PBF Energy Inc. — Q2 2015 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2015; financial statements are unaudited. PBF Energy consolidates its refining operations and PBF Logistics LP (PBFX). Its three refineries had combined capacity of approximately 540,000 barrels per day. Comparisons below are with the corresponding 2014 period unless stated otherwise.
Financial and operating performance
| Metric | Q2 2015 | Six months 2015 |
|---|---|---|
| Revenue | $3.551 billion, down 33.0% | $6.546 billion, down 34.9% |
| Operating income | $273.8 million | $446.2 million |
| Net income | $158.5 million | $261.6 million |
| Net income attributable to PBF Energy | $135.8 million; diluted EPS $1.57 | $223.1 million; diluted EPS $2.57 |
| Gross margin | $319.3 million | $535.6 million |
| Gross refining margin | $523.7 million, or $11.72 per throughput barrel; $417.7 million, or $9.35, excluding the inventory item described below | $989.8 million, or $11.40 per throughput barrel; $862.6 million, or $9.93, excluding that item |
| Operating cash flow | Not provided separately for the quarter | $317.7 million, versus $166.1 million |
| Capital spending and investing | Not provided separately for the quarter | $224.1 million of property, plant and equipment expenditures; net investing cash outflow was $113.6 million |
At June 30, cash and cash equivalents were $623.8 million; working capital was $1.113 billion. Long-term debt was $1.354 billion, including catalyst lease obligations in the debt fair-value disclosure. Total liquidity, as defined by the company, was approximately $1.176 billion. PBFX also reported $298.5 million of unused revolver capacity, and the Rail Facility had $106.6 million of borrowing capacity; these facility amounts should not be added to company-defined liquidity without checking for overlap.
Material changes versus the prior comparable period
- Revenue declined substantially as oil and refined-product prices fell. Throughput increased to 491,100 barrels per day in Q2 from 470,400; six-month throughput rose to 479,500 from 450,800 barrels per day.
- Q2 earnings benefited from a $106.0 million non-cash inventory lower-of-cost-or-market (LCM) reserve release. The six-month net benefit was $127.2 million. Excluding the LCM impact, Q2 gross refining margin per barrel improved year over year, while the six-month figure declined.
- Management attributed underlying results to stronger industry crack spreads, partly offset by less favorable crude differentials and unplanned June downtime at Toledo, which reduced throughput and increased maintenance costs.
- Q2 operating expenses fell 7.5% and six-month operating expenses fell 9.9%, mainly due to lower energy costs. Depreciation and amortization increased, principally reflecting completed capital projects and refinery optimization work.
- Cash increased from $397.9 million at year-end 2014 to $623.8 million. Six-month operating cash flow improved, while investing outflow was lower than in 2014, when marketable securities were purchased as collateral for PBFX’s term loan.
Outlook, commentary, risks and unusual items
- Management expected 2015 net capital expenditures of approximately $175 million to $200 million, excluding the pending Chalmette acquisition, and stated that available cash and capital resources should cover the next 12 months’ needs and the planned acquisition. These are forward-looking expectations, not guarantees.
- The proposed Chalmette refinery acquisition was for $322 million cash plus inventory and working capital, subject to adjustments and customary conditions, with closing expected before year-end 2015. The company planned to use cash, revolver borrowings and potentially third-party inventory intermediation; it did not expect to issue equity. Closing, integration, financing and unforeseen liabilities were identified risks.
- The board declared a $0.30-per-share dividend after quarter-end. Management stated an intention to continue quarterly dividends at that level, but future dividends remain discretionary. PBFX declared a subsequent $0.37-per-unit distribution.
- On May 29, PBF Holding extended and amended its J. Aron inventory intermediation agreements for two years beyond their prior expiry, subject to early termination rights. Termination could increase PBF’s inventory-funding needs and require repurchases of certain stored products.
- PBFX issued $350 million of 6.875% senior notes due 2023. Total liabilities under the tax receivable agreement were $737.4 million; estimated accelerated payments would have been approximately $679.7 million under the filing’s stated assumptions.
- In March and June, the company sold railcars and leased them back, receiving approximately $138.1 million in total proceeds. It reported $375.7 million of outstanding letters of credit and no other off-balance-sheet arrangements.
- Key exposures include volatile refining margins and commodity prices, crude supply and transportation disruptions, interest rates, RIN compliance costs, counterparty performance, substantial indebtedness and restrictions on subsidiary distributions. The EPA’s proposed renewable-fuel standards could materially affect compliance costs.
- Environmental and legal matters include a pending Delaware Supreme Court appeal concerning Delaware City rail and barge-loading permits, which could have a material adverse effect if the challengers prevail, and a disputed DNREC penalty assessment seeking $460,200 plus $69,030 in investigation costs. Recorded environmental remediation liability was $11.1 million.
- The company reported compliance with debt covenants and effective disclosure controls. It cautioned that actual results may differ materially from forward-looking statements.
Important facts for investors to verify
- How much of reported Q2 and year-to-date earnings and refining margin reflects the non-cash LCM reserve release, and what margins look like excluding it.
- Current refinery throughput, Toledo reliability, crude differentials and realized margins relative to industry crack spreads.
- Chalmette transaction closing status, final inventory and working-capital cost, financing mix and integration or liability risks.
- Debt maturities, borrowing availability and covenants, including how much facility capacity is available after planned acquisition and other commitments.
- Cash requirements and timing for the tax receivable agreement, dividends, PBFX distributions and capital spending.
- Developments in the Delaware permit appeal, DNREC penalty discussions, RIN regulations and crude-by-rail requirements.