PBF Energy Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 21, 2019. This is an annual filing, not a standalone Q4 report. PBF Energy consolidates PBF Energy Company LLC (PBF LLC) and its subsidiaries, including PBFX. Unless noted, financial figures below are PBF Energy consolidated.
Business context
PBF operates five U.S. refineries with approximately 900,000 barrels per day of combined capacity, plus a logistics segment through publicly traded PBF Logistics LP (PBFX). The business depends chiefly on refining margins, crude differentials, operating reliability, and regulatory compliance costs.
Financial and operating performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $27.19 billion | $21.79 billion |
| Income from operations | $358.1 million | $731.6 million |
| Net income | $175.3 million | $483.4 million |
| Net income attributable to PBF Energy shareholders | $128.3 million; diluted EPS $1.10 | $415.5 million; diluted EPS $3.73 |
| Consolidated gross margin | $602.6 million | $960.6 million |
| Gross refining margin, per barrel of throughput | $7.79; $9.09 excluding disclosed special items | $9.08; $8.08 excluding disclosed special items |
| Operating cash flow | $837.9 million | $685.9 million |
| Capital expenditures, as reported | $733.9 million | $727.0 million |
| Total debt | $1.975 billion | $2.226 billion |
| Cash and cash equivalents | $597.3 million | $573.0 million |
| Working capital | $1.102 billion | $1.384 billion |
Revenue rose 24.8%, reflecting higher commodity prices and increased throughput. Average crude/feedstock throughput was 849,700 barrels per day versus 807,400. Benchmark crack spreads weakened year over year at most refinery regions, while wider heavy-crude differentials and higher volumes helped underlying refining performance. Refinery operating expense declined to $5.34 per barrel from $5.52.
Operating cash flow increased year over year. Investing cash outflow was $685.6 million, including $317.5 million for property, plant and equipment and $266.0 million for turnarounds. PBF reported $1.420 billion of available capacity under its revolving credit facilities; reported total liquidity was approximately $1.677 billion, including cash and availability under PBF Holding’s revolver. PBFX also had approximately $340 million of separate available capacity.
Material changes and unusual items
- Full-year net income fell substantially. FY2018 included a $351.3 million non-cash, pre-tax LIFO lower-of-cost-or-market (LCM) inventory charge, compared with a $295.5 million benefit in FY2017. The year-end LCM reserve was $651.7 million versus $300.5 million a year earlier.
- The fourth quarter was particularly weak: PBF Energy reported an operating loss of $446.2 million, a net loss of $346.7 million, and a diluted loss per share of $2.97. The quarter included an LCM charge reflecting a rise in the reserve from zero at September 30 to $651.7 million at year-end. The annual net charge differs from the Q4 reserve movement because the reserve changed during earlier quarters.
- Other 2018 items included a $52.3 million pre-tax expense for early return of leased railcars and a $43.8 million gain on the sale of non-refinery Torrance land. The 2017 comparison benefited from a $250.9 million gain from remeasurement of the Tax Receivable Agreement liability; that gain was much smaller in 2018.
- RIN compliance costs declined to $143.9 million from $293.7 million. PBF attributed improved underlying gross refining margin excluding special items to favorable crude differentials, higher throughput and lower RIN costs, partly offset by weaker crack spreads.
Outlook, risks and contingencies
- Management expected approximately $625–$675 million of 2019 net capital expenditures, excluding PBFX, and $27.5–$32.5 million for PBFX. Planned work included major refinery turnarounds, regulatory projects, restarting Chalmette’s idled coker, and a Delaware City hydrogen project. The Chalmette coker was expected in service by year-end 2019.
- PBF said operating cash flow and available capital resources should be sufficient for the next 12 months, while cautioning that cash generation depends on volatile oil markets and other factors. It reported compliance with debt covenants at year-end. PBF Energy intended to continue quarterly dividends of approximately $0.30 per share, subject to board discretion and financing restrictions.
- Refining margins, crude-price differentials, inventory valuations, natural gas costs, refinery outages, transportation disruptions, and counterparty performance are major business risks. The company’s inventory intermediation agreements with J. Aron were due to expire in 2019, with possible extensions by mutual consent; termination could increase working-capital needs and require inventory repurchases.
- Environmental liabilities included approximately $130.8 million associated with Torrance remediation. The filing also describes ongoing regulatory matters, including an appeal of Delaware City’s ethanol permit, unresolved Torrance environmental findings, and an asserted affirmative defense concerning potentially invalid RINs. PBF said certain unresolved matters could not yet be estimated; it considered several potential penalties not material, while noting that the Chalmette flaring mass action could have a material adverse effect if resolved adversely.
- As a subsequent event, PBFX agreed to cancel its incentive distribution rights in exchange for 10 million newly issued common units, with closing expected February 28, 2019. PBF disclosed that the restructuring would end IDR distributions to PBF LLC and increase its PBFX common-unit ownership.
Important facts for investors to verify
- How much of reported 2018 earnings and refining margins reflects recurring operations versus LCM inventory accounting and other special items; in particular, reconcile the Q4 reserve movement with the full-year charge.
- Whether refinery margins, crude differentials and throughput remain favorable enough to support cash generation after the 2018 decline in GAAP earnings.
- Actual 2019 capital spending, turnaround timing, project costs, and operating performance at Chalmette, Delaware City and Torrance.
- Liquidity and working-capital sensitivity to commodity-price changes, letters of credit, debt covenants, and the expiration or renewal of the J. Aron agreements.
- Developments in significant environmental remediation and litigation, the Delaware City ethanol-permit appeal, and EPA’s response to the RIN defense.
- Whether the stated dividend intention is supported by cash available at the holding-company level and remains permissible under subsidiary debt covenants.