PBF ENERGY INC.
The following review of our results of operations and financial condition should
be read in conjunction with "Item 1. Business", "Item 1A. Risk Factors", "Item
2. Properties", "Item 6. Selected Financial Data," and "Item 8. Financial
Statements and Supplementary Data," respectively, included in this Annual Report
on Form 10-K.
CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains certain "forward-looking statements,"
as defined in the Private Securities Litigation Reform Act of 1995 ("PSLRA"), of
expected future developments that involve risks and uncertainties. You can
identify forward-looking statements because they contain words such as
"believes," "expects," "may," "should," "seeks," "approximately," "intends,"
"plans," "estimates," "anticipates" or similar expressions that relate to our
strategy, plans or intentions. All statements we make relating to our estimated
and projected earnings, margins, costs, expenditures, cash flows, growth rates
and financial results or to our strategies, objectives, intentions, resources
and expectations regarding future industry trends are forward-looking statements
made under the safe harbor of the PSLRA except to the extent such statements
relate to the operations of a partnership or limited liability company. In
addition, we, through our senior management, from time to time make
forward-looking public statements concerning our expected future operations and
performance and other developments. These forward-looking statements are subject
to risks and uncertainties that may change at any time, and, therefore, our
actual results may differ materially from those that we expected. We derive many
of our forward-looking statements from our operating budgets and forecasts,
which are based upon many detailed assumptions. While we believe that our
assumptions are reasonable, we caution that it is very difficult to predict the
impact of known factors, and, of course, it is impossible for us to anticipate
all factors that could affect our actual results.
Important factors that could cause actual results to differ materially from our
expectations, which we refer to as "cautionary statements," are disclosed under
"Item 1A. Risk Factors," and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Annual
Report on Form 10-K. All forward-looking information in this Annual Report on
Form 10-K and subsequent written and oral forward-looking statements
attributable to us, or persons acting on our behalf, are expressly qualified in
their entirety by the cautionary statements. Some of the factors that we believe
could affect our results include:
•supply, demand, prices and other market conditions for our products, including
volatility in commodity prices;
• the effects of competition in our markets;
•changes in currency exchange rates, interest rates and capital costs;
• adverse developments in our relationship with both our key employees and
unionized employees;
•our ability to operate our businesses efficiently, manage capital expenditures
and costs (including general and administrative expenses) and generate earnings
and cash flow;
•our indebtedness;
•our expectations with respect to our capital improvement and turnaround
projects;
•our supply and inventory intermediation arrangements expose us to counterparty
credit and performance risk;
•termination of our Inventory Intermediation Agreements with J. Aron , which
could have a material adverse effect on our liquidity, as we would be required
to finance our crude oil, intermediate and refined products inventory covered by
the agreements. Additionally, we are obligated to repurchase from J. Aron
certain products located at our J. Aron Storage Tanks upon termination of these
agreements;
•restrictive covenants in our indebtedness that may adversely affect our
operational flexibility;
•payments by PBF Energy to the current and former holders of PBF LLC Series A
Units and PBF LLC Series B Units under PBF Energy's Tax Receivable Agreement for
certain tax benefits we may claim;
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•our assumptions regarding payments arising under PBF Energy's Tax Receivable
Agreement and other arrangements relating to our organizational structure are
subject to change due to various factors, including, among other factors, the
timing of exchanges of PBF LLC Series A Units for shares of PBF Energy Class A
common stock as contemplated by the Tax Receivable Agreement, the price of PBF
Energy Class A common stock at the time of such exchanges, the extent to which
such exchanges are taxable, and the amount and timing of our income;
•our expectations and timing with respect to our acquisition activity and
whether such acquisitions are accretive or dilutive to shareholders;
•the impact of disruptions to crude or feedstock supply to any of our
refineries, including disruptions due to problems at PBFX or with third-party
logistics infrastructure or operations, including pipeline, marine and rail
transportation;
•the possibility that we might reduce or not make further dividend payments;
•the inability of our subsidiaries to freely pay dividends or make distributions
to us;
•the impact of current and future laws, rulings and governmental regulations,
including the implementation of rules and regulations regarding transportation
of crude oil by rail;
•the impact of the recently enacted federal income tax legislation on our
business;
•the threat of cyber-attacks;
•the effectiveness of our crude oil sourcing strategies, including our crude by
rail strategy and related commitments;
•adverse impacts related to legislation by the federal government lifting the
restrictions on exporting U.S. crude oil;
•adverse impacts from changes in our regulatory environment, such as the effects
of compliance with AB32, or from actions taken by environmental interest groups;
•market risks related to the volatility in the price of RINs required to comply
with the Renewable Fuel Standards and GHG emission credits required to comply
with various GHG emission programs, such as AB32;
•our ability to complete the successful integration of the Martinez refinery and
any other acquisitions into our business and to realize the benefits from such
acquisitions;
•unforeseen liabilities associated with the Martinez Acquisition and any other
acquisitions;
•risk associated with the operation of PBFX as a separate, publicly-traded
entity;
•potential tax consequences related to our investment in PBFX; and
•any decisions we continue to make with respect to our energy-related logistics
assets that may be transferred to PBFX.
We caution you that the foregoing list of important factors may not contain all
of the material factors that are important to you. In addition, in light of
these risks and uncertainties, the matters referred to in the forward-looking
statements contained in this Annual Report on Form 10-K may not in fact occur.
Accordingly, investors should not place undue reliance on those statements.
Our forward-looking statements speak only as of the date of this Annual Report
on Form 10-K. Except as required by applicable law, including the securities
laws of the United States , we do not intend to update or revise any
forward-looking statements. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the foregoing.
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Executive Summary
Our business operations are conducted by PBF LLC and its subsidiaries. We were
formed in March 2008 to pursue the acquisitions of crude oil refineries and
downstream assets in North America . As of December 31, 2019 , we owned and
operated five domestic oil refineries and related assets located in Delaware
City, Delaware , Paulsboro, New Jersey , Toledo, Ohio , Chalmette, Louisiana and
Torrance, California . Our refineries have a combined processing capacity, known
as throughput, of approximately 900,000 bpd, and a weighted average Nelson
Complexity Index of 12.2. We operate in two reportable business segments:
Refining and Logistics. Our five 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 operates certain logistical assets such as crude
oil and refined petroleum products terminals, pipelines, and storage facilities,
which are aggregated into the Logistics segment.
Following the completion of the Martinez Acquisition, we increased our total
throughput capacity to over 1,000,000 bpd and became the most complex
independent refiner with a consolidated Nelson Complexity of 12.8.
Factors Affecting Comparability
Our results over the past three years have been affected by the following
events, the understanding of which will aid in assessing the comparability of
our period to period financial performance and financial condition.
Torrance Land Sale
On August 1, 2019 and August 7, 2018 , we closed on third-party sales of parcels
of real property acquired as part of the Torrance refinery , but not part of the
refinery itself. The sales resulted in gains of approximately $33.1 million and
$43.8 million in the third quarter of 2019 and 2018, respectively, included
within Gain on sale of assets in the Consolidated Statements of Operations.
Inventory Intermediation Agreements
The Inventory Intermediation Agreements with J. Aron were amended in the first
quarter of 2019 and amended and restated in the third quarter of 2019, pursuant
to which certain terms of the Inventory Intermediation Agreements were amended,
including, among other things, the maturity date. On March 29, 2019 the
Inventory Intermediation Agreement by and among J. Aron , PBF Holding and DCR was
amended to add the PBFX East Coast Storage Assets as a location and crude oil as
a new product type to be included in the products sold to J. Aron by DCR. On
August 29, 2019 the Inventory Intermediation Agreement by and among J. Aron , PBF
Holding and PRC was extended to December 31, 2021 , which term may be further
extended by mutual consent of the parties to December 31, 2022 and the Inventory
Intermediation Agreement by and among J. Aron , PBF Holding and DCR was extended
to June 30, 2021 , which term may be further extended by mutual consent of the
parties to June 30, 2022 .
Pursuant to each Inventory Intermediation Agreement, J. Aron continues to
purchase and hold title to the J. Aron Products produced by the East Coast
Refineries, and delivered into our J. Aron Storage Tanks. Furthermore, J. Aron
agrees to sell the J. Aron Products back to the East Coast Refineries as they
are discharged out of our J. Aron Storage Tanks. J. Aron has the right to store
the J. Aron Products purchased in tanks under the Inventory Intermediation
Agreements and will retain these storage rights for the term of the agreements.
PBF Holding continues to market and sell the J. Aron Products independently to
third parties.
Adoption of Accounting Standards Codification ("ASC") Topic 842, "Leases"
As disclosed in "Note 14 - Leases" of our Notes to Consolidated Financial
Statements, prior to January 1, 2019 , we accounted for leases under ASC 840 and
did not record a right of use asset or corresponding lease liability for
operating leases on our Consolidated Balance Sheets. We adopted ASC 842 using a
modified retrospective approach, and elected the transition method to apply the
new standard at the adoption date of January 1, 2019 . As such, financial
information for prior periods has not been adjusted and continues to be reported
under ASC 840.
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Early Return of Railcars
On September 30, 2018 , we agreed to voluntarily return a portion of railcars
under an operating lease in order to rationalize certain components of our
railcar fleet based on prevailing market conditions in the crude oil by rail
market. Under the terms of the lease amendment, we agreed to pay amounts in lieu
of satisfaction of return conditions (the "early termination penalty") and a
reduced rental fee over the remaining term of the lease. Certain of these
railcars were idle as of September 30, 2018 and the remaining railcars were
taken out of service during the fourth quarter of 2018 and subsequently fully
returned to the lessor. As a result, we recognized an expense of $52.3 million
for the year ended December 31, 2018 included within Cost of sales consisting of
(i) a $40.3 million charge for the early termination penalty and (ii) a $12.0
million charge related to the remaining lease payments associated with the
railcars identified within the amended lease, all of which were idled and out of
service as of December 31, 2018 .
PBF Energy Inc. Public Offerings
As a result of the initial public offering and related reorganization
transactions, PBF Energy became the sole managing member of PBF LLC with a
controlling voting interest in PBF LLC and its subsidiaries. Effective with
completion of the initial public offering, PBF Energy consolidates the financial
results of PBF LLC and its subsidiaries and records a noncontrolling interest in
its Consolidated Financial Statements representing the economic interests of PBF
LLC unitholders other than PBF Energy . Additionally, a series of secondary
offerings were made subsequent to our IPO whereby funds affiliated with The
Blackstone Group L.P. ("Blackstone") and First Reserve Management L.P. ("First
Reserve") sold their interests in us. As a result of these secondary offerings,
Blackstone and First Reserve no longer hold any PBF LLC Series A units.
On August 14, 2018 , PBF Energy completed a public offering of an aggregate of
6,000,000 shares of PBF Energy Class A common stock for net proceeds of $287.3
million , after deducting underwriting discounts and commissions and other
offering expenses (the "August 2018 Equity Offering").
As of December 31, 2019 , including the offerings described above, PBF Energy
owns 119,826,202 PBF LLC Series C Units and our current and former executive
officers and directors and certain employees and others beneficially own
1,215,317 PBF LLC Series A Units, and the holders of our issued and outstanding
shares of PBF Energy Class A common stock have 99.0% 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 the remaining 1.0% of the voting power in us.
PBFX Equity Offerings
On April 24, 2019 , PBFX entered into subscription agreements to sell an
aggregate of 6,585,500 common units to certain institutional investors in a
registered direct offering (the "2019 Registered Direct Offering") for gross
proceeds of approximately $135.0 million . The 2019 Registered Direct Offering
closed on April 29, 2019 .
On July 30, 2018 , PBFX closed on a common unit purchase agreement with certain
funds managed by Tortoise Capital Advisors, L.L.C. providing for the issuance
and sale in a registered direct offering of an aggregate of 1,775,750 common
units for net proceeds of approximately $34.9 million .
As of December 31, 2019 , PBF LLC held a 48.2% limited partner interest in PBFX
with the remaining 51.8% limited partner interest owned by public common
unitholders.
PBFX Assets and Transactions
PBFX's assets consist of various logistics assets (as described in "Item 1.
Business"). Apart from business associated with certain third-party
acquisitions, PBFX's revenues are derived from long-term, fee-based commercial
agreements with subsidiaries of PBF Holding , which include minimum volume
commitments, for receiving, handling, transferring and storing crude oil,
refined products and natural gas. These transactions are eliminated by PBF
Energy and PBF LLC in consolidation.
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Since the inception of PBFX in 2014, PBF LLC and PBFX have entered into a series
of drop-down transactions. Such transactions and third-party acquisitions made
by PBFX occurring in the three years ended December 31, 2019 are discussed
below.
TVPC Acquisition
On April 24, 2019 , PBFX entered into the TVPC Contribution Agreement, pursuant
to which PBF LLC contributed to PBFX all of the issued and outstanding limited
liability company interests of TVP Holding for total consideration of $200.0
million . Prior to the TVPC Acquisition, TVP Holding owned a 50% membership
interest in TVPC. Subsequent to the closing of the TVPC Acquisition on May 31,
2019 , PBFX owns 100% of the membership interests in TVPC. The transaction was
financed through a combination of proceeds from the 2019 Registered Direct
Offering and borrowings under the PBFX Revolving Credit Facility.
PBFX IDR Restructuring
On February 28, 2019 , PBFX closed on the IDR Restructuring Agreement with PBF
LLC and PBF GP, pursuant to which PBFX's IDRs held by PBF LLC were canceled and
converted into 10,000,000 newly issued PBFX common units. Subsequent to the
closing of the IDR Restructuring, no distributions were made to PBF LLC with
respect to the IDRs and the newly issued PBFX common units are entitled to
normal distributions by PBFX.
East Coast Storage Assets Acquisition
On October 1, 2018 , PBFX closed on its agreement with Crown Point International,
LLC ("Crown Point") to purchase its wholly-owned subsidiary, CPI Operations LLC
(the "East Coast Storage Assets Acquisition") for total consideration of
approximately $127.0 million , including working capital and the Contingent
Consideration (as defined in "Note 4 - Acquisitions" of our Notes to
Consolidated Financial Statements), comprised of an initial payment at closing
of $75.0 million with a remaining balance of $32.0 million that was paid on
October 1, 2019 . The residual purchase consideration consists of the Contingent
Consideration. The consideration was financed through a combination of cash on
hand and borrowings under the PBFX Revolving Credit Facility.
Development Assets Acquisition
On July 16, 2018 , PBFX and PBF LLC entered into the Development Assets
Contribution Agreements, pursuant to which PBFX acquired from PBF LLC all of the
issued and outstanding limited liability company interests of Toledo Rail
Logistics Company LLC , whose assets consist of a loading and unloading rail
facility located at PBF Holding's Toledo refinery (the "Toledo Rail Products
Facility"); Chalmette Logistics Company LLC , whose assets consist of a truck
loading rack facility (the "Chalmette Truck Rack") and a rail yard facility (the
"Chalmette Rosin Yard"), both of which are located at PBF Holding's Chalmette
refinery ; Paulsboro Terminaling Company LLC , whose assets consist of a lube oil
terminal facility located at PBF Holding's Paulsboro refinery (the "Paulsboro
Lube Oil Terminal "); and DCR Storage and Loading Company LLC , whose assets
consist of an ethanol storage facility located at PBF Holding's Delaware City
refinery (the "Delaware Ethanol Storage Facility" and collectively with the
Toledo Rail Products Facility, the Chalmette Truck Rack, the Chalmette Rosin
Yard, and the Paulsboro Lube Oil Terminal , the "Development Assets"). The
acquisition of the Development Assets closed on July 31, 2018 for total
consideration of $31.6 million consisting of 1,494,134 common units representing
limited partner interests in PBFX, issued to PBF LLC .
Knoxville Terminal Acquisition
On April 16, 2018 , PBFX completed the purchase of two refined product terminals
located in Knoxville, Tennessee , which include product tanks, pipeline
connections to the Colonial Pipeline Company and Plantation Pipe Line Company
pipeline systems and truck loading facilities (the "Knoxville Terminals") from
Cummins Terminals, Inc. for total cash consideration of $58.0 million , excluding
working capital adjustments (the "Knoxville Terminals Purchase"). The
transaction was financed through a combination of cash on hand and borrowings
under the PBFX Revolving Credit Facility.
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Chalmette Storage Services Agreement
On February 15, 2017 , we entered into a ten-year storage services agreement,
under which PBFX, through PBFX Op Co, assumed construction of a crude oil
storage tank at the Chalmette refinery (the "Chalmette Storage Tank"). The
Chalmette Storage Tank commenced operations providing storage services to PBF
Holding in November 2017 upon completion of construction.
PNGPC Contribution Agreement
On February 15, 2017 , PBFX entered into the PNGPC Contribution Agreement between
PBFX and PBF LLC , pursuant to which PBFX Op Co acquired from PBF LLC all of the
issued and outstanding limited liability company interests of PNGPC. PNGPC owns
and operates an existing interstate natural gas pipeline. In August 2017 , PBFX
Op Co completed the construction of a new pipeline which replaced the existing
pipeline and commenced operations providing pipeline transportation services to
PBF Holding .
PBFX Revolving Credit Facility
On July 30, 2018 , PBFX entered into the PBFX Revolving Credit Facility with
Wells Fargo Bank, National Association , as administrative agent, and a syndicate
of lenders. The PBFX Revolving Credit Facility amended and restated the May 2014
PBFX Revolving Credit Facility to, among other things, increase the maximum
commitment available to PBFX from $360.0 million to $500.0 million and extend
the maturity date to July 2023 . PBFX has the ability to increase the maximum
amount of the PBFX Revolving Credit Facility by an aggregate amount of up to
$250.0 million to a total facility size of $750.0 million , subject to receiving
increased commitments from lenders or other financial institutions and
satisfaction of certain conditions. The commitment fees on the unused portion,
the interest rate on advances, and the fees for letters of credit are consistent
with the May 2014 PBFX Revolving Credit Facility. The PBFX Revolving Credit
Facility is guaranteed by a limited guaranty of collection from PBF LLC . During
2019 and 2018, PBFX incurred net borrowings of $127.0 million and $126.3
million , respectively, primarily to fund acquisitions and capital projects.
The outstanding borrowings under the PBFX Revolving Credit Facility were $283.0
million , $156.0 million and $29.7 million as of December 31, 2019 , 2018 and
2017, respectively.
PBF Holding Revolving Credit Facility
On May 2, 2018 , PBF Holding and certain of its wholly-owned subsidiaries, as
borrowers or subsidiary guarantors, replaced our existing asset-based revolving
credit agreement dated as of August 15, 2014 (the "August 2014 Revolving Credit
Agreement") with the Revolving Credit Facility. Among other things, the
Revolving Credit Facility increases the maximum commitment available to PBF
Holding from $2.6 billion to $3.4 billion , extends the maturity date to May
2023 , and redefines certain components of the Borrowing Base, as defined in the
agreement governing the Revolving Credit Facility (the "Revolving Credit
Agreement"), to make more funding available for working capital and other
general corporate purposes. In addition, an accordion feature allows for
commitments of up to $3.5 billion . The commitment fees on the unused portion,
the interest rate on advances and the fees for letters of credit are consistent
with the August 2014 Revolving Credit Agreement and further described in "Note 9
- Credit Facilities and Debt" of our Notes to Consolidated Financial Statements.
There were no outstanding borrowings under the Revolving Credit Facility as of
December 31, 2019 and December 31, 2018 . At December 31, 2017 , there was $350.0
million outstanding under the August 2014 Revolving Credit Agreement.
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Senior Notes
On May 30, 2017 , PBF Holding and PBF Finance Corporation ("PBF Finance") issued
$725.0 million , in aggregate, principal amount of the 2025 Senior Notes. We used
the net proceeds of $711.6 million to fund the cash tender offer (the "Tender
Offer") for any and all of the outstanding 8.25% senior secured notes due 2020
(the "2020 Senior Secured Notes"), to pay the related redemption price and
accrued and unpaid interest for any 2020 Senior Secured Notes that remained
outstanding after the completion of the Tender Offer, and for general corporate
purposes. As described in "Note 9 - Credit Facilities and Debt" of our Notes to
Consolidated Financial Statements, upon the satisfaction and discharge of the
2020 Senior Secured Notes in connection with the closing of the Tender Offer and
the redemption, the 2023 Senior Notes became unsecured and certain covenants
were modified, as provided for in the indenture governing the 2023 Senior Notes
and related documents.
On October 6, 2017 , PBFX issued an additional $175.0 million in aggregate
principal amount of 6.875% Senior Notes due 2023 (together with the initially
issued notes, the "PBFX 2023 Senior Notes"). The additional amount of the PBFX
2023 Senior Notes were issued at 102% of face value with an effective rate of
6.442% and were issued under the indenture governing the initial PBFX 2023
Senior Notes dated May 12, 2015 . PBFX used the net proceeds from the offering of
the additional amount of the PBFX 2023 Senior Notes to repay a portion of the
PBFX Revolving Credit Facility and for general capital purposes.
Renewable Fuels Standard
We are subject to obligations to purchase RINs required to comply with the
Renewable Fuels Standard. Our overall RINs obligation is based on a percentage
of domestic shipments of on-road fuels as established by EPA . To the degree we
are unable to blend the required amount of biofuels to satisfy our RINs
obligation, RINs must be purchased on the open market to avoid penalties and
fines. We record our RINs obligation on a net basis in Accrued expenses when our
RINs liability is greater than the amount of RINs earned and purchased in a
given period and in Prepaid and other current assets when the amount of RINs
earned and purchased is greater than the RINs liability. We incurred
approximately $122.7 million in RINs costs during the year ended December 31,
2019 as compared to $143.9 million and $293.7 million during the years ended
December 31, 2018 and 2017, respectively. The fluctuations in RINs costs are due
primarily to volatility in prices for ethanol-linked RINs and increases in our
production of on-road transportation fuels since 2012. Our RINs purchase
obligation is dependent on our actual shipment of on-road transportation fuels
domestically and the amount of blending achieved.
Crude Oil Acquisition Agreements
We have a contract with Saudi Aramco pursuant to which we have been purchasing
up to approximately 100,000 bpd of crude oil from Saudi Aramco that is processed
at our Paulsboro refinery . In connection with the Chalmette Acquisition we
entered into a contract with PDVSA for the supply of 40,000 to 60,000 bpd of
crude oil that can be processed at any of our East or Gulf Coast refineries. We
have not sourced crude oil under this agreement since 2017 as PDVSA has
suspended deliveries due to the parties' inability to agree to mutually
acceptable payment terms and because of U.S. government sanctions against PDVSA .
In connection with the closing of the Torrance Acquisition, we entered into a
crude supply agreement with ExxonMobil for approximately 60,000 bpd of crude oil
that can be processed at our Torrance refinery . We currently purchase all of our
crude and feedstock needs independently from a variety of suppliers on the spot
market or through term agreements for our Delaware City and Toledo refineries.
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Tax Receivable Agreement
In connection with PBF Energy's initial public offering, PBF Energy entered into
a Tax Receivable Agreement pursuant to which PBF Energy is required to pay the
members of PBF LLC , who exchange their units for PBF Energy Class A common stock
or whose units PBF Energy purchases, approximately 85% of the cash savings in
income taxes that PBF Energy realizes as a result of the increase in the tax
basis of its interest in PBF LLC , including tax benefits attributable to
payments made under the Tax Receivable Agreement. PBF Energy has recognized, as
of December 31, 2019 , 2018 and 2017, a liability for the Tax Receivable
Agreement of $373.5 million , $373.5 million and $362.1 million , respectively,
reflecting its estimate of the undiscounted amounts that it expects to pay under
the agreement due to exchanges including those in connection with its IPO and
its secondary offerings. PBF Energy's estimate of the Tax Receivable Agreement
liability is based, in part, on forecasts of future taxable income over the
anticipated life of its future business operations, assuming no material changes
in the relevant tax law. Periodically, it may adjust the liability based, in
part, on an updated estimate of the amounts that it expects to pay, using
assumptions consistent with those used in its concurrent estimate of the
deferred tax asset valuation allowance. For example, PBF Energy must adjust the
estimated Tax Receivable Agreement liability each time it purchases PBF LLC
Series A Units or upon an exchange of PBF LLC Series A Units for PBF Energy
Class A common stock. These periodic adjustments to the tax receivable
liability, if any, are recorded in general and administrative expense and may
result in adjustments to its income tax expense and deferred tax assets and
liabilities. As a result of the reduction of the corporate tax rate to 21% as
part of the TCJA, the liability associated with the Tax Receivable Agreement was
reduced. Accordingly, the deferred tax assets associated with the payments made
or expected to be made were also reduced.
Factors Affecting Operating Results
Overview
Our earnings and cash flows from operations are primarily affected by the
relationship between refined product prices and the prices for crude oil and
other feedstocks. The cost to acquire crude oil and other feedstocks and the
price of refined petroleum products ultimately sold depends on numerous factors
beyond our control, including the supply of, and demand for, crude oil,
gasoline, diesel and other refined petroleum products, which, in turn, depend
on, among other factors, changes in global and regional economies, weather
conditions, global and regional political affairs, production levels, the
availability of imports, the marketing of competitive fuels, pipeline capacity,
prevailing exchange rates and the extent of government regulation. Our revenue
and income from operations fluctuate significantly with movements in industry
refined petroleum product prices, our materials cost fluctuate significantly
with movements in crude oil prices and our other operating expenses fluctuate
with movements in the price of energy to meet the power needs of our refineries.
In addition, the effect of changes in crude oil prices on our operating results
is influenced by how the prices of refined products adjust to reflect such
changes.
Crude oil and other feedstock costs and the prices of refined petroleum products
have historically been subject to wide fluctuation. Expansion and upgrading of
existing facilities and installation of additional refinery distillation or
conversion capacity, price volatility, governmental regulations, international
political and economic developments and other factors beyond our control are
likely to continue to play an important role in refining industry economics.
These factors can impact, among other things, the level of inventories in the
market, resulting in price volatility and a reduction or increase in product
margins. Moreover, the industry typically experiences seasonal fluctuations in
demand for refined petroleum products, such as for gasoline and diesel, during
the summer driving season and for home heating oil during the winter.
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Benchmark Refining Margins
In assessing our operating performance, we compare the refining margins (revenue
less materials cost) of each of our refineries against a specific benchmark
industry refining margin based on crack spreads. Benchmark refining margins take
into account both crude and refined petroleum product prices. When these prices
are combined in a formula they provide a single value-a gross margin per
barrel-that, when multiplied by throughput, provides an approximation of the
gross margin generated by refining activities.
The performance of our East Coast refineries generally follows the Dated Brent
(NYH) 2-1-1 benchmark refining margin. Our Toledo refinery generally follows the
WTI (Chicago ) 4-3-1 benchmark refining margin. Our Chalmette refinery generally
follows the LLS (Gulf Coast ) 2-1-1 benchmark refining margin. Our Torrance
refinery generally follows the ANS (West Coast ) 4-3-1 benchmark refining margin.
While the benchmark refinery margins presented below under "Results of
Operations-Market Indicators" are representative of the results of our
refineries, each refinery's realized gross margin on a per barrel basis will
differ from the benchmark due to a variety of factors affecting the performance
of the relevant refinery to its corresponding benchmark. These factors include
the refinery's actual type of crude oil throughput, product yield differentials
and any other factors not reflected in the benchmark refining margins, such as
transportation costs, storage costs, credit fees, fuel consumed during
production and any product premiums or discounts, as well as inventory
fluctuations, timing of crude oil and other feedstock purchases, a rising or
declining crude and product pricing environment and commodity price management
activities. As discussed in more detail below, each of our refineries, depending
on market conditions, has certain feedstock-cost and product-value advantages
and disadvantages as compared to the refinery's relevant benchmark.
Credit Risk Management
Credit risk refers to the risk that a counterparty will default on its
contractual obligations resulting in financial loss to us. Our exposure to
credit risk is reflected in the carrying amount of the receivables that are
presented in our Consolidated Balance Sheets. To minimize credit risk, all
customers are subject to extensive credit verification procedures and extensions
of credit above defined thresholds are to be approved by the senior management.
Our intention is to trade only with recognized creditworthy third parties. In
addition, receivable balances are monitored on an ongoing basis. We also limit
the risk of bad debts by obtaining security such as guarantees or letters of
credit.
Other Factors
We currently source our crude oil for our refineries on a global basis through a
combination of market purchases and short-term purchase contracts, and through
our crude oil supply agreements. We believe purchases based on market pricing
has given us flexibility in obtaining crude oil at lower prices and on a more
accurate "as needed" basis. Since our Paulsboro and Delaware City refineries
access their crude slates from the Delaware River via ship or barge and through
our rail facilities at Delaware City , these refineries have the flexibility to
purchase crude oils from the Mid-Continent and Western Canada , as well as a
number of different countries. We have not sourced crude oil under our crude
supply arrangement with PDVSA since 2017 as PDVSA has suspended deliveries due
to our inability to agree to mutually acceptable payment terms and because of
U.S. government sanctions against PDVSA .
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In the past several years, we expanded and upgraded the existing on-site
railroad infrastructure at the Delaware City refinery . Currently, crude oil
delivered by rail to this facility is consumed at our Delaware City and
Paulsboro refineries. The Delaware City rail unloading facilities, and the East
Coast Storage Assets, allow our East Coast refineries to source WTI-based crude
oils from Western Canada and the Mid-Continent, which we believe, at times, may
provide cost advantages versus traditional Brent-based international crude oils.
In support of this rail strategy, we have at times entered into agreements to
lease or purchase crude railcars. Certain of these railcars were subsequently
sold to a third-party, which has leased the railcars back to us for periods of
between four and seven years. In subsequent periods, we have sold or returned
railcars to optimize our railcar portfolio. Our railcar fleet, at times,
provides transportation flexibility within our crude oil sourcing strategy that
allows our East Coast refineries to process cost advantaged crude from Canada
and the Mid-Continent.
Our operating cost structure is also important to our profitability. Major
operating costs include costs relating to employees and contract labor, energy,
maintenance and environmental compliance, and emission control regulations,
including the cost of RINs required for compliance with the Renewable Fuels
Standard. The predominant variable cost is energy, in particular, the price of
utilities, natural gas and electricity.
Our operating results are also affected by the reliability of our refinery
operations. Unplanned downtime of our refinery assets generally results in lost
margin opportunity and increased maintenance expense. The financial impact of
planned downtime, such as major turnaround maintenance, is managed through a
planning process that considers such things as the margin environment, the
availability of resources to perform the needed maintenance and feed logistics,
whereas unplanned downtime does not afford us this opportunity.
Refinery-Specific Information
The following section includes refinery-specific information related to our
operations, crude oil differentials, ancillary costs, and local premiums and
discounts.
Delaware City Refinery . The benchmark refining margin for the Delaware City
refinery is calculated by assuming that two barrels of Dated Brent crude oil are
converted into one barrel of gasoline and one barrel of diesel. We calculate
this benchmark using the NYH market value of reformulated blendstock for
oxygenate blending ("RBOB") and ULSD against the market value of Dated Brent and
refer to the benchmark as the Dated Brent (NYH) 2-1-1 benchmark refining margin.
Our Delaware City refinery has a product slate of approximately 51% gasoline,
31% distillate, 2% high-value petrochemicals, with the remaining portion of the
product slate comprised of lower-value products (3% petroleum coke, 3% LPGs, 7%
black oil and 3% other). For this reason, we believe the Dated Brent (NYH) 2-1-1
is an appropriate benchmark industry refining margin. The majority of Delaware
City revenues are generated off NYH-based market prices.
The Delaware City refinery's realized gross margin on a per barrel basis has
historically differed from the Dated Brent (NYH) 2-1-1 benchmark refining margin
due to the following factors:
•the Delaware City refinery processes a slate of primarily medium and heavy sour
crude oils, which has constituted approximately 55% to 65% of total throughput.
The remaining throughput consists of sweet crude oil and other feedstocks and
blendstocks. In addition, we have the capability to process a significant volume
of light, sweet crude oil depending on market conditions. Our total throughput
costs have historically priced at a discount to Dated Brent; and
•as a result of the heavy, sour crude slate processed at Delaware City , we
produce lower value products including sulfur, carbon dioxide and petroleum
coke. These products are priced at a significant discount to RBOB and ULSD.
Paulsboro Refinery . The benchmark refining margin for the Paulsboro refinery is
calculated by assuming that two barrels of Dated Brent crude oil are converted
into one barrel of gasoline and one barrel of diesel. We calculate this
benchmark using the NYH market value of RBOB and ULSD diesel against the market
value of Dated Brent and refer to the benchmark as the Dated Brent (NYH) 2-1-1
benchmark refining margin. Our Paulsboro refinery has a product slate of
approximately 44% gasoline, 34% distillate and 3% high-value Group I lubricants,
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with the remaining portion of the product slate comprised of lower-value
products (13% black oil, 2% petroleum coke, and 4% LPGs). For this reason, we
believe the Dated Brent (NYH) 2-1-1 is an appropriate benchmark industry
refining margin. The majority of Paulsboro revenues are generated off NYH-based
market prices.
The Paulsboro refinery's realized gross margin on a per barrel basis has
historically differed from the Dated Brent (NYH) 2-1-1 benchmark refining margin
due to the following factors:
•the Paulsboro refinery processes a slate of primarily medium and heavy sour
crude oils, which has historically constituted approximately 75% to 85% of total
throughput. The remaining throughput consists of sweet crude oil and other
feedstocks and blendstocks;
•as a result of the heavy, sour crude slate processed at Paulsboro , we produce
lower value products including sulfur and petroleum coke. These products are
priced at a significant discount to RBOB and ULSD; and
•the Paulsboro refinery produces Group I lubricants which carry a premium sales
price to RBOB and ULSD.
Toledo Refinery . The benchmark refining margin for the Toledo refinery is
calculated by assuming that four barrels of WTI crude oil are converted into
three barrels of gasoline, one-half barrel of ULSD and one-half barrel of jet
fuel. We calculate this refining margin using the Chicago market values of
conventional blendstock for oxygenate blending and ULSD and the United States
Gulf Coast value of jet fuel against the market value of WTI and refer to this
benchmark as the WTI (Chicago ) 4-3-1 benchmark refining margin. Our Toledo
refinery has a product slate of approximately 55% gasoline, 34% distillate, 5%
high-value petrochemicals (including nonene, tetramer, benzene, xylene and
toluene) with the remaining portion of the product slate comprised of
lower-value products (4% LPGs and 2% other). For this reason, we believe the WTI
(Chicago ) 4-3-1 is an appropriate benchmark industry refining margin. The
majority of Toledo revenues are generated off Chicago -based market prices.
The Toledo refinery's realized gross margin on a per barrel basis has
historically differed from the WTI (Chicago ) 4-3-1 benchmark refining margin due
to the following factors:
•the Toledo refinery processes a slate of domestic sweet and Canadian synthetic
crude oil. Historically, Toledo's blended average crude costs have differed from
the market value of WTI crude oil;
•the Toledo refinery configuration enables it to produce more barrels of product
than throughput which generates a pricing benefit; and
•the Toledo refinery generates a pricing benefit on some of its refined
products, primarily its petrochemicals.
Chalmette Refinery . The benchmark refining margin for the Chalmette refinery is
calculated by assuming two barrels of LLS crude oil are converted into one
barrel of gasoline and one barrel of diesel. We calculate this benchmark using
the US Gulf Coast market value of 87 conventional gasoline and ULSD against the
market value of LLS and refer to this benchmark as the LLS (Gulf Coast ) 2-1-1
benchmark refining margin. Our Chalmette refinery has a product slate of
approximately 50% gasoline and 33% distillate, with the remaining portion of the
product slate comprised of lower-value products (8% black oil, 4% petroleum
coke, 3% LPGs, and 2% petrochemical feedstocks). For this reason, we believe the
LLS (Gulf Coast ) 2-1-1 is an appropriate benchmark industry refining margin. The
majority of Chalmette revenues are generated off Gulf Coast -based market prices.
The Chalmette refinery's realized gross margin on a per barrel basis has
historically differed from the LLS (Gulf Coast ) 2-1-1 benchmark refining margin
due to the following factors:
•the Chalmette refinery has generally processed a slate of primarily medium and
heavy sour crude oils, which has historically constituted approximately 55% to
65% of total throughput. The remaining throughput consists of sweet crude oil
and other feedstocks and blendstocks; and
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•as a result of the heavy, sour crude slate processed at Chalmette , we produce
lower-value products including sulfur and petroleum coke. These products are
priced at a significant discount to 87 conventional gasoline and ULSD.
The PRL (pre-treater, reformer, light ends) project was completed in 2017 which
has increased high-octane, ultra-low sulfur reformate and chemicals production.
The new crude oil tank was also commissioned in 2017 and is allowing additional
gasoline and diesel exports, reduced RINs compliance costs and lower crude ship
demurrage costs.
Additionally, the idled 12,000 barrel per day coker unit was restarted in the
fourth quarter of 2019 to increase the refinery's long-term feedstock
flexibility to capture the potential benefit in the price for heavy and
high-sulfur feedstocks. The unit has increased the refinery's total coking
capacity to approximately 40,000 barrels per day.
Torrance Refinery . The benchmark refining margin for the Torrance refinery is
calculated by assuming that four barrels of Alaskan North Slope ("ANS") crude
oil are converted into three barrels of gasoline, one-half barrel of diesel and
one-half barrel of jet fuel. We calculate this benchmark using the West Coast
Los Angeles market value of California reformulated blendstock for oxygenate
blending (CARBOB), CARB diesel and jet fuel and refer to the benchmark as the
ANS (West Coast ) 4-3-1 benchmark refining margin. Our Torrance refinery has a
product slate of approximately 62% gasoline and 26% distillate with the
remaining portion of the product slate comprised of lower-value products (8%
petroleum coke, 2% LPG and 2% black oil). For this reason, we believe the ANS
(West Coast ) 4-3-1 is an appropriate benchmark industry refining margin. The
majority of Torrance revenues are generated off West Coast Los Angeles-based
market prices.
The Torrance refinery's realized gross margin on a per barrel basis has
historically differed from the ANS (West Coast ) 4-3-1 benchmark refining margin
due to the following factors:
•the Torrance refinery has generally processed a slate of primarily heavy sour
crude oils, which has historically constituted approximately 80% to 90% of total
throughput. The Torrance crude slate has the lowest API gravity (typically an
American Petroleum Institute ("API") gravity of less than 20 degrees) of all of
our refineries. The remaining throughput consists of other feedstocks and
blendstocks; and
•as a result of the heavy, sour crude slate processed at Torrance, we produce
lower-value products including petroleum coke and sulfur. These products are
priced at a significant discount to gasoline and diesel.
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Results of Operations
The tables below reflect our consolidated financial and operating highlights for
the years ended December 31, 2019 , 2018 and 2017 (amounts in millions, except
per share data). Differences between the results of operations of PBF Energy and
PBF LLC primarily pertain to income taxes, interest expense and noncontrolling
interest as shown below. Earnings per share information applies only to the
financial results of PBF Energy . We operate in two reportable business segments:
Refining and Logistics. Our oil refineries, excluding the assets owned by PBFX,
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 MLP that operates certain logistics assets such as crude oil and
refined petroleum products terminals, pipelines and storage facilities. PBFX's
operations are aggregated into the Logistics segment. We do not separately
discuss our results by individual segments as, apart from PBFX's third-party
acquisitions, our Logistics segment did not have any significant third-party
revenues and a significant portion of its operating results eliminate in
consolidation.
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PBF Energy Year Ended December 31,
2019 2018 2017
Revenues $ 24,508.2 $ 27,186.1 $ 21,786.6
Cost and expenses:
Cost of products and other 21,387.5 24,503.4 18,863.6
Operating expenses (excluding
depreciation and amortization expense as
reflected below) 1,782.3 1,721.0 1,684.4
Depreciation and amortization expense 425.3 359.1
278.0
Cost of sales 23,595.1 26,583.5
20,826.0
General and administrative expenses (excluding depreciation and amortization expense as reflected below) 284.0 277.0
214.5
Depreciation and amortization expense 10.8 10.6
13.0
Change in contingent consideration (0.8 ) - - (Gain) loss on sale of assets (29.9 ) (43.1 ) 1.5 Total cost and expenses 23,859.2 26,828.0 21,055.0 Income from operations 649.0 358.1 731.6 Other income (expense): Interest expense, net (159.6 ) (169.9 ) (154.4 ) Change in Tax Receivable Agreement liability - 13.9
250.9
Change in fair value of catalyst obligations (9.7 ) 5.6 (2.2 ) Debt extinguishment costs - - (25.5 ) Other non-service components of net periodic benefit cost (0.2 ) 1.1 (1.4 ) Income before income taxes 479.5 208.8 799.0 Income tax expense 104.3 33.5 315.6 Net income 375.2 175.3 483.4 Less: net income attributable to noncontrolling interests 55.8 47.0
67.8
Net income attributable to PBF Energy Inc. stockholders$ 319.4 $ 128.3 $ 415.6 Consolidated gross margin$ 913.1 $ 602.6 $ 960.6 Gross refining margin (1)$ 2,801.2 $ 2,419.4 $ 2,676.6 Net income available to Class A common stock per share: Basic$ 2.66 $ 1.11 $ 3.78 Diluted$ 2.64 $ 1.10 $ 3.73 ----------
(1) See Non-GAAP Financial Measures.
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PBF LLC Year Ended December 31,
2019 2018 2017
Revenues $ 24,508.2 $ 27,186.1 $ 21,786.6
Cost and expenses:
Cost of products and other 21,387.5 24,503.4 18,863.6
Operating expenses (excluding
depreciation and amortization expense as
reflected below) 1,782.3 1,721.0 1,684.4
Depreciation and amortization expense 425.3 359.1
278.0
Cost of sales 23,595.1 26,583.5
20,826.0
General and administrative expenses (excluding depreciation and amortization expense as reflected below) 282.3 275.2
214.2
Depreciation and amortization expense 10.8 10.6
13.0
Change in contingent consideration (0.8 ) - - (Gain) loss on sale of assets (29.9 ) (43.1 ) 1.5 Total cost and expenses 23,857.5 26,826.2 21,054.7 Income from operations 650.7 359.9 731.9 Other income (expense): Interest expense, net (169.1 ) (178.5 ) (162.3 ) Change in fair value of catalyst obligations (9.7 ) 5.6 (2.2 ) Debt extinguishment costs - - (25.5 ) Other non-service components of net periodic benefit cost (0.2 ) 1.1 (1.4 ) Income before income taxes 471.7 188.1
540.5
Income tax (benefit) expense (8.3 ) 8.0 (10.8 ) Net income 480.0 180.1
551.3
Less: net income attributable to noncontrolling interests 51.5 42.3
51.2
Net income attributable to PBF Energy Company LLC$ 428.5 $ 137.8 $ 500.1 72
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Operating Highlights
Year Ended December 31,
2019 2018 2017
Key Operating Information
Production (bpd in thousands) 825.2 854.5 802.9
Crude oil and feedstocks throughput (bpd in
thousands) 823.1 849.7 807.4
Total crude oil and feedstocks throughput
(millions of barrels) 300.4 310.0 294.7
Consolidated gross margin per barrel of
throughput $ 3.04 $ 1.94 $ 3.25
Gross refining margin, excluding special
items, per barrel of throughput (1) $ 8.51 $ 9.09 $ 8.08
Refinery operating expense, per barrel of
throughput $ 5.61 $
5.34
Crude and feedstocks (% of total throughput) (2) Heavy 32 % 36 % 34 % Medium 28 % 30 % 30 % Light 26 % 21 % 21 % Other feedstocks and blends 14 % 13 % 15 % Total throughput 100 % 100 % 100 % Yield (% of total throughput) Gasoline and gasoline blendstocks 49 % 50 % 50 % Distillates and distillate blendstocks 32 % 32 % 30 % Lubes 1 % 1 % 1 % Chemicals 2 % 2 % 2 % Other 16 % 16 % 16 % Total yield 100 % 101 % 99 % ---------- (1) See Non-GAAP Financial Measures. (2) We define heavy crude oil as crude oil withAmerican Petroleum Institute (API) gravity less than 24 degrees. We define medium crude oil as crude oil with API gravity between 24 and 35 degrees. We define light crude oil as crude oil with API gravity higher than 35 degrees. 73 --------------------------------------------------------------------------------
The table below summarizes certain market indicators relating to our operating results as reported by Platts.
Year Ended December 31,
2019 2018 2017
(dollars per barrel, except as noted)
Dated Brent crude oil $ 64.34 $ 71.34 $ 54.18
West Texas Intermediate (WTI) crude oil $ 57.03 $ 65.20 $ 50.79
Light Louisiana Sweet (LLS) crude oil $ 62.67 $ 70.23 $ 54.02
Alaska North Slope (ANS) crude oil $ 65.00 $ 71.54 $ 54.43
Crack Spreads
Dated Brent (NYH) 2-1-1 $ 12.68 $ 13.17 $ 14.74
WTI (Chicago) 4-3-1 $ 15.25 $ 14.84 $ 15.88
LLS (Gulf Coast) 2-1-1 $ 12.43 $ 12.30 $ 13.57
ANS (West Coast) 4-3-1 $ 18.46 $ 15.48 $ 17.43
Crude Oil Differentials
Dated Brent (foreign) less WTI $ 7.31 $ 6.14 $ 3.39
Dated Brent less Maya (heavy, sour) $ 6.76 $ 8.70 $ 7.16
Dated Brent less WTS (sour) $ 8.09 $ 13.90 $ 4.37
Dated Brent less ASCI (sour) $ 3.73 $ 4.64 $ 3.66
WTI less WCS (heavy, sour) $ 13.61 $ 26.93 $ 12.24
WTI less Bakken (light, sweet) $ 0.66 $ 2.86 $ (0.26 )
WTI less Syncrude (light, sweet) $ 0.18 $ 6.84 $ (1.74 )
WTI less LLS (light, sweet) $ (5.64 ) $ (5.03 ) $ (3.23 )
WTI less ANS (light, sweet) $ (7.97 ) $ (6.34 ) $ (3.63 )
Natural gas (dollars per MMBTU) $ 2.53 $ 3.07 $ 3.02
2019 Compared to 2018
Overview- PBF Energy net income was $375.2 million for the year ended
December 31, 2019 compared to net income of $175.3 million for the year ended
December 31, 2018 . PBF LLC net income was $480.0 million for the year ended
December 31, 2019 compared to net income of $180.1 million for the year ended
December 31, 2018 . Net income attributable to PBF Energy stockholders was $319.4
million , or $2.64 per diluted share, for the year ended December 31, 2019 ($2.64
per share on a fully-exchanged, fully-diluted basis based on adjusted
fully-converted net income, or $0.90 per share on a fully-exchanged,
fully-diluted basis based on adjusted fully-converted net income excluding
special items, as described below in Non-GAAP Financial Measures) compared to
net income attributable to PBF Energy stockholders of $128.3 million , or $1.10
per diluted share, for the year ended December 31, 2018 ($1.10 per share on a
fully-exchanged, fully-diluted basis based on adjusted fully-converted net
income, or $3.26 per share on a fully-exchanged, fully-diluted basis based on
adjusted fully-converted net income excluding special items, as described below
in Non-GAAP Financial Measures). The net income attributable to PBF Energy
stockholders 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 99.0% and 98.3% for the years ended December 31, 2019
and 2018, respectively.
Our results for the year ended December 31, 2019 were positively impacted by
special items comprised of a non-cash, pre-tax LCM inventory adjustment of
approximately $250.2 million , or $188.0 million net of tax and a pre-tax gain on
the sale of land at our Torrance refinery of $33.1 million , or $24.9 million net
of tax. Our results for the year ended December 31, 2018 were negatively
impacted by special items consisting of a non-cash, pre-
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tax LCM inventory adjustment of approximately $351.3 million , or $260.0 million
net of tax, and the early return of certain leased railcars, resulting in a
pre-tax charge of $52.3 million , or $38.7 million net of tax. These unfavorable
impacts were partially offset by special items related to a pre-tax benefit
associated with the change in the Tax Receivable Agreement liability of $13.9
million , or $10.3 million net of tax, and a pre-tax gain on the sale of land at
our Torrance refinery of $43.8 million , or $32.4 million net of tax.
Excluding the impact of these special items, our results were negatively
impacted by unfavorable movements in crude differentials and overall lower
throughput volumes and barrels sold across our refineries, partially offset by
higher crack spreads realized at our West Coast refinery . Refining margins for
the current year compared to the prior year were weaker at our East Coast ,
Mid-Continent and Gulf Coast refineries, offset by significantly stronger
margins realized on the West Coast . Our results for the year ended December 31,
2019 were also negatively impacted by increased operating expenses and
depreciation and amortization expense associated with our continued investment
in our refining assets and the effect of significant turnaround and maintenance
activity during 2019.
Revenues- Revenues totaled $24.5 billion for the year ended December 31, 2019
compared to $27.2 billion for the year ended December 31, 2018 , a decrease of
approximately $2.7 billion or 9.9%. Revenues per barrel sold were $69.93 and
$77.08 for the years ended December 31, 2019 and 2018, respectively, a decrease
of 9.3% directly related to lower hydrocarbon commodity prices. For the year
ended December 31, 2019 , the total throughput rates at our East Coast ,
Mid-Continent, Gulf Coast and West Coast refineries averaged approximately
336,400 bpd, 153,000 bpd, 177,900 bpd and 155,800 bpd, respectively. For the
year ended December 31, 2018 , the total throughput rates at our East Coast ,
Mid-Continent, Gulf Coast and West Coast refineries averaged approximately
344,700 bpd, 149,600 bpd, 185,600 bpd and 169,800 bpd, respectively. The
throughput rates at our East Coast and West Coast refineries were lower in the
year ended December 31, 2019 compared to the same period in 2018 due to planned
downtime associated with turnarounds of the coker and associated units at our
Delaware City and Torrance refineries and the crude unit at our Paulsboro
refinery , all of which were completed in the first half of 2019, and unplanned
downtime at our Delaware City refinery in the first quarter of 2019. Throughput
rates at our Mid-Continent refinery were higher in the current year compared to
the prior year due to a planned turnaround at our Toledo refinery in the first
half of the prior year. Throughput rates at our Gulf Coast refinery were lower
in the year ended December 31, 2019 compared to the same period in 2018 due to
unplanned downtime in the fourth quarter of 2019. For the year ended
December 31, 2019 , the total barrels sold at our East Coast , Mid-Continent, Gulf
Coast and West Coast refineries averaged approximately 382,500 bpd, 163,900 bpd,
225,300 bpd and 188,600 bpd, respectively. For the year ended December 31, 2018 ,
the total barrels sold at our East Coast , Mid-Continent, Gulf Coast and West
Coast refineries averaged approximately 372,700 bpd, 161,800 bpd, 233,700 bpd
and 198,100 bpd, respectively. Total refined product barrels sold were higher
than throughput rates, reflecting sales from inventory as well as sales and
purchases of refined products outside the refineries.
Consolidated Gross Margin- Consolidated gross margin totaled $913.1 million for
the year ended December 31, 2019 , compared to $602.6 million for the year ended
December 31, 2018 , an increase of $310.5 million . Gross refining margin (as
described below in Non-GAAP Financial Measures) totaled $2,801.2 million , or
$9.34 per barrel of throughput, for the year ended December 31, 2019 compared to
$2,419.4 million , or $7.79 per barrel of throughput, for the year ended
December 31, 2018 , an increase of approximately $381.8 million . Gross refining
margin excluding special items totaled $2,551.0 million , or $8.51 per barrel of
throughput, for the year ended December 31, 2019 compared to $2,823.0 million ,
or $9.09 per barrel of throughput, for the year ended December 31, 2018 , a
decrease of $272.0 million .
Consolidated gross margin and gross refining margin were positively impacted in
the current year by a non-cash LCM inventory adjustment of approximately $250.2
million on a net basis, resulting from the increase in crude oil and refined
product prices from the year ended 2018. Gross refining margin excluding the
impact of special items decreased due to unfavorable movements in certain crude
differentials and refining margins and reduced throughput rates at the majority
of our refineries, partially offset by higher throughput rates in the
Mid-Continent and stronger crack spreads on the West Coast . For the year ended
December 31, 2018 , special items impacting our margin calculations included a
non-cash LCM inventory adjustment of approximately $351.3 million
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on a net basis, resulting from a decrease in crude oil and refined product
prices and a $52.3 million charge resulting from costs associated with the early
return of certain leased railcars.
Additionally, our results continue to be impacted by significant costs to comply
with the RFS, although at a reduced level from the prior year. Total RFS costs
were $122.7 million for the year ended December 31, 2019 compared with $143.9
million for the year ended December 31, 2018 .
Average industry margins were mixed during the year ended December 31, 2019
compared with the prior year, primarily as a result of varying regional product
inventory levels and seasonal and unplanned refining downtime issues impacting
product margins. Crude oil differentials were generally unfavorable compared
with the prior year, with notable light-heavy crude differential compression
negatively impacting our gross refining margin and moving our overall crude
slate lighter.
On the East Coast , the Dated Brent (NYH) 2-1-1 industry crack spread was
approximately $12.68 per barrel, or 3.7% lower, in the year ended December 31,
2019 , as compared to $13.17 per barrel in the same period in 2018. Our margins
were negatively impacted from our refinery specific slate on the East Coast by
tightening in the Dated Brent/Maya and WTI/Bakken differentials, which decreased
$1.94 per barrel and $2.20 per barrel, respectively, in comparison to the prior
year. In addition, the WTI/WCS differential decreased significantly to $13.61
per barrel in 2019 compared to $26.93 per barrel in 2018, which unfavorably
impacted our cost of heavy Canadian crude.
Across the Mid-Continent, the WTI (Chicago ) 4-3-1 industry crack spread was
$15.25 per barrel, or 2.8% higher, in the year ended December 31, 2019 , as
compared to $14.84 per barrel in the prior year. Our margins were negatively
impacted from our refinery specific slate in the Mid-Continent by a decreasing
WTI/Bakken differential, which averaged $0.66 per barrel in the year ended
December 31, 2019 , as compared to $2.86 per barrel in the prior year.
Additionally, the WTI/Syncrude differential averaged $0.18 per barrel for the
year ended December 31, 2019 as compared to $6.84 per barrel in the prior year.
In the Gulf Coast , the LLS (Gulf Coast ) 2-1-1 industry crack spread was $12.43
per barrel, or 1.1% higher, in the year ended December 31, 2019 as compared to
$12.30 per barrel in the prior year. Margins in the Gulf Coast were negatively
impacted from our refinery specific slate by a weakening WTI/LLS differential,
which averaged a premium of $5.64 per barrel for the year ended December 31,
2019 as compared to a premium of $5.03 per barrel in the prior year.
On the West Coast , the ANS (West Coast ) 4-3-1 industry crack spread was $18.46
per barrel, or 19.3% higher, in the year ended December 31, 2019 as compared to
$15.48 per barrel in the prior year. Margins on the West Coast were negatively
impacted from our refinery specific slate by a weakening WTI/ANS differential,
which averaged a premium of $7.97 per barrel for the year ended December 31,
2019 as compared to a premium of $6.34 per barrel in the prior year.
Favorable movements in these benchmark crude differentials typically result in
lower crude costs and positively impact our earnings, while reductions in these
benchmark crude differentials typically result in higher crude costs and
negatively impact our earnings.
Operating Expenses- Operating expenses totaled $1,782.3 million for the year
ended December 31, 2019 compared to $1,721.0 million for the year ended
December 31, 2018 , an increase of approximately $61.3 million , or 3.6%. Of the
total $1,782.3 million of operating expenses for the year ended December 31,
2019 , $1,684.3 million , or $5.61 per barrel of throughput, related to expenses
incurred by the Refining segment, while the remaining $98.0 million related to
expenses incurred by the Logistics segment ($1,654.8 million or $5.34 per barrel
of throughput, and $66.2 million of operating expenses for the year ended
December 31, 2018 related to the Refining and Logistics segments, respectively).
Increases in operating expenses were mainly attributed to higher outside service
costs related to turnaround and maintenance activity. Operating expenses related
to our Logistics segment increased when compared to 2018 due to expenses related
to the operations of PBFX's recently acquired assets and higher environmental
clean-up remediation costs and product contamination remediation costs.
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General and Administrative Expenses- General and administrative expenses totaled
$284.0 million for the year ended December 31, 2019 , compared to $277.0 million
for the year ended December 31, 2018 , an increase of $7.0 million or 2.5%. The
increase in general and administrative expenses for the year ended December 31,
2019 compared with the year ended December 31, 2018 primarily related to higher
outside services, including legal settlement charges, and transaction costs
related to the Martinez Acquisition, partially offset by a reduction in
incentive compensation. Our general and administrative expenses are comprised of
personnel, facilities and other infrastructure costs necessary to support our
refineries and related logistics assets.
Gain on Sale of Assets- Gain on sale of assets was $29.9 million and $43.1
million for the year ended December 31, 2019 and December 31, 2018 ,
respectively, mainly attributed to the sale of two separate parcels of land at
our Torrance refinery .
Depreciation and Amortization Expense- Depreciation and amortization expense
totaled $436.1 million for the year ended December 31, 2019 (including $425.3
million recorded within Cost of sales) compared to $369.7 million for the year
ended December 31, 2018 (including $359.1 million recorded within Cost of
sales), an increase of $66.4 million . The increase was a result of additional
depreciation expense associated with a general increase in our fixed asset base
due to capital projects and turnarounds completed during 2019 and 2018, as well
as accelerated amortization related to the Delaware City and Torrance refinery
turnarounds, which were completed in the first half of 2019.
Change in Tax Receivable Agreement Liability- There was no change in the Tax
Receivable Agreement liability for the year ended December 31, 2019 . Change in
the Tax Receivable Agreement liability for the year ended December 31, 2018
represented a gain of $13.9 million .
Change in Fair Value of Catalyst Obligations- Change in the fair value of
catalyst obligations represented a loss of $9.7 million for the year ended
December 31, 2019 , compared to a gain of $5.6 million for the year ended
December 31, 2018 . These gains and losses relate to the change in value of the
precious metals underlying the sale and leaseback of our refineries' precious
metal catalysts, which we are obligated to repurchase at fair market value on
the catalyst financing arrangement termination dates.
Interest Expense, net- PBF Energy interest expense totaled $159.6 million for
the year ended December 31, 2019 , compared to $169.9 million for the year ended
December 31, 2018 , a decrease of $10.3 million . This net decrease is mainly
attributable to lower outstanding revolver borrowings for the year ended
December 31, 2019 . Interest expense includes interest on long-term debt
including the PBFX credit facilities, costs related to the sale and leaseback of
our precious metal catalysts, 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. PBF LLC interest expense totaled $169.1 million and $178.5 million for
the year ended December 31, 2019 and December 31, 2018 , respectively (inclusive
of $9.5 million and $8.6 million , respectively, of incremental interest expense
on the affiliate note payable with PBF Energy that eliminates in consolidation
at the PBF Energy level).
Income Tax Expense- PBF LLC is organized as a limited liability company and PBFX
is an MLP, both of which are treated as "flow-through" entities for federal
income tax purposes and therefore are not subject to income tax. However, two
subsidiaries of Chalmette Refining and our Canadian subsidiary, PBF Energy
Limited ("PBF Ltd. "), are treated as C-Corporations for income tax purposes and
may incur income taxes with respect to their earnings, as applicable. 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 PBF LLC's amended and restated
limited liability company agreement, related to such taxes on a pro-rata basis.
PBF Energy recognizes 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 or loss, which was approximately 99.0% and 98.3%, on a weighted-average
basis for the years ended December 31, 2019 and 2018, respectively. PBF Energy's
Consolidated Financial Statements do not reflect any benefit or provision for
income taxes on the pre-tax income or loss attributable to the noncontrolling
interests in PBF LLC or PBFX (although, as described above, PBF LLC must make
tax distributions
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to all its members on a pro-rata basis). PBF Energy's effective tax rate,
excluding the impact of noncontrolling interest, for the years
ended December 31, 2019 and 2018 was 21.8% and 16.0%, respectively, reflecting
tax adjustments for discrete items and the impact of tax return to income tax
provision adjustments.
Noncontrolling Interest- PBF Energy is 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, including PBFX. With respect to the consolidation of PBF LLC , the
Company records a noncontrolling interest for the economic interest in PBF LLC
held by members other than PBF Energy , and with respect to the consolidation of
PBFX, the Company records a noncontrolling interest for the economic interests
in PBFX held by the public unitholders of PBFX, and with respect to the
consolidation of PBF Holding , the Company records a 20% noncontrolling interest
for the ownership interests in two subsidiaries of Chalmette Refining held by a
third party. The total noncontrolling interest on the Consolidated Statements of
Operations represents the portion of the Company's earnings or loss attributable
to the economic interests held by members of PBF LLC other than PBF Energy , by
the public common unitholders of PBFX and by the third-party stockholders of
certain of Chalmette Refining's subsidiaries. The total noncontrolling interest
on the Consolidated Balance Sheets represents the portion of the Company's net
assets attributable to the economic interests held by the members of PBF LLC
other than PBF Energy , by the public common unitholders of PBFX and by the
third-party stockholders of the two Chalmette Refining subsidiaries. PBF
Energy's weighted-average equity noncontrolling interest ownership percentage in
PBF LLC for the years ended December 31, 2019 and 2018 was approximately 1.0%
and 1.7%, respectively. The carrying amount of the noncontrolling interest on
our Consolidated Balance Sheets attributable to the noncontrolling interest is
not equal to the noncontrolling interest ownership percentage due to the effect
of income taxes and related agreements that pertain solely to PBF Energy .
2018 Compared to 2017
Overview- PBF Energy net income was $175.3 million for the year ended
December 31, 2018 compared to net income of $483.4 million for the year ended
December 31, 2017 . PBF LLC net income was $180.1 million for the year ended
December 31, 2018 compared to net income of $551.3 million for the year ended
December 31, 2017 . Net income attributable to PBF Energy stockholders was $128.3
million , or $1.10 per diluted share, for the year ended December 31, 2018 ($1.10
per share on a fully-exchanged, fully-diluted basis based on adjusted
fully-converted net income, or $3.26 per share on a fully-exchanged, fully-
diluted basis based on adjusted fully-converted net income excluding special
items, as described below in Non-GAAP Financial Measures) compared to net income
attributable to PBF Energy stockholders of $415.6 million , or $3.73 per diluted
share, for the year ended December 31, 2017 ($3.73 per share on a
fully-exchanged, fully-diluted basis based on adjusted fully-converted net
income, or $1.14 per share on a fully-exchanged, fully-diluted basis based on
adjusted fully-converted net income excluding special items, as described below
in Non-GAAP Financial Measures). The net income attributable to PBF Energy
stockholders 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 98.3% and 96.6% for the years ended December 31, 2018
and 2017, respectively.
Our results for the year ended December 31, 2018 were negatively impacted by
special items consisting of a non-cash, pre-tax LCM inventory adjustment of
approximately $351.3 million , or $260.0 million net of tax, and the early return
of certain leased railcars, resulting in a pre-tax charge of $52.3 million , or
$38.7 million net of tax. These unfavorable impacts were partially offset by
special items related to a pre-tax benefit associated with the change in the Tax
Receivable Agreement liability of $13.9 million , or $10.3 million net of tax,
and a pre-tax gain on the Torrance land sale of $43.8 million , or $32.4 million
net of tax. Our results for the year ended December 31, 2017 were positively
impacted by special items consisting of a non-cash, pre-tax LCM inventory
adjustment of approximately $295.5 million , or $178.5 million net of tax, and a
pre-tax benefit of $250.9 million , or $151.5 million net of tax related to the
change in our Tax Receivable Agreement liability. These favorable impacts were
partially offset by special items related to pre-tax debt extinguishment costs
of $25.5 million , or $15.4 million net of tax, related to the redemption of the
2020 Senior Secured Notes and the enactment of the TCJA resulting in a
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net tax expense of $20.2 million associated with the remeasurement of the Tax
Receivable Agreement associated deferred tax assets and related reduction of our
deferred tax liabilities.
Excluding the impact of these special items, our results were positively
impacted by favorable movements in crude differentials, higher throughput
volumes and barrels sold across the majority of our refineries and reduced
regulatory compliance costs, offset by lower crack spreads realized at the
majority of our refineries, which were favorably impacted in the prior year by
the hurricane-related effect on refining margins due to tightening product
inventories, specifically distillates. Our results for the year ended
December 31, 2018 were negatively impacted by higher general and administrative
costs and increased depreciation and amortization expense.
Revenues- Revenues totaled $27.2 billion for the year ended December 31, 2018
compared to $21.8 billion for the year ended December 31, 2017 , an increase of
approximately $5.4 billion , or 24.8%. Revenues per barrel sold were $77.08 and
$64.90 for the years ended December 31, 2018 and 2017, respectively, an increase
of 18.8% directly related to higher hydrocarbon commodity prices. For the year
ended December 31, 2018 , the total throughput rates at our East Coast ,
Mid-Continent, Gulf Coast and West Coast refineries averaged approximately
344,700 bpd, 149,600 bpd, 185,600 bpd and 169,800 bpd, respectively. For the
year ended December 31, 2017 , the total throughput rates at our East Coast ,
Mid-Continent, Gulf Coast and West Coast refineries averaged approximately
338,200 bpd, 145,200 bpd, 184,500 bpd and 139,500 bpd, respectively. The
throughput rates at our East Coast , Mid-Continent and West Coast refineries were
higher in the year ended December 31, 2018 compared to the same period in 2017.
Throughput rates at our Gulf Coast refinery were in line with the prior year
despite planned downtimes during the first half of 2018. The throughput rates at
our East Coast refineries increased due to planned downtime at our Delaware City
refinery during 2017, whereas our Mid-Continent refinery ran at modestly higher
rates during the year, taking advantage of a relatively strong margin
environment. The throughput rates at our West Coast refinery increased due to
planned downtime in the prior year as part of the first significant turnaround
of the refinery under our ownership and improved refinery performance
experienced in the year ended December 31, 2018 . For the year ended December 31,
2018 , the total refined product barrels sold at our East Coast , Mid-Continent,
Gulf Coast and West Coast refineries averaged approximately 372,700 bpd, 161,800
bpd, 233,700 bpd and 198,100 bpd, respectively. For the year ended December 31,
2017 , the total refined product barrels sold at our East Coast , Mid-Continent,
Gulf Coast and West Coast refineries averaged approximately 363,800 bpd, 160,400
bpd, 227,200 bpd and 168,300 bpd, respectively. Total refined product barrels
sold were higher than throughput rates, reflecting sales from inventory as well
as sales and purchases of refined products outside the refineries.
Consolidated Gross Margin- Consolidated gross margin totaled $602.6 million for
the year ended December 31, 2018 , compared to $960.6 million for the year ended
December 31, 2017 , a decrease of $358.0 million . Gross refining margin (as
described below in Non-GAAP Financial Measures) totaled $2,419.4 million , or
$7.79 per barrel of throughput, for the year ended December 31, 2018 compared to
$2,676.6 million , or $9.08 per barrel of throughput, for the year ended
December 31, 2017 , a decrease of approximately $257.2 million . Gross refining
margin excluding special items totaled $2,823.0 million , or $9.09 per barrel of
throughput for the year ended December 31, 2018 compared to $2,381.1 million or
$8.08 per barrel of throughput, for the year ended December 31, 2017 , an
increase of $441.9 million .
Consolidated gross margin and gross refining margin were negatively impacted in
the year ended December 31, 2018 by special items. The special items impacting
our margin calculations included a non-cash LCM inventory adjustment of
approximately $351.3 million on a net basis, resulting from a decrease in crude
oil and refined product prices compared with the prices at the end of 2017 and a
$52.3 million charge resulting from costs associated with the early return of
certain leased railcars. The non-cash LCM inventory adjustment increased
consolidated gross margin and gross refining margin by approximately $295.5
million in the year ended December 31, 2017 . Excluding the impact of special
items, consolidated gross margin and gross refining margin increased due to
generally favorable movements in crude differentials and higher throughput
volumes and barrels sold across all of our refineries.
Additionally, our results continue to be impacted by significant costs to comply
with RFS, although at a reduced level from the prior year. Total RFS costs were
$143.9 million for the year ended December 31, 2018 compared with $293.7 million
for the year ended December 31, 2017 .
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Average industry margins were weaker during the year ended December 31, 2018
compared with the prior year, primarily as a result of 2017 being favorably
impacted by the hurricane-related effect on refining margins in the second half
of the year due to tightening product inventories, specifically distillates.
Crude oil differentials were generally favorable compared with the prior year,
with beneficial differentials experienced across the East Coast and
Mid-Continent, partially offset by marginally unfavorable impacts related to our
refinery specific crude slate in the Gulf and West Coast .
On the East Coast , the Dated Brent (NYH) 2-1-1 industry crack spread was
approximately $13.17 per barrel, or 10.7% lower, in the year ended December 31,
2018 as compared to $14.74 per barrel in the same period in 2017. Our margins
were positively impacted from our refinery specific slate on the East Coast by
an improving Dated Brent/WTI differential, which increased $2.75 per barrel
compared with the prior year and increases in the Dated Brent/Maya and
WTI/Bakken differentials, which increased $1.54 per barrel and $3.12 per barrel,
respectively, compared with the prior year. In addition, the WTI/WCS
differential widened significantly to $26.93 per barrel in 2018 compared to
$12.24 in 2017, which favorably impacted our cost of heavy Canadian crude.
Across the Mid-Continent, the WTI (Chicago ) 4-3-1 industry crack spread was
$14.84 per barrel, or 6.5% lower, in the year ended December 31, 2018 , as
compared to $15.88 per barrel in the same period in 2017. Our margins were
positively impacted from our refinery specific slate in the Mid-Continent by an
improving WTI/Bakken differential, which was approximately $2.86 per barrel in
the year ended December 31, 2018 , as compared to a premium of $0.26 per barrel
in the same period in 2017. Additionally, the WTI/Syncrude differential averaged
a discount of $6.84 per barrel for the year ended December 31, 2018 as compared
to a premium of $1.74 per barrel in the same period in 2017.
In the Gulf Coast , the LLS (Gulf Coast ) 2-1-1 industry crack spread was $12.30
per barrel, or 9.4% lower, in the year ended December 31, 2018 as compared to
$13.57 per barrel in the same period in 2017. Margins in the Gulf Coast were
negatively impacted from our refinery specific slate by a declining WTI/LLS
differential, which averaged a premium of $5.03 for the year ended December 31,
2018 as compared to an average premium of $3.23 experienced in the prior year.
On the West Coast , the ANS (West Coast ) 4-3-1 industry crack spread was $15.48
per barrel, or 11.2% lower, in the year ended December 31, 2018 as compared to
$17.43 per barrel in the same period in 2017. Margins on the West Coast were
negatively impacted from our refinery specific slate by a declining WTI/ANS
differential, which averaged a premium of $6.34 per barrel for the year ended
December 31, 2018 as compared to a premium of $3.63 per barrel in the same
period of 2017.
Favorable movements in these benchmark crude differentials typically result in
lower crude costs and positively impact our earnings, while reductions in these
benchmark crude differentials typically result in higher crude costs and
negatively impact our earnings.
Operating Expenses- Operating expenses totaled $1,721.0 million for the year
ended December 31, 2018 compared to $1,684.4 million for the year ended
December 31, 2017 , an increase of approximately $36.6 million , or 2.2%. Of the
total $1,721.0 million of operating expenses for the year ended December 31,
2018 , $1,654.8 million , or $5.34 per barrel of throughput, related to expenses
incurred by the Refining segment, while the remaining $66.2 million related to
expenses incurred by the Logistics segment ($1,626.4 million or $5.52 per barrel
of throughput, and $58.0 million of operating expenses for the year ended
December 31, 2017 related to the Refining and Logistics segment respectively).
Decreases in operating expenses on a per barrel basis were driven by increased
system reliability and our focused efforts on reducing operating costs. The
increase in operating expenses compared with the prior year was mainly
attributable to higher energy and utility costs as a result of higher natural
gas pricing and overall increased throughput. This increase was slightly offset
by a decrease in supplies and materials due to our Torrance refinery
experiencing higher costs in 2017 related to its turnaround. Operating expenses
related to our Logistics segment were generally consistent with the prior year
and consist of costs related to the operation and maintenance of PBFX's assets.
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General and Administrative Expenses- General and administrative expenses totaled
$277.0 million for the year ended December 31, 2018 , compared to $214.5 million
for the year ended December 31, 2017 , an increase of $62.5 million or 29.1%. The
increase in general and administrative expenses for the year ended December 31,
2018 compared with the year ended December 31, 2017 primarily related to higher
employee-related expenses, including incentive compensation and retirement
benefits. Our general and administrative expenses are comprised of the
personnel, facilities and other infrastructure costs necessary to support our
refineries and related logistics assets.
(Gain) Loss on Sale of Assets- There was a net gain of $43.1 million for the
year ended December 31, 2018 mainly attributable to a $43.8 million gain related
to the Torrance land sale. There was a loss of $1.5 million for the year ended
December 31, 2017 relating to the sale of non-operating refining assets.
Depreciation and Amortization Expense- Depreciation and amortization expense
totaled $369.7 million for the year ended December 31, 2018 (including $359.1
million recorded within Cost of sales) compared to $291.0 million for the year
ended December 31, 2017 (including $278.0 million recorded within Cost of
sales), an increase of $78.7 million . The increase was a result of additional
depreciation expense associated with a general increase in our fixed asset base
due to capital projects and turnarounds completed during 2018 and 2017, which
included the first significant Torrance refinery turnaround under our ownership.
Change in Tax Receivable Agreement Liability- Change in the Tax Receivable
Agreement liability for the year ended December 31, 2018 represented a gain of
$13.9 million , compared to a gain of $250.9 million for the year ended
December 31, 2017 .
Change in Fair Value of Catalyst Obligations- Change in the fair value of
catalyst obligations represented a gain of $5.6 million for the year ended
December 31, 2018 , compared to a loss of $2.2 million for the year ended
December 31, 2017 . These gains and losses relate to the change in value of the
precious metals underlying the sale and leaseback of our refineries' precious
metal catalysts, which we are obligated to return or repurchase at fair market
value on the catalyst financing arrangement termination dates.
Debt extinguishment costs- Debt extinguishment costs of $25.5 million incurred
for the year ended December 31, 2017 relate to nonrecurring charges associated
with debt refinancing activity calculated based on the difference between the
carrying value of the 2020 Senior Secured Notes on the date that they were
reacquired and the amount for which they were reacquired. There were no such
costs incurred in the year ended December 31, 2018 .
Interest Expense, net- PBF Energy interest expense totaled $169.9 million for
the year ended December 31, 2018 , compared to $154.4 million for the year ended
December 31, 2017 , an increase of $15.5 million . This net increase is mainly
attributable to the interest costs associated with the issuance of the
additional amount of the PBFX 2023 Senior Notes in October 2017 and higher
borrowings under the PBFX Revolving Credit Facility. Interest expense includes
interest on long-term debt including the PBFX credit facilities, costs related
to the sale and leaseback of our precious metal catalysts, financing costs
associated with the Inventory Intermediation Agreements with J. Aron , letter of
credit fees associated with the purchase of certain crude oils, the amortization
of deferred financing costs and the amortization of discounted liabilities. PBF
LLC interest expense totaled $178.5 million and $162.3 million for the years
ended December 31, 2018 and 2017, respectively (inclusive of $8.6 million and
$7.9 million , respectively, of incremental interest expense on the affiliate
note payable with PBF Energy that eliminates in consolidation at the PBF Energy
level).
Income Tax Expense- PBF LLC is organized as a limited liability company and PBFX
is an MLP, both of which are treated as "flow-through" entities for federal
income tax purposes and therefore are not subject to income tax. However, two
subsidiaries of Chalmette Refining and PBF Ltd. are treated as C-Corporations
for income tax purposes and may incur income taxes with respect to their
earnings, as applicable. 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
PBF LLC's amended and restated limited liability company agreement,
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related to such taxes on a pro-rata basis. PBF Energy recognizes 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 or loss, which was
approximately 98.3% and 96.6%, on a weighted-average basis for the years ended
December 31, 2018 and 2017, respectively. PBF Energy's consolidated financial
statements do not reflect any benefit or provision for income taxes on the
pre-tax income or loss attributable to the noncontrolling interests in PBF LLC
or PBFX (although, as described above, PBF LLC must make tax distributions to
all its members on a pro-rata basis). PBF Energy's effective tax rate, excluding
the impact of noncontrolling interest, for the years ended December 31, 2018 and
2017 was 16.0% and 39.5%, respectively, reflecting discrete tax items primarily
related to return to provision adjustments pertaining to equity compensation and
the impact of the TCJA which, among other things, reduced the U.S federal
corporate tax rate from 35% to 21%.
Noncontrolling Interests- PBF Energy is 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, including PBFX. With respect to the consolidation of PBF LLC , the
Company records a noncontrolling interest for the economic interest in PBF LLC
held by members other than PBF Energy , and with respect to the consolidation of
PBFX, the Company records a noncontrolling interest for the economic interests
in PBFX held by the public unitholders of PBFX, and with respect to the
consolidation of PBF Holding , the Company records a 20% noncontrolling interest
for the ownership interests in two subsidiaries of Chalmette Refining held by a
third-party. The total noncontrolling interest on the consolidated statements of
operations represents the portion of the Company's earnings or loss attributable
to the economic interests held by members of PBF LLC other than PBF Energy , by
the public common unitholders of PBFX and by the third-party stockholder of
certain of Chalmette Refining's subsidiaries. The total noncontrolling interest
on the consolidated balance sheet represents the portion of the Company's net
assets attributable to the economic interests held by the members of PBF LLC
other than PBF Energy , by the public common unitholders of PBFX and by the
third-party stockholders of the two Chalmette Refining subsidiaries. PBF
Energy's weighted-average equity noncontrolling interest ownership percentage in
PBF LLC for the years ended December 31, 2018 and 2017 was approximately 1.7%
and 3.4%, 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 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 GAAP ("Non-GAAP"). These measures should not be considered a
substitute for, or superior to, measures of financial performance prepared in
accordance with GAAP, and our calculations thereof may not be comparable to
similarly entitled measures reported by other companies. Such Non-GAAP financial
measures are presented only in the context of PBF Energy's results and are not
presented or discussed in respect to PBF LLC .
Special Items
The Non-GAAP measures presented include Adjusted Fully-Converted Net Income
excluding special items, EBITDA excluding special items and gross refining
margin excluding special items. Special items for the periods presented relate
to LCM inventory adjustments, gains on sale of assets at our Torrance refinery ,
changes in the Tax Receivable Agreement liability, charges associated with the
early return of certain leased railcars, debt extinguishment costs, a net tax
benefit related to the TCJA enactment and a net tax expense associated with the
remeasurement of Tax Receivable Agreement associated deferred tax assets.
Although we believe that Non-GAAP financial measures, excluding the impact of
special items, provide useful supplemental information to investors regarding
the results and performance of our business and allow for helpful
period-over-period comparisons, such Non-GAAP measures should only be considered
as a supplement to, and not as a substitute for, or superior to, the financial
measures prepared in accordance with GAAP.
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Adjusted Fully-Converted Net Income and Adjusted Fully-Converted Net Income
Excluding Special Items
PBF Energy utilizes results presented on an Adjusted Fully-Converted basis that
reflects an assumed exchange of all PBF LLC Series A Units for shares of PBF
Energy Class A common stock. In addition, we present results on an Adjusted
Fully-Converted basis excluding special items as described above. We believe
that these Adjusted Fully-Converted measures, when presented in conjunction with
comparable GAAP measures, are useful to investors to compare PBF Energy results
across different periods and to facilitate an understanding of our operating
results.
Neither Adjusted Fully-Converted Net Income nor Adjusted Fully-Converted Net
Income excluding special items should be considered an alternative to net income
presented in accordance with GAAP. Adjusted Fully-Converted Net Income and
Adjusted Fully-Converted Net Income excluding special items presented by other
companies may not be comparable to our presentation, since each company may
define these terms differently. The differences between Adjusted Fully-Converted
and GAAP results are as follows:
Assumed exchange of all
Class A common stock. As a result of the assumed exchange of all
1 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.
Income Taxes. Prior to PBF Energy's IPO, PBF Energy was organized as alimited liability company treated as a "flow-through" entity for income
tax purposes, and even after
subject to corporate-level income taxes. Adjustments have been made to the
Adjusted Fully-Converted tax provisions and earnings to assume that we had
2 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 PBF Energy's earnings that are subject to corporate income tax.
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The following table reconciles
Year Ended December 31,
2019 2018 2017
Net income attributable to PBF Energy Inc.
stockholders $ 319.4 $ 128.3 $ 415.6
Less: Income allocated to participating
securities 0.5 0.7 1.0
Income available to PBF Energy Inc.
stockholders - basic 318.9 127.6 414.6
Add: Net income attributable to noncontrolling
interests(1) 4.3 4.6 16.7
Less: Income tax expense(2) (1.0 ) (1.2 ) (6.6 )
Adjusted fully-converted net income $ 322.2 $ 131.0 $ 424.7
Special Items:(3)
Add: Non-cash LCM inventory adjustment (250.2 ) 351.3 (295.5 )
Add: Change in Tax Receivable Agreement
liability - (13.9 ) (250.9 )
Add: Debt extinguishment costs - - 25.5
Add: Net tax benefit related to the TCJA - - (173.3 )
Add: Net tax expense on remeasurement of Tax
Receivable Agreement associated deferred tax
assets - - 193.4
Add: Gain on Torrance land sale (33.1 ) (43.8 ) -
Add: Early railcar return expense - 52.3 -
Less: Recomputed income taxes on special items 70.4 (89.9 ) 206.3
Adjusted fully-converted net income excluding
special items $ 109.3 $
387.0
Weighted-average shares outstanding of PBF Energy Inc. 119,887,646 115,190,262 109,779,407 Conversion of PBF LLC Series A Units (4) 1,207,581 1,938,089 3,823,783 Common stock equivalents (5) 758,072 1,645,255 295,655
Fully-converted shares outstanding-diluted 121,853,299 118,773,606 113,898,845
Diluted net income per share$ 2.64 $ 1.10 $ 3.73 Adjusted fully-converted net income per fully exchanged, fully diluted shares outstanding$ 2.64 $ 1.10 $ 3.73 Adjusted fully-converted net income excluding special items per fully exchanged, fully diluted shares outstanding$ 0.90 $ 3.26 $ 1.14 ---------- See Notes to Non-GAAP Financial Measures. Gross Refining Margin and Gross Refining Margin Excluding Special Items Gross refining margin is defined as consolidated gross margin excluding refinery depreciation, refinery operating expense, and gross margin of PBFX. We believe both gross refining margin and gross refining margin excluding special items are important measures of operating performance and provide useful information to investors because they are helpful metric comparisons to the industry refining margin benchmarks, as the refining margin benchmarks do not include a charge for refinery operating expenses and depreciation. In order to assess our operating performance, we compare our gross refining margin (revenues less cost of products and other) to industry refining margin benchmarks and crude oil prices as defined in the table below. 84 -------------------------------------------------------------------------------- Neither gross refining margin nor gross refining margin excluding special items should be considered an alternative to consolidated gross margin, income from operations, net cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Gross refining margin and gross refining margin excluding special items presented by other companies may not be comparable to our presentation, since each company may define these terms differently. The following table presents our GAAP calculation of gross margin and a reconciliation of gross refining margin to the most directly comparable GAAP financial measure, consolidated gross margin, on a historical basis, as applicable, for each of the periods indicated (in millions, except per barrel amounts): Year Ended December 31, 2019 2018 2017 per barrel of per barrel of per barrel of $ throughput $ throughput $ throughput Calculation of consolidated gross margin: Revenues$ 24,508.2 $ 81.58 $ 27,186.1 $ 87.67 $ 21,786.6 $ 73.92 Less: Cost of sales 23,595.1 78.54 26,583.5 85.73 20,826.0 70.67 Consolidated gross margin$ 913.1 $ 3.04 $ 602.6 $ 1.94 $ 960.6 $ 3.25 Reconciliation of consolidated gross margin to gross refining margin: Consolidated gross margin$ 913.1 $ 3.04 $ 602.6 $ 1.94 $ 960.6 $ 3.25 Add: PBFX operating expense 118.7 0.40 84.4 0.27 66.4 0.23 Add: PBFX depreciation expense 38.6 0.13 29.4 0.09 23.7 0.08 Less: Revenues of PBFX (340.2 ) (1.13 ) (281.5 ) (0.91 ) (254.8 ) (0.86 ) Add: Refinery operating expense 1,684.3 5.61 1,654.8 5.34 1,626.4 5.52 Add: Refinery depreciation expense 386.7 1.29 329.7 1.06 254.3 0.86 Gross refining margin$ 2,801.2 $ 9.34 $ 2,419.4 $ 7.79 $ 2,676.6 $ 9.08 Special Items: (3) Add: Non-cash LCM inventory adjustment (250.2 ) (0.83 ) 351.3 1.13 (295.5 ) (1.00 ) Add: Early railcar return expense - - 52.3 0.17 - - Gross refining margin excluding special items$ 2,551.0 $ 8.51 $ 2,823.0 $ 9.09 $ 2,381.1 $ 8.08 ----------
See Notes to Non-GAAP Financial Measures.
85
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EBITDA, EBITDA Excluding Special Items and Adjusted EBITDA
Our management uses EBITDA (earnings before interest, income taxes, depreciation
and amortization), EBITDA excluding special items and Adjusted EBITDA as
measures of operating performance to assist in comparing performance from period
to period on a consistent basis and to readily view operating trends, as a
measure for planning and forecasting overall expectations and for evaluating
actual results against such expectations, and in communications with our board
of directors, creditors, analysts and investors concerning our financial
performance. Our outstanding indebtedness for borrowed money and other
contractual obligations also include similar measures as a basis for certain
covenants under those agreements which may differ from the Adjusted EBITDA
definition described below.
EBITDA, EBITDA excluding special items and Adjusted EBITDA are not presentations
made in accordance with GAAP and our computation of EBITDA, EBITDA excluding
special items and Adjusted EBITDA may vary from others in our industry. In
addition, Adjusted EBITDA contains some, but not all, adjustments that are taken
into account in the calculation of the components of various covenants in the
agreements governing our senior notes and other credit facilities. EBITDA,
EBITDA excluding special items and Adjusted EBITDA should not be considered as
alternatives to income from operations or net income as measures of operating
performance. In addition, EBITDA, EBITDA excluding special items and Adjusted
EBITDA are not presented as, and should not be considered, an alternative to
cash flows from operations as a measure of liquidity. Adjusted EBITDA is defined
as EBITDA before adjustments for items such as stock-based compensation expense,
the non-cash change in the fair value of catalyst obligations, the write down of
inventory to the LCM, changes in the liability for Tax Receivable Agreement due
to factors out of PBF Energy's control such as changes in tax rates, debt
extinguishment costs related to refinancing activities and certain other
non-cash items. Other companies, including other companies in our industry, may
calculate EBITDA, EBITDA excluding special items and Adjusted EBITDA differently
than we do, limiting their usefulness as comparative measures. EBITDA, EBITDA
excluding special items and Adjusted EBITDA also have limitations as analytical
tools and should not be considered in isolation, or as a substitute for analysis
of our results as reported under GAAP. Some of these limitations include that
EBITDA, EBITDA excluding special items and Adjusted EBITDA:
• do not reflect depreciation expense or our cash expenditures, or future
requirements, for capital expenditures or contractual commitments;
• do not reflect changes in, or cash requirements for, our working capital
needs;
• do not reflect our interest expense, or the cash requirements necessary to
service interest or principal payments, on our debt;
• do not reflect realized and unrealized gains and losses from certain hedging
activities, which may have a substantial impact on our cash flow;
• do not reflect certain other non-cash income and expenses; and
• exclude income taxes that may represent a reduction in available cash.
86
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The following tables reconcile net income as reflected in PBF Energy's results
of operations to EBITDA, EBITDA excluding special items and Adjusted EBITDA for
the periods presented (in millions):
Year Ended
2019 2018 2017
Reconciliation of net income to EBITDA and EBITDA excluding special items: Net income$ 375.2 $ 175.3 $ 483.4 Add: Depreciation and amortization expense 436.1 369.7 291.0 Add: Interest expense, net 159.6 169.9 154.4 Add: Income tax expense 104.3 33.5 315.6 EBITDA$ 1,075.2 $ 748.4 $ 1,244.4 Special Items: (3) Add: Non-cash LCM inventory adjustment (250.2 ) 351.3 (295.5 ) Add: Change in Tax Receivable Agreement liability - (13.9 ) (250.9 ) Add: Debt extinguishment costs - -
25.5
Add: Gain on Torrance land sale (33.1 ) (43.8 ) - Add: Early railcar return expense - 52.3 - EBITDA excluding special items$ 791.9 $ 1,094.3
Reconciliation of EBITDA to Adjusted EBITDA: EBITDA$ 1,075.2 $ 748.4 $ 1,244.4 Add: Stock based compensation 37.3 26.0
26.8
Add: Net non-cash change in fair value of catalyst obligations 9.7 (5.6 ) 2.2 Add: Non-cash LCM inventory adjustment (3) (250.2 ) 351.3 (295.5 ) Add: Change in Tax Receivable Agreement liability (3) - (13.9 ) (250.9 ) Add: Debt extinguishment costs (3) - - 25.5 Adjusted EBITDA$ 872.0 $ 1,106.2 $ 752.5 ----------
See Notes to Non-GAAP Financial Measures.
87
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Notes to Non-GAAP Financial Measures
The following notes are applicable to the Non-GAAP Financial Measures above:
(1) Represents the elimination of the noncontrolling interest associated with
the ownership by the members of
members had fully exchanged their
Energy Class A common stock.
(2) Represents an adjustment to reflect
corporate tax rate of approximately 24.9%, 26.0% and 39.6% for the 2019,
2018 and 2017 periods, respectively, applied to the net income attributable
to noncontrolling interest for all periods presented. The adjustment assumes
the full exchange of existing
above. Our statutory tax rates were reduced in 2018 as a result of the TCJA
enactment.
(3) Special items:
LCM inventory adjustment - LCM is a GAAP requirement related to inventory
valuation that mandates inventory to be stated at the lower of cost or market.
Our inventories are stated at the lower of cost or market. Cost is determined
using the LIFO inventory valuation methodology, in which the most recently
incurred costs are charged to cost of sales and inventories are valued at base
layer acquisition costs. Market is determined based on an assessment of the
current estimated replacement cost and net realizable selling price of the
inventory. In periods where the market price of our inventory declines
substantially, cost values of inventory may exceed market values. In such
instances, we record an adjustment to write down the value of inventory to
market value in accordance with GAAP. In subsequent periods, the value of
inventory is reassessed and an LCM inventory adjustment is recorded to reflect
the net change in the LCM inventory reserve between the prior period and the
current period. The net impact of these LCM inventory adjustments are included
in the Refining segment's income from operations, but are excluded from the
operating results presented, as applicable, in order to make such information
comparable between periods.
The following table includes the LCM inventory reserve as of each date presented
(in millions):
2019 2018 2017
January 1, $ 651.8 $ 300.5 $ 596.0
December 31, 401.6 651.8 300.5
The following table includes the corresponding impact of changes in the LCM
inventory reserve on income from operations and net income for the periods
presented (in millions):
Year Ended December 31,
2019 2018 2017
Net LCM inventory adjustment
(charge) benefit in income from
operations $ 250.2 $ (351.3 ) $ 295.5
Net LCM inventory adjustment
(charge) benefit in net income 188.0 (260.0 ) 178.5
Gain on Torrance land sale - During the years endedDecember 31, 2019 and 2018, respectively, we recorded a gain on the sale of two separate parcels of real property acquired as part of theTorrance refinery , but not part of the refinery itself. The gain increased income from operations and net income by$33.1 million and$24.9 million , respectively, during the year endedDecember 31, 2019 . The gain increased income from operations and net income by$43.8 million and$32.4 million , respectively, during the year endedDecember 31, 2018 . There was no such gain in the year endedDecember 31, 2017 . 88 -------------------------------------------------------------------------------- Early Return of Railcars - During the year endedDecember 31, 2018 we recognized certain expenses within Cost of sales associated with the voluntary early return of certain leased railcars. These charges decreased income from operations and net income by$52.3 million and$38.7 million , respectively. There were no such expenses in the years endedDecember 31, 2019 andDecember 31, 2017 . Change in Tax Receivable Agreement liability - During the year endedDecember 31, 2018 ,PBF Energy recorded a change in the Tax Receivable Agreement liability that increased income before taxes and net income by$13.9 million and$10.3 million , respectively. During the year endedDecember 31, 2017 PBF Energy recorded a change in Tax Receivable Agreement liability that increased income before income taxes and net income by$250.9 million and$151.5 million , respectively. There was no such change in the liability for the year endedDecember 31, 2019 . The changes in the Tax Receivable Agreement liability reflect charges or benefits attributable to changes inPBF Energy's obligation under the Tax Receivable Agreement due to factors out of our control such as changes in tax rates. Debt Extinguishment Costs - During the year endedDecember 31, 2017 , we recorded pre-tax debt extinguishment costs of$25.5 million related to the redemption of the 2020 Senior Secured Notes. These nonrecurring charges decreased net income by$15.4 million for the year endedDecember 31, 2017 . There were no such costs in the years endedDecember 31, 2019 andDecember 31, 2018 . TCJA Enactment - We recorded a one-time adjustment in 2017 to deferred tax assets and liabilities in relation to the TCJA. The 2017 net income tax expense impact of$20.2 million consisted of a net tax expense of$193.5 million associated with the remeasurement of the Tax Receivable Agreement associated deferred tax assets and a net tax benefit of$173.3 million for the reduction of our deferred tax liabilities as a result of the TCJA. Recomputed Income taxes on special items - The income tax impact of the special items, other than TCJA related items, were calculated using the tax rates shown in (2) above.
(4) Represents an adjustment to weighted-average diluted shares outstanding to
assume the full exchange of existing
(1) above.
(5) Represents weighted-average diluted shares outstanding assuming theconversion of all common stock equivalents, including options and warrants
for
shares of PBF Energy Class A common stock as calculated under the treasury
stock method (to the extent the impact of such exchange would not be
anti-dilutive) for the years ended December 31, 2019 , 2018 and 2017,
respectively. Common stock equivalents exclude the effects of options,
warrants and performance share units to purchase 6,765,526, 1,293,242 and
6,820,275 shares of PBF Energy Class A common stock and PBF LLC Series A
Units because they are anti-dilutive for the years ended
2018 and 2017, respectively. For periods showing a net loss, all common
stock equivalents and unvested restricted stock are considered
anti-dilutive.
Liquidity and Capital Resources Overview Our primary sources of liquidity are our cash flows from operations and borrowing availability under our credit facilities, as described below. We believe that our cash flows from operations and available capital resources will be sufficient to meet our and our subsidiaries' capital expenditures, working capital needs, dividend payments, debt service and share repurchase program requirements, as well as our obligations under the Tax Receivable Agreement, for the next twelve months. However, our ability to generate sufficient cash flow from operations depends, in part, on petroleum oil market pricing and general economic, political and other factors beyond our control. We are in compliance as ofDecember 31, 2019 with all of the covenants, including financial covenants, in all of our debt agreements. 89 -------------------------------------------------------------------------------- Cash Flow Analysis Cash Flows from Operating Activities Net cash provided by operating activities was$933.5 million for the year endedDecember 31, 2019 compared to net cash provided by operating activities of$838.0 million for the year endedDecember 31, 2018 . Our operating cash flows for the year endedDecember 31, 2019 included our net income of$375.2 million , depreciation and amortization of$447.5 million , deferred income tax expense of$103.7 million , pension and other post-retirement benefits costs of$44.8 million , stock-based compensation of$37.3 million , net non-cash charges relating to the change in the fair value of our inventory repurchase obligations of$25.4 million , and changes in the fair value of our catalyst obligations of$9.7 million , partially offset by a net non-cash benefit of$250.2 million relating to an LCM inventory adjustment, a gain on sale of assets of$29.9 million and change in fair value of contingent consideration of$0.8 million . In addition, net changes in operating assets and liabilities reflected cash inflows of approximately$170.8 million driven by the timing of inventory purchases, payments for accrued expenses and accounts payable and collections of accounts receivables. Our operating cash flows for the year endedDecember 31, 2018 included our net income of$175.3 million , depreciation and amortization of$378.6 million , deferred income tax expense of$32.7 million , pension and other post-retirement benefits costs of$47.4 million , a net non-cash charge of$351.3 million relating to an LCM inventory adjustment, stock-based compensation of$26.0 million , partially offset by a gain on sale of assets of$43.1 million , net non-cash charges relating to the change in the fair value of our inventory repurchase obligations of$31.8 million , change in the Tax Receivable Agreement liability of$13.9 million and changes in the fair value of our catalyst obligations of$5.6 million . In addition, net changes in operating assets and liabilities reflected uses of cash of approximately$78.9 million driven by the timing of inventory purchases, payments for accrued expenses and accounts payable and collections of accounts receivables. Net cash provided by operating activities was$838.0 million for the year endedDecember 31, 2018 compared to net cash provided by operating activities of$685.7 million for the year endedDecember 31, 2017 . Our operating cash flows for the year endedDecember 31, 2017 included our net income of$483.4 million , deferred income tax expense of$313.8 million , depreciation and amortization of$299.9 million , pension and other post-retirement benefits costs of$42.2 million , stock-based compensation of$26.8 million , debt extinguishment costs related to the refinancing of our 2020 Senior Secured Notes of$25.5 million , the change in the fair value of our inventory repurchase obligations of$13.8 million , changes in the fair value of our catalyst obligations of$2.2 million and a loss on the sale of assets of$1.5 million , partially offset by change in the Tax Receivable Agreement liability of$250.9 million , and a net non-cash benefits relating to an LCM inventory adjustment of$295.5 million . In addition, net changes in operating assets and liabilities reflected sources of cash of approximately$23.0 million driven by the timing of inventory purchases, payments for accrued expenses and accounts payable and collections of accounts receivable. Cash Flows from Investing Activities Net cash used in investing activities was$712.6 million for the year endedDecember 31, 2019 compared to$685.6 million for the year endedDecember 31, 2018 . The net cash flows used in investing activities for the year endedDecember 31, 2019 was comprised of cash outflows of$404.9 million for capital expenditures, expenditures for refinery turnarounds of$299.3 million and expenditures for other assets of$44.7 million , partially offset by proceeds of$36.3 million related to the sale of land at ourTorrance refinery . Net cash used in investing activities for the year endedDecember 31, 2018 was comprised of cash outflows of$317.5 million for capital expenditures, expenditures for refinery turnarounds of$266.0 million , expenditures for other assets of$17.0 million , expenditures for the acquisition of the East Coast Storage Assets by PBFX of$75.0 million and expenditures for the acquisition of theKnoxville Terminals by PBFX of$58.4 million , partially offset by proceeds of$48.3 million related to the sale of land at ourTorrance refinery . 90 -------------------------------------------------------------------------------- Net cash used in investing activities was$685.6 million for the year endedDecember 31, 2018 compared to$687.0 million for the year endedDecember 31, 2017 . Net cash used in investing activities for the year endedDecember 31, 2017 was comprised of cash outflows of$306.7 million for capital expenditures, expenditures for refinery turnarounds of$379.1 million , expenditures for other assets of$31.2 million and expenditures for the acquisition of theToledo Products Terminal by PBFX of$10.1 million , partially offset by$40.1 million of net maturities of marketable securities. Cash Flows from Financing Activities Net cash used in financing activities was$3.3 million for the year endedDecember 31, 2019 compared to net cash used in financing activities of$128.1 million for the year endedDecember 31, 2018 . For the year endedDecember 31, 2019 , net cash used in financing activities consisted primarily of distributions and dividends of$209.2 million , principal amortization payments of the PBF Rail Term Loan (as defined in "Note 9 - Credit Facilities and Debt" of our Notes to Consolidated Financial Statements) of$7.0 million , settlements of catalyst obligations of$6.5 million , taxes paid for net settlement of equity-based compensation of$4.8 million , repurchases of our common stock in connection with tax withholding obligations upon the vesting of certain restricted stock awards of$4.9 million and deferred payment for the East Coast Storage Assets Acquisition of$32.0 million , partially offset by$132.5 million in net proceeds from the issuance of PBFX common units, net borrowings from the PBFX Revolving Credit Facility of$127.0 million and deferred financing costs and other of$1.6 million . Additionally, during the year endedDecember 31, 2019 , we borrowed and repaid 1,350.0 million under our Revolving Credit Facility resulting in no net change to amounts outstanding for the year endedDecember 31, 2019 . For the year endedDecember 31, 2018 , net cash used in financing activities consisted primarily of distributions and dividends of$189.3 million , principal amortization payments of the PBF Rail Term Loan of$6.8 million , repayment of the note payable of$5.6 million , settlements of catalyst obligations of$9.1 million , taxes paid for net settlement of equity-based compensation of$5.4 million , deferred financing costs of$16.2 million , repurchases of our common stock in connection with tax withholding obligations upon the vesting of certain restricted stock awards of$8.2 million and net repayments of our Revolving Credit Facility of$350.0 million , partially offset by$287.3 million in net proceeds from theAugust 2018 Equity Offering,$34.9 million in net proceeds from the issuance of PBFX common units, net borrowings from the PBFX Revolving Credit Facility of$126.3 million and proceeds from stock options exercised of$14.0 million . Net cash used in financing activities was$128.1 million for the year endedDecember 31, 2018 compared to net cash used in financing activities of$172.0 million for the year endedDecember 31, 2017 . For the year endedDecember 31, 2017 , net cash used in financing activities consisted of distributions and dividends of$181.5 million , full repayment of the PBFX Term Loan of$39.7 million , net repayments of the PBFX Revolver of$159.5 million , payments of principal under the PBF Rail Term Loan of$6.6 million , deferred financing costs related to the PBFX 2023 Senior Notes of$3.7 million , repayment of the note payable of$1.2 million and repurchases of our common stock in connection with tax withholding obligations upon the vesting of certain restricted stock awards of$1.0 million , partially offset by the proceeds from the issuance of the additional amount of the PBFX 2023 Senior Notes of$178.5 million , cash proceeds of$21.4 million from the issuance of the 2025 Senior Notes net of cash paid to redeem the 2020 Senior Secured Notes and related issuance costs, proceeds from settlements of catalyst obligations of$10.8 million and proceeds from stock options exercised of$10.5 million . Additionally, during the year endedDecember 31, 2017 , we borrowed and repaid$490.0 million under ourAugust 2014 Revolving Credit Agreement resulting in no net change to amounts outstanding for the year endedDecember 31, 2017 . The cash flow activity ofPBF LLC for the years endedDecember 31, 2019 ,December 31, 2018 andDecember 31, 2017 is materially consistent with that ofPBF Energy discussed above, other than changes in deferred income taxes and certain working capital items, which are different fromPBF Energy due to certain tax related items not applicable toPBF LLC . Additionally,PBF LLC reflects net borrowings of$3.1 million and net proceeds of$44.1 million and$102.5 million for the years endedDecember 31, 2019 , 2018, and 2017, respectively, related to an affiliate loan withPBF Energy , included in cash flows from financing activities, which eliminates in consolidation atPBF Energy . 91 --------------------------------------------------------------------------------
Capitalization
Our capital structure was comprised of the following as of
December 31, 2019
Debt, including current maturities (1):
PBF LLC debt
Affiliate note payable $ 376.4
PBF Holding debt
2025 Senior Notes 725.0
2023 Senior Notes 500.0
PBF Rail Term Loan 14.5
Catalyst financing arrangements 47.6
PBF Holding debt 1,287.1
PBFX debt
PBFX 2023 Senior Notes 525.0
PBFX Revolving Credit Facility 283.0
PBFX debt
808.0
Unamortized deferred financing costs (32.4 ) Unamortized premium on PBFX 2023 Senior Notes
2.2
2,441.3
Less: Affiliate note payable (376.4 ) TotalPBF Energy debt, net of unamortized deferred financing costs and premium (2) $ 2,064.9 Total PBF Energy Equity $ 3,585.5 Total PBF Energy Capitalization (3) $
5,650.4
Total PBF Energy Debt to Capitalization Ratio
37 %
_______________________________________________
(1) Refer to "Note 9 - Credit Facilities and Debt" and "Note 10 - Affiliate Note Payable -PBF LLC " of our Notes to Consolidated Financial Statements for further discussion related to debt. (2) Excludes thePBF LLC affiliate note payable that is eliminated at thePBF Energy level. (3) Total Capitalization refers to the sum of debt, excluding intercompany debt, plus total Equity. Debt Transactions OnJanuary 24, 2020 ,PBF Holding and PBF Finance issued$1.0 billion in aggregate principal amount of 6.00% senior unsecured notes due 2028. The net proceeds from this offering were approximately$989.0 million after deducting the initial purchasers' discount and estimated offering expenses. We used the proceeds to redeem our outstanding 2023 Senior Notes, to pay a portion of the cash consideration for the Martinez Acquisition and for general corporate purposes. We closed on the acquisition of theMartinez refinery onFebruary 1, 2020 . The purchase price for the Martinez Acquisition was$960.0 million plus approximately$230.0 million for estimated hydrocarbon inventory, which is subject to final valuation. In addition, we also have an obligation to make certain post-closing payments to the Seller if certain conditions are met including earn-out payments based on certain earnings thresholds of theMartinez refinery (as set forth in the Sale and Purchase Agreement), for a period of up to four years following the 92 -------------------------------------------------------------------------------- closing. The transaction was financed through a combination of cash on hand, including proceeds from our offering of the 2028 Senior Notes, and borrowings under our Revolving Credit Facility. OnFebruary 14, 2020 , we exercised our right under the indenture governing the 2023 Senior Notes to redeem all of the outstanding 2023 Senior Notes at a price of 103.5% of the aggregate principal amount thereof plus accrued and unpaid interest. The aggregate redemption price for all 2023 Senior Notes approximated$517.5 million plus accrued and unpaid interest. Revolving Credit Facilities Overview Our primary sources of liquidity are cash flows from operations with additional sources available under borrowing capacity from our revolving lines of credit. As ofDecember 31, 2019 ,PBF Energy had$814.9 million of cash and cash equivalents, no outstanding balance under the Revolving Credit Facility and$283.0 million outstanding under the PBFX Revolving Credit Facility. We believe available capital resources will be adequate to meet our capital expenditure, working capital and debt service requirements. We had available capacity under revolving credit facilities as follows atDecember 31, 2019 (in millions): Amount Borrowed as of Outstanding Available Total Commitment December 31, 2019 Letters of Credit Capacity Expiration date Revolving Credit Facility (a) $ 3,400.0 $ - $ 221.4$ 1,461.3 May 2023 PBFX Revolving Credit Facility 500.0 283.0 4.8 212.2 July 2023 Total Credit Facilities $ 3,900.0 $ 283.0 $ 226.2$ 1,673.5
___________________________________
(a) The amount available for borrowings and letters of credit under the Revolving
Credit Facility is calculated according to a "borrowing base" formula based
on (i) 90% of the book value of Eligible Accounts with respect to investment
grade obligors plus (ii) 85% of the book value of Eligible Accounts with
respect to non-investment grade obligors plus (iii) 80% of the cost of
Eligible Hydrocarbon Inventory plus (iv) 100% of Cash and Cash Equivalents in
deposit accounts subject to a control agreement, in each case as defined in
the Revolving Credit Agreement. The borrowing base is subject to customary
reserves and eligibility criteria and in any event cannot exceed
billion.
Additional Information on Indebtedness Our debt, including our revolving credit facilities, term loans and senior notes, include certain typical financial covenants and restrictions on our subsidiaries' ability to, among other things, incur or guarantee new debt, engage in certain business activities including transactions with affiliates and asset sales, make investments or distributions, engage in mergers or pay dividends in certain circumstances. These covenants are subject to a number of important exceptions and qualifications. For further discussion of our indebtedness and these covenants and restrictions, see "Note 9 - Credit Facilities and Debt" of our Notes to Consolidated Financial Statements.PBF Holding and PBFX were in compliance with their respective debt covenants as ofDecember 31, 2019 . Cash Balances As ofDecember 31, 2019 ,PBF Energy andPBF LLC cash and cash equivalents totaled$814.9 million and$813.7 million , respectively. Liquidity As ofDecember 31, 2019 , our total liquidity was approximately$2,276.2 million , compared to total liquidity of approximately$1,677.4 million as ofDecember 31, 2018 . Our total liquidity is equal to the amount of excess availability under the Revolving Credit Facility, which includesPBF Energy cash balance atDecember 31, 2019 . In addition, as ofDecember 31, 2019 , PBFX had approximately$212.2 million of borrowing capacity under the PBFX Revolving Credit Facility compared with$340.0 million as ofDecember 31, 2018 . The PBFX Revolving 93 -------------------------------------------------------------------------------- Credit Facility is available to fund working capital, acquisitions, distributions, capital expenditures, and other general corporate purposes incurred by PBFX. Working CapitalPBF Energy's working capital atDecember 31, 2019 was approximately$1,314.5 million , consisting of$3,823.7 million in total current assets and$2,509.2 million in total current liabilities.PBF Energy's working capital atDecember 31, 2018 was$1,102.4 million , consisting of$3,236.9 million in total current assets and$2,134.5 million in total current liabilities.PBF LLC's working capital atDecember 31, 2019 was approximately$1,281.7 million , consisting of$3,821.5 million in total current assets and$2,539.8 million in total current liabilities.PBF LLC's working capital atDecember 31, 2018 was$1,081.5 million , consisting of$3,235.1 million in total current assets and$2,153.6 million in total current liabilities. Working capital has increased during the year endedDecember 31, 2019 primarily as a result of earnings and the change in our LCM inventory adjustment, partially offset by capital expenditures, including turnaround costs, and dividends and distributions. Crude and Feedstock Supply Agreements Certain of our purchases of crude oil under our agreements with foreign national oil companies require that we post letters of credit and arrange for shipment. We pay for the crude when invoiced, at which time the letters of credit are lifted. We have a contract with Saudi Aramco pursuant to which we have been purchasing up to approximately 100,000 bpd of crude oil from Saudi Aramco that is processed at ourPaulsboro refinery . In connection with theChalmette Acquisition we entered into a contract withPDVSA for the supply of 40,000 to 60,000 bpd of crude oil that can be processed at any of our East orGulf Coast refineries. We have not sourced crude oil under this agreement since 2017 whenPDVSA suspended deliveries due to the parties' inability to agree to mutually acceptable payment terms and because ofU.S. government sanctions againstPDVSA . Notwithstanding the suspension, the recentU.S. government sanctions imposed againstPDVSA andVenezuela would prevent us from purchasing crude oil under this agreement. In connection with the closing of the Torrance Acquisition, we entered into a crude supply agreement with ExxonMobil for approximately 60,000 bpd of crude oil that can be processed at ourTorrance refinery . We currently purchase all of our crude and feedstock needs independently from a variety of suppliers on the spot market or through term agreements for ourDelaware City andToledo refineries. We have entered into various five-year crude supply agreements withShell Oil Products for approximately 150,000 bpd, in the aggregate, to support ourWest Coast andMid-Continent refinery operations. In addition, we have entered into certain offtake agreements for ourWest Coast system with the same counterparty for clean products with varying terms up to 15 years. Inventory Intermediation Agreements We entered into Inventory Intermediation Agreements withJ. Aron , to support the operations of the East Coast Refineries. The Inventory Intermediation Agreement by and amongJ. Aron ,PBF Holding and DCR expires onJune 30, 2021 , which term may be further extended by mutual consent of the parties toJune 30, 2022 . The Inventory Intermediation Agreement by and amongJ. Aron ,PBF Holding and PRC expires onDecember 31, 2021 , which term may be further extended by mutual consent of the parties toDecember 31, 2022 . If not extended, at expiration, we will be required to repurchase the inventories outstanding under the Inventory Intermediation Agreement at that time. Pursuant to each Inventory Intermediation Agreement,J. Aron purchases and holds title to the J. Aron Products produced by the East Coast Refineries, and delivered into our J. Aron Storage Tanks.J. Aron has agreed to sell the J. Aron Products back to the East Coast Refineries as they are discharged out of our J. Aron Storage Tanks.J. Aron has the right to store the J. Aron Products purchased in tanks under the Inventory Intermediation Agreements and will retain these storage rights for the term of the agreements.PBF Holding continues to market and sell the J. Aron Products independently to third parties. 94 -------------------------------------------------------------------------------- AtDecember 31, 2019 , LIFO value of crude oil, intermediates and finished products owned byJ. Aron included within Inventory in our Consolidated Balance Sheets was$355.6 million . We accrue a corresponding liability for such crude oil, intermediates and finished products. Capital Spending Capital spending was$748.9 million for the year endedDecember 31, 2019 , which primarily included turnaround costs at our Torrance,Delaware City andPaulsboro refineries, safety related enhancements, and facility improvements at our refineries, and approximately$31.7 million of capital expenditures related to PBFX. We currently expect to spend an aggregate of approximately$550.0 million to$600.0 million excluding PBFX and any capital expenditures related to the Martinez Acquisition, for facility improvements and refinery maintenance and turnarounds, as well as expenditures to meet environmental and regulatory requirements. In addition, PBFX expects to spend an aggregate of approximately$22.0 to$34.0 million in net capital expenditures during 2020. Contractual Obligations and Commitments The following table summarizes our material contractual payment obligations as ofDecember 31, 2019 (in millions). The table below does not include any contractual obligations with PBFX as these related party transactions are eliminated upon consolidation of our financial statements. This table also excludes any obligations or commitments associated with theMartinez refinery that was acquired onFebruary 1, 2020 . Payments due by period Less than More than Total 1 year 1-3 Years 3-5 Years 5 years PBF Energy: Long-term debt (a)$ 2,095.1 $ 21.4 $ 40.7 $ 1,308.0 $ 725.0 Interest payments on debt facilities (a) 607.5 138.3 276.5 166.4 26.3 Leases and other rental-related commitments (b) 641.3 193.9 128.1 71.1 248.2 Purchase obligations: (c) Crude and Feedstock Supply and Inventory Intermediation Agreements 6,494.9 3,331.7 3,149.1 14.1 - Other Supply and Capacity Agreements 544.1 138.5 109.3 97.1 199.2 Construction obligations 37.2 37.2 - - - Environmental obligations (d) 141.2 12.8 35.3 17.2 75.9 Pension and post-retirement obligations (e) 274.9 15.8 33.4 27.0 198.7 Tax Receivable Agreement obligation (f) 373.5 - 75.6 107.8 190.1 East Coast Storage Assets Contingent Consideration (g) 30.6 10.7 19.9 - - Total contractual cash obligations for PBF Energy$ 11,240.3 $ 3,900.3 $ 3,867.9 $ 1,808.7 $ 1,663.4 Adjustments forPBF LLC : Less: Tax Receivable Agreement obligation (h) (373.5 ) - (75.6 ) (107.8 ) (190.1 ) Add: Affiliate Note Payable (h) 376.4 - - - 376.4 Total contractual cash obligations for PBF LLC$ 11,243.2 $ 3,900.3 $ 3,792.3 $ 1,700.9 $ 1,849.7 95
-------------------------------------------------------------------------------- (a) Long-term debt and Interest payments on debt facilities Long-term obligations represent (i) the repayment of the outstanding borrowings under the Revolving Credit Facility; (ii) the repayment of indebtedness incurred in connection with the 2023 Senior Notes and 2025 Senior Notes; (iii) the repayment of our catalyst financing obligations on their maturity dates; (iv) the repayment of outstanding amounts under the PBFX Revolving Credit Facility and the PBFX 2023 Senior Notes; and (v) the repayment of outstanding amounts under the PBF Rail Term Loan.PBF Energy's contractual obligations exclude the$376.4 million PBF LLC affiliate note payable, which bears interest at 2.5%, is due in 2030 and eliminates in consolidation at thePBF Energy level. Interest payments on debt facilities include cash interest payments on the 2023 Senior Notes, 2025 Senior Notes, PBFX Revolving Credit Facility, PBFX 2023 Senior Notes, catalyst financing obligations, PBF Rail Term Loan, plus cash payments for the commitment fees on the unused portion on our revolving credit facilities and letter of credit fees on the letters of credit outstanding atDecember 31, 2019 . With the exception of our catalyst financing obligations and PBF Rail Term Loan, we have no long-term debt maturing before 2023 as ofDecember 31, 2019 . The table above does not include future interest and principal repayments related to theJanuary 2020 issuance of$1.0 billion in aggregate principal amount of the 2028 Senior Notes or theFebruary 2020 redemption of the 2023 Senior Notes. Refer to "Debt Transactions" above, for further details. Refer to "Note 9 - Credit Facilities and Debt" and "Note 10 - Affiliate Note Payable -PBF LLC " of our Notes to Consolidated Financial Statements for further discussion related to debt. (b) Leases and other rental-related commitments We enter into leases and other rental-related agreements in the normal course of business. As described in "Note 2 - Summary of Significant Accounting Policies" of our Notes to Consolidated Financial Statements, we adopted new guidance on leases effectiveJanuary 1, 2019 which brought substantially all leases with initial terms of over twelve months outstanding as of the implementation date onto our Consolidated Balance Sheets. Leases with initial terms of twelve months or less are considered short-term and we elected the practical expedient in the new lease guidance to exclude these leases from our Consolidated Balance Sheets. Some of our leases provide us with the option to renew the lease at or before expiration of the lease terms. Future lease obligations would change if we chose to exercise renewal options or if we enter into additional operating or finance lease agreements. Certain of our lease obligations contain a fixed and variable component. The table above reflects the fixed component of our lease obligations, including short-term lease expense. The variable component could be significant. Additionally, we have entered into a 15-year lease for hydrogen supply, with future lease payments estimated to total approximately$212.6 million , expected to commence in the second quarter of 2020. As this lease has not yet commenced, the table above does not include any contractual obligation for this lease. See "Note 14 - Leases" of our Notes to Consolidated Financial Statements for further details and disclosures regarding our operating and finance lease obligations. Also included within the lease section above are our obligations related to our leased railcar fleet. In support of our rail strategy, we have at times entered into agreements to lease or purchase crude railcars. Certain of these railcars were subsequently sold to third parties, which have leased the railcars back to us for periods of between four and seven years. OnSeptember 30, 2018 , we agreed to voluntarily return a portion of railcars under an operating lease in order to rationalize certain components of our railcar fleet based on prevailing market conditions in the crude oil by rail market. Under the terms of the lease amendment, we agreed to pay the early termination penalty and will pay a reduced rental fee over the remaining term of the lease. As ofDecember 31, 2019 ,$16.1 million of our total$52.3 million charge recognized in 2018 has not yet been paid and is included within the table above. 96 -------------------------------------------------------------------------------- We also enter into contractual obligations with third parties for the right to use property for locating pipelines and accessing certain of our assets (also referred to as land easements) in the normal course of business. Our obligations regarding such land easements are included within Leases and other rental-related commitments in the table above. As described in "Note 2 - Summary of Significant Accounting Policies" of our Notes to Consolidated Financial Statements, we elected the practical expedient to not evaluate land easements for lease consideration under the new lease guidance adopted onJanuary 1, 2019 and we have applied the new lease guidance to any new or modified land easements after the date of adoption. (c) Purchase obligations We have obligations to repurchase the J. Aron Products under the Inventory Intermediation Agreements withJ. Aron as further explained in "Note 2 - Summary of Significant Accounting Policies", "Note 5 - Inventories" and "Note 8 - Accrued Expenses" of our Notes to Consolidated Financial Statements. Additionally, purchase obligations under "Crude and Feedstock Supply and Inventory Intermediation Agreements" include commitments to purchase crude oil from certain counterparties under supply agreements entered into to ensure adequate supplies of crude oil for our refineries. These obligations are based on aggregate minimum volume commitments at 2019 year end market prices. Payments under "Other Supply and Capacity Agreements" include contracts for the transportation of crude oil and supply of hydrogen, steam, or natural gas to certain of our refineries, contracts for the treatment of wastewater, and contracts for pipeline capacity. We enter into these contracts to facilitate crude oil deliveries and to ensure an adequate supply of energy or essential services to support our refinery operations. Substantially all of these obligations are based on fixed prices. Certain agreements include fixed or minimum volume requirements, while others are based on our actual usage. The amounts included in this table are based on fixed or minimum quantities to be purchased and the fixed or estimated costs based on market conditions as ofDecember 31, 2019 . The amounts included in this table exclude our crude supply agreement withPDVSA . We have not sourced crude oil under this agreement since the third quarter of 2017 asPDVSA has suspended deliveries due to the parties inability to agree to mutually acceptable payment terms and because ofU.S. government sanctions againstPDVSA . (d) Environmental obligations In connection with certain of our refinery and logistics acquisitions, we have assumed certain environmental remediation obligations to address matters that were outstanding at the time of such acquisitions. In addition, in connection with most of these acquisitions, we have purchased environmental insurance policies to insure against unknown environmental liabilities at each site. The obligations in the table above reflect our best estimate in cost and tenure to remediate our outstanding obligations and are further discussed in "Note 13 - Commitments and Contingencies" of our Notes to Consolidated Financial Statements. (e) Pension and post-retirement obligations Pension and post-retirement obligations include only those amounts we expect to pay out in benefit payments and are further explained in "Note 18 - Employee Benefit Plans" of our Notes to Consolidated Financial Statements. (f) Tax Receivable Agreement obligation The table above reflectsPBF Energy's estimated timing of payments under the Tax Receivable Agreement, including the impact of the TCJA, assuming that we earn sufficient taxable income to realize all tax benefits that are subject to the Tax Receivable Agreement as ofDecember 31, 2019 . Refer to "Note 13 - Commitments and Contingencies" of our Notes to Consolidated Financial Statement for further discussion of the Tax Receivable Agreement. 97 -------------------------------------------------------------------------------- (g) East Coast Storage Assets Contingent Consideration The East Coast Storage Assets Contingent Consideration includes the estimated undiscounted Contingent Consideration amounts payable to Crown Point related to the PBFX acquisition of the East Coast Storage Assets and related annual earn-out payments through 2022. (h) Affiliate Note Payable As described in "Note 10 - Affiliate Note Payable -PBF LLC " of our Notes to Consolidated Financial Statements, as ofDecember 31, 2019 ,PBF LLC had an outstanding note payable withPBF Energy for an aggregate principal amount of$376.4 million . The note has an interest rate of 2.5% and matures inApril 2030 , but may be prepaid in whole or in part at any time, at the option ofPBF LLC without penalty or premium. This affiliate note payable is a cash obligation ofPBF LLC only and eliminates in consolidation forPBF Energy . Martinez Acquisition The Contractual Obligations and Commitments table as ofDecember 31, 2019 above and its related notes (a) through (h) above do not include any contractual payment obligations related to theMartinez refinery and related logistics assets that were acquired onFebruary 1, 2020 . Such contractual payment obligations assumed include: (i) leases and related rental commitments, (ii) purchase obligations, including crude and feedstock supply agreements and other supply and capacity agreements, (iii) environmental obligations and (iv) earn-out payments based on certain earnings thresholds of theMartinez refinery (as set forth in the Sale and Purchase Agreement), for a period of up to four years following the closing. Tax DistributionsPBF LLC is required to make periodic tax distributions to the members ofPBF LLC , includingPBF Energy , pro rata in accordance with their respective percentage interests for such period (as determined under the amended and restated limited liability company agreement ofPBF LLC ), subject to available cash and applicable law and contractual restrictions (including pursuant to our debt instruments) and based on certain assumptions. Generally, these tax distributions will be an amount equal to our estimate of the taxable income ofPBF LLC for the year multiplied by an assumed tax rate equal to the highest effective marginal combinedU.S. federal, state and local income tax rate prescribed for an individual or corporate resident inNew York, New York (taking into account the nondeductibility of certain expenses). If, with respect to any given calendar year, the aggregate periodic tax distributions were less than the actual taxable income ofPBF LLC multiplied by the assumed tax rate,PBF LLC will make a "true up" tax distribution, no later thanMarch 15 of the following year, equal to such difference, subject to the available cash and borrowings ofPBF LLC . As these distributions are conditional they have been excluded from the table above. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements as ofDecember 31, 2019 , other than outstanding letters of credit of approximately$226.2 million . Critical Accounting Policies The following summary provides further information about our critical accounting policies that involve critical accounting estimates and should be read in conjunction with "Note 2 - Summary of Significant Accounting Policies" of our Notes to Consolidated Financial Statements, "Item 8. Financial Statements and Supplementary Data." The following accounting policies involve estimates that are considered critical due to the level of subjectivity and judgment involved, as well as the impact on our financial position and results of operations. We believe that all of our estimates are reasonable. Unless otherwise noted, estimates of the sensitivity to earnings that would result from changes in the assumptions used in determining our estimates is not practicable due to the number of assumptions and contingencies involved, and the wide range of possible outcomes. 98 --------------------------------------------------------------------------------
Inventory
Inventories are carried at the lower of cost or market. The cost of crude oil, feedstocks, blendstocks and refined products is determined under the LIFO method using the dollar value LIFO method with increments valued based on average cost during the year. The cost of supplies and other inventories is determined principally on the weighted average cost method. In addition, the use of the LIFO inventory method may result in increases or decreases to cost of sales in years that inventory volumes decline as the result of charging cost of sales with LIFO inventory costs generated in prior periods. AtDecember 31, 2019 and 2018, market values had fallen below historical LIFO inventory costs and, as a result, we recorded lower of cost or market inventory valuation reserves of$401.6 million and$651.8 million , respectively. The lower of cost or market inventory valuation reserve, or a portion thereof, is subject to reversal as a reduction to cost of products sold in subsequent periods as inventories giving rise to the reserve are sold, and a new reserve is established. Such a reduction to cost of products sold could be significant if inventory values return to historical cost price levels. Additionally, further decreases in overall inventory values could result in additional charges to cost of products sold should the lower of cost or market inventory valuation reserve be increased. Environmental Matters Liabilities for future clean-up costs are recorded when environmental assessments and/or clean-up efforts are probable and the costs can be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals generally are based on the completion of investigations or other studies or a commitment to a formal plan of action. Environmental liabilities are based on best estimates of probable future costs using currently available technology and applying current regulations, as well as our own internal environmental policies. The actual settlement of our liability for environmental matters could materially differ from our estimates due to a number of uncertainties such as the extent of contamination, changes in environmental laws and regulations, potential improvements in remediation technologies and the participation of other responsible parties. While we believe that our current estimates of the amounts and timing of the costs related to the remediation of these liabilities are reasonable, we have had limited experience with certain of these environmental obligations due to our short operating history with certain of our assets. It is possible that our estimates of the costs and duration of the environmental remediation activities related to these liabilities could materially change. Business Combinations We use the acquisition method of accounting for the recognition of assets acquired and liabilities assumed in business combinations at their estimated fair values as of the date of acquisition. Any excess consideration transferred over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is required in estimating the fair value of assets acquired. As a result, in the case of significant acquisitions, we obtain the assistance of third-party valuation specialists in estimating fair values of tangible and intangible assets based on available historical information and on expectations and assumptions about the future, considering the perspective of marketplace participants. While management believes those expectations and assumptions are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions. Certain of our acquisitions may include earn-out provisions or other forms of contingent consideration. As of the acquisition date, we record contingent consideration, as applicable, at the estimated fair value of expected future payments associated with the earn-out. Any changes to the recorded fair value of contingent consideration, subsequent to the measurement period, will be recognized as earnings in the period in which it occurs. Such contingent consideration liabilities are based on best estimates of future expected payment obligations, which are subject to change due to many factors outside of our control. Changes to the estimate of expected future contingent consideration payments may occur, from time to time, due to various reasons, including actual results differing from estimates and adjustments to the revenue or earnings assumptions used as the basis for the liability based on historical experience. While we believe that our current estimate of the fair value of our contingent consideration liability is reasonable, it is possible that the actual future settlement of our earn-out obligations could materially differ. 99 -------------------------------------------------------------------------------- Deferred Turnaround Costs Refinery turnaround costs, which are incurred in connection with planned major maintenance activities at our refineries, are capitalized when incurred and amortized on a straight-line basis over the period of time estimated until the next turnaround occurs (generally three to six years). While we believe that the estimates of time until the next turnaround are reasonable, it should be noted that factors such as competition, regulation or environmental matters could cause us to change our estimates thus impacting amortization expense in the future. Derivative Instruments We are exposed to market risk, primarily related to changes in commodity prices for the crude oil and feedstocks used in the refining process, as well as the prices of the refined products sold and the risk associated with the price of credits needed to comply with various governmental and regulatory environmental compliance programs. The accounting treatment for commodity and environmental compliance contracts depends on the intended use of the particular contract and on whether or not the contract meets the definition of a derivative. Non-derivative contracts are recorded at the time of delivery. All derivative instruments that are not designated as normal purchases or sales are recorded in our Consolidated Balance Sheets as either assets or liabilities measured at their fair values. Changes in the fair value of derivative instruments that either are not designated or do not qualify for hedge accounting treatment or normal purchase or normal sale accounting are recognized in income. Contracts qualifying for the normal purchases and sales exemption are accounted for upon settlement. We elect fair value hedge accounting for certain derivatives associated with our inventory repurchase obligations. Derivative accounting is complex and requires management judgment in the following respects: identification of derivatives and embedded derivatives; determination of the fair value of derivatives; identification of hedge relationships; assessment and measurement of hedge ineffectiveness; and election and designation of the normal purchases and sales exception. All of these judgments, depending upon their timing and effect, can have a significant impact on earnings. Income Taxes and Tax Receivable Agreement As a result of thePBF Energy's acquisition ofPBF LLC Series A Units or exchanges ofPBF LLC Series A Units for PBF Energy Class A common stock, it expects to benefit from amortization and other tax deductions reflecting the step up in tax basis in the acquired assets. Those deductions will be allocated toPBF Energy and will be taken into account in reporting its taxable income. As a result of a federal income tax election made byPBF LLC , applicable to a portion ofPBF Energy's acquisition ofPBF LLC Series A Units, the income tax basis of the assets ofPBF LLC , underlying a portion of the unitsPBF Energy acquired, has been adjusted based upon the amount thatPBF Energy paid for that portion of itsPBF LLC Series A Units.PBF Energy entered into the Tax Receivable Agreement (as defined in "Note 13 - Commitments and Contingencies" of the Notes to our Consolidated Financial Statements) which provides for the payment byPBF Energy equal to 85% of the amount of the benefits, if any, that it is deemed to realize as a result of (i) increases in tax basis and (ii) certain other tax benefits related to entering into the Tax Receivable Agreement, including tax benefits attributable to payments under the Tax Receivable Agreement. As a result of these transactions,PBF Energy's tax basis in its share ofPBF LLC's assets will be higher than the book basis of these same assets. This resulted in a deferred tax asset of$278.1 million as ofDecember 31, 2019 , of which the majority is expected to be realized over 10 years as the tax basis of these assets are amortized. Deferred taxes are provided using a liability method, whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences represent the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and 100
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liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment. We recognize tax benefits for uncertain tax positions only if it is more likely than not that the position is sustainable based on its technical merits. Interest and penalties on uncertain tax positions are included as a component of the provision for income taxes on the Consolidated Statements of Operations. As a result of the reduction of the corporate federal tax rate to 21% as part of the TCJA, the liability associated with the Tax Receivable Agreement was reduced. Accordingly, the deferred tax assets associated with the payments made or expected to be made related to the Tax Receivable Agreement liability were also reduced. Pursuant to the Tax Receivable Agreement PBF Energy entered into at the time of its initial public offering, it is required to pay the current and former PBF LLC Series A unitholders, who exchange their units forPBF Energy stock or whose units we purchase, approximately 85% of the cash savings in income taxes thatPBF Energy is deemed to realize as a result of the increase in the tax basis of its interest inPBF LLC , including tax benefits attributable to payments made under the Tax Receivable Agreement. These payment obligations are ofPBF Energy and not ofPBF LLC or any of its subsidiaries.PBF Energy has recognized a liability for the Tax Receivable Agreement reflecting its estimate of the undiscounted amounts that it expects to pay under the agreement.PBF Energy's estimate of the Tax Receivable Agreement liability is based, in part, on forecasts of future taxable income over the anticipated life ofPBF Energy's future business operations, assuming no material changes in the relevant tax law. The assumptions used in the forecasts are subject to substantial uncertainty aboutPBF Energy's future business operations and the actual payments that it is required to make under the Tax Receivable Agreement could differ materially from its current estimates.PBF Energy must adjust the estimated Tax Receivable Agreement liability each time we purchasePBF LLC Series A Units or upon an exchange ofPBF LLC Series A Units forPBF Energy Class A common stock. Such adjustments will be based on forecasts of future taxable income andPBF Energy's future business operations at the time of such purchases or exchanges. Periodically,PBF Energy may adjust the liability based on an updated estimate of the amounts that it expects to pay, using assumptions consistent with those used in its concurrent estimate of the deferred tax asset valuation allowance. These periodic adjustments to the Tax Receivable Agreement liability, if any, are recorded in general and administrative expense and may result in adjustments to our income tax expense and deferred tax assets and liabilities. Recent Accounting Pronouncements Refer to "Note 2 - Summary of Significant Accounting Policies" of our Notes to Consolidated Financial Statements, for Recently Issued Accounting Pronouncements.
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