Inventory Financing Agreements

12 Months Ended

Dec. 31, 2021

The following table summarizes our outstanding obligations under our inventory financing agreements (in thousands):


	December 31,
	2021		2020
Supply and Offtake Agreements	$	569,158	$	312,185
Washington Refinery Intermediation Agreement	168,546		111,501
Obligations under inventory financing agreements	$	737,704	$	423,686

Supply and Offtake Agreement

We have an agreement with J. Aron to support our Hawaii refining operations. Under the agreement, J. Aron may enter into agreements with third parties whereby J. Aron remits payments to these third parties for refinery procurement contracts for which we will become immediately obligated to reimburse J. Aron. As of December 31, 2021, we had no obligations due to J. Aron under this contractual undertakings agreement. On May 4, 2021, we amended the first amended and restated supply and offtake agreement and extended the term expiry date from May 31, 2021, to June 30, 2021.

On June 1, 2021, we entered into the Second Amended and Restated Supply and Offtake Agreement (“Supply and Offtake Agreement”), which amended and restated the first amended and restated supply and offtake agreement in its entirety. The Supply and Offtake Agreement expires May 31, 2024 (as extended, the “Expiration Date”), subject to a one-year extension at the mutual agreement of the parties at least 120 days prior to the Expiration Date. Under the Supply and Offtake Agreement, we are subject to an early termination fee if we terminate the Supply and Offtake Agreement on or prior to May 31, 2023. Under the Supply and Offtake Agreement, Par Hawaii Refining, LLC (“PHR”) is required to maintain minimum liquidity of not less than $15 million for any three consecutive business days, with at least $7.5 million of such liquidity consisting of cash and cash equivalents. Commencing on July 1, 2021 (the “Adjustment Date”), the Supply and Offtake Agreement makes available a discretionary draw facility (the “Discretionary Draw Facility”) to PHR.

During the term of the Supply and Offtake Agreement, J. Aron and we will identify mutually acceptable contracts for the purchase of crude oil from third parties. Per the agreement, J. Aron will provide up to 150 Mbpd of crude oil to our Hawaii refinery. Additionally, we agreed to sell and J. Aron agreed to buy, at market prices, refined products produced at our Hawaii refinery. We will then repurchase the refined products from J. Aron prior to selling the refined products to our retail operations or to third parties. The agreement also provides for the lease of crude oil and certain refined product storage facilities to J. Aron. Following the expiration or termination of the agreement, we are obligated to purchase the crude oil and refined product inventories then owned by J. Aron and located at the leased storage facilities at then-current market prices.

Though title to the crude oil and certain refined product inventories resides with J. Aron, the Supply and Offtake Agreement is accounted for similar to a product financing arrangement; therefore, the crude oil and refined products inventories will continue to be included in our consolidated balance sheets until processed and sold to a third party. Each reporting period, we record a liability in an amount equal to the amount we expect to pay to repurchase the inventory held by J. Aron based on current market prices.

Prior to July 1, 2021, the supply and offtake agreements also included a deferred payment arrangement whereby we could defer payments owed under the agreements up to the lesser of $165 million or 85% of the eligible accounts receivable and inventory. The deferred amounts under the deferred payment arrangement bore interest at a rate equal to three-month LIBOR plus 3.50% per annum. We also paid a deferred payment availability fee equal to 0.75% of the unused capacity under the deferred payment arrangement. As of December 31, 2020, the capacity of the deferred payment arrangement was $80.1 million and we had $78.6 million outstanding.

Effective July 1, 2021, the Discretionary Draw Facility became available to PHR up to but excluding the Expiration Date (the “Discretionary Draw Commitment Period”). Under the Discretionary Draw Facility, J. Aron agreed to make advances to PHR from time to time at the request of PHR, subject to the satisfaction of certain conditions precedent, in an aggregate principal amount at any one time outstanding not to exceed the lesser of $165 million or the sum of the borrowing base, which is calculated as (x) 85% of the eligible accounts receivables, plus (y) the lesser of $82.5 million and 85% of eligible hydrocarbon inventory, minus (z) such reserves as established by J. Aron in respect of eligible receivables and eligible hydrocarbon inventory. The advances under the Discretionary Draw Facility bear interest at a rate equal to three-month LIBOR plus 4.00% per annum until May 31, 2022. Beginning on June 1, 2022, the advances will bear interest at a rate equal to LIBOR (or LIBOR equivalent) plus an applicable spread between 3.50% and 4.00% to be determined annually based on certain financial ratios. We also agreed to pay a discretionary draw availability fee equal to 0.75% of the unused capacity under the Discretionary Draw Facility. Amounts outstanding under the Discretionary Draw Facility are included in Obligations under inventory financing agreements on our consolidated balance sheets. Changes in the amount outstanding under the Obligations under inventory financing agreements are included within Cash flows from financing activities on the consolidated statements of cash flows. As of December 31, 2021, our outstanding balance under the Discretionary Draw Facility was equal to our borrowing base of $126.2 million.

Under the supply and offtake agreements, we pay or receive certain fees from J. Aron based on changes in market prices over time. In 2017, we fixed the market fee for the period from June 1, 2018 through May 2021 for an additional $2.2 million. In 2020, we fixed the market fee for the period from February 1, 2020 through April 1, 2021 for an additional $0.8 million to be settled in fifteen payments. In 2021, we entered into multiple contracts to fix certain market fees for the period from May 2021 through May 2022 for $18.2 million. The amount due to or from J. Aron was recorded as an adjustment to our Obligations under inventory financing agreements as allowed under the Supply and Offtake Agreement. As of December 31, 2021 and 2020, we had a payable of $6.2 million and a receivable of $0.5 million, respectively.

Washington Refinery Intermediation Agreement

In connection with the consummation of the Washington Acquisition, we became a party to 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. Under this arrangement, U.S. Oil purchases crude oil supplied from third-party suppliers and MLC provides credit support for such crude oil purchases. MLC’s credit support can consist of either providing a payment guaranty, causing 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 the same, exclusively to MLC. On February 11, 2021, we and MLC amended the Washington Refinery Intermediation Agreement and extended the term through March 31, 2022. This amendment also included transition guidance on the interest rate of the MLC receivable advances to be based on another industry standard benchmark rate that will be effective upon the scheduled retirement of three-month LIBOR in 2023. On December 17, 2021, we and MLC amended the Washington Refinery Intermediation Agreement to further extend the term through December 21, 2022, with an automatic extension to March 31, 2023, upon an ABL extension event, and to revise certain other terms and conditions in the Washington Refinery Intermediation Agreement.

During the remaining term of the Washington Refinery Intermediation Agreement, MLC will make receivable advances to U.S. Oil based on an advance rate of 95% of eligible receivables, up to a total receivables advance maximum of $90.0 million (the “MLC receivable advances”), and additional advances based on crude oil and products inventories. Changes in the amount outstanding under the MLC receivable advances are included within Cash flows from financing activities on the consolidated statements of cash flows. The MLC receivable advances bear interest at a rate equal to three-month LIBOR plus 3.25% per annum. We also agreed to pay an availability fee equal to 1.50% of the unused capacity under the MLC receivable advances. As part of the November 1, 2019 amendment, the availability fee was amended to equal 0.75% of the unused capacity under the MLC receivable advances. As of December 31, 2021 and 2020, our outstanding balance included in our Obligations under inventory financing agreements on our consolidated balance sheets under the MLC receivable advances was equal to our borrowing base of $54.5 million and $41.1 million, respectively. Additionally, as of December 31, 2021 and 2020, we had approximately $167.0 million and $93.6 million in letters of credit outstanding through MLC’s credit support, respectively.

The following table summarizes the inventory intermediation fees, which are included in Cost of revenues (excluding depreciation) on our consolidated statements of operations, and Interest expense and financing costs, net related to the intermediation agreements (in thousands):


	Year Ended December 31,
	2021		2020		2019
Net fees and expenses:
Supply and Offtake Agreement
Inventory intermediation fees	$	21,612	$	12,034	$	35,459
Interest expense and financing costs, net	3,015		3,044		5,863
Washington Refinery Intermediation Agreement
Inventory intermediation fees	$	3,236	$	4,112	$	3,734
Interest expense and financing costs, net	4,900		2,791		6,359

The Supply and Offtake Agreement and the Washington Refinery Intermediation Agreement also provide us with the ability to economically hedge price risk on our inventories and crude oil purchases. Please read Note 14—Derivatives for further information.