PBF Energy Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report; fourth-quarter figures below are unaudited. PBF Energy is a holding company that consolidates PBF LLC, its refining operations and PBF Logistics LP (PBFX).
Business context and reporting period
PBF operated five U.S. refineries in 2016, with combined nameplate throughput capacity of approximately 900,000 barrels per day. Actual crude and feedstock throughput averaged 727,700 barrels per day. The company reports Refining and Logistics segments.
The July 1, 2016 Torrance acquisition added a 155,000-barrel-per-day refinery and related logistics assets in California. As a result, 2016 included six months of Torrance operations, compared with no Torrance operations in 2015. Chalmette contributed a full year in 2016 versus two months in 2015, limiting year-over-year comparability.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $15.92 billion | $13.12 billion |
| Operating income | $498.9 million | $360.1 million |
| Net income | $225.5 million | $195.5 million |
| Net income attributable to PBF Energy stockholders | $170.8 million; $1.74 diluted EPS | $146.4 million; $1.65 diluted EPS |
| Net cash from operating activities | $651.9 million | $560.4 million |
| Year-end cash and equivalents | $746.3 million | $944.3 million |
| Gross debt, excluding deferred issuance costs | $2.18 billion | $1.88 billion |
Revenue increased 21.3%, although revenue per barrel fell 14.2% to $59.77, primarily reflecting lower commodity prices and increased throughput and acquired capacity. The reported annual net income includes a $521.3 million non-cash lower-of-cost-or-market (LCM) inventory benefit, compared with a $427.2 million charge in 2015. Excluding special items, gross refining margin fell to $6.09 per barrel from $10.29; management cited weaker crack spreads, less favorable crude differentials and higher renewable-fuel compliance costs.
Refinery operating expense excluding depreciation was $5.22 per barrel, up from $4.72, with acquired operations contributing to the increase. Net interest expense rose to $150.0 million from $106.2 million, largely due to debt issued in 2015 and borrowing to help fund Torrance. RIN compliance costs were $347.5 million, versus $171.6 million in 2015.
Fourth quarter: Revenue was $4.75 billion, operating income $139.8 million, net income $71.8 million, and net income attributable to PBF Energy stockholders $54.6 million, or $0.54 per diluted share. The quarter included a $200.5 million pre-tax LCM inventory benefit. The filing does not provide clear quarterly cash-flow or refining-margin figures.
Cash flow and investment: Operating cash flow was $651.9 million. Investing activities used $1.39 billion, including the Torrance acquisition, capital expenditures, turnarounds and the PBFX terminal purchase. Financing activities provided $544.0 million; cash declined by $198.0 million during the year. Working capital was $1.35 billion, down from $1.53 billion.
Debt and liquidity: Year-end total liquidity was approximately $1.28 billion, including cash and estimated availability under PBF Holding’s revolving facility; PBFX also had $167.2 million of unused revolving capacity. Debt to capitalization was 46%. PBF reported compliance with debt covenants at year-end. The company paid $1.20 per share in dividends during 2016 and announced another $0.30-per-share dividend in February 2017.
Material changes, outlook and risks
- Acquisitions and funding: Torrance was acquired for approximately $971.9 million including working capital. The acquisition broadened geographic exposure but increased operating costs, debt and environmental obligations. PBF issued 10 million Class A shares in December 2016 for net proceeds of $274.3 million.
- Capital spending: Management expected 2017 net capital expenditures of $575–600 million, excluding PBFX; PBFX expected $75–100 million, primarily for growth. Planned work included refinery turnarounds and Tier 3 gasoline compliance projects. No earnings or margin guidance is provided.
- Projects and commercial arrangements: Chalmette projects to restart certain units and construct a tank were expected to be completed in the third quarter of 2017. The Delaware City and Paulsboro J. Aron inventory intermediation agreements were scheduled to expire July 1, 2017 and had not been renewed; termination could require PBF to repurchase inventory and fund it directly. The inventory carried a LIFO value of $352.5 million at year-end.
- Environmental and regulatory exposure: PBF recorded $142.5 million of Torrance environmental remediation liabilities. RFS/RIN costs may rise under 2017 requirements, and California emissions programs could add costs if they cannot be recovered from customers. Multiple refinery notices and regulatory matters were disclosed. The company described most expected penalties as immaterial, but the Chalmette class-action litigation concerning a 2010 release could have a material adverse effect depending on the claims and class size.
- Market and operating risks: Earnings and liquidity depend on volatile refining margins, crude differentials, product prices and energy costs. Additional risks include refinery outages, dependence on third-party crude and product pipelines and rail, competition, labor, debt and working-capital needs. Management’s outlook also depends on successful integration of Torrance.
- Tax receivable agreement: The recorded liability was $611.4 million. Under the agreement, PBF Energy generally pays former and current unit holders 85% of specified realized tax benefits; payments can be accelerated in certain circumstances.
- Controls: Management and the auditor concluded internal control over financial reporting was effective. Their assessments excluded Torrance, representing 17% of assets and 12% of revenue, while its controls were being integrated; completion was expected in 2017.
Important facts for investors to verify
- How much 2016 earnings and Q4 performance depended on the non-cash LCM inventory benefit, and how results look excluding that item.
- Whether underlying refining margins recover from $6.09 per barrel excluding special items, given narrower crude differentials and weaker benchmark crack spreads.
- Progress on renewing or replacing the J. Aron agreements before July 1, 2017, and the resulting working-capital requirements.
- Actual 2017 capital and turnaround spending, refinery reliability, and delivery of the planned Chalmette projects.
- RIN and California emissions-credit costs, recoverability of compliance costs, and outcomes of refinery environmental matters and the Chalmette litigation.
- Debt repayment capacity and liquidity after acquisition spending, dividends, tax receivable agreement payments and planned capital expenditures.
- Completion of Torrance integration and controls, and whether the final acquisition valuation or environmental estimates change.