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PBF > SEC Filings for PBF > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for PBF ENERGY INC.


7-Nov-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 the 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 PBF LLC. PBF Energy owned an equity interest representing approximately 24.4% of the outstanding economic interests in PBF LLC prior to the Secondary Offering completed on June 12, 2013, and its economic interests increased to approximately 40.9% as of September 30, 2013. PBF Holding is a wholly-owned subsidiary of PBF LLC and PBF Finance is a wholly-owned subsidiary of PBF Holding. PBF Holding is the parent company for PBF LLC's operating subsidiaries.
PBF Holding is an indirect subsidiary of PBF Energy, representing 100% of PBF Energy's consolidated revenue for the three and nine months ended September 30, 2013 and September 30, 2012, respectively. PBF Holding also constitutes 100% of PBF Energy's revenue generating assets as of September 30, 2013 and December 31, 2012.

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, consisting of 40,000 bpd of heavy crude oil and 70,000 bpd of light crude oil. However, due to greater operating efficiency, discharge capacity for light crude oil at our dual-loop track has increased from 70,000 bpd to approximately 100,000 bpd. In conjunction with the development of our rail crude unloading facilities at Delaware City, we constructed a railcar storage yard with capacity for 330 railcars that is integral to railcar staging and storage and helps facilitate daily rail traffic at the refinery. Also in February 2013, our board of directors approved a third rail crude offloading project to add an additional 40,000 bpd of heavy crude rail unloading capability at the refinery, which is expected to cost approximately $62 million and to be completed in 2014. Completion of this third rail 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 180,000 bpd. As a result of our crude rail unloading facility


expansion, the delivery of coiled and insulated railcars, the development of crude rail loading infrastructure in Canada and the use of unit trains, we expect to be capable of taking delivery of approximately 80,000 bpd of Canadian heavy crude oil at the Delaware City refinery by the end of 2014.

We entered into agreements to lease or purchase a total of 5,900 railcars, including 4,600 coiled and insulated rails cars, which are capable of transporting Canadian heavy crude oils, and 1,300 general purpose cars, which we intend to use to transport lighter crude oils. In addition to the construction of our rail unloading facilities at Delaware City and the execution of our railcar procurement strategy, we also created dedicated crude-by-rail acquisition and rail logistics teams. These teams, staffed by PBF employees in our corporate headquarters, at the Delaware City refinery and in our field office in Calgary, Alberta, are responsible for crude procurement, logistics via rail and monitoring crude-by-rail offloading. In April 2013, we opened a field office in Oklahoma City to augment these activities.

Crude delivered to our Delaware City refinery is processed at Delaware City or we can load up to 45,000 bpd to be transferred to our Paulsboro refinery. The Delaware City rail unloading facility allows our East Coast refineries to source West Texas Intermediate ("WTI") based crudes from Western Canada and the Mid-Continent, which we believe may provide significant cost advantages versus traditional Brent-based international crudes trading on the Brent-WTI differential.

Factors Affecting the Comparability Between Periods Throughout 2013 we have seen an escalation in the cost of renewable fuel credits, known as RINs, required for compliance with the Renewable Fuels Standard. We incurred approximately $112.9 million in RINs costs during the nine months ended September 30, 2013 as compared to $33.2 million during the nine months ended September 30, 2012, an increase of $79.7 million due primarily to the price increase for ethanol-linked RINs during 2013. Our RINs purchase obligation is dependent on our actual shipment of on-road transportation fuels domestically and the amount of blending achieved.


Results of Operations

The following tables reflect our financial and operating highlights for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands, except per share data) except for income tax benefit, interest expenses, net income attributable to noncontrolling interest and earnings per share, each of which apply only to the financial results of PBF Energy. In addition, general and administrative expenses for PBF Energy for the three and nine months ended September 30, 2013 include a charge of $8.1 million associated with a change in the tax receivable agreement liability.

                                         Three months ended September 30,           Nine months ended September 30,
                                            2013                   2012                 2013                 2012
Revenue                              $      4,858,880       $      5,395,206     $     14,335,020       $ 15,188,327
Cost of sales, excluding
depreciation                                4,663,697              4,932,645           13,394,777         13,871,884
Gross refining margin (1)                     195,183                462,561              940,243          1,316,443
Operating expenses, excluding
depreciation                                  192,647                179,035              601,245            537,880
General and administrative expenses            30,748                 38,942               79,983             78,042
Loss (gain) on sale of assets                     (48 )                   20                  (48 )           (2,430 )
Depreciation and amortization
expense                                        27,435                 24,455               81,530             67,419
(Loss) income from operations                 (55,599 )              220,109              177,533            635,532
Change in fair value of catalyst
leases                                         (2,363 )               (5,952 )              3,118             (6,929 )
Change in fair value of contingent
consideration                                       -                   (692 )                  -             (2,076 )
Interest expense, net                         (26,242 )              (26,901 )            (69,561 )          (86,753 )
(Loss) income before income taxes             (84,204 )              186,564              111,090            539,774
Income tax benefit                            (19,311 )                    -                 (898 )                -
Net (loss) income                             (64,893 )     $        186,564              111,988       $    539,774
Less: net (loss) income attributable
to noncontrolling interest                    (45,045 )                                   103,604
Net (loss) income attributable to
PBF Energy Inc.                      $        (19,848 )                          $          8,384

Gross margin                         $        (21,580 )     $        261,254     $        266,927       $    716,267

Net (loss) income available to
Class A common stock per share:
Basic                                $          (0.50 )                          $           0.28
Diluted                              $          (0.50 )                          $           0.27


(1) See Non-GAAP Financial Measures below.


Operating Highlight
                                              Three Months Ended             Nine Months Ended
                                                  September 30,                 September 30,
                                              2013            2012           2013           2012
Key Operating Information
Production (barrels per day ("bpd") in
thousands)                                     446.1           488.3          449.3          463.3
Crude oil and feedstocks throughput (bpd
in thousands)                                  446.0           488.9          450.7          464.0
Total crude oil and feedstocks throughput
(millions of barrels)                           41.0            45.0          123.1          127.1
Gross refining margin per barrel of
throughput (1)                            $     4.75       $   10.29     $     7.65      $   10.35
Operating expense, excluding
depreciation, per barrel of throughput    $     4.69       $    3.98     $     4.89      $    4.23

Crude and feedstocks (% of total
throughput) (2):
Heavy crude                                       17 %            11 %           16 %           16 %
Medium crude                                      43 %            51 %           44 %           48 %
Light crude                                       30 %            30 %           32 %           28 %
Other feedstocks and blends                       10 %             8 %            8 %            8 %

Yield (% of total throughput):
Gasoline and gasoline blendstocks                 45 %            45 %           45 %           47 %
Distillates and distillate blendstocks            37 %            38 %           37 %           36 %
Lubes                                              2 %             2 %            2 %            2 %
Chemicals                                          3 %             3 %            3 %            3 %
Other                                             13 %            12 %           13 %           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          Nine Months Ended
                                              September 30,               September 30,
                                            2013          2012          2013         2012
(dollars per barrel, except as noted)
Dated Brent Crude                       $    110.29    $ 109.50     $   108.46     $ 112.21
West Texas Intermediate (WTI) crude oil $    105.79    $  92.10     $    98.13     $  96.13
Crack Spreads
Dated Brent (NYH) 2-1-1                 $     13.15    $  17.87     $    13.43     $  14.55
WTI (Chicago) 4-3-1                     $     14.97    $  35.00     $    23.38     $  28.05
Crude Oil Differentials
Dated Brent (foreign) less WTI          $      4.50    $  17.40     $    10.33     $  16.08
Dated Brent less Maya (heavy, sour)     $     10.95    $  12.06     $     8.56     $  10.51
Dated Brent less WTS (sour)             $      4.81    $  20.74     $    12.48     $  20.18
Dated Brent less ASCI (sour)            $      5.92    $   5.30     $     4.37     $   4.46
WTI less WCS (heavy, sour)              $     23.89    $  14.89     $    22.37     $  20.40
WTI less Bakken (light, sweet)          $      4.75    $   1.06     $     2.92     $   6.36
WTI less Syncrude (light, sweet)        $      0.81    $  (4.89 )   $    (2.23 )   $   1.37
Natural gas (dollars per MMBTU)         $      3.56    $   2.89     $     3.69     $   2.58

Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012
Overview- Net loss for PBF Energy was $64.9 million for the three months ended September 30, 2013 compared to net income of $186.6 million for the three months ended September 30, 2012. Net loss attributable to PBF Energy was $19.8 million, or $(0.50) per diluted share, for the three months ended September 30, 2013 ($(0.48) per share on a fully exchanged, fully diluted basis based on adjusted pro forma net (loss) income as described below in Non-GAAP Financial Measures). The net loss attributable to PBF Energy represents PBF Energy's equity interest in PBF LLC's pre-tax loss, less applicable income tax benefit of approximately 40.9% for the three months ended September 30, 2013. Net loss for PBF Holding, which does not include income tax benefits or the expense associated with the change in our tax receivable agreement liability, was $76.2 million for the three months ended September 30, 2013 compared to net income of $186.6 million for the three months ended September 30, 2012.

Our results for the three months ended September 30, 2013 were unfavorably impacted by lower crack spreads, the tightening of crude differentials, higher operating expenses due to increased energy costs, the continued higher costs of compliance with the Renewable Fuels Standard and lower throughput primarily due to reduced run rates.

Revenues- Revenues totaled $4.9 billion for the three months ended September 30, 2013 compared to $5.4 billion for the three months ended September 30, 2012, a decrease of $0.5 billion, or 9.9%. For the three months ended September 30, 2013, the total throughput rates in the East Coast and Mid-Continent refineries averaged approximately 298,100 bpd and 147,900 bpd, respectively. For the three months ended September 30, 2012, the total throughput rates at our East Coast and Mid-Continent refineries averaged approximately 335,900 bpd, and 153,000 bpd, respectively. The decrease in throughput rates at our East Coast refineries in 2013 compared to 2012 was primarily driven by market factors including narrower crude differentials for rail-delivered crude which reduced crude run rates during the period. The decrease in throughput rates at our Mid-Continent refinery in 2013 compared to 2012 was primarily driven by refinery maintenance which occurred during the period. For the three months ended September 30, 2013, the total barrels sold at our East Coast and Mid-Continent refineries averaged approximately 301,200 bpd and 150,700 bpd, respectively. For the three months ended September 30, 2012, the total barrels sold at our East Coast and Mid-Continent refineries averaged approximately 332,400 bpd and 161,900 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. Total barrels sold from our East Coast refineries were higher than throughput rates, reflecting sales from inventory as well as sales and purchases of refined products outside the refinery.

Gross Margin- Gross refining margin (as described below in Non-GAAP Financial Measures) totaled $195.2 million, or $4.75 per barrel of throughput, for the three months ended September 30, 2013 compared to $462.6 million, or $10.29 per barrel of throughput during the three months ended September 30, 2012, a decrease of $267.4 million. Gross margin,


including refinery operating expenses and depreciation was a loss of $21.6 million, or $(0.53) per barrel of throughput, for the three months ended September 30, 2013 compared to a gain of $261.3 million, or $5.81 per barrel of throughput, for the three months ended September 30, 2012, a decrease of $282.9 million. The decrease in gross refining margin was primarily due to lower crack spreads and the result of unfavorable crude differentials, the continued 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 decrease in gross margin was also attributable to an increase in operating expenses due to increased energy costs.

Average industry refining margins in the U.S. Mid-Continent were significantly weaker during the three months ended September 30, 2013 as compared to the same period in 2012. The WTI (Chicago) 4-3-1 industry crack spread was approximately $14.97 per barrel or 57.2% lower in the three months ended September 30, 2013 as compared to the same period in 2012. Moreover, the price of WTI versus Dated Brent and other crudes narrowed during the quarter negatively impacting our results.

The Dated Brent (NYH) 2-1-1 industry crack spread was approximately $13.15 per barrel, or 26.4%, lower in the three months ended September 30, 2013 as compared to the same period in 2012. Moreover, the WTI/Dated Brent differential was $12.90 lower in the three months ended September 30, 2013 as compared to the same period in 2012 and the Dated Brent/Maya differential was approximately $1.11 per barrel lower in the three months ended September 30, 2013 as compared to the same period in 2012. A decrease in the WTI/Dated Brent crude differential unfavorably impacts our East Coast refineries which have increased shipments of WTI based crudes from the Bakken and Western Canada. A reduction in the Dated Brent/Maya crude differential, our proxy for the light/heavy crude differential, has a negative impact on our East Coast refineries, which can 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 $192.6 million, or $4.69 per barrel of throughput, for the three months ended September 30, 2013 compared to $179.0 million, or $3.98 per barrel of throughput, for the three months ended September 30, 2012, an increase of $13.6 million, or 7.6%. The increase in operating expenses is mainly attributable to an increase of approximately $6.3 million in outside engineering and consulting fees related to refinery capital and maintenance projects, as well as an increase of approximately $3.1 million in energy and utilities costs primarily driven by higher natural gas prices. 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 $30.7 million for the three months ended September 30, 2013 compared to $38.9 million for the three months ended September 30, 2012, a decrease of $8.2 million or 21.1%. The decrease in general and administrative expenses primarily relates to lower employee compensation expense, partially offset by $8.1 million of expense associated with the change in our tax receivable agreement liability during the period. Our general and administrative expenses are comprised of the personnel, facilities and other infrastructure costs necessary to support our refineries.

General and administrative expenses for PBF Holding, which do not include the $8.1 million expense associated with PBF Energy's tax receivable agreement liability, totaled $22.7 million for the three months ended September 30, 2013 compared to $38.9 million for the three months ended September 30, 2012.

Gain / loss on Sale of Assets- Gain on sale of assets for the three months ended September 30, 2013 was $48.0 thousand related to the sale of railcars which were subsequently leased back, compared to a loss which was recorded for the three months ended September 30, 2012 of $20.0 thousand related to sales of certain equipment at Paulsboro and Delaware City.

Depreciation and Amortization Expense- Depreciation and amortization expense totaled $27.4 million for the three months ended September 30, 2013 compared to $24.5 million for the three months ended September 30, 2012, an increase of $2.9 million. The increase was principally due to capital projects that were completed at our Paulsboro and Toldeo refineries.

Change in Fair Value of Catalyst Leases- Change in the fair value of catalyst leases represented a loss of $2.4 million for the three months ended September 30, 2013 compared to a loss of $6.0 million for the three months ended September 30, 2012. This 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 paid in full in April 2013.


Interest Expense, net- Interest expense totaled $26.2 million for the three months ended September 30, 2013 compared to $26.9 million for the three months ended September 30, 2012, a decrease of $0.7 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, financing cost associated with the Inventory Intermediation Agreements ("Intermediation Agreements") with J. Aron, 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 ("credit facilities") due to lower outstanding borrowings and reduced financing costs related to the termination of our Paulsboro Statoil supply agreement partially offset by higher letter of credit fees and costs pertaining to the Intermediation Agreements.

Income Tax Benefit- 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 40.9% for the three months ended September 30, 2013. We do not recognize any income tax expense or benefit related to the noncontrolling interest of the other members in PBF LLC (although, as described elsewhere, we must make tax distributions to all members of PBF LLC under the terms of its amended and restated limited liability company agreement). PBF Energy's effective tax rate for the three months ended September 30, 2013 was 49.3% reflecting tax benefit adjustments for discrete items related to changes in income tax provision estimates based on our income tax returns and changes in our effective state tax rates.

PBF Holding, as a limited liability company treated as a "flow-through" entity for income tax purposes, did not recognize a benefit or provision for income tax expense for the three months ended September 30, 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. 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 September 30, 2013 and December 31, 2012 was approximately 59.1% and 75.6%, respectively. The carrying amount of the noncontrolling interest on our consolidated balance sheet attributable to the noncontrolling interest is not equal to the noncontrolling interest ownership percentage due to the effect of . . .

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