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PBF > SEC Filings for PBF > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for PBF ENERGY INC.


9-May-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited financial statements of PBF Energy Inc. and PBF Holding Company LLC included in their Annual Reports on Form 10-K for the year ended December 31, 2012 and the unaudited financial statements and related notes included in this report. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. Please see "Cautionary Note Regarding Forward-Looking Statements."

Explanatory Note
PBF Energy is the sole managing member of, and owner of an equity interest representing approximately 24.4% of the outstanding economic interests, in PBF
LLC. PBF Holding is the parent company for PBF LLC's operating subsidiaries. PBF Holding is a wholly-owned subsidiary of PBF LLC.

PBF Holding is an indirect subsidiary of PBF Energy, representing 100% of PBF Energy's consolidated revenue for the three months ended March 31, 2013 and constituting 100% of PBF Energy's revenue generating assets as of March 31, 2013.

Unless the context indicates otherwise, the terms "we," "us," and "our" refer to both PBF Energy and PBF Holding and subsidiaries, as the financial information is materially consistent. Discussions or areas of this report that either apply only to PBF Energy or PBF Holding are clearly noted in such sections.

Overview
We are one of the largest independent petroleum refiners and suppliers of unbranded transportation fuels, heating oil, petrochemical feedstocks, lubricants and other petroleum products in the United States. We sell our products throughout the Northeast and Midwest of the United States, as well as in other regions of the United States and Canada, and are able to ship products to other international destinations. We were formed in 2008 to pursue acquisitions of crude oil refineries and downstream assets in North America. We currently own and operate three domestic oil refineries and related assets, which we acquired in 2010 and 2011. Our refineries have a combined processing capacity, known as throughput, of approximately 540,000 bpd, and a weighted-average Nelson Complexity Index of 11.3.

Our three refineries are located in Toledo, Ohio, Delaware City, Delaware and Paulsboro, New Jersey. Our Mid-Continent refinery at Toledo processes light, sweet crude, has a throughput capacity of 170,000 bpd and a Nelson Complexity Index of 9.2. The majority of Toledo's WTI-based crude is delivered via pipelines that originate in both Canada and the United States. Since our acquisition of Toledo in 2011, we have added additional truck and rail crude unloading capabilities that provide feedstock sourcing flexibility for the refinery and enables Toledo to run a more cost-advantaged crude slate. Our East Coast refineries at Delaware City and Paulsboro have a combined refining capacity of 370,000 bpd and Nelson Complexity Indices of 11.3 and 13.2, respectively. These high-conversion refineries process primarily medium and heavy, sour crudes and have historically received the bulk of their feedstock via ships and barges on the Delaware River. In May 2012, we commenced crude shipments via rail into a newly developed crude rail unloading facility at our Delaware City refinery. During 2012, we expanded and upgraded the existing on-site railroad infrastructure, including the expansion of the crude rail unloading facilities that was completed in February 2013 and is capable of discharging approximately 110,000 bpd. In addition, our board of directors approved a project, in February 2013 to add an additional 40,000 bpd of heavy crude rail unloading capability at the refinery. Completion of the project will increase our discharge capacity of heavy crude oil from 40,000 bpd to 80,000 bpd and bring the total rail crude unloading capability up to 150,000 bpd by the end of 2013.

Currently, crude delivered to this facility is consumed at our Delaware City refinery. In the future we plan to transport some of the crude delivered by rail from Delaware City via barge to our Paulsboro refinery. The Delaware City rail unloading facility allows our East Coast refineries to source WTI-based crudes from Western Canada and the Mid-Continent, which we believe currently provides significant cost advantages versus traditional Brent-based international crudes.


Results of Operations

The following tables reflect our financial and operating highlights for the
three months ended March 31, 2013 and 2012 (amounts in thousands, except per
share data) except income tax expense, net income attributable to noncontrolling
interest and earnings per share which apply only to the financial results of PBF
Energy.

                                                            Three Months Ended March 31,
                                                               2013               2012
Revenue                                                  $    4,797,847       $ 4,716,106
Cost of sales, excluding depreciation                         4,435,101         4,660,193
Gross refining margin (1)                                       362,746            55,913
Operating expenses, excluding depreciation                      206,015           188,143
General and administrative expenses                              30,094            13,814
Gain on sale of assets                                                -            (2,503 )
Depreciation and amortization expense                            26,532            20,542
                                                                262,641           219,996
Income (loss) from operations                                   100,105          (164,083 )
Change in fair value of catalyst leases                          (1,339 )          (6,348 )
Change in fair value of contingent consideration                      -              (692 )
Interest expense, net                                           (21,611 )         (31,408 )
Income (loss) before income taxes                                77,155          (202,531 )
Income tax expense                                               (7,444 )               -
Net income (loss)                                                69,711       $  (202,531 )
Less: net income attributable to noncontrolling
interest                                                         58,305
Net income attributable to PBF Energy Inc.               $       11,406

Gross margin                                             $      133,022       $  (151,221 )

Net income available to Class A common stock per share:
Basic                                                    $         0.48
Diluted                                                  $         0.48


(1) See Non-GAAP Financial Measures below.


Operating Highlights
                                                             Three Months Ended March 31,
                                                               2013                 2012
Key Operating Information
Production (barrels per day ("bpd") in thousands)                440.3                 419.0
Crude oil and feedstocks throughput (bpd in thousands)           441.6                 423.5
Total crude oil and feedstocks throughput (millions of
barrels)                                                          39.7                  38.5
Gross refining margin per barrel of throughput (1)       $        9.13         $        1.45
Operating expense, excluding depreciation, per barrel of
throughput                                               $        5.19         $        4.88

Crude and feedstocks (% of total throughput) (2):
Heavy crude                                                         15 %                  20 %
Medium crude                                                        47 %                  49 %
Light crude                                                         30 %                  24 %
Other feedstocks and blends                                          8 %                   7 %

Yield (% of total throughput):
Gasoline and gasoline blendstocks                                   46 %                  47 %
Distillates and distillate blendstocks                              38 %                  37 %
Lubes                                                                2 %                   2 %
Chemicals                                                            3 %                   2 %
Other                                                               11 %                  12 %


(1) See Non-GAAP Financial Measures below.

(2) We define heavy crude oil as crude oil with an American Petroleum Institute (API) gravity less than 24 degrees. We define medium crude oil as crude oil with an API gravity between 24 and 35 degrees. We define light crude oil as crude oil with an API gravity higher than 35 degrees.


The table below summarizes certain market indicators relating to our operating results as reported by Platts.

                                            Three Months Ended March 31,
                                              2013                2012
(dollars per barrel, except as noted)
Dated Brent Crude                       $       112.57       $       118.60
West Texas Intermediate (WTI) crude oil $        94.29       $       103.10
Crack Spreads
Dated Brent (NYH) 2-1-1                 $        12.79       $        10.62
WTI (Chicago) 4-3-1                     $        26.09       $        19.55
Crude Oil Differentials
Dated Brent (foreign) less WTI          $        18.28       $        15.50
Dated Brent less Maya (heavy, sour)     $         9.86       $         9.57
Dated Brent less WTS (sour)             $        24.61       $        19.17
Dated Brent less ASCI (sour)            $         3.66       $         3.29
WTI less WCS (heavy, sour)              $        26.62       $        26.53
WTI less Bakken (light, sweet)          $         1.90       $        12.48
WTI less Syncrude (light, sweet)        $        (3.33 )     $         7.38
Natural gas (dollars per MMBTU)         $         3.48       $         2.50

Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012
Overview- Net income for PBF Energy was $69.7 million for the three months ended March 31, 2013 compared to a loss of $202.5 million for the three months ended March 31, 2012. Net income attributable to PBF Energy was $11.4 million, or $0.48 per share, for the three months ended March 31, 2013. The net income attributable to PBF Energy represents PBF Energy's approximately 24.4% equity interest in PBF LLC's pre-tax income, less applicable income taxes, for the period. Net income for PBF Holding, which does not include income tax expenses, was $77.2 million for the three months ended March 31, 2013 compared to a loss of $202.5 million for the three months ended March 31, 2012.

During the three months ended March 31, 2013 and 2012, all three of our refineries were operating. However, on January 31, 2013 there was a brief fire within the fluid catalytic cracking complex at the Toledo refinery that resulted in that unit being temporarily shutdown. The refinery resumed running at planned rates on February 18, 2013. In the first quarter of 2012, the Toledo refinery was impacted by a thirty day turnaround of its hydrocracker, reformer and UDEX units which commenced on March 9, 2012. Our results for the three months ended March 31, 2013 were favorably impacted by improved crack spreads partially offset by higher operating expenses due to increased energy costs and repair and restart costs related to the Toledo fire, as well as higher costs of compliance with the Renewable Fuels Standard.

Revenues- Revenues totaled $4.8 billion for the three months ended March 31, 2013 compared to $4.7 billion for the three months ended March 31, 2012, an increase of $0.1 billion, or 1.7%. For the three months ended March 31, 2013, the total throughput rates in the East Coast and Mid-Continent refineries averaged approximately 318,900 bpd and 122,700 bpd, respectively. For the three months ended March 31, 2012, the total throughput rates at our East Coast and Mid-Continent refineries averaged approximately 295,500 bpd, and 128,000 bpd, respectively. The increase in throughput rates in our East Coast refineries in 2013 compared to 2012 was primarily driven by refinery optimization efforts. The decrease in throughput rates in our Mid-Continent refinery in 2013 compared to 2012 was due to the refinery's 18 day unplanned down time. For the three months ended March 31, 2013, the total barrels sold at our East Coast and Mid-Continent refineries averaged approximately 311,600 bpd and 147,800 bpd, respectively. For the three months ended March 31, 2012, the total barrels sold at our East Coast and Mid-Continent refineries averaged approximately 291,900 bpd and 147,200 bpd, respectively. Total barrels sold at our Mid-Continent refinery are typically higher than throughput rates, reflecting sales and purchases of refined products outside the refinery.

Gross Margin- Gross refining margin totaled $362.7 million, or $9.13 per barrel of throughput, for the three months ended March 31, 2013 compared to $55.9 million, or $1.45 per barrel of throughput during the three months ended March 31, 2012, an increase of $306.8 million. Gross margin, including refinery operating expenses and depreciation, totaled $133.0


million, or $3.34 per barrel of throughput, for the three months ended March 31, 2013 compared to $(151.2) million, or $(3.92) per barrel of throughput, for the three months ended March 31, 2012, an increase of $284.2 million. The increase in gross refining margin was primarily due to higher crack spreads and the result of more favorable crude differentials, partially offset by reduced throughput rates during the unplanned 18 day outage at our Toledo refinery, which significantly reduced our gasoline production during that period, higher costs of compliance with the Renewable Fuels Standard and the production of low-value products such as sulfur, petroleum coke and fuel oils at our East Coast refineries that price at a substantial discount to light products. The increase in gross margin was also attributable to these factors, but was further offset by an increase in operating expenses due to increased energy costs and repair and restart costs related to the Toledo fire.

Average industry refining margins in the U.S. Mid-Continent were generally stronger during the three months ended March 31, 2013 as compared to the same period in 2012. The WTI (Chicago) 4-3-1 industry crack spread was approximately $26.09 per barrel or 33.5% higher in the three months ended March 31, 2013 as compared to the same period in 2012. Additionally, the increase in available supply produced in North America decreased the price of WTI versus Dated Brent and other crudes.

The Dated Brent (NYH) 2-1-1 industry crack spread was approximately $12.79 per barrel, or 20.4%, higher in the three months ended March 31, 2013 as compared to the same period in 2012. Moreover, the WTI/Dated Brent differential was $2.78 higher in the three months ended March 31, 2013 as compared to the same period in 2012 and the Dated Brent/Maya differential was approximately $0.29 per barrel higher in the three months ended March 31, 2013 as compared to the same period in 2012. An increase in the WTI/Dated Brent crude differential favorably impacts our East Coast refineries which have increased shipments of WTI based crudes from the Bakken and Western Canada. An improvement in the Dated Brent/Maya crude differential, our proxy for the light/heavy crude differential, has a positive impact on our East Coast refineries, which process a large slate of medium and heavy, sour crude oil that is priced at a discount to light, sweet crude oil.

Operating Expenses-Operating expenses totaled $206.0 million, or $5.19 per barrel of throughput, for the three months ended March 31, 2013 compared to $188.1 million, or $4.88 per barrel of throughput, for the three months ended March 31, 2012, an increase of $17.9 million, or 9.5%. The increase in operating expenses per barrel of throughput is mainly attributable to an increase of approximately $12.7 million in energy and utilities costs, primarily driven by higher natural gas prices, as well as approximately $7.5 million in repair and restart costs related to the Toledo fire. Our operating expenses principally consist of salaries and employee benefits, maintenance, energy and catalyst and chemicals costs at our refineries.

General and Administrative Expenses-General and administrative expenses totaled $30.1 million for the three months ended March 31, 2013 compared to $13.8 million for the three months ended March 31, 2012, an increase of $16.3 million or 117.9%. The increase in general and administrative expenses primarily relates to higher employee compensation expense of approximately $12.7 million, mainly related to headcount increases in 2012 and 2013. Our general and administrative expenses are comprised of the personnel, facilities and other infrastructure costs necessary to support our refineries.

Gain on Sale of Assets-Gain on sale of assets for the three months ended March 31, 2012 was $2.5 million related to sales of certain equipment at Paulsboro and Delaware City.

Depreciation and Amortization Expense-Depreciation and amortization expense totaled $26.5 million for the three months ended March 31, 2013 compared to $20.5 million for the three months ended March 31, 2012, an increase of $6.0 million. The increase was principally due to capital projects related to turnarounds at Toledo completed in the second quarter of 2012 as well as new system implementations at the corporate level during 2012.

Change in Fair Value of Catalyst Leases-Change in the fair value of catalyst leases represented a loss of $1.3 million for the three months ended March 31, 2013 compared to a loss of $6.3 million for the three months ended March 31, 2012. This gain or loss relates to the change in value of the precious metals underlying the sale and leaseback of our refineries' precious metals catalyst, which we are obligated to repurchase at fair market value on the lease termination dates.

Change in Fair Value of Contingent Consideration-In 2013, there was no change in the fair value of contingent consideration related to the Toledo refinery acquisition and the liability was settled in April 2013.

Interest Expense, net-Interest expense totaled $21.6 million for the three months ended March 31, 2013 compared to $31.4 million for the three months ended March 31, 2012, a decrease of $9.8 million. Interest expense includes interest on long-term debt, costs related to the sale and leaseback of our precious metals catalyst, interest expense incurred in connection with our crude and feedstock supply agreements with Statoil and MSCG, letter of credit fees associated with the purchase of certain crude oils, and the amortization of deferred financing fees. The decrease in interest expense primarily


relates to lower interest costs associated with our ABL Revolving Credit Facility and Statoil agreement and the $4.4 million write-off of deferred financing costs in the first quarter of 2012 on debt that was repaid from the proceeds of our 2012 senior secured notes offering.

Income Tax Expense-As PBF LLC is a limited liability company treated as a "flow through" entity for income tax purposes, the members of PBF LLC are required to include their proportionate share of PBF LLC's taxable income or loss on their respective tax returns. Accordingly, PBF Energy's consolidated financial statements do not include a benefit or provision for income taxes for periods prior to the closing of our initial public offering on December 18, 2012. However, we generally made distributions to our members, per the terms of the PBF LLC limited liability agreement, related to such taxes. Effective with the completion of the initial public offering of PBF Energy, we recognize an income tax expense or benefit in our consolidated financial statements based on PBF Energy's allocable share of PBF LLC's pre-tax income (loss), which was approximately 24.4% for the three months ended March 31, 2013. We do not recognize any income tax expense or benefit related to the noncontrolling interest of the other members in PBF LLC. PBF Energy's effective tax rate for the three months ended March 31, 2013 was 39.5%

PBF Holding, as a limited liability company, did not recognize a benefit or provision for income tax expense for the three months ended March 31, 2013 and 2012.

Noncontrolling Interest-As a result of our initial public offering and the related reorganization transactions, PBF Energy became the sole managing member of, and has a controlling interest in, PBF LLC. As the sole managing member of PBF LLC, PBF Energy operates and controls all of the business and affairs of PBF LLC and its subsidiaries. PBF Energy consolidates the financial results of PBF LLC and its subsidiaries, and records a noncontrolling interest for the economic interest in PBF LLC held by members other than PBF Energy. Noncontrolling interest on the consolidated statement of operations represents the portion of earnings or loss attributable to the economic interest in PBF LLC held by members other than PBF Energy, which was approximately 75.6% for the three months ended March 31, 2013. Noncontrolling interest on the balance sheet represents the portion of net assets of PBF Energy attributable to the members of PBF LLC other than PBF Energy, based on the relative equity interest held by such members. The noncontrolling interest ownership percentage as of March 31, 2013 and December 31, 2012 was approximately 75.6%. The carrying amount of the noncontrolling interest on our consolidated balance sheet attributable to the noncontrolling interest is not equal to 75.6% due to the effect of income taxes and related agreements that pertain solely to PBF Energy.

Non-GAAP Financial Measures
Management uses certain financial measures to evaluate our operating performance that are calculated and presented on the basis of methodologies other than in accordance with U.S. GAAP. These measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with U.S. GAAP, and our calculations thereof may not be comparable to similarly entitled measures reported by other companies.

Adjusted Pro Forma Net Income (Loss)
PBF Energy utilizes results presented on an Adjusted Pro Forma basis that reflects an assumed exchange of all PBF LLC Series A Units for shares of Class A common stock of PBF Energy. We believe that these Adjusted Pro Forma measures, when presented in conjunction with comparable U.S. GAAP measures, are useful to investors to compare PBF Energy results across different periods and to facilitate an understanding of our operating results. The differences between Adjusted Pro Forma and U.S. GAAP results are as follows:
1. Assumed Exchange of all PBF LLC Series A Units for shares of PBF Energy Class A common stock. As a result of the assumed exchange of all PBF LLC Series A Units, the noncontrolling interest related to these units is converted to controlling interest. Management believes that it is useful to provide the per-share effect associated with the assumed exchange of all PBF LLC Series A Units.

2. Income Taxes. Prior to the initial public offering we were organized as a limited liability company treated as a "flow-through" entity for income tax purposes, and even after our IPO, not all of our earnings are subject to corporate-level income taxes. Adjustments have been made to the Adjusted Pro Forma tax provisions and earnings to assume that we had adopted our post-IPO corporate tax structure for all periods presented and are taxed as a C corporation in the U.S. at the prevailing corporate rates. These assumptions are consistent with the assumption in clause 1 above that all PBF LLC Series A Units are exchanged for shares of PBF Energy Class A common stock, as the assumed exchange would change the amount of our earnings that is subject to corporate income tax.


The following table reconciles our Adjusted Pro Forma results with our results presented in accordance with U.S. GAAP for the three months ended March 31, 2013 and 2012:

                                                             Three Months Ended March 31,
                                                              2013                2012
Net income attributable to PBF Energy Inc.               $     11,406       $             -
Add: Net income (loss) attributable to the
noncontrolling interest(1)                                     58,305              (202,531 )
Less: Income tax (expense) benefit(2)                         (23,025 )              79,979
Adjusted pro forma net income (loss)                     $     46,686       $      (122,552 )
Pro forma shares outstanding-diluted(3)                    97,415,576            97,415,576
Adjusted pro forma net income (loss) per fully
exchanged, fully diluted shares outstanding              $       0.48       $         (1.26 )


(1) Represents the elimination of the noncontrolling interest associated with the ownership by the members of PBF LLC other than PBF Energy as if such members had fully exchanged their Series A Units for shares of PBF Energy's Class A common stock.

(2) Represents an adjustment to reflect PBF Energy's current effective corporate tax rate of approximately 39.5% applied to all periods presented. The adjustment assumes the full exchange of existing PBF LLC Series A Units as described in (1) above.

(3) Represents weighted-average diluted shares outstanding assuming the full exchange of all PBF LLC Series A Units and common stock equivalents, including options and warrants for units of PBF LLC Series A Units and options for shares of PBF Energy Class A common stock as calculated under the treasury method for the three month period ended March 31, 2013. Common stock equivalents exclude the effects of options to purchase 57,500 shares of PBF Energy Class A common stock because they are anti-dilutive.

Gross Refining Margin
Gross refining margin is defined as gross margin excluding depreciation and operating expense related to the refineries. We believe gross refining margin is an important measure of operating performance and provides useful information to investors because it is a better metric comparison for the industry refining margin benchmarks, as the refining margin benchmarks do not include a charge for depreciation expense. In order to assess our operating performance, we compare our gross refining margin (revenue less cost of sales) to industry refining margin benchmarks and crude oil prices as defined in the table below.


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