PBF Energy Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. PBF Energy consolidates PBF LLC and PBFX, its publicly traded logistics partnership. At quarter-end, PBF Energy held 90.4% of PBF LLC’s economic interests and PBF LLC held 51.1% of PBFX. Logistics revenue is primarily from agreements with PBF affiliates and is eliminated in consolidation.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $5,260.0 million | $4,858.9 million | $15,308.2 million | $14,335.0 million |
| Operating income (loss) | $284.1 million | $(55.6) million | $632.2 million | $177.5 million |
| Net income (loss) | $170.0 million | $(64.9) million | $399.1 million | $112.0 million |
| Net income (loss) attributable to PBF Energy | $141.0 million | $(19.8) million | $239.4 million | $8.4 million |
| Diluted EPS | $1.60 | $(0.50) | $3.32 | $0.27 |
| Gross refining margin, non-GAAP | $574.4 million; $12.60/barrel | $195.2 million; $4.75/barrel | $1,531.6 million; $12.04/barrel | $940.2 million; $7.65/barrel |
Q3 throughput averaged 495,500 barrels per day versus 446,000 a year earlier. Management attributed the improvement principally to stronger crack spreads, favorable crude differentials, higher throughput, and increased rail-delivered crude shipments. For the nine-month period, higher volumes and favorable crude differentials and product margins were partly offset by weaker overall crack spreads and higher energy costs.
Cash flow and investment: Nine-month operating cash flow was $353.0 million, compared with $142.6 million in 2013. Working-capital changes used $244.2 million, primarily reflecting inventory purchases, accrued expenses, and receivable timing. Investing cash flow was a $521.3 million use, including $258.9 million of property, plant and equipment spending, $58.4 million of turnaround spending, and net purchases of marketable securities. Financing cash flow provided $568.8 million, including PBFX offering proceeds and borrowings. Cash at September 30 was $477.4 million.
Margins and costs: GAAP gross margin was $322.1 million in Q3 2014, versus a $21.6 million loss in Q3 2013; nine-month gross margin was $746.6 million versus $266.9 million. Refinery operating expense per barrel was $4.41 in Q3 versus $4.69, but $5.34 for the nine months versus $4.89. Nine-month general and administrative expense rose to $104.0 million from $80.0 million.
Balance sheet, debt and liquidity
At September 30, 2014, working capital was $1,181.1 million, compared with $556.0 million at December 31, 2013. Consolidated current assets were $3,005.6 million and current liabilities $1,824.5 million. Debt and catalyst lease obligations totaled $1,148.5 million, up from $735.6 million at year-end; this included $668.3 million of senior secured notes, $264.9 million of PBFX term borrowing, $140.1 million of PBFX revolver borrowing, $35.9 million under the Rail Facility, and $39.3 million of catalyst lease obligations. The Delaware Economic Development Authority loan was another $8.0 million.
PBF Holding’s revolving facility was expanded from $1.61 billion to $2.50 billion, with maturity extended to August 2019; it had no borrowings outstanding at quarter-end. Reported PBF Energy liquidity was approximately $1,138.5 million, including cash and availability under that facility. PBFX had $134.9 million of unused revolver capacity; the Rail Facility had $214.1 million of borrowing capacity. The $264.9 million of marketable securities primarily collateralized PBFX’s term loan and should not be treated as unrestricted cash.
Material developments and unusual items
- In May 2014, PBFX completed its IPO, raising approximately $341.0 million before offering expenses. On September 30, PBFX acquired the Delaware City West Rack from PBF LLC for $150.0 million: $135.0 million cash and $15.0 million in PBFX units. PBFX funded the cash portion partly with revolver borrowings.
- PBF Energy’s three 2014 secondary offerings increased its PBF LLC economic interest from 40.9% at December 31, 2013 to 90.4% at September 30, 2014. PBF Energy received no proceeds from those secondary offerings. This ownership change affects comparability of attributable earnings and EPS.
- A $28.5 million impairment was recorded in Q3 for an abandoned Delaware City hydrocracker project. The company chose a lower-investment alternative to meet low-sulfur heating-oil requirements; management said no further cash expenditures were required for the abandoned project.
- Non-designated commodity derivatives generated a $70.6 million gain in Q3 and $101.9 million for the nine months, recognized in cost of sales. Commodity-price volatility and derivative accounting therefore affected reported results.
- PBF Energy repurchased approximately 1.35 million Class A shares for $32.6 million through September 30 under a $200 million authorization. On October 29, the board increased the authorization by $100 million; the company reported approximately $200 million of authorization remaining after that increase and prior purchases.
Outlook, risks and contingencies
Management expected approximately $325 million of net capital expenditures in 2014, including a planned approximately 40-day Toledo refinery turnaround in Q4. It said cash flows and available resources should be sufficient for the next 12 months, while noting that operating cash generation depends on volatile petroleum markets and other factors. No formal earnings guidance was provided. PBF Energy stated an intent to continue a quarterly $0.30-per-share dividend, but future dividends remain at the board’s discretion. A $0.30 dividend was declared after quarter-end.
The tax receivable agreement liability was $690.3 million, reflecting estimated undiscounted payments; the filing estimated annual payments over the next five years ranging from approximately $12.5 million to $57.6 million, with possible acceleration under specified circumstances. Management estimated accelerated payments of $652.3 million if triggered immediately, subject to stated assumptions.
Key risks include refining-margin and commodity-price volatility; RIN compliance costs; substantial indebtedness and restrictive covenants; counterparty and performance risk under inventory intermediation arrangements; dependence on PBFX logistics and minimum-volume commitments; rail and other crude-supply disruptions; and the possibility that subsidiaries cannot distribute sufficient cash to PBF Energy. The company disclosed appeals challenging Delaware City crude-barge and rail-terminal permits; adverse outcomes could materially affect results. It also disputed a Delaware environmental penalty assessment seeking $460,200 in penalties plus $69,030 in investigation costs. Recorded environmental remediation liabilities were $10.8 million.
Most important facts to verify
- Whether the substantial Q3 margin and earnings improvement is sustainable as crack spreads, crude differentials, throughput, and derivative valuations change.
- Debt, covenant compliance, and usable liquidity, including the restricted or collateralized nature of PBFX’s marketable securities.
- The scale and timing of tax receivable agreement payments and the cash available to PBF Energy from subsidiaries.
- Progress and costs of the 2014 capital program and Toledo turnaround, alongside the abandoned hydrocracker impairment.
- Outcomes of the Delaware permit appeals and DNREC penalty dispute, and PBFX’s ability to maintain logistics service and distributions.