PBF Energy Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; filed May 5, 2016. PBF Energy is a holding company that consolidates PBF LLC and PBF Logistics LP (PBFX). It operates four U.S. refineries with approximately 730,000 barrels per day of combined capacity, plus logistics assets. Unless otherwise noted, amounts below are in U.S. dollars.
Financial results and key metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $2.800 billion | $2.995 billion |
| Operating income (loss) | $(5.4) million | $172.4 million |
| Net income (loss), consolidated | $(23.3) million | $103.1 million |
| Net income (loss) attributable to PBF Energy | $(29.4) million | $87.3 million |
| Diluted earnings (loss) per share | $(0.30) | $1.00 |
| Gross margin | $38.9 million | $216.3 million |
| Gross refining margin, excluding LCM adjustment | $295.1 million; $4.99 per throughput barrel | $444.9 million; $10.57 per throughput barrel |
| Adjusted EBITDA, company-defined non-GAAP | $(5.2) million | $201.9 million |
| Net cash from (used in) operating activities | $(20.6) million | $132.5 million |
Revenue declined 6.5%. Refinery throughput averaged 650,100 barrels per day versus 467,800; the increase chiefly reflects the Chalmette refinery, acquired in November 2015, which was not included in Q1 2015 results. The filing reports total production of 655,900 barrels per day versus 465,400.
Q1 2016 results included a noncash $59.1 million benefit from a reduction in the lower-of-cost-or-market (LCM) inventory reserve, compared with a $21.2 million benefit in Q1 2015. Excluding that item, gross refining margin was $4.99 per throughput barrel versus $10.57. Management cited weaker crack spreads and less favorable crude differentials as key pressures.
Balance sheet, cash flow and liquidity
- At March 31, 2016, cash and cash equivalents were $740.3 million; working capital was $1.398 billion. Total assets were $6.184 billion and total equity was $2.034 billion.
- Long-term debt on the balance sheet was $1.842 billion, plus a $4.0 million Delaware Economic Development Authority loan. The debt fair-value note lists $1.881 billion of aggregate carrying value including catalyst lease obligations. The company also reported $661.4 million of tax receivable agreement liabilities.
- Management reported total liquidity of approximately $1.207 billion, defined as cash plus availability under PBF Holding’s revolving loan. PBFX had $298.4 million of revolving-credit availability; the Rail Facility had $82.5 million available.
- Cash declined by $204.0 million during the quarter. Investing activities used $145.9 million, including $82.7 million for turnaround costs and $43.2 million for property, plant and equipment. Financing activities used $37.5 million, principally dividends and distributions.
- Interest expense, net, rose to $37.5 million from $22.2 million, primarily reflecting the PBFX notes issued in 2015 and PBF’s 2023 senior secured notes.
- The company paid a $0.30-per-share dividend in the quarter and declared another $0.30 dividend payable May 31, 2016.
Material changes and management commentary
- Delaware City experienced about two weeks of unplanned downtime after a weather-related power loss in January. PBF advanced its planned coker and related-unit turnaround, which continued through the remainder of the quarter. Restart and repair activities added approximately $3.6 million of operating costs.
- Chalmette contributed to Q1 2016 results and added operating expenses of approximately $77 million for the quarter. The acquisition’s final purchase-price allocation was completed in March 2016.
- Management attributed weaker results, excluding the LCM benefit, to reduced crack spreads, unfavorable crude differentials and lower East Coast throughput; higher Mid-Continent throughput and Chalmette’s contribution partly offset these pressures.
- Management stated that cash flows and available capital resources should be sufficient for the next 12 months, while noting that operating cash generation depends on petroleum markets and other factors beyond its control. PBF reported compliance with debt covenants.
Outlook, transactions, risks and contingencies
- PBF expected 2016 net capital expenditures of approximately $475–$500 million for facility improvements, maintenance and turnarounds, excluding potential spending related to Torrance and the PBFX terminal acquisition.
- The pending Torrance refinery acquisition was expected to close in Q2 2016, subject to customary conditions and restoration of the refinery to required operating condition following the February 2015 incident. The stated purchase price was $537.5 million plus working capital and customary adjustments; expected funding included cash, debt and proceeds from prior offerings.
- After quarter-end, PBFX completed its approximately $100 million purchase of four Philadelphia-area refined-product terminals on April 29. PBFX also completed a unit offering in April, after which PBF LLC’s limited-partner interest fell to 49.5%.
- On April 11, 2016, the EPA notified PBF Holding that it may have used potentially invalid renewable identification numbers (RINs), requiring review and possible replacement. The company was assessing validity and said it did not then expect material effects; the eventual agency action and penalties were uncertain.
- Environmental regulation and remediation, RIN prices and compliance, volatile crude/product prices and crack spreads, supply and logistics disruptions, counterparty risks, and substantial indebtedness are among the disclosed risks. PBF reported a $12.0 million environmental remediation liability. It also disclosed pending state environmental matters and stated that any penalties were not expected to be material.
- The tax receivable agreement liability was $661.4 million. The company estimated accelerated payments of approximately $616.7 million if triggered immediately under specified assumptions; actual payments could differ materially.
- Disclosure controls were judged effective at the reasonable-assurance level. Management’s evaluation excluded Chalmette’s internal controls, which were being integrated and were expected to be completed during 2016.
Important facts for investors to verify
- How much of operating performance and cash generation is sustainable after excluding the noncash LCM inventory benefit, and how refinery margins evolve from Q1 levels.
- Whether the Torrance acquisition meets its operating-condition requirements, closes on expected terms and can be financed without materially weakening liquidity or leverage.
- The outcome and potential cost of the EPA’s RIN inquiry, including whether any credits must be replaced or penalties assessed.
- Actual turnaround and capital spending versus the $475–$500 million plan, and the effect of refinery downtime on throughput and margins.
- Liquidity and covenant headroom under weaker refining conditions, including cash needs for debt service, dividends, tax receivable agreement payments and acquisitions.
- Completion of Chalmette control integration and any material updates to environmental or other contingencies.