PBF Energy Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The filing presents consolidated results for PBF Energy and its operating subsidiary, PBF Holding, which owns and operates three U.S. refineries with approximately 540,000 barrels per day of combined capacity. PBF Energy’s economic interest in PBF LLC rose from approximately 24.4% to 41.0% following a June secondary offering by existing owners; PBF Energy received no proceeds.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $4.68 billion | $5.08 billion | $9.48 billion | $9.79 billion |
| Income from operations | $133.0 million | $579.5 million | $233.1 million | $415.4 million |
| Consolidated net income | $107.2 million | $555.7 million | $176.9 million | $353.2 million |
| Gross refining margin | $382.3 million; $9.04/barrel | $798.0 million; $18.30/barrel | $745.1 million; $9.08/barrel | $853.9 million; $10.40/barrel |
| Net income attributable to PBF Energy | $16.8 million; $0.61 diluted EPS | Not presented on a comparable basis | $28.2 million; $1.08 diluted EPS | Not presented on a comparable basis |
PBF Holding, which does not record PBF Energy’s corporate income tax expense, reported net income of $118.1 million for Q2 and $195.3 million for the first half of 2013. PBF Energy reported income tax expense of $11.0 million for Q2 and $18.4 million for the first half; its effective tax rate was 39.5%. Results across periods are affected by PBF Energy’s December 2012 IPO, tax structure and changing ownership interest.
- Cash flow: First-half operating cash flow was negative $40.2 million, versus positive $117.4 million in 2012. Working-capital changes used $278.8 million, mainly reflecting higher hydrocarbon sales, purchases and inventory-related balances. Investing cash outflow was $112.7 million, including $105.1 million of property, plant and equipment spending; financing cash outflow was $63.7 million.
- Liquidity: Cash was $69.2 million at June 30, down from $285.9 million at year-end 2012. Working capital was $807.1 million. Reported total liquidity, including cash and ABL availability, was approximately $652.8 million.
- Debt: Long-term debt was $800.0 million, including $667.0 million of senior secured notes, $95.0 million drawn on the revolver and $38.0 million of catalyst lease obligations. A separate Delaware Economic Development Authority loan balance was $16.0 million. Net interest expense was $21.7 million for Q2 and $43.3 million for the first half.
- Dividends: PBF Energy paid two $0.30-per-share dividends during the first half and declared another $0.30 dividend payable August 21, 2013. The board retains discretion over future dividends.
Material changes and operating drivers
- Q2 revenue fell 7.8% year over year; first-half revenue declined 3.2%. Q2 throughput averaged 464,600 barrels per day versus 479,100; first-half throughput was nearly flat at 453,100 versus 451,300.
- Q2 gross refining margin per barrel fell to $9.04 from $18.30. Management cited weaker East Coast crack spreads, narrower crude differentials, higher energy costs, higher RIN compliance costs, lower throughput and production of lower-value products. First-half refining margin also declined, reflecting reduced throughput, crude differential movements, RIN costs, energy costs and Toledo repair and restart expenses.
- Operating expenses rose 18.7% in Q2 and 13.9% in the first half, driven principally by higher energy and utilities costs. The first-half period also included approximately $7.5 million of Toledo fire repair and restart costs. First-half RIN costs were approximately $74.1 million, compared with $23.4 million in 2012.
- A January 31, 2013 fire at Toledo’s fluid catalytic cracking complex led to an 18-day disruption; the refinery resumed planned rates on February 18. Maintenance also limited Toledo runs in Q2.
- The June secondary offering increased PBF Energy’s ownership of PBF LLC to approximately 41%, but was a sale by existing owners and did not raise capital for the company.
Outlook, risks and unusual items
- Management said available operating cash flow and capital resources were expected to cover capital spending, working capital, debt service, dividends and tax receivable agreement obligations for the next 12 months, while noting cash generation depends on market and other factors beyond its control. The filing gives no earnings or margin guidance.
- Expected 2013 capital expenditures were approximately $250–$275 million. Toledo improvement projects were estimated at approximately $85 million through the end of 2014; a separate Delaware City heavy-crude rail expansion was expected to cost approximately $62 million and be completed in 2014.
- PBF Logistics LP had confidentially submitted a draft registration statement for a possible MLP IPO. The offering remained conditional on SEC effectiveness, market conditions and other factors; there was no assurance it would proceed.
- PBF Energy recorded a $291.0 million tax receivable agreement liability. Management estimated accelerated payments could have been approximately $646.0 million if triggered immediately under stated assumptions; actual payments may differ materially and future exchanges could add obligations.
- On July 1, product offtake agreements with MSCG for Delaware City and Paulsboro ended and inventory intermediation agreements with J. Aron began. The company said it did not expect a material effect on working capital, liquidity or commodity-price exposure.
- Environmental and permitting matters include two appeals challenging the Delaware City crude-barge permit and rail terminal. The first appeal was dismissed for lack of standing, with a final written decision pending and possible further appeal; the second had no hearing date. Separately, DNREC issued a July 24 order alleging air-quality and permit violations and seeking a $460,200 penalty plus $69,030 cost recovery; the company could request a hearing.
- Other material exposures include volatile refining margins and commodity prices, RIN price increases, natural-gas costs, environmental compliance, substantial debt and covenants, and potential limits on distributions. The company disclosed $186.2 million of outstanding letters of credit and expected $147.1 million of payments over the term of additional railcar leases.
Important facts for investors to verify
- Whether refining margins, crude differentials and RIN costs improved or further weakened after June 30, and whether Toledo operated reliably following the fire.
- Actual cash conversion and working-capital needs, revolver availability and compliance with debt covenants, especially given the decline in cash and negative first-half operating cash flow.
- Capital spending against the 2013 plan, progress and economics of the Delaware City rail and Toledo projects, and whether the proposed logistics MLP proceeds.
- Final outcomes of the Delaware permit appeals and DNREC order, and any resulting costs or operating restrictions.
- Tax receivable agreement payments, possible acceleration triggers, and the sustainability of the $0.30 quarterly dividend under changing operating conditions.