Transaction”). We used approximately $51.7 million of the net cash proceeds to repay the certain financing arrangements which were related to certain of the retail properties and expect to use the remainder for general corporate purposes. Please read Note 24—Subsequent Events to our consolidated financial statements under Item 8 of this Form 10-K for additional discussion on the Sale-Leaseback Transaction. We may from time to time seek to retire or purchase our outstanding 5.00% Convertible Senior Notes, our 7.75% Senior Secured Notes, our 12.875% Senior Secured Notes, or our common stock through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material. Debt Activity We had the following significant debt issuances and amendments during the years ended December 31, 2020, 2019, and 2018: • On June 5, 2020, Par Petroleum, LLC and Par Petroleum Finance Corp., both our wholly owned subsidiaries, completed the issuance and sale of $105 million in aggregate principal amount of 12.875% Senior Secured Notes in a private placement under Rule 144A and Regulation S of the Securities Act of 1933, as amended. The net proceeds of $98.8 million from the sale were used for general corporate purposes. • On April 13, 2020, Par Hawaii, LLC (“PHL”), our wholly owned subsidiary, entered into a Term Loan Agreement (“PHL Term Loan”) with American Savings Bank F.S.B., which provided a term loan in the principal amount of approximately $6.0 million. The proceeds from the PHL Term Loan were used to finance PHL’s equity in certain real property. On February 23, 2021, we terminated and repaid all amounts outstanding under the PHL Term Loan. Please read Note 24—Subsequent Events to our consolidated financial statements under Item 8 of this Form 10-K for additional discussion on the repayment. • On November 1, 2019, we and MLC amended the Washington Refinery Intermediation Agreement and extended the term through June 30, 2021. We further amended the Washington Refinery Intermediation Agreement on February 11, 2021 and extended the term through March 31, 2022. Please read Note 24—Subsequent Events to our consolidated financial statements under Item 8 of this Form 10-K for additional discussion on the February 11, 2021 amendment. • During May, June, and December 2019, we entered into privately negotiated exchange agreements with a limited number of holders (the “Noteholders”) to repurchase $66.3 million in aggregate principal amount of the 5.00% Convertible Senior Notes held by the Noteholders for an aggregate of $18.6 million in cash and approximately 3.2 million shares of our common stock with a fair value of $74.3 million. As of December 31, 2020, the remaining outstanding principal amount of the 5.00% Convertible Senior Notes was $48.7 million, the unamortized discount and deferred financing cost was $1.4 million, and the carrying amount of the liability component was $47.3 million. • On March 29, 2019, Par Pacific Hawaii Property Company, LLC (“Par Property LLC”), our wholly owned subsidiary, entered into the Retail Property Term Loan with the Bank of Hawaii (“BOH”), which provided a term loan in the principal amount of $45.0 million. The proceeds from the Retail Property Term Loan were used to repay and terminate the Par Pacific Term Loan Agreement (as defined below). As of December 31, 2020, the outstanding principal on the Retail Property Term Loan was $42.5 million. On February 23, 2021, we terminated and repaid all amounts outstanding under the Retail Property Term Loan. Please read Note 24—Subsequent Events to our consolidated financial statements under Item 8 of this Form 10-K for additional discussion on the repayment. • On January 11, 2019, Par Petroleum, LLC and Par Petroleum Finance Corp., entered into the Term Loan B Facility with Goldman Sachs Bank USA, as administrative agent, and the lenders party thereto from time to time. Pursuant to the Term Loan B Facility, the lenders made a term loan to the borrowers in the amount of $250.0 million (“Term Loan B”). We are required to make quarterly principal payments of $3.1 million. The proceeds from the Term Loan B were used to fund the Washington Acquisition. As of December 31, 2020, the outstanding principal on the Term Loan B was $228.1 million. • On January 9, 2019, we entered into the Par Pacific Term Loan Agreement with BOH. Pursuant to the Par Pacific Term Loan Agreement, BOH made a loan to the Company in the amount of $45.0 million (the “Par Pacific Term Loan”). The proceeds from the Par Pacific Term Loan Agreement were used to fund the Washington Acquisition. On 60 March 29, 2019, we terminated and repaid all amounts outstanding under the Par Pacific Term Loan Agreement using the proceeds of the Retail Property Term Loan. • On December 5, 2018, we amended the Supply and Offtake Agreements to account for additional processing capacity expected to be provided through the Par West Acquisition. The December 5, 2018 amendment to the Supply and Offtake Agreements also (i) required us to increase our margin requirements by an aggregate $2.5 million by making certain additional margin payments on December 19, 2018, March 1, 2019, and June 3, 2019, and (ii) only allows dividends, payments, or other distributions with respect to any equity interests in PHR in limited and restricted circumstances. • On September 27, 2018, PHL (which includes the assets of the dissolved entity formerly known as Mid Pac Petroleum, LLC), entered into the Mid Pac Term Loan with American Savings Bank, F.S.B., which provided a term loan of up to approximately $1.5 million. We received the proceeds on October 18, 2018, which we used to purchase certain retail property. • On July 24, 2018, we amended the ABL Credit Facility dated as of December 21, 2017 to increase the maximum principal amount at any time outstanding of the ABL Revolver by $10 million to $85 million, subject to a borrowing base. The ABL Revolver had no outstanding balance and a borrowing base of approximately $39.8 million at December 31, 2020. Please read Note 11—Inventory Financing Agreements, Note 13—Debt, and Note 24—Subsequent Events to our consolidated financial statements under Item 8 of this Form 10-K for further discussion on our inventory financing and debt agreements, respectively. Cash Flows The following table summarizes cash activities for the years ended December 31, 2020, 2019, and 2018 (in thousands): Years Ended December 31, 2020 2019 2018 Net cash provided by (used in) operating activities $ (37,214) $ 105,630 $ 90,620 Net cash used in investing activities (63,464) (353,229) (175,821) Net cash provided by financing activities 42,559 300,208 41,943 Net cash used in operating activities was approximately $37.2 million for the year ended December 31, 2020, which resulted from a net loss of approximately $409.1 million, partially offset by non-cash charges to operations of approximately $219.1 million and net cash provided by changes in operating assets and liabilities of approximately $152.8 million. The change in our operating assets and liabilities for the year ended December 31, 2020 was primarily due to a decrease in our trade receivables of $117.8 million, a decrease in inventories of $171.9 million, and an increase in our environmental credit obligations of $127.7 million, partially offset by a net decrease in our Supply and Offtake Agreements and Washington Refinery Intermediation Agreement obligations of $190.8 million. Net cash provided by changes in operating assets and liabilities also includes an increase of $49.8 million in deferred turnaround costs associated with the Hawaii and Wyoming turnarounds. These decreases in accounts receivable, inventory, and Supply and Offtake Agreements were primarily driven by the decline in crude oil prices in 2020 and overall decline in sales and inventory volumes resulting from COVID-19 demand destruction. The increase in our environmental credit obligations was primarily driven by the increase in the market prices of RINs. Net cash provided by operating activities was approximately $105.6 million for the year ended December 31, 2019, which resulted from net income of approximately $40.8 million and non-cash charges to operations of approximately $144.9 million, partially offset by net cash used for changes in operating assets and liabilities of approximately $80.1 million. Net cash provided by operating activities was approximately $90.6 million for the year ended December 31, 2018, which resulted from net income of approximately $39.4 million and non-cash charges to operations of approximately $65.5 million, partially offset by net cash used for changes in operating assets and liabilities of approximately $14.3 million. For the year ended December 31, 2020, net cash used in investing activities was approximately $63.5 million and primarily related to additions to property, plant, and equipment totaling approximately $63.5 million. Net cash used in investing activities was approximately $353.2 million for the year ended December 31, 2019 and was primarily related to $273.4 million for the Washington Acquisition and additions to property, plant, and equipment totaling approximately $83.9 million. Net cash used in investing activities was approximately $175.8 million for the year ended December 31, 2018 and was primarily related 61 to $74.3 million for the Northwest Retail Acquisition, $53.9 million for the Par West Acquisition, and additions to property, plant, and equipment totaling approximately $48.4 million. Net cash provided by financing activities for the year ended December 31, 2020 was approximately $42.6 million and consisted primarily of proceeds from net borrowings on our debt agreements, J. Aron deferred payment arrangement, and MLC receivable advances of $49.3 million, partially offset by deferred loan costs of $6.3 million related to the issuance of the 12.875% Senior Secured Notes. Net cash provided by financing activities for the year ended December 31, 2019 of approximately $300.2 million consisted primarily of proceeds from net borrowings on our debt agreements, J. Aron deferred payment arrangement, and MLC receivable advances of $313.0 million and the exercise of employee stock options of $8.2 million, partially offset by deferred loan costs of $13.5 million and payments of $8.1 million in commitment and other fees related to the funding for the Washington Acquisition and the financing costs related to the repurchase and cancellation of a portion of our 5.00% Convertible Senior Notes. Net cash provided by financing activities for the year ended December 31, 2018 of approximately $41.9 million consisted primarily of proceeds from net repayments of borrowings and net borrowings on our deferred payment arrangement of $27.3 million and the issuance of common stock totaling approximately $19.3 million, partially offset by the payment of $3.4 million in commitment and other fees related to the funding for the Washington Acquisition. Capital Expenditures and Turnaround Costs Our deferred turnaround costs and capital expenditures, excluding acquisitions, for the year ended December 31, 2020, totaled approximately $113.3 million and were primarily related to equipment purchases and engineering work for the 2020 turnarounds at our Par East Hawaii and Wyoming refineries, the second phase of a Washington renewables logistics project, tank compliance construction and repairs within our Wyoming logistics network, and scheduled maintenance. Our capital expenditures and deferred turnaround costs budget for 2021 ranges from $35 to $45 million and primarily relates to a partial turnaround at our Washington refinery, scheduled maintenance, and other capital projects related to regulatory and safety compliance. We also continue to seek strategic investments in business opportunities, but the amount and timing of those investments are not predictable. Contractual Obligations We have various contractual obligations and financial commitments in the normal course of our operations and financing activities. Contractual obligations include future cash payments required under existing contractual arrangements, such as debt and lease agreements. These obligations may result from both general financing activities and from commercial arrangements that are directly related to our operating activities. The following table summarizes our contractual obligations as of December 31, 2020. Cash obligations reflected in the table below are not discounted. Total Less than 1 Year 1 - 3 Years 3 - 5 Years More than 5 Years (in thousands) Long-term debt (including current portion) $ 731,523 $ 62,950 $ 28,792 $ 363,016 $ 276,765 Interest payments on debt 252,357 54,353 94,934 91,467 11,603 Operating leases (1) 495,456 82,212 123,212 88,066 201,966 Finance leases (1) 12,484 2,143 3,877 3,007 3,457 Purchase commitments 670,065 518,700 150,751 585 29 _________________________________________________________ (1) Additionally, we have $6.6 million and $4.9 million in future undiscounted cash flows for operating leases and finance leases, respectively, that have not yet commenced. These leases are expected to commence when the lessor has made the equipment or location available to the Company to operate or begin construction, respectively. Long-Term Debt (including Current Portion). Long-term debt includes the scheduled principal payments related to our outstanding debt obligations and letters of credit. Please read Note 13—Debt to our consolidated financial statements under Item 8 of this Form 10-K for further discussion. 62 Interest Payments on Debt. Interest payments on debt represent estimated periodic interest payment obligations associated with our outstanding debt obligations using interest rates in effect as of December 31, 2020. Please read Note 13—Debt to our consolidated financial statements under Item 8 of this Form 10-K for further discussion. Operating Leases. Operating leases primarily include obligations associated with the lease of land, office space, retail facilities, and other facilities used in the storage and transportation of crude oil and refined products. Please read Note 16—Leases to our consolidated financial statements under Item 8 of this Form 10-K for further discussion. Finance Leases. Finance leases primarily include obligations associated with the lease of retail facilities and vehicles. Please read Note 16—Leases to our consolidated financial statements under Item 8 of this Form 10-K for further discussion. Purchase Commitments. Purchase commitments primarily consist of contracts executed as of December 31, 2020 for the purchase of crude oil for use at our refineries that are scheduled for delivery in 2021 and 2022. Commitments and Contingencies Supply and Offtake Agreements. On June 1, 2015, we entered into several agreements with J. Aron to support the operations of our Hawaii refineries (the “Supply and Offtake Agreements”). On May 8, 2017, we and J. Aron amended the Supply and Offtake Agreements and extended the term through May 31, 2021 with a one-year extension option upon mutual agreement of the parties. On June 27, 2018, we and J. Aron amended the Supply and Offtake Agreements to increase the amount that we may defer under the deferred payment arrangement. On December 5, 2018, we amended the Supply and Offtake Agreements to account for additional processing capacity expected to be provided through the Par West Acquisition. We are evaluating options to extend or replace the Supply and Offtake Agreements. Please read Note 11—Inventory Financing Agreements to our consolidated financial statements under Item 8 of this Form 10-K for more information. Washington Refinery Intermediation Agreement . In connection with the consummation of the Washington Acquisition on January 11, 2019, we assumed the Washington Refinery Intermediation Agreement with MLC to support the operations of our Washington refinery. On November 1, 2019, we amended the Washington Refinery Intermediation Agreement and extended the term through June 30, 2021. We further amended the Washington Refinery Intermediation Agreement on February 11, 2021 and extended the term through March 31, 2022. Please read Note 11—Inventory Financing Agreements and Note 24—Subsequent Events to our consolidated financial statements under Item 8 of this Form 10-K for more information. Environmental Matters. Our operations and Laramie Energy’s oil and gas exploration and production operations in which we have a working interest are subject to extensive and periodically-changing federal, state, and local environmental laws and regulations governing air emissions, wastewater discharges, and solid and hazardous waste management activities. Many of these laws and 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. Except as disclosed below, we do not anticipate that any such matters currently asserted will have a material impact on our financial condition, results of operations, or cash flows. Regulation of Greenhouse Gases The EPA regulates GHG under the CAA. New construction or material expansions that meet certain GHG emissions thresholds will likely require that, among other things, a GHG permit be issued in accordance with the federal CAA regulations and we will be required, in connection with such permitting, to undertake a technology review to determine appropriate controls to be implemented with the project in order to reduce GHG emissions. Furthermore, the EPA has in the past begun developing refinery-specific GHG regulations and performance standards that are expected to impose GHG emission limits and/or technology requirements. If adopted, these control requirements may affect a wide range of refinery operations. Any such controls could result in material increased compliance costs, additional operating restrictions for our business, and an increase in cost of the products we produce, which could have a material adverse effect on our financial position, results of operations, or cash flows. 63 Additionally, the EPA's final rule updating standards that control toxic air emissions from petroleum refineries imposed additional controls and monitoring requirements on flaring operations, storage tanks, sulfur recovery units, delayed coking units, and required fenceline monitoring. Compliance with this rule has not had a material impact on our financial condition, results of operations, or cash flows to date. In 2007, the State of Hawaii passed Act 234, which required that GHG emissions be rolled back on a statewide basis to 1990 levels by the year 2020. In June of 2014, the DOH adopted regulations that require each major facility to reduce CO 2 emissions by 16% by 2020 relative to a calendar year 2010 baseline (the first year in which GHG emissions were reported to the EPA under 40 CFR Part 98). The Hawaii refineries’ capacity to materially reduce fuel use and GHG emissions is limited because most energy conservation measures have already been implemented over the past 20 years. Hawaii's regulation allows for “partnering” with other facilities (principally power plants) that have already dramatically reduced GHG emissions or are on schedule to reduce CO 2 emissions in order to comply with the state’s Renewable Portfolio Standards. Accordingly, our Hawaii refineries submitted a GHG reduction plan that incorporates the partnering provisions and demonstrates that additional reductions are not cost-effective or necessary because the State of Hawaii has already reached the 1990 levels according to a report prepared by the DOH in January 2019. Fuel Standards In 2007, the U.S. Congress passed the 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 U.S. by model year 2020 and contained an expanded RFS. In August 2012, the EPA and NHTSA jointly adopted regulations that establish vehicle carbon dioxide emissions standards and an average industry fuel economy of 54.5 miles per gallon by model year 2025. On August 8, 2018, the EPA and NHTSA jointly proposed to revise existing fuel economy standards for model years 2021-2025 and to set standards for 2026 for the first time. On March 31, 2020, the agencies released updated fuel economy and vehicle emissions standards, which provide for an increase in stringency by 1.5% each year through model year 2026, as compared with the standards issued in 2012 that required 5% annual increases. Higher fuel economy standards have the potential to reduce demand for our refined transportation fuel products. Under EISA, the RFS requires an increasing amount of renewable fuel to be blended into the nation’s transportation fuel supply, up to 36.0 billion gallons by 2022. Over time, higher annual RFS requirements have the potential to reduce demand for our refined transportation fuel products. In the near term, the RFS will be satisfied primarily with fuel ethanol blended into gasoline. We, and other refiners subject to the RFS, may meet the RFS requirements by blending the necessary volumes of renewable fuels produced by us or purchased from third parties. To the extent that refiners will not or cannot blend renewable fuels into the products they produce in the quantities required to satisfy their obligations under the RFS program, those refiners must purchase RINs to maintain compliance. The EPA has not yet set volumetric requirements for 2021, which makes it difficult to estimate our obligations. To the extent that we exceed the minimum volumetric requirements for blending of renewable fuels, we have the option of retaining these RINs for current or future RFS compliance or selling those RINs on the open market. The RFS may present production and logistics challenges for both the renewable fuels and petroleum refining and marketing industries in that we may have to enter into arrangements with other parties or purchase D3 waivers 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 federal CAA to allow for an increase in the amount of ethanol permitted to be blended into gasoline from 10% to 15% 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 years 2001-2006. In 2019, the EPA approved year-round sales of E15. There are numerous issues, including state and federal regulatory issues, which need to be addressed before E15 can be marketed on a large scale for use in traditional gasoline engines; however, increased renewable fuel in the nation’s transportation fuel supply could reduce demand for our refined products. In March 2014, the EPA published a final Tier 3 gasoline standard that requires, among other things, that gasoline contain no more than 10 ppm sulfur on an annual average basis and no more than 80 ppm sulfur on a per-gallon basis. The standard also lowers the allowable benzene, aromatics, and olefins content of gasoline. The effective date for the new standard was January 1, 2017, however, approved small volume refineries had until January 1, 2020 to meet the standard. The Par East Hawaii refinery was required to comply with Tier 3 gasoline standards within 30 months of June 21, 2016, the date it was disqualified from small volume refinery status. On March 19, 2015, the EPA confirmed the small refinery status of our Wyoming refinery. The Par East Hawaii refinery, our Wyoming refinery, and our Washington refinery, acquired in January 2019, were all granted small refinery status by the EPA for 2018. All of our refineries are compliant with the final Tier 3 gasoline standard. 64 Beginning on June 30, 2014, new sulfur standards for fuel oil used by marine vessels operating within 200 miles of the U.S. coastline (which includes the entire Hawaiian Island chain) was lowered from 10,000 ppm (1%) to 1,000 ppm (0.1%). The sulfur standards began at the Hawaii refineries and were phased in so that by January 1, 2015, they were to be fully aligned with IMO standards and deadline. The more stringent standards apply universally to both U.S. and foreign-flagged ships. Although the marine fuel regulations provided vessel operators with a few compliance options such as installation of on-board pollution controls and demonstration unavailability, many vessel operators will be forced to switch to a distillate fuel while operating within the ECA. Beyond the 200 mile ECA, large ocean vessels are still allowed to burn marine fuel with up to 3.5% sulfur. Our Hawaii refineries are capable of producing the 1% sulfur residual fuel oil that was previously required within the ECA. Although our Hawaii refineries remain in a position to supply vessels traveling to and through Hawaii, the market for 0.1% sulfur distillate fuel and 3.5% sulfur residual fuel is much more competitive. In addition to U.S. fuels requirements, the IMO has also adopted newer standards that further reduce the global limit on sulfur content in maritime fuels to 0.5% beginning in 2020. There will be compliance costs and uncertainties regarding how we will comply with the various requirements contained in the EISA, RFS, IMO 2020, 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. Wyoming Refinery and Recent Acquisitions Our Wyoming refinery is subject to a number of consent decrees, orders, and settlement agreements involving the EPA and/or the Wyoming Department of Environmental Quality, some of which date back to the late 1970s and several of which remain in effect, requiring further actions at the Wyoming refinery. Our recent acquisition of the Par West Hawaii refinery and the Washington Acquisition also subject us to additional environmental compliance costs. Please read Note 17—Commitments and Contingencies to our consolidated financial statements under Item 8 of this Form 10-K for more information. Environmental Agreement On September 25, 2013, Par Petroleum, LLC, Tesoro, and PHR entered into an Environmental Agreement (“Environmental Agreement”), which allocated responsibility for known and contingent environmental liabilities related to the acquisition of PHR, including a consent decree. Please read Note 17—Commitments and Contingencies to our consolidated financial statements under Item 8 of this Form 10-K for more information. Off-Balance Sheet Arrangements We are guarantors of Laramie Energy’s credit facility, with recourse limited to the pledge of our equity interest in our wholly owned subsidiary, Par Piceance Energy Equity, LLC. As of June 30, 2020, we have discontinued the application of the equity method of accounting for our investment in Laramie Energy because the book value of such investment has been reduced to zero. Please read Note 3—Investment in Laramie Energy, LLC to our consolidated financial statements under Item 8 of this Form 10-K for further information. Other than this guarantee and the purchase commitments described in the Contractual Obligations section above, we have no material off-balance sheet arrangements as of December 31, 2020 that are reasonably likely to have a current or future material effect on our financial condition, results of operations, or cash flows. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations were based on the consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements required us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Our significant accounting policies are described in Note 2—Summary of Significant Accounting Policies to our audited consolidated financial statements under Item 8 of this Form 10-K. We have identified certain policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by management. We analyze our estimates on a periodic basis, including those related to fair value, impairments, natural gas and crude oil reserves, bad debts, natural gas and oil properties, income taxes, derivatives, contingencies, and litigation and base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. 65 Inventory Commodity inventories, excluding commodity inventories at the Washington refinery, are stated at the lower of cost and net realizable value using the FIFO accounting method. Commodity inventories at the Washington refinery are stated at the lower of cost and net realizable value using the LIFO inventory accounting method. We value merchandise along with spare parts, materials, and supplies at average cost. Estimating the net realizable value of our inventory requires management to make assumptions about the timing of sales and the expected proceeds that will be realized for these sales. Please read Note 6—Inventories to our consolidated financial statements under Item 8 of this Form 10-K for additional information. All of the crude oil utilized at the Hawaii refineries is financed by J. Aron under procurement contracts. The crude oil remains in the legal title of J. Aron and is stored in our storage tanks governed by a storage agreement. Legal title to the crude oil passes to us at the tank outlet. After processing, J. Aron takes title to the refined products stored in our storage tanks until they are sold to our retail locations or to third parties. We record the inventory owned by J. Aron 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 and we have an obligation to repurchase it. The valuation of our repurchase obligation requires that we make estimates of the prices and differentials assuming settlement occurs at the end of the reporting period. Please read Note 11—Inventory Financing Agreements to our consolidated financial statements under Item 8 of this Form 10-K for additional information. In connection with the consummation of the Washington Acquisition, we became a party to the Washington Refinery Intermediation Agreement with MLC. Under this arrangement, U.S. Oil purchases crude oil supplied from third-party suppliers and MLC provides credit support for certain of these purchases. MLC’s credit support can consist of providing a payment guaranty, procuring the issuance of a letter of credit from a third party issuing bank, or purchasing crude oil directly from third parties on our behalf. U.S. Oil holds title to all crude oil and refined products inventories at all times and pledges such inventories, together with all receivables arising from the sales of same, exclusively to MLC. The valuation of our terminal obligation requires that we make estimates of the prices and differentials for our then monthly forward purchase obligations. Please read Note 11—Inventory Financing Agreements to our consolidated financial statements under Item 8 of this Form 10-K for additional information. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. In estimating fair value, we use discounted cash flow projections, recent comparable market transactions, if available, or quoted prices. We consider assumptions that third parties would make in estimating fair value, including the highest and best use of the asset. The assumptions used by another party could differ significantly from our assumptions. We classify fair value balances based on the classification of the inputs used to calculate the fair value of a transaction. The inputs used to measure fair value have been placed in a hierarchy based on priority. The hierarchy gives the highest priority to unadjusted, readily observable quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Please read Note 15—Fair Value Measurements to our consolidated financial statements under Item 8 of this Form 10-K for additional information. We recognize assets acquired and liabilities assumed in business combinations at their estimated fair values as of the date of acquisition. Significant judgment is required in estimating the fair value of assets acquired. We obtain the assistance of third-party valuation specialists in estimating fair values of tangible and intangible assets based on available historical information and on expectations and assumptions about the future, considering the perspectives of marketplace participants. These valuation methods require management to make estimates and assumptions regarding characteristics of the acquired property and future revenues and expenses. Changes in these estimates and assumptions would result in different amounts allocated to the related assets and liabilities. Impairment of Goodwill and Long-lived Assets 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. 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 quantitative test is required. Under the quantitative test, we compare the 66 carrying value of the net assets of the reporting unit to the estimated fair value of the reporting unit. If the carrying value exceeds the estimated fair value of the reporting unit, an impairment loss is recorded. The fair value of a reporting unit is determined using the income approach and the market approach. Under the income approach, we estimate the present value of expected future cash flows using a market participant discount rate. Under the market approach, we estimate fair value using observable multiples for comparable companies within our industry. These valuation methods require us to make significant estimates and assumptions regarding future cash flows, capital projects, commodity prices, long-term growth rates, and discount rates. We review property, plant, and equipment, operating leases, and other long-lived assets whenever events or changes in business circumstances indicate the carrying value 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’ carrying value. If this occurs, an impairment loss is recognized for the difference between the fair value and carrying value. The fair value of long-lived assets is determined using the income approach. Impairment of our Investment in Laramie Energy We evaluate our investment in Laramie Energy for impairment when factors indicate that a decrease in the value of our investment has occurred and the carrying amount of our investment may not be recoverable. The fair value of our investment in Laramie Energy is determined using the income approach and/or the market approach. Under the income approach, we estimate the present value of expected future cash flows using a market participant discount rate. Other significant inputs used in the income approach include proved and unproved reserves information and forecasts of operating expenditures obtained from Laramie Energy's management. Under the market approach, we estimate fair value using observable multiples for comparable companies within our industry. These valuation methods require us to make significant estimates and assumptions regarding future cash flows, capital projects, commodity prices, long-term growth rates, and discount rates. An impairment loss, based on the difference between the carrying value and the estimated fair value of the investment, is recognized in earnings when an impairment is deemed to be other than temporary. Derivatives and Other Financial instruments We are exposed to commodity price risk related to crude oil and refined products. We manage this exposure through the use of various derivative commodity instruments. These instruments include exchange traded futures and over-the-counter swaps, forwards, and options. For our forward contracts that are derivatives, we have elected the normal purchase normal sale exclusion, as it is our policy to fulfill or accept the physical delivery of the product and not net settle. Therefore, we did not recognize the unrealized gains or losses related to these contracts in our consolidated financial statements. We apply the accrual method of accounting to contracts qualifying for the normal purchase and sale exemption. All derivative instruments not designated as normal purchases or sales are recorded in the balance sheet as either assets or liabilities measured at their fair values. Changes in the fair value of these derivative instruments are recognized currently in earnings. We have not designated any derivative instruments as cash flow or fair value hedges and, therefore, do not apply hedge accounting treatment. In addition, 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. We have accounted for our obligation to repurchase crude oil and refined products from J.Aron at the termination of the Supply and Offtake Agreements and to repay MLC for monthly crude oil and refined products’ financing under the Washington Refinery Intermediation Agreement as embedded derivatives. Additionally, we have determined that the redemption option and the related make-whole premium on our 5.00% Convertible Senior Notes represent an embedded derivative. These liabilities were initially recorded at fair value and subsequently adjusted to fair value at the end of each reporting period through earnings. Asset Retirement Obligations We record asset retirement obligations (“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. Our AROs arise from our refining, logistics, and retail operations. 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. Both 67 expenses are recorded in Depreciation, depletion, and amortization in the consolidated statements of operations. The difference between the settlement amount and the recorded liability is recorded as a gain or loss on asset disposals in our consolidated statements of 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 primarily because we cannot estimate settlement dates (or ranges of dates) associated with these assets. These AROs include disposal of hazardous materials (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 facilities, terminal facilities, or pipelines, including the demolition or removal of certain major processing units, buildings, tanks, pipelines, or other equipment. 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 (“NOL”) and tax credit carry forwards. 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. 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 these temporary differences become deductible. Based upon the level of historical taxable income and projections for future results of operations over the periods in which the deferred tax assets are deductible, among other factors, management concluded that we did not meet the “more likely than not” requirement in order to recognize deferred tax assets and therefore, a valuation allowance has been recorded for substantially all of our net deferred tax assets at December 31, 2020 and 2019. 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 are presented within Other liabilities on our consolidated balance sheets. Environmental expenses are recorded in Operating expense (excluding depreciation) on our consolidated statements of operations.