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Par Pacific Holdings Inc (NYSE:PARR)
Q2 2019 Earnings Call
Aug 6, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Par Pacific Holdings Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Suneel Mandava, Senior Vice President of Finance for Par Pacific Holdings. Thank you, Mr. Mandava. You may begin.

Suneel Mandava -- Senior Vice President of Finance

Thank you, operator. Good afternoon, everyone, and welcome to Par Pacific Holdings second quarter 2019 earnings conference call. Joining me today are William Pate, President and Chief Executive Officer; Will Monteleone, Chief Financial Officer; and Joseph Israel, President and Chief Executive Officer of Par Petroleum.

Before we begin, please note that some of our comments today may include forward-looking statements as that term is defined under federal securities laws. Such statements include, but are not limited to, those concerning plans, expectations, estimates and our outlook for the company. Any forward-looking statements are subject to change and are not guarantees of future performance or events. They are subject to risks and uncertainties and actual results may differ materially from what is indicated in these forward-looking statements.

Because of this, investors should not place undue reliance on forward-looking statements, and we disclaim any intention or obligation to update or revise any forward-looking statement. I refer you to the latest forms 10-K and 10-Q of Par Pacific Holdings filed with the SEC for a more detailed discussion of the major risk factors affecting our businesses.

Further information regarding these as well as supplemental financial and operating information, including reconciliations of certain non-GAAP financial measures to the most comparable GAAP figures can be found on our press release and our investor presentation on our website, www.parpacific.com, or in our filings with the SEC.

I'll now turn the call over to our President and Chief Executive Officer, Bill Pate.

William Pate -- President and Chief Executive Officer

Thank you, Suneel. Good morning to all of our conference call participants. I'm delighted to report record financial and operational results for the second quarter of 2019. Our adjusted earnings per share of $0.45 was a 45% increase over adjusted earnings per share for the second quarter of 2018, illustrating the accretive impact of our recent acquisitions. We generated $57.5 million of free cash flow and $69 million of adjusted EBITDA. We achieved these financial results due to record operational availability in our refining system, record throughput in our logistics unit, and solid retail volumes and margins.

High operational availability is achieved only through solid environmental compliance and safety awareness. I want to thank our refining team for their attention to the environment and to ensuring safe operations. I also want to highlight our ability to integrate three significant acquisitions in the last 18 months without any increase to G&A expense. This accomplishment illustrates our ability to leverage systems and processes and achieve consistent productivity gains at our headquarters. I'm very pleased with our Washington acquisition, the integration is moving forward rapidly and we're already realizing significant commercial opportunities and benefiting from the strong -- spring market conditions triggered by unplanned outages on the west coast.

We're expanding our marine freight capabilities, which will lower our refined product transport costs. The inland crude oil pricing in Washington is also nicely counterbalancing the elevated waterborne crude oil dips that we continue to face in Hawaii. And we're making progress on our next gen renewables fuel project in Washington, which I expect to generate further logistics savings upon completion.

In Hawaii, we continue to face challenges in the waterborne crude market and in the first half of the year, we also experienced some of the worst Singapore gasoline cracks in years. Nonetheless, our increased scale and related cost structure improvements allowed us to sequentially improve our capture in the quarter. In July, we also completed the pipeline integration work to interconnect the crude oil facilities at our two Hawaii refining locations.

With the completion of that project, the IES assets are fully integrated within the Par Pacific System. I also want to congratulate our team on the commissioning of our distillate hydrotreater project last month. The Hawaii team completed this project under budget and two months ahead of plan. They accomplished this task while simultaneously executing a turnaround at the newly acquired crude unit, undertaking a reformer catalyst region and completing the pipeline tie-in project.

Looking forward to the third quarter, we expect the business to continue to perform well with strong retail performance, improving cracks in the Asian markets and the peak summer driving season in Washington and Wyoming. These trends will be tempered by a continued challenging waterborne crude market and downtime from the Hawaii crude unit turn around. Looking out to the fourth quarter, we continue to be well positioned for IMO 2020 with our high distillate yields.

At this time, I'll turn the call over to Joseph to provide more details on our operations.

Joseph Israel -- President & Chief Executive Officer of Par Petroleum, LLC

Thank you, Bill. Second quarter execution for our refining system was exceptional. By running safely and close to a perfect 100% reliability, we were able to fully capture what the market gave us with high efficiency and low production costs. Our balanced system helps to minimize our exposure to certain market conditions and gives us the opportunity to optimize and perform on a consistent basis.

Global waterborne crude differentials remained elevated, mostly due to an under supplied global oil market and ongoing geopolitical tension. As a result, in the quarter, our realized crude differential NOI averaged $2.95 per barrel over Brent on delivering base. This crude differential is approximately $2.15 per barrel over five year’s average.

On the product side, Singapore 4-1-2-1 Crack Spread was $6.22 per barrel, driven by weak gasoline and partially offset like favorable and distillate, and fuel oil. Our realized adjusted gross margin in Hawaii was $3.46 per barrel in the quarter, with 99.3% operational availability. Our refinery throughput averaged approximately 116,000 barrels per day. Refinery yield matches well with the demand profile in Hawaii, which allows us to focus on the local supply needs consistent with input pricing and with minimum exports.

Production costs in the second quarter were only $2.82 per barrel, reflecting our improved cost structure, following the refining assets acquisition from IES. The new 10,000 barrels per day diesel hydrotreater or DHT, is starting up distillate [Phonetic] couple of months ahead of original schedule. Project cost is just under $26 million compared to the announced $27 million budget. With the DHT online, our distillate production capability in Hawaii is up to approximately 55,000 barrels per day and including 20,000 barrels per day of low sulfur fuel oil production, 65% to 70% of oil production in Hawaii is driven by distillate pricing through the IMO transition. During the month of July, we are also executing our plan from a reformer catalyst regeneration and turnaround works in the acquired IES asset for approximately $10 million to $12 million outlay, of which approximately 75% is expected to be capitalized. We are estimating approximately $0.70 to $0.80 per barrel of gross margin missed opportunities associated for the works.

Considering the turnaround works, our target throughput for the third quarter is 98,000 to 103,000barrels per day in Hawaii. Crude differentials remain elevated for the third quarter at approximately $3.16 per barrel premium to Brent, reflecting a highly backward dated market structure. However, following the recent economic cost in Asia with several refineries, Singapore inventories are close to five years low for all product and 4-1-2-1 Singapore Crack Spread index has improved to approximately $9.80 per barrel so far in the third quarter.

In Washington, our refinery throughput averaged approximately 39,000barrels per day.Out5-2-2-1 Index on ANS basis, averaged $17.14 per barrel in the second quarter. PADD V product inventories are back to normal through imports and high utilization rates following a busy maintenance period between March and May. Bakken crude oil reflecting approximately two-thirds of our crude slate in Washington traded at $1.42 per barrel discount to WTI and WCS, reflecting approximately one-third of our crude slate traded at $12.56 per barrel discount to WTI, both on FOB basis.

In the second quarter, adjusted gross margin was $9.92 per barrel with 99.9% operational availability. The strong West Coast cost funds and VGO crack spreads positively impacted our structure. Production costs were $4.42 per barrel. We continue to be very impressed with our local team in Washington. Integration is going well as our logistics and commercial flexibility as a system continue to revolve around our Pacific Northwest assets, providing us with more optionality along the West Coast. So far in the third quarter, our 5-2-2-1 Index has averaged approximately $15 per barrel on ANS basis. Our target throughput for the third quarter in Washington is 38,000 to 40,000 barrels per day. In Wyoming, our 3-2-1 Index was $28.89 per barrel in the second quarter. Our refinery throughput averaged approximately 18,000 barrels per day.

Our realized adjusted gross margin in the quarter was $16.78 per barrel, including a negative $1.16 per barrel FIFO impact. Production costs were only $5.58 per barrel, reflecting 99.6% operational availability and high throughput. We are now at the peak of our gas -- of our regional gasoline season, and our Wyoming 3-2-1 Index has averaged approximately $27.75 per barrel in July. We continue to access and benefit from discounted pipeline and local crude oil production in the Powder River Basin. Our third quarter target throughput in Wyoming is 17,000 to 18,000 barrels per day.

And now, I'll turn the call over to Will to review consolidated results and Laramie highlights.

Will Monteleone -- Chief Financial Officer

Thank you, Joseph. Our segment-level results reflect strong contributions from each area, while we were able to continue to hold our aggregate G&A spend relatively flat. Refining segment contribution was $43 million, an increase of $14 million compared to Q2, 2018. The increase in the quarter was principally driven by the first full quarter contribution from the Washington refinery.

Our logistics segment posted another record quarter of $20 million of adjusted EBITDA, driven by elevated marine movements in Hawaii, and overall throughput in Washington. The outlook for commercial synergies between Hawaii and Washington continues to improve and we are feeling more comfortable with the upper end of our previously provided range of $5 million to $10 million.

Our Retail segment was also a solid contributor with segment contribution of $15 million, up nearly $4 million versus the second quarter of 2018. Retail same store sales fuel volumes were flat compared to Q2, 2018. In total, our retail and logistics segments made up 44% of segment adjusted EBITDA contribution, reflecting an attractive segment balance. Laramie generated approximately $14 million of adjusted EBITDAX, and a net loss of $11 million, excluding the impact of $8 million of unrealized gain on derivatives. Laramie's last 12 months adjusted EBITDAX stands at $93 million. Given the current natural gas and natural gas liquids pricing, Laramie intends to cease drilling activity during August, resulting in lower capex for the year.

Shifting focus to accounting items. The largest item impacting both adjusted EBITDA and adjusted net income was the FIFO drag of approximately $2 million for the second quarter within the Wyoming Refining segment. In addition, adjusted net income was reduced by a $1.6 million charge associated with unrealized interest rate derivatives flowing through the interest expense line. Last and only impacting our GAAP net income was an approximately $4 million of debt extinguishment expenses related to the exchange of the convertible notes during the quarter.

On the capital structure front, we made strides towards our targets through our convertible exchange activities and allocating cash flow from operations towards paying down debt. Our net debt capitalization declined by 6% from 52% to 46%, while total liquidity increased approximately $50 million to $175 million at quarter end. Second quarter GAAP interest expense totaled $20 million of which $15 million was cash interest. DD&A totaled $22 million. Cash from operations adjusted for funding underneath the working capital facilities totaled approximately $95 million, including a working capital inflow of approximately $12 million and reflecting the partial reversal of the Q1, 2019 working capital build. Capital expenditures totaled $24 million during the second quarter.

Planned 2019 total capital expenditures and turnaround outlays remains consistent with previously communicated ranges between $100 million and $110 million.

This concludes our prepared remarks. Operator, I'll turn it back to you for Q&A.

Questions and Answers:

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.

Neil Mehta -- Goldman Sachs -- Analyst

Good morning, team. The first question I had was just on the Hawaii operations. It’s good to see Singapore margins moving in the right direction in the third quarter. One of the risks continues to be on the crude side with OPEC cuts continuing and the lack of availability of some of those medium and heavy grade crudes on the water. Can you talk about, what you are doing to optimize to manage that risk and drive profitability for your waterborne exposed refineries?

Joseph Israel -- President & Chief Executive Officer of Par Petroleum, LLC

Yes, Neil, good morning, Joseph, here. With regards to the elevated global crude oil differentials, really since the second half of 2017, oil demand has clearly outpaced supply. OPECs has demonstrated consistent production discipline, and ongoing geopolitical tension kept oil barrels out of the market, resulting in elevated crude differentials to clear the barrel. In addition, the backlog data market structure is another cost component in the realized crude differentials considering the delivery time. Fortunately, as you would expect, oil products in Asia caught up recently with the elevated crude differentials and time will tell where it's going from here. Eventually it will take an oversupplied crude market to take us back to historical range for crude differentials.

To help you monitor our crude differential, we are adding starting this week, history in current quarter guidance, for realized crude differential in Hawaii, to our weekly index file, which is available on our website. Our optimizations team in Hawaii does consistent, really robust scanning work on our crude opportunities around the globe and end up with a optimized crude freight for us really on a monthly basis. So we'll continue to do that and minimize the pain as we can.

William Pate -- President and Chief Executive Officer

Neil, this is Bill, just to chime in on that too. You know fortunately our refinery has a fair amount of flexibility. And I think we've mentioned in the past, we've run in a batch mode and one of the things we can do is we optimize as we can, if the medium seller market starts to get a little pricey we can go for longer runs on sweet. That allows us, you know, the key and the big challenge for us in the market is the demand for jet. And obviously as we access more sweets and lighter crude sometimes we can get a little more jet yield out of that and that helps to reduce the import. So as Joseph said, we're constantly optimizing assessing the market and if a different grade start to become unfavorable, then you know following the LP analysis will adjust our batch mode slightly to optimize our crude selection.

Neil Mehta -- Goldman Sachs -- Analyst

That's great. And then to follow up just kind of a bigger picture question on capital allocation, free cash flow and leverage after -- after completing the West Coast transaction, leverage did take up and you had the option theoretically to issue equity. And it looks like you guys are going to try to organically delever the business to not dilute your existing shareholders. And so just your views on where you want the target leverage ratio to get to? How long it's going to take you in a base case to kind of get to the place you want to get to, confirm that you have no intention to issue equity at this point, and then, sort of what do you do with excess cash? It's a big picture question. But maybe you can kind of help us think about, the uses of free cash flow.

Will Monteleone -- Chief Financial Officer

Neil, this is Will. I'll take a shot at that. So I think just from a target perspective, and where we'd like to be, I think we like our net debt to capitalization to be down in the 30% to 35% range. And I think, on a imputed basis, that gets you in the net debt to EBITDA, probably in that 1.5 times range. So again, I think that's our target. I think, as we indicated, this quarter we made some decent progress there. We allocated about $16 million cash towards the convertible note exchange that we conducted. So again, moving it down 6percentage points during the quarter was a good step in the right direction. And we also built our liquidity up to $175 million range.

I think we will continue to build liquidity through the year and evaluate our debt position as we head into next year and evaluate whether we'd like to pay down debt or pursue other alternatives from a deleveraging standpoint. I think from a time horizon, I think we've got capital expenditure requirements next year with respect to turnarounds. That being said, I think, over the next 24, 36 months, we think we ought to be able to achieve that.

Neil Mehta -- Goldman Sachs -- Analyst

Thanks, team.

Operator

Our next question comes from line of Matthew Blair with Tudor, Pickering, Holt. Please proceed with your question.

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

Hey, good morning, everyone.

William Pate -- President and Chief Executive Officer

Good morning, Blair.

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

I thought the value of your integrated model really came through this quarter with the record logistics results near record retail. Could you just provide a little bit more commentary on the drivers behind the good numbers in each of those segments? And I guess specifically on logistics, do you feel that that's a sustainable number going forward?

Will Monteleone -- Chief Financial Officer

Sure, Matt, it's Will. I think the perspective logistics, the principal driver of the increase was really in activity -- marine activity in Hawaii. And again, that's going to move a little bit quarter-to-quarter based on both deliveries of both crude and product. And then separately, you may recall during the first quarter, we referenced some delays with respect to train deliveries in and out of Washington due to weather, again, I think we caught up on that during the second quarter had more activity there. So again, I think the historical kind of throughput that we've guided to on an annual basis or the historical contribution, I think is a good representation of -- you know the way we think about the business. And again, I think on the retail side, really a stronger environment for retail margins, given changes in flat price during the quarter and I think overall seen industry wide expansion and retail margins during the quarter, we participated in that.

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

Sounds good. And then, Will, could you provide an update on the drilling program and just overall strategy at Laramie, given the drop in natural gas and NGL prices? Did you say that you had ceased drilling in August?

Will Monteleone -- Chief Financial Officer

That's correct. So Laramie will be ceasing drilling activity during the month of August, given where pricing is. We will be continuing some of its completion activity for the balance of the year and I think we'll revisit pricing on a go forward basis. I think strategically given where commodity prices are, I think the most important thing for Laramie is, frankly, just balance sheet preservation and trying to get to a point where we are generating free cash flow. And I think that's what Laramie is focused on. And I'd expect them to continue to do that on a ongoing basis.

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

Thank you. I'm going to re-queue for a few more questions. Thanks.

Operator

Our next question comes from the line of Mike Harrison with Seaport Global Securities. Please proceed with your question.

Mike Harrison -- Seaport Global Securities -- Analyst

Hi, good morning. I was wondering if you could go through the DHT project and maybe now that it's complete, congratulations on getting it completed. Now that it’s complete, can you maybe talk through how we should think about the timing or ramp up of that 5000 to 7000 barrels a day? And maybe the magnitude of that contribution on kind of an EBITDA basis? Is this something that we see a lot of contribution in kind of like Q3 or is it still mostly 2020 once the new regulations start to kick in?

Will Monteleone -- Chief Financial Officer

Yes, Mike, it's Will, I think the best way to think about it from a modeling perspective is really kind of a mid Q4 type of contribution as it starts to kick in. And again, if you recall, we had previously provided our assessment on return thresholds for that $27 million project in the 30% range and I think we still feel comfortable with that return profile, which I think got to put you in the mid single-digits in terms of the annual contribution for additional EBITDA.

Mike Harrison -- Seaport Global Securities -- Analyst

Okay. And then, I know you mentioned the crude unit turnaround in Hawaii. Any other kind of special maintenance or turnaround actions that we need to keep in mind for the second half? And as we get into that -- I guess, first part of 2020?

Joseph Israel -- President & Chief Executive Officer of Par Petroleum, LLC

No, you know, why we're still planning a major turnaround next year, early in the summer. But until then, we don't have any scheduled or planned turnaround in Hawaii, other what we executed even in the first quarter, reformer generation, sulfur unit and sundry maintenance.

Mike Harrison -- Seaport Global Securities -- Analyst

Alright. And then, last question for me is on Wyoming. You mentioned the $1.9 million of FIFO headwinds during this quarter. Just wondering how we think about that as we move into Q3? Is that something that kind of reverses or any thoughts on that?

Will Monteleone -- Chief Financial Officer

Mike, it's Will. I think, we're going to need to wait and see how kind of flat prices settle out, I think the principal driver there -- the change period over period is, usually the change in crude oil prices. So again, I think, a little early to provide any thoughts on the direction of that move going into the third quarter?

Mike Harrison -- Seaport Global Securities -- Analyst

Alright. Thanks very much.

William Pate -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Jason Gabelman with Cowen. Please proceed with your question.

Jason Gabelman -- Cowen -- Analyst

Hey, thanks for taking my questions. I want to revisit a topic discussed last quarter just on low sulfur fuel oil pricing. And I'm wondering as we think about kind of low sulfur fuel oil pricing improving through 2020, because of IMO, could we expect Par to roughly get the price that we see on the screen? And then, if I could just add a wriggle to that? Do you guys sell all of the low sulfur fuel oil you produce in Hawaii to utilities? Or is there an opportunity to sell it into the bunker pool as well?

Will Monteleone -- Chief Financial Officer

Jason, it's Will. I think, we do sell the majority of our -- most of our fuels oils to the utilities, that being said, I think there's nothing that we think that would prevent us from selling incremental volumes into the bunker market, either locally or into another region of the world. So I think that's with respect to the output. And I think in terms of the way we think about the pricing, I think at least initially, that distillates are going to be the best representation of where low sulfur fuel oil will clear in the market. And I suspect over time that low sulfur fuel oil spreads will move away from pure diesel pricing. And again, that's why I think we think about the value of that product in the marketplace.

Jason Gabelman -- Cowen -- Analyst

So. Just if I could clarify that answer, if there are two prices, I'm looking at in my model, one of ULSD and one of low sulfur fuel oil, which one would be more appropriate to attribute to the low sulfur fuel oil that you're selling?

William Pate -- President and Chief Executive Officer

I think in the interim it's going to be somewhere in between, Jason, it's probably the best way to think about.

Jason Gabelman -- Cowen -- Analyst

Got it. Okay. Thanks for that answer. And then just, I think you guys had just mentioned that you're going to have a turnaround in Hawaii in 2020, if I heard you correctly. And I believe there's also one in Washington next year. So if you just give an indication of what capex directionally what it's going to come in at in 2020?

Joseph Israel -- President & Chief Executive Officer of Par Petroleum, LLC

Yes, so we'll deal with the turnaround schedule, across the system and we believe we are able to push the majority of the Washington turnaround into 2021. In the first quarter, this will leave slowly first chapter in October, but it's really going to have an insignificant impact to our overall operations. This will allow us to focus on only two terminals next year, first one in Hawaii early in the summer, and then the one in Wyoming in October.

Will Monteleone -- Chief Financial Officer

And then Jason, it's Will. From just a turnaround outlay perspective, I think what we've historically indicated is that Hawaii typically runs about $35 million, and Wyoming in that $15 million to $17 million range. So I think that's probably a pretty good sense of where the outlay is for 2020. And then again, I think a smaller number for Washington as Joseph indicated later in the fourth quarter, probably in the -- less than $5 million range. Yeah, and then -- Jason also keep in mind, some of the turnaround outlays for Hawaii and Wyoming are actually incurred during 2019. So again, I think you could probably shave about $10 million of that total.

Joseph Israel -- President & Chief Executive Officer of Par Petroleum, LLC

[Indecipherable]

Jason Gabelman -- Cowen -- Analyst

And I'm assuming these are partial turnarounds, these aren't full shutdowns our plants?

Joseph Israel -- President & Chief Executive Officer of Par Petroleum, LLC

You're talking about the 2019 outlay?

Jason Gabelman -- Cowen -- Analyst

Yeah.

Joseph Israel -- President & Chief Executive Officer of Par Petroleum, LLC

So yes, the 2019outlay is just reflecting ordering equipment that we will need later in the terminal. It doesn't involve any type of shutdown or slowdown.

Jason Gabelman -- Cowen -- Analyst

But in 2020, there are plant-wide outages?

Joseph Israel -- President & Chief Executive Officer of Par Petroleum, LLC

Yes.

Jason Gabelman -- Cowen -- Analyst

Got it. Alright, great. Thanks. I appreciate the answers.

Joseph Israel -- President & Chief Executive Officer of Par Petroleum, LLC

Thank you.

Operator

Our next question comes from the line of Tim Rezvan with Oppenheimer & Company. Please proceed with your question.

Tim Rezvan -- Oppenheimer & Company -- Analyst

Hi, good morning, folks. A question first, on the balance sheet. You’ve been pretty clear that deleveraging is a goal. You're ending the second quarter with $106 million of cash on the balance sheet. I'm assuming if I could use that to -- to continue kind of grinding down debt. I guess what debt vehicles are kind of in your crosshairs right now and how can we think about interest expense sort of trending into 2020 in addition to I guess, the reduction we saw from the last convert retirement?

William Pate -- President and Chief Executive Officer

Sure. So I think, Tim as a indication with respect to the starting point on a cash interest basis, right, we're running about $50 [Phonetic] million a year, just using the second quarter as the starting point on an annualized basis. And so again, I think the convert reduction of about $35 million on the principal balances, a positive contribution, you didn't get a full quarter of that. So again, I think we would expect a small reduction there. And then I think, as I indicated, I think we will likely to continue to build our cash position, monitor overall cash from operations and carry into the year, a cash cost, probably at least $175 million range is the target, I should say, liquidity balance, not cash balance. And then I think we will visit which one of the debt facilities makes the most sense to reduce the overall balance assuming we continue to generate additional liquidity.

Tim Rezvan -- Oppenheimer & Company -- Analyst

Okay. I appreciate that. Thank you.

Operator

Our next question comes from the line of Andrew Shapiro with Lawndale Capital Management. Please proceed with your question.

Andrew Shapiro -- Lawndale Capital Management -- Analyst

Hi, thank you. A lot were asked and answered, but I have a few around the edges here. Just a little bit more clarification, if you could on both the IES and U.S. soil acquisition, integration synergies. Is like what do you see as any further consolidation integration, synergy timelines for each of the acquisitions? Or is the digestion completed now and all we're doing here is anniversarying the year-over-year savings?

William Pate -- President and Chief Executive Officer

So, Andrew, let me take this. I think first of all, with respect to Washington, we're making some really good progress on commercial synergies, and they're probably more significant than we thought they were when we acquired the business. So those will continue to be ongoing. I don't know this will show up as a synergy or a cost saving, these are opportunities where we think we can maximize the value of our products within our system. And that will play out for a period of time. With respect to Washington, we've also expanded our marine capability. This really ties into Hawaii as well, which will reduce the cost of moving ethanol out to Hawaii. We have not begun to realize that savings yet. That's a significant savings, it's probably as big as the close to the lower end of the range of the cost savings that we laid out for the acquisition by itself.

And then, in addition to that, with that expanded capability, our ability to backhaul and to move products from Hawaii back to the West Coast, on an opportunistic basis exists and those are the synergies that I see in the system that we're really just starting to get our arms around.

With respect to that integration too, we still have a fair amount of work to do in terms of integrating the process within the systems. We see that unfolding over the next two to three quarters. Not sure that you'll see a lot of impact on the bottom line there, but it's more a matter of aligning all our systems and processes and ensuring that we’ve got consistent kind of systems and processes throughout the organization. There will be certainly a point in time when we're shifting the entire organization over to our SAP system that will require some more effort.

And then turning to IES, the integration is largely done. So the asset is folding in and working very well with respect to our existing -- our original refineries. There’s probably still some optimization work in terms of logistics and planning and the movement of products even between those two locations. And I think the real opportunity there will be, as that market evolves, having that expanded capability in the product that we can offer into the marketplace, we think there will be some continued growth and profitability in that market as well which would play out over probably two to three years.

Tim Rezvan -- Oppenheimer & Company -- Analyst

Okay. And with respect to -- I guess the IES, which probably contributed to this, I noticed on the Defense Department contract site, I guess it was within the last two days, you guys were named for -- I think it's the next, the upcoming governmental fiscal year of a sizable increase in the DoD supply contract. Are these high margin products in our sales mix and this should enhance our sales mix and margins or is it just a bigger movement of volume and we see the benefit that way, but it's on the lower margin sales mix?

William Pate -- President and Chief Executive Officer

I don't want to comment on the profitability of specific contracts, but, we obviously value our relationship with the DLA. We're fortunate to have three pipelines that are connected to major defense installations and we were very pleased to again, win a contract with the DLA in Hawaii where I think we have a great relationship with the local military forces and community. The volumes, keep in mind, are not necessarily indicative of what the military will actually purchase during the year, it's -- they do on occasion, buy more, and they do on occasion buy less, but we don't see a material change to our operations as a result of that contract and we're very pleased to continue to be their major supplier in the state of Hawaii.

Andrew Shapiro -- Lawndale Capital Management -- Analyst

Okay. When is the first year that powers substantial tax NOL start expiring?

Joseph Israel -- President & Chief Executive Officer of Par Petroleum, LLC

Will, do you want to answer that?

Will Monteleone -- Chief Financial Officer

Yes, I mean, I think the time horizon listed in the fillings for 2027, again, I think -- again I think there are a variety of strategies that we can deploy to ensure that we optimally consume the NOL over time as we generate taxable income.

William Pate -- President and Chief Executive Officer

And Andrew, this is Bill, I think, given the assets we have today and the earnings power we have today, I don't see any reason why we would have NOLs that expire.

Andrew Shapiro -- Lawndale Capital Management -- Analyst

Excellent. So you're chewing on them as fast and they're coming up. And lastly, can you highlight and identify for us for a calendaring upcoming non-deal road shows and investor presentations that you are planning?

Suneel Mandava -- Senior Vice President of Finance

Andrew, this is Suneel. We just registered for the Seaport Global Securities, Chicago Energy Industrial Conference that'll be held in late August 27, 28. And then we're going to be picking up our planning here for the fourth quarter additional conferences and we'll be announcing those as we confirm them.

Andrew Shapiro -- Lawndale Capital Management -- Analyst

Okay. Is there any way you can -- you announce them either on your website or that's why I usually ask on the call, a little ahead of time because otherwise your press releases for them only come out basically the week off or the week before?

William Pate -- President and Chief Executive Officer

That's a good point, Andrew, we will try to accelerate that announcement going forward -- those announcements.

Andrew Shapiro -- Lawndale Capital Management -- Analyst

Alright. Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Matthew Blair with Tudor, Pickering, Holt. Please proceed with your question.

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

Hi, thanks for taking my follow ups here. Joseph, Hawaii put up a very low 280 OpEx number, once again in Q2. After Q1, you found it a little cautious on whether that was sustainable? Now it sounds like it might be sustainable. Is that the right read from your comments there?

Joseph Israel -- President & Chief Executive Officer of Par Petroleum, LLC

Yes, first half cost structure for combined refinery in Hawaii has been very low at $2.82 per barrel. Strong reliability and minimum planned and unplanned repairs have been the main reason. For the third quarter, we already mentioned the estimated $0.30 per barrels of incrementally costs through OpEx associated with the planned maintenance. Also, throughput barrels are going down in the third quarter, due to the maintenance which will elevate everything reported on a per barrel basis. Long term, probably most important, under average budget and throughput below $3 per barrel production cost is probably still our best guidance at this point.

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

Sounds good. And then could you talk about where Par stands on Tier-3 compliance at each refinery and your outlook on octane spreads next year?

Joseph Israel -- President & Chief Executive Officer of Par Petroleum, LLC

From a Q3 standpoint, we’re already there. And from an octane standpoint, as a system, we produce 20 –over 22% of our sold gasoline is a premium gasoline and probably more important we have even more room to increase premium and octane blending if we choose to and market is there. So we are really comfortably there.

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

Great. And then last question, some refiners have noted the weak naphtha cracks had a negative impact on margin capture. And I was just wondering about your exposure here. What is your naphtha yield? And is there anything you can do to offset the weak pricing?

Joseph Israel -- President & Chief Executive Officer of Par Petroleum, LLC

Yes, I think the naphtha programs are the -- more relevant for Gulf Coast refineries associated with more Eagle Ford Permian Basin type of blending. We have less of that, but we still have some elevated [Indecipherable] in our cold feedstock which our equipment can handle with a minimum noise.

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

Great. Thank you very much.

Operator

Since there are no further questions left in the queue. I would like to turn the floor back over to Mr. Will Pate for any closing remarks.

William Pate -- President and Chief Executive Officer

Thank you, operator. Thanks for joining us this morning.

This has been the first reporting cycle when we believe that our financial statements reflect the benefits of our recent acquisitions. We achieved record financial and operating results despite difficult market conditions in Asia, largely due to the excellent performance from our mainland acquisitions over the past few years. Conditions in Asia are improving into the back half of the year as IMO 2020 approaches. And we believe our Hawaii business is well positioned to capture this market improvement. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Suneel Mandava -- Senior Vice President of Finance

William Pate -- President and Chief Executive Officer

Will Monteleone -- Chief Financial Officer

Joseph Israel -- President & Chief Executive Officer of Par Petroleum, LLC

Neil Mehta -- Goldman Sachs -- Analyst

Matthew Blair -- Tudor, Pickering, Holt -- Analyst

Mike Harrison -- Seaport Global Securities -- Analyst

Jason Gabelman -- Cowen -- Analyst

Tim Rezvan -- Oppenheimer & Company -- Analyst

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