PBF Energy Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. PBF Energy is a holding company that consolidates PBF LLC and its subsidiaries, including PBF Logistics LP (PBFX). Its two reportable segments are Refining and Logistics.
Business context and reporting period
PBF operated five U.S. refineries with combined crude-processing capacity of approximately 900,000 barrels per day and a weighted-average Nelson Complexity Index of 12.2. PBFX provides pipeline, terminaling and storage services; most of its revenue comes from long-term fee-based agreements with PBF affiliates. The Torrance refinery, acquired in July 2016, contributed a full year of results in 2017 versus six months in 2016.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $21.79 billion | $15.92 billion |
| Operating income | $730.2 million | $498.9 million |
| Net income | $483.4 million | $225.5 million |
| Net income attributable to PBF Energy stockholders | $415.5 million | $170.8 million |
| Diluted EPS | $3.73 | $1.74 |
| Cash from operating activities | $685.9 million | $651.9 million |
| Capital expenditures, including turnarounds | $727.0 million | $1.61 billion |
Revenue rose 36.8%, reflecting higher hydrocarbon prices, increased throughput and the full-year contribution from Torrance. Throughput averaged 807,400 barrels per day, up from 727,700. GAAP gross margin was $1.04 billion, or $3.53 per barrel, versus $727.5 million, or $2.73 per barrel. Non-GAAP gross refining margin was $2.68 billion, or $9.08 per barrel; excluding special items, it was $2.38 billion, or $8.08 per barrel, versus $1.62 billion, or $6.09 per barrel, in 2016.
Fourth-quarter revenue was $6.54 billion; operating income was $253.5 million, net income was $260.4 million, net income attributable to PBF Energy stockholders was $241.9 million, and diluted EPS was $2.14. The quarter included a $197.6 million pre-tax benefit from the lower-of-cost-or-market inventory adjustment.
At year-end, cash and cash equivalents were $573.0 million, working capital was $1.38 billion, and total debt was approximately $2.23 billion before deferred debt issuance costs. Total debt to capitalization was 43%. Reported liquidity was approximately $1.44 billion, including cash and availability under PBF Holding’s revolving loan; PBFX separately had $326.7 million of revolver availability. The company reported compliance with debt covenants.
Net income and margins included material non-cash and other special items. The 2017 lower-of-cost-or-market inventory adjustment added $295.5 million to operating income and $178.5 million to net income; the comparable 2016 benefit was $521.3 million pre-tax. The reduction in the Tax Receivable Agreement liability added $250.9 million pre-tax in 2017, primarily following the Tax Cuts and Jobs Act. Debt extinguishment costs were $25.5 million. The TCJA also produced a net tax expense of $20.2 million, comprising a $193.5 million expense related to Tax Receivable Agreement deferred tax assets and a $173.3 million benefit from reduced deferred tax liabilities.
Material changes versus 2016
- Refining margins improved across the regions, with stronger benchmark crack spreads and tighter product inventories in the second half of 2017; hurricane-related Gulf Coast disruption also contributed to market conditions.
- Results benefited from improved operating performance at Chalmette and Torrance. Torrance completed its first significant turnaround under PBF ownership early in the third quarter; throughput averaged 164,000 barrels per day in the final six months of 2017.
- RFS compliance costs declined: PBF reported $293.7 million of RIN costs for 2017 versus $347.5 million in 2016. Refinery operating expenses rose, partly due to a full year of Torrance operations, higher natural gas costs and maintenance timing. G&A increased 29% to $214.8 million, mainly reflecting higher employee and incentive compensation costs.
- Cash from operations increased modestly, but year-end cash fell by $173.3 million. Capital spending was lower than in 2016, which included the Torrance acquisition.
- PBF issued $725 million of 7.25% notes due 2025 and used proceeds primarily to tender and redeem its 2020 secured notes, recording $25.5 million of extinguishment costs. PBFX issued $175 million of additional 6.875% notes due 2023 and used proceeds partly to repay its revolver.
Outlook, commentary, risks and contingencies
PBF did not provide specific earnings or margin guidance. Management stated that it expected 2018 net capital expenditures, excluding PBFX, of $525 million to $550 million, including major turnarounds at Chalmette, Paulsboro, Torrance and Delaware City; PBFX expected $20 million to $25 million. PBF intended to continue quarterly Class A dividends of approximately $0.30 per share, subject to board discretion and available cash. A $0.30 dividend was declared in February 2018.
- Commodity and operating exposure: Refining profitability depends on volatile product-to-crude margins, crude differentials, energy costs and refinery reliability. Unplanned outages, severe weather, or pipeline, rail and marine disruptions could impair throughput and cash flow.
- Crude supply: PDVSA suspended deliveries after the parties could not agree on payment terms; PBF had not sourced crude under that arrangement since the third quarter of 2017 and was using alternative sources. PBF also relies on third-party crude and product transportation.
- Regulation and environmental obligations: RIN prices and renewable-fuel requirements remain uncertain; PBF cited potential tightening in the RIN market in 2018. California AB32/SB32 credit obligations affect Torrance, although the company said it recovers most related costs from customers. Recorded environmental liabilities included $136.5 million for Torrance remediation and $10.3 million for Paulsboro remediation.
- Legal and regulatory matters: Matters include the Delaware City crude-barge penalty appeal, the remanded challenge to its ethanol permit, Toledo flare-related allegations, and environmental notices and investigations concerning Torrance. The filing generally said specified penalties were not expected to be material, but some outcomes and amounts remain uncertain. Separate Chalmette litigation includes mass and individual claims for alleged exposure or property damage; the filing noted that an adverse outcome could be material.
- Debt, liquidity and structure: Debt covenants restrict certain distributions and transactions. PBF’s $362.1 million Tax Receivable Agreement liability is estimated and could change; accelerated payments following certain change-of-control events could be substantial. Dividends depend on distributions from subsidiaries and are not assured.
- Other risks: The filing highlights acquisition integration, labor negotiations with union agreements expiring in 2019, cyber and information-system disruptions, insurance limitations, and potential restrictions on modified hydrofluoric acid use at Torrance.
The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- How much of reported 2017 earnings and fourth-quarter performance reflects inventory valuation and Tax Receivable Agreement remeasurement benefits rather than recurring operations.
- Whether improved refinery margins, utilization and Torrance performance continued after year-end, and how the planned 2018 turnarounds affected throughput and costs.
- Actual 2018 RIN and California emissions-credit costs, and the extent to which compliance expenses can be passed through to customers.
- Updates on PDVSA crude supply, environmental remediation estimates and the material legal or permit matters described in the filing.
- Cash flow after the planned 2018 capital program, debt service and dividends; confirm revolving-credit availability, borrowing-base capacity and covenant headroom.
- Changes to the Tax Receivable Agreement liability and any effect of tax-law implementation on tax expense, cash payments or liquidity.