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PBF > SEC Filings for PBF > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for PBF ENERGY INC.

Form 10-Q for PBF ENERGY INC.


7-Aug-2014

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. included in the Annual Report on Form 10-K for the year ended December 31, 2013 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
This Form 10-Q is filed by PBF Energy Inc. ("PBF Energy") which is a holding company whose sole asset is an equity interest in PBF Energy Company LLC ("PBF LLC"). PBF Energy is the sole managing member of, and owner of an equity interest representing approximately 90.5% of the outstanding economic interests in, PBF LLC. PBF Energy operates and controls all of the business and affairs and consolidates the financial results of PBF LLC and its subsidiaries. PBF LLC is a holding company for the companies that directly and indirectly own and operate our business. PBF Holding Company LLC ("PBF Holding") is a wholly-owned subsidiary of PBF LLC and PBF Finance Corporation ("PBF Finance") is a wholly-owned subsidiary of PBF Holding. Prior period filings of PBF Energy with the U.S. Securities and Exchange Commission ("SEC") for the periods March 31, 2013 through March 31, 2014, reflect a combined Form 10-Q and and Form 10-K with PBF Holding and PBF Finance. As of June 30, 2014, each entity will file periodic SEC filings separately due to the change in the corporate structure related to the initial public offering of PBF Logistics LP ("PBFX"), a consolidated subsidiary of PBF Energy.

Unless the context indicates otherwise, the terms "we," "us," and "our" refer to PBF Energy and its consolidated subsidiaries, including PBF LLC, PBF Holding and its subsidiaries and PBFX and its subsidiaries.

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 barrels per day ("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.

During 2012 and 2013, we expanded and upgraded existing on-site railroad infrastructure at our Delaware City refinery, including the expansion of the crude rail unloading facilities. Currently, crude delivered to this facility is consumed at our Delaware City refinery. We also transport some of the crude delivered by rail from Delaware City via barge to our Paulsboro refinery or other third party destinations. In the first half of 2014, we have continued


projects to add additional unloading spots to the dual-loop track, which will increase its unloading capability from 105,000 bpd to 130,000 bpd, and to expand the heavy crude rail unloading capability at the refinery from 40,000 bpd to 80,000 bpd. We expect these projects to bring total rail crude unloading capability up to 210,000 bpd by the end of 2014, subject to the delivery of coiled and insulated railcars, the development of crude rail loading infrastructure in Canada and the use of unit trains. The Delaware City rail unloading facility allows our East Coast refineries to source West Texas Intermediate ("WTI") price-based crudes from Western Canada and the Mid-Continent, which we believe provides significant cost advantages versus traditional Brent based international crudes.

As of June 30, 2014, we owned 87,670,832 PBF LLC Series C Units and funds affiliated with The Blackstone Group L.P., or Blackstone, and First Reserve Management, L.P., or First Reserve, and our executive officers and directors and certain employees held 9,219,874 PBF LLC Series A Units (we refer to all of the holders of the PBF LLC Series A Units as "the members of PBF LLC other than PBF Energy"). As a result, the holders of our issued and outstanding shares of our Class A common stock have approximately 90.5% of the voting power in us, and the members of PBF LLC other than PBF Energy through their holdings of Class B common stock have approximately 9.5% of the voting power in us.

Factors Affecting Comparability Between Periods On May 14, 2014, PBFX completed its initial public offering (the "PBFX Offering") of 15,812,500 common units, including 2,062,500 common units issued upon exercise of the over-allotment option that was granted to the underwriters, at a price to the public of $23.00 per unit. As of June 30, 2014, PBF LLC holds a 50.2% limited partner interest in PBFX (consisting of 74,053 common units and 15,886,553 subordinated units), with the remaining 49.8% limited partner interest held by the public unit holders. PBF LLC also owns all of the incentive distribution rights and indirectly owns a non-economic general partner interest in PBFX through its wholly-owned subsidiary, PBF Logistics GP LLC ("PBF GP"), the general partner of PBFX. During the subordination period (as set forth in the partnership agreement of PBFX) holders of the subordinated units are not entitled to receive any distribution of available cash until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. If PBFX does not pay distributions on the subordinated units, the subordinated units will not accrue arrearages for those unpaid distributions. Each subordinated unit will convert into one common unit at the end of the subordination period.

PBFX is a fee-based, growth-oriented, traditional Delaware master limited partnership formed by PBF Energy to own or lease, operate, develop and acquire crude oil and refined petroleum products terminals, pipelines, storage facilities and similar logistics assets. PBFX receives, handles and transfers crude oil from sources located throughout the United States and Canada for PBF Energy in support of its three refineries. PBFX's initial assets consist of a light crude oil rail unloading terminal at the Delaware City refinery that also services the Paulsboro refinery (which we refer to as the "Delaware City Rail Terminal"), and a crude oil truck unloading terminal at the Toledo refinery (which we refer to as the "Toledo Truck Terminal") that are integral components of the crude oil delivery operations at all three of PBF Energy's refineries. All of PBFX's revenue is derived from long-term, fee-based commercial agreements with subsidiaries of PBF Energy, which include minimum volume commitments, for receiving, handling and transferring crude oil. These transactions are eliminated by PBF Energy in consolidation.

PBFX received proceeds (after deducting underwriting discounts and structuring fees but before estimated offering expenses) from the PBFX Offering of approximately $341.0 million. PBFX used the net proceeds from the offering to:
(i) distribute approximately $35.0 million to PBF LLC for certain capital expenditures incurred prior to the closing of the PBFX Offering with respect to assets contributed to PBFX and to reimburse it for estimated offering expenses;
(ii) pay debt issuance costs of approximately $2.3 million related to PBFX's five-year, $275.0 million senior secured revolving credit facility (the "PBFX Revolving Credit Facility") and PBFX's three-year, $300.0 million term loan facility (the "PBFX Term Loan"); and (iii) purchase $298.7 million in U.S. Treasury or other investment grade securities which will be used to fund anticipated capital expenditures by PBFX. PBFX retained approximately $5.0 million for general partnership purposes. PBFX also borrowed $298.7 million under the PBFX Term Loan, which is secured by a pledge of the U.S. Treasury or other investment grade securities


held by PBFX, and distributed the proceeds of such borrowings to PBF LLC. PBF LLC contributed the proceeds of the PBFX Offering and PBFX Term Loan borrowings to PBF Holding, which intends to use such funds for general corporate purposes. In addition, in May 2014, 270,522 phantom units with distribution equivalent rights were granted under the PBFX long term incentive plan to certain directors, officers (including our named executive officers) and employees of PBF GP or its affiliates, which will vest in equal annual installments over a four-year period.

Results of Operations
The tables below reflect our consolidated financial and operating highlights for the three and six months ended June 30, 2014 and 2013 (amounts in thousands, except per share data). Effective with the completion of the PBFX Offering in May 2014, we operate in two reportable business segments: Refining and Logistics. Our three oil refineries are all engaged in the refining of crude oil and other feedstocks into petroleum products, and are aggregated into the Refining segment. PBFX is a publicly traded master limited partnership that operates logistical assets such as crude oil and refined petroleum products terminals, pipelines and storage facilities. PBFX's operations are aggregated into the Logistics segment. Prior to the PBFX Offering, PBFX's assets were operated within the refining operations of our Delaware City and Toledo refineries and were not considered to be a separate reportable segment. We did not analyze our results by individual segment as our Logistic segment does not have any third party revenue and substantially all of its operating results eliminate in consolidation. Additionally, third party expenses attributable directly to the Logistics segment are immaterial to our consolidated operating results.


                                    Three Months Ended                 Six Months Ended
                                          June 30,                          June 30,
                                   2014             2013             2014             2013
Revenue                       $  5,301,709     $  4,678,293     $ 10,048,152     $  9,476,141
Cost of sales, excluding
depreciation                     4,935,456        4,295,979        9,083,140        8,731,081
                                   366,253          382,314          965,012          745,060
Operating expenses, excluding
depreciation                       210,722          202,583          479,621          408,599
General and administrative
expenses                            33,013           19,141           69,637           49,235
Loss (gain) on sale of assets            6                -             (180 )              -
Depreciation and amortization
expense                             34,662           27,563           67,877           54,093
Income from operations              87,850          133,027          348,057          233,133
Change in fair value of
catalyst leases                     (2,338 )          6,820           (4,339 )          5,481
Interest expense, net              (26,202 )        (21,708 )        (51,457 )        (43,319 )
Income before income taxes          59,310          118,139          292,261          195,295
Income tax expense                  13,474           10,969           63,153           18,413
Net income                          45,836          107,170          229,108          176,882
Less: net income attributable
to noncontrolling interests         24,877           90,344          130,704          148,649
Net income attributable to
PBF Energy Inc.               $     20,959           16,826     $     98,404     $     28,233

Gross margin                  $    124,357     $    155,484     $    424,482     $    288,506

Gross refining margin (1)     $    358,471     $    382,314     $    957,230     $    745,060
PBFX gross margin (1)         $      7,782     $          -     $      7,782     $          -

Net income available to
Class A common stock per
share:
Basic                         $       0.29     $       0.62     $       1.55     $       1.12
Diluted                       $       0.29     $       0.61     $       1.54     $       1.08



(1) See Non-GAAP Financial Measures below.


Operating Highlights
                                             Three Months Ended               Six Months Ended
                                                   June 30,                        June 30,
                                            2014             2013            2014            2013
Key Operating Information
Production (bpd in thousands)                470.5             464.0           448.3          450.9
Crude oil and feedstocks throughput
(bpd in thousands)                           470.4             464.6           450.8          453.1
Total crude oil and feedstocks
throughput (millions of barrels)              42.8              42.3            81.6           82.0
Gross refining margin per barrel of
throughput (1)                         $      8.38       $      9.04     $     11.73     $     9.08
Operating expenses, excluding
depreciation, per barrel of throughput $      4.90       $      4.79     $      5.87     $     4.98

Crude and feedstocks (% of total
throughput) (2):
Heavy crude                                     15 %              16 %            14 %           15 %
Medium crude                                    43 %              39 %            44 %           44 %
Light crude                                     33 %              38 %            34 %           33 %
Other feedstocks and blends                      9 %               7 %             8 %            8 %

Yield (% of total throughput):
Gasoline and gasoline blendstocks               45 %              45 %            47 %           46 %
Distillates and distillate blendstocks          36 %              37 %            37 %           37 %
Lubes                                            2 %               2 %             2 %            2 %
Chemicals                                        3 %               3 %             3 %            3 %
Other                                           14 %              13 %            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          Six Months Ended
                                                 June 30,                   June 30,
                                            2014          2013         2014         2013
                                               (dollars per barrel, except as noted)
Dated Brent Crude                       $    109.67    $ 102.43     $  108.93    $ 107.50
West Texas Intermediate (WTI) crude oil $    103.05    $  94.07     $  100.90    $  94.17
Crack Spreads
Dated Brent (NYH) 2-1-1                 $     13.70    $  14.67     $   12.60    $  13.60
WTI (Chicago) 4-3-1                     $     18.78    $  29.26     $   17.80    $  27.72
Crude Oil Differentials
Dated Brent (foreign) less WTI          $      6.62    $   8.36     $    8.02    $  13.33
Dated Brent less Maya (heavy, sour)     $     13.89    $   4.59     $   16.34    $   7.30
Dated Brent less WTS (sour)             $     13.77    $   8.42     $   14.40    $  16.42
Dated Brent less ASCI (sour)            $      9.55    $   3.14     $    8.65    $   3.55
WTI less WCS (heavy, sour)              $     20.39    $  16.63     $   21.04    $  21.54
WTI less Bakken (light, sweet)          $      4.67    $   2.06     $    4.23    $   1.98
WTI less Syncrude (light, sweet)        $      0.72    $  (4.33 )   $    0.89    $  (3.84 )
Natural gas (dollars per MMBTU)         $      4.58    $   4.02     $    4.65    $   3.76

Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013
Overview- Net income for PBF Energy was $45.8 million for the three months ended June 30, 2014 compared to net income of $107.2 million for the three months ended June 30, 2013. Net income attributable to PBF Energy was $21.0 million, or $0.29 per diluted share, for the three months ended June 30, 2014 ($0.35 per share on a fully exchanged, fully diluted basis based on adjusted pro forma net income as described below in Non-GAAP Financial Measures) compared to net income attributable to PBF Energy of $16.8 million, or $0.61 per diluted share, for the three months ended June 30, 2013 ($0.73 per share on a fully exchanged, fully diluted basis). The net income attributable to PBF Energy represents PBF Energy's equity interest in PBF LLC's pre-tax income, less applicable income tax expense. PBF Energy's weighted-average equity interest in PBF LLC was 74.8% and 27.7% for the three months ended June 30, 2014 and 2013, respectively. Our results for the three months ended June 30, 2014 were negatively impacted by lower crack spreads, unfavorable movements in certain crude differentials on the East Coast and higher operating expenses due to increased employee compensation costs, partially offset by favorable movements in crude differentials in the Mid-Continent.
Revenues- Revenues totaled $5.3 billion for the three months ended June 30, 2014 compared to $4.7 billion for the three months ended June 30, 2013, an increase of $0.6 billion, or 13.3%. For the three months ended June 30, 2014, the total throughput rates in the East Coast and Mid-Continent refineries averaged approximately 323,800 bpd and 146,600 bpd, respectively. For the three months ended June 30, 2013, the total throughput rates at our East Coast and Mid-Continent refineries averaged approximately 317,300 bpd and 147,300 bpd, respectively. For the three months ended June 30, 2014, the total barrels sold at our East Coast and Mid-Continent refineries averaged approximately 348,800 bpd and 155,200 bpd, respectively. For the three months ended June 30, 2013, the total barrels sold at our East Coast and Mid-Continent refineries averaged approximately 308,200 bpd and 148,700 bpd, respectively. Total barrels sold 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 $358.5 million, or $8.38 per barrel of throughput, for the three months ended June 30, 2014 compared to $382.3 million, or $9.04 per barrel of throughput during the three months ended June 30, 2013, a decrease of $23.8 million. Gross margin, including refinery operating expenses and depreciation, totaled $124.4 million, or $2.93 per barrel of throughput, for the three months ended June 30, 2014 compared to $155.5 million, or $3.68 per barrel of throughput, for the three months ended June 30, 2013, a decrease of $31.1 million. The decrease in gross refining margin and gross margin was primarily due to lower crack spreads, unfavorable movements in certain crude differentials 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. Gross margin was also negatively impacted by higher than anticipated employee compensation and outside engineering and consulting costs. Average industry refining margins in the Mid-Continent were weaker during the three months ended June 30, 2014 as compared to the same period in 2013. The WTI (Chicago) 4-3-1 industry crack spread was approximately $18.78 per barrel or 35.8% lower in the three months ended June 30, 2014 as compared to $29.26 per barrel in the same period in 2013. In addition, lower run rates at Toledo due to unplanned downtime of the Fluid Catalytic Cracking Unit (the "FCC Unit") negatively impacted refining margins. However, while the price of WTI versus Dated Brent and other crude discounts narrowed during the second quarter of 2014, our refinery specific crude slate in the Mid-Continent benefited from an improving WTI/Syncrude differential, which averaged a discount of $0.72 per barrel in the second quarter of 2014 as compared to a premium of $4.33 per barrel in the second quarter of 2013.
The Dated Brent (NYH) 2-1-1 industry crack spread was approximately $13.70 per barrel, or 6.6%, lower in the three months ended June 30, 2014 as compared to $14.67 per barrel in the same period in 2013. While the WTI/Dated Brent differential was $1.74 lower in the three months ended June 30, 2014 as compared to the same period in 2013, the Dated Brent/Maya differential was approximately $9.30 per barrel more favorable in the three months ended June 30, 2014 as compared to the same period in 2013. While a decrease in the WTI/Dated Brent crude differential can unfavorably impact our East Coast refineries, we significantly increased our shipments of rail-delivered WTI-based crudes from the Bakken and Western Canada by over 29,000 barrels per day or almost 31.9% versus the second quarter of 2013, which had the overall effect of reducing our landed cost of crude oil processed at our East Coast refineries and increasing our gross refining margin and gross margin. Additionally, an increase in the Dated Brent/Maya crude differential, our proxy for the light/heavy crude differential, had a positive 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 $210.7 million, or $4.90 per barrel of throughput, for the three months ended June 30, 2014 compared to $202.6 million, or $4.79 per barrel of throughput, for the three months ended June 30, 2013, an increase of $8.1 million, or 4.0%. The increase in operating expenses is mainly attributable to an increase of approximately $5.3 million in employee compensation primarily driven by higher employee benefit costs as well as an increase of approximately $2.7 million in outside engineering and consulting fees related to refinery maintenance projects. 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 $33.0 million for the three months ended June 30, 2014 compared to $19.1 million for the three months ended June 30, 2013, an increase of $13.9 million or 72.6%. The increase in general and administrative expenses primarily relates to higher employee compensation expense, mainly related to increases in headcount, incentive compensation, and severance costs. Our general and administrative expenses are comprised of the personnel, facilities and other infrastructure costs necessary to support our refineries.

Depreciation and Amortization Expense- Depreciation and amortization expense totaled $34.7 million for the three months ended June 30, 2014 compared to $27.6 million for the three months ended June 30, 2013, an increase of $7.1 million. The increase was primarily due to capital projects related to turnarounds completed in


2013 and early 2014, the expansion of the crude rail unloading facility at the Delaware City refinery and refinery optimization projects at Toledo.

Change in Fair Value of Catalyst Leases- Change in the fair value of catalyst leases represented a loss of $2.3 million for the three months ended June 30, 2014 compared to a gain of $6.8 million for the three months ended June 30, 2013. These gains and losses relate 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.

Interest Expense, net- Interest expense totaled $26.2 million for the three months ended June 30, 2014 compared to $21.7 million for the three months ended June 30, 2013, an increase of $4.5 million. The increase in interest expense is primarily due to the issuance of the $300 million PBFX Term Loan in connection with the PBFX Offering and the related amortization of deferred financing fees as well as higher letter of credit fees. Interest expense includes interest on long-term debt including the PBFX credit facilities, 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 costs associated with the Inventory Intermediation Agreements with J. Aron, letter of credit fees associated with the purchase of certain crude oils, and the amortization of deferred financing costs.

Income Tax Expense- PBF LLC is organized as a limited liability company and PBFX is a master limited partnership, both of which are treated as "flow-through" entities for federal income tax purposes and therefore are not subject to income tax. However, the members of PBF LLC are required to include their proportionate share of PBF LLC's taxable income or loss, which includes PBF LLC's allocable share of PBFX's pre-tax income or loss, on their respective tax returns. PBF LLC generally makes distributions to its members, per the terms of the PBF LLC amended and restated limited liability agreement, related to such taxes on a pro-rata basis. PBF Energy recognizes an income tax expense or benefit in our . . .

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