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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
(Mark one)
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2021
or
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 333-186007
Commission File Number: 333-186007-07 PBF HOLDING COMPANY LLC
PBF FINANCE CORPORATION
(Exact name of registrant as specified in its charter) | | | | | | | | | | | |
Delaware | | 27-2198168 |
Delaware | | 45-2685067 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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| One Sylvan Way, Second Floor | | |
| Parsippany | New Jersey | | 07054 |
| (Address of principal executive offices) | | (Zip Code) |
(973) 455-7500
(Registrants’ telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act. | | | | | | | | |
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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| PBF Holding Company LLC | ☐ | Yes | ☒ | No |
| PBF Finance Corporation | ☐ | Yes | ☒ | No |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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| PBF Holding Company LLC | ☒ | Yes | ☐ | No |
| PBF Finance Corporation | ☒ | Yes | ☐ | No |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated
filer | | Accelerated filer | | Non-accelerated filer | | Smaller reporting
company | Emerging growth company |
| | | (Do not check if a
smaller reporting
company) | |
| PBF Holding Company LLC | ☐ | | ☐ | | ☒ | | ☐ | ☐ |
| PBF Finance Corporation | ☐ | | ☐ | | ☒ | | ☐ | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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| PBF Holding Company LLC | ☐ | Yes | ☐ | No |
| PBF Finance Corporation | ☐ | Yes | ☐ | No |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| | | | | | | | | | | | | | |
| PBF Holding Company LLC | ☐ | Yes | ☒ | No |
| PBF Finance Corporation | ☐ | Yes | ☒ | No |
PBF Holding Company LLC has no common stock outstanding. As of October 28, 2021, 100% of the membership interests of PBF Holding Company LLC were owned by PBF Energy Company LLC, and PBF Finance Corporation had 100 shares of common stock outstanding, all of which were held by PBF Holding Company LLC.
PBF Finance Corporation meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.
PBF HOLDING COMPANY LLC
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS | | | | | | | | | | | | | | |
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS | |
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| | ITEM 1. | | |
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| | ITEM 2. | | |
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| | ITEM 4. | | |
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| | ITEM 1. | | |
| | ITEM 1A. | | |
| | ITEM 6. | | |
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EXPLANATORY NOTE
This combined Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 (this “Form 10-Q”) is filed by PBF Holding Company LLC (“PBF Holding”) and PBF Finance Corporation (“PBF Finance”). PBF Holding is a wholly-owned subsidiary of PBF Energy Company LLC (“PBF LLC”) and is the parent company for PBF LLC’s refinery operating subsidiaries. PBF Finance is a wholly-owned subsidiary of PBF Holding. PBF Holding is an indirect subsidiary of PBF Energy Inc. (“PBF Energy”), which is the sole managing member of, and owner of an equity interest representing approximately 99.2% of the outstanding economic interests in PBF LLC as of September 30, 2021. PBF Energy operates and controls all of the business and affairs and consolidates the financial results of PBF LLC and its subsidiaries. PBF Logistics GP LLC is a wholly-owned subsidiary of PBF LLC and the general partner of PBF Logistics LP (“PBFX”), which is an affiliate of PBF Holding. PBF Holding, together with its consolidated subsidiaries, owns and operates oil refineries and related facilities in North America.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This combined Quarterly Report on Form 10-Q contains certain “forward-looking statements” 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,” or “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 expectations regarding future industry trends are forward-looking statements. 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 on 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q, the Annual Report on Form 10-K for the year ended December 31, 2020 of PBF Holding and PBF Finance, which we refer to as our 2020 Annual Report on Form 10-K, and in our other filings with the U.S. Securities and Exchange Commission. All forward-looking information in this Quarterly Report on Form 10-Q 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:
•our obligation to buy Renewable Identification Numbers (“RINs”) and market risks related to the volatility in the price of RINs required to comply with the Renewable Fuel Standard and greenhouse gas (“GHG”) emission credits required to comply with various GHG emission programs, such as Assembly Bill 32 (“AB 32”);
•the effect of the novel coronavirus (“COVID-19”) pandemic, and the Delta and other variants thereof, as well as related governmental and consumer responses on our business, financial condition and results of operations;
•political pressure and influence of environmental groups and other stakeholders on decisions and policies related to the refining and processing of crude oil and refined petroleum products, and the related adverse impacts from changes in our regulatory environment, such as the effects of compliance with AB 32, or from actions taken by environmental interest groups;
•our ability to target and execute expense reduction measures and achieve opportunities to improve our liquidity in 2021 and thereafter, including continued repurchases of our outstanding debt securities or otherwise further reducing our debt, and/or potential sales of non-operating assets or other real property;
•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 substantial indebtedness, including the impact of the recent downgrades to our corporate credit rating, secured notes and unsecured notes;
•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 third amended and restated inventory intermediation agreement (“Third Inventory Intermediation Agreement”) with J. Aron & Company, a subsidiary of The Goldman Sachs Group, Inc. (“J. Aron”) which is scheduled to expire in December 2024 and 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 agreement. Additionally, we are obligated to repurchase from J. Aron certain crude oil, intermediates and finished products (the “J. Aron Products”) upon termination of this agreement;
•restrictive covenants in our indebtedness that may adversely affect our operational flexibility;
•our assumptions regarding payments arising under PBF Energy’s tax receivable agreement entered with the PBF LLC Series A and PBF LLC Series B unitholders and other arrangements relating to PBF Energy;
•our expectations and timing with respect to our acquisition activity;
•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 impact of current and future laws, rulings and governmental regulations, including the implementation of rules and regulations regarding transportation of crude oil by rail or in response to the potential impacts of climate change;
•the risk of cyber-attacks;
•our increasing dependence on technology;
•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;
•our ability to make acquisitions or investments, including in renewable diesel production, and to realize the benefits from such acquisitions or investments;
•unforeseen liabilities associated with the Martinez Acquisition (as defined in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and any other acquisitions or investments; 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 Form 10-Q 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 Form 10-Q. 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.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
PBF HOLDING COMPANY LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in millions) | | | | | | | | | | | |
| September 30,
2021 | | December 31,
2020 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,441.8 | | | $ | 1,570.1 | |
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| Accounts receivable | 1,050.8 | | | 501.5 | |
| Accounts receivable - affiliate | 4.0 | | | 4.9 | |
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| Inventories | 2,831.4 | | | 1,686.2 | |
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| Prepaid and other current assets | 121.6 | | | 56.4 | |
| Total current assets | 5,449.6 | | | 3,819.1 | |
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| Property, plant and equipment, net | 4,047.3 | | | 4,023.1 | |
| Lease right of use assets - third party | 720.0 | | | 916.7 | |
| Lease right of use assets - affiliate | 507.6 | | | 571.0 | |
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| Deferred charges and other assets, net | 782.3 | | | 862.7 | |
| Total assets | $ | 11,506.8 | | | $ | 10,192.6 | |
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| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 457.3 | | | $ | 402.3 | |
| Accounts payable - affiliate | 63.2 | | | 53.2 | |
| Accrued expenses | 3,511.7 | | | 1,881.8 | |
| Current operating lease liabilities - third party | 64.3 | | | 78.3 | |
| Current operating lease liabilities - affiliate | 89.4 | | | 85.6 | |
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| Current debt | 89.1 | | | 7.4 | |
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| Deferred revenue | 39.6 | | | 45.1 | |
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| Total current liabilities | 4,314.6 | | | 2,553.7 | |
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| Long-term debt | 3,670.9 | | | 3,932.8 | |
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| Deferred tax liabilities | 23.1 | | | 38.7 | |
| Long-term operating lease liabilities - third party | 585.6 | | | 755.9 | |
| Long-term operating lease liabilities - affiliate | 418.3 | | | 485.4 | |
| Long-term financing lease liabilities - third party | 61.4 | | | 68.3 | |
| Other long-term liabilities | 247.9 | | | 267.0 | |
| Total liabilities | 9,321.8 | | | 8,101.8 | |
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| Commitments and contingencies (Note 8) | | | |
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| Equity: | | | |
| PBF Holding Company LLC equity | | | |
| Member’s equity | 2,855.7 | | | 2,809.7 | |
| Retained earnings (Accumulated deficit) | (676.9) | | | (723.4) | |
| Accumulated other comprehensive loss | (6.0) | | | (6.1) | |
| Total PBF Holding Company LLC equity | 2,172.8 | | | 2,080.2 | |
| Noncontrolling interest | 12.2 | | | 10.6 | |
| Total equity | 2,185.0 | | | 2,090.8 | |
| Total liabilities and equity | $ | 11,506.8 | | | $ | 10,192.6 | |
See notes to condensed consolidated financial statements.
5
PBF HOLDING COMPANY LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in millions)
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Revenues | $ | 7,173.3 | | | $ | 3,649.2 | | | $ | 18,969.7 | | | $ | 11,408.3 | |
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| Cost and expenses: | | | | | | | |
| Cost of products and other | 6,445.8 | | | 3,446.1 | | | 16,880.7 | | | 11,300.3 | |
| Operating expenses (excluding depreciation and amortization expense as reflected below) | 507.6 | | | 452.4 | | | 1,430.1 | | | 1,383.6 | |
| Depreciation and amortization expense | 103.0 | | | 115.9 | | | 310.0 | | | 332.4 | |
| Cost of sales | 7,056.4 | | | 4,014.4 | | | 18,620.8 | | | 13,016.3 | |
| General and administrative expenses (excluding depreciation and amortization expense as reflected below) | 59.7 | | | 42.0 | | | 150.5 | | | 173.5 | |
| Depreciation and amortization expense | 3.4 | | | 2.7 | | | 10.1 | | | 8.4 | |
| Change in fair value of contingent consideration | (0.7) | | | (13.9) | | | 23.6 | | | (79.3) | |
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| Loss (gain) on sale of assets | 0.2 | | | 1.7 | | | (0.4) | | | (469.4) | |
| Total cost and expenses | 7,119.0 | | | 4,046.9 | | | 18,804.6 | | | 12,649.5 | |
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| Income (loss) from operations | 54.3 | | | (397.7) | | | 165.1 | | | (1,241.2) | |
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| Other income (expense): | | | | | | | |
| Interest expense, net | (71.5) | | | (59.0) | | | (211.0) | | | (148.3) | |
| Change in fair value of catalyst obligations | 17.8 | | | (2.4) | | | 13.6 | | | 4.2 | |
| Gain (loss) on extinguishment of debt | 60.3 | | | — | | | 60.3 | | | (22.2) | |
| Other non-service components of net periodic benefit cost | 2.0 | | | 1.1 | | | 5.9 | | | 3.2 | |
| Income (loss) before income taxes | 62.9 | | | (458.0) | | | 33.9 | | | (1,404.3) | |
| Income tax (benefit) expense | (2.0) | | | (1.2) | | | (16.9) | | | 8.6 | |
| Net income (loss) | 64.9 | | | (456.8) | | | 50.8 | | | (1,412.9) | |
| Less: net income (loss) attributable to noncontrolling interests | (0.1) | | | (0.1) | | | 2.3 | | | (0.1) | |
| Net income (loss) attributable to PBF Holding Company LLC | $ | 65.0 | | | $ | (456.7) | | | $ | 48.5 | | | $ | (1,412.8) | |
See notes to condensed consolidated financial statements.
6
PBF HOLDING COMPANY LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited, in millions)
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Net income (loss) | $ | 64.9 | | | $ | (456.8) | | | $ | 50.8 | | | $ | (1,412.9) | |
| Other comprehensive income (loss): | | | | | | | |
| Unrealized gain (loss) on available for sale securities | — | | | 0.1 | | | (0.5) | | | 0.8 | |
| Net gain on pension and other post-retirement benefits | 0.2 | | | 0.2 | | | 0.6 | | | 0.6 | |
| Total other comprehensive income | 0.2 | | | 0.3 | | | 0.1 | | | 1.4 | |
| Comprehensive income (loss) | 65.1 | | | (456.5) | | | 50.9 | | | (1,411.5) | |
| Less: comprehensive income (loss) attributable to noncontrolling interests | (0.1) | | | (0.1) | | | 2.3 | | | (0.1) | |
| Comprehensive income (loss) attributable to PBF Holding Company LLC | $ | 65.2 | | | $ | (456.4) | | | $ | 48.6 | | | $ | (1,411.4) | |
See notes to condensed consolidated financial statements.
7
PBF HOLDING COMPANY LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(unaudited, in millions)
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| | Member’s Equity | Accumulated
Other
Comprehensive
Income (Loss) | Retained Earnings (Accumulated deficit) | Noncontrolling
Interest | Total
Equity |
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| Balance, June 30, 2021 | $ | 2,841.1 | | $ | (6.2) | | $ | (741.9) | | $ | 12.3 | | $ | 2,105.3 | |
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| Capital contributions from PBF LLC | 9.1 | | — | | — | | — | | 9.1 | |
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| Stock-based compensation | 5.5 | | — | | — | | — | | 5.5 | |
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| Other comprehensive income (loss) | — | | 0.2 | | 65.0 | | (0.1) | | 65.1 | |
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| Balance, September 30, 2021 | $ | 2,855.7 | | $ | (6.0) | | $ | (676.9) | | $ | 12.2 | | $ | 2,185.0 | |
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| Balance, June 30, 2020 | $ | 2,777.0 | | $ | (8.6) | | $ | 179.7 | | $ | 10.9 | | $ | 2,959.0 | |
| Member distributions | — | | — | | (1.1) | | — | | (1.1) | |
| Capital contributions from PBF LLC | 9.0 | | — | | — | | — | | 9.0 | |
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| Stock-based compensation | 7.9 | | — | | — | | — | | 7.9 | |
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| Comprehensive income (loss) | — | | 0.3 | | (456.7) | | (0.1) | | (456.5) | |
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| Balance, September 30, 2020 | $ | 2,793.9 | | $ | (8.3) | | $ | (278.1) | | $ | 10.8 | | $ | 2,518.3 | |
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See notes to condensed consolidated financial statements.
8
PBF HOLDING COMPANY LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(unaudited, in millions)
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| | Member’s Equity | Accumulated
Other
Comprehensive
Income (Loss) | Retained Earnings (accumulated deficit) | Noncontrolling
Interest | Total
Equity |
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| Balance, December 31, 2020 | $ | 2,809.7 | | $ | (6.1) | | $ | (723.4) | | $ | 10.6 | | $ | 2,090.8 | |
| Member distributions | — | | — | | (2.0) | | — | | (2.0) | |
| Capital contributions from PBF LLC | 28.0 | | — | | — | | — | | 28.0 | |
| Distribution of assets to PBF LLC | (0.3) | | — | | — | | — | | (0.3) | |
| Stock-based compensation expense | 18.3 | | — | | — | | — | | 18.3 | |
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| Comprehensive income | — | | 0.1 | | 48.5 | | 2.3 | | 50.9 | |
| Other | — | | — | | — | | (0.7) | | (0.7) | |
| Balance, September 30, 2021 | $ | 2,855.7 | | $ | (6.0) | | $ | (676.9) | | $ | 12.2 | | $ | 2,185.0 | |
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| Balance, December 31, 2019 | $ | 2,739.1 | | $ | (9.7) | | $ | 1,156.9 | | $ | 10.9 | | $ | 3,897.2 | |
| Member distributions | — | | — | | (22.2) | | — | | (22.2) | |
| Capital contributions from PBF LLC | 33.4 | | — | | — | | — | | 33.4 | |
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| Stock-based compensation | 21.4 | | — | | — | | — | | 21.4 | |
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| Comprehensive income (loss) | — | | 1.4 | | (1,412.8) | | (0.1) | | (1,411.5) | |
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| Balance, September 30, 2020 | $ | 2,793.9 | | $ | (8.3) | | $ | (278.1) | | $ | 10.8 | | $ | 2,518.3 | |
See notes to condensed consolidated financial statements.
9
PBF HOLDING COMPANY LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions) | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2021 | | 2020 |
| Cash flows from operating activities: | | | |
| Net income (loss) | $ | 50.8 | | | $ | (1,412.9) | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | |
| Depreciation and amortization | 331.4 | | | 352.0 | |
| Stock-based compensation | 20.1 | | | 25.9 | |
| Change in fair value of catalyst obligations | (13.6) | | | (4.2) | |
| Deferred income taxes | (15.6) | | | 8.6 | |
| Non-cash change in inventory repurchase obligations | 46.0 | | | (19.1) | |
| Non-cash lower of cost or market inventory adjustment | (669.6) | | | 691.5 | |
| Change in fair value of contingent consideration | 23.6 | | | (79.3) | |
| (Gain) loss on extinguishment of debt | (60.3) | | | 22.2 | |
| Pension and other post-retirement benefit costs | 38.0 | | | 41.5 | |
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| Gain on sale of assets | (0.4) | | | (469.4) | |
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| Changes in operating assets and liabilities: | | | |
| Accounts receivable | (549.3) | | | 371.4 | |
| Due to/from affiliates | 11.0 | | | 7.7 | |
| Inventories | (475.6) | | | 169.3 | |
| Prepaid and other current assets | (65.2) | | | (22.1) | |
| Accounts payable | 34.8 | | | (392.9) | |
| Accrued expenses | 1,564.4 | | | (168.9) | |
| Deferred revenue | (5.5) | | | 1.1 | |
| Other assets and liabilities | (80.1) | | | (57.4) | |
| Net cash provided by (used in) operating activities | $ | 184.9 | | | $ | (935.0) | |
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| Cash flows from investing activities: | | | |
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| Expenditures for property, plant and equipment | (135.1) | | | (148.4) | |
| Expenditures for deferred turnaround costs | (64.6) | | | (175.8) | |
| Expenditures for other assets | (20.6) | | | (9.7) | |
| Acquisition of Martinez refinery | — | | | (1,176.2) | |
| Proceeds from sale of assets | — | | | 529.4 | |
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| Net cash used in investing activities | $ | (220.3) | | | $ | (980.7) | |
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See notes to condensed consolidated financial statements.
10
PBF HOLDING COMPANY LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited, in millions) | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2021 | | 2020 |
| Cash flows from financing activities: | | | |
| Contributions from PBF LLC | $ | 28.0 | | | $ | 33.4 | |
| Distributions to members | (2.0) | | | (22.2) | |
| | | |
| Distributions to T&M and Collins shareholders | (0.7) | | | — | |
| Proceeds from 2025 9.25% Senior Secured Notes | — | | | 1,000.0 | |
| Proceeds from 2028 6.00% Senior Notes | — | | | 1,000.0 | |
| Repurchase of 2028 6.00% Senior Notes | (69.7) | | | — | |
| Repurchase of 2025 7.25% Senior Notes | (21.2) | | | — | |
| Redemption of 2023 7.00% Senior Notes | — | | | (517.5) | |
| Repayments of PBF Rail Term Loan | (5.5) | | | (5.4) | |
| | | |
| | | |
| Proceeds from revolver borrowings | — | | | 1,450.0 | |
| Repayments of revolver borrowings | — | | | (550.0) | |
| Settlement of precious metal catalyst obligations | (18.5) | | | (8.8) | |
| Proceeds from catalyst financing arrangements | — | | | 51.9 | |
| Payments on financing leases | (10.7) | | | (8.9) | |
| Proceeds from insurance premium financing | 7.0 | | | 12.7 | |
| Deferred financing costs and other | 0.4 | | | (29.6) | |
| Net cash (used in) provided by financing activities | $ | (92.9) | | | $ | 2,405.6 | |
| | | |
| Net (decrease) increase in cash and cash equivalents | (128.3) | | | 489.9 | |
| Cash and cash equivalents, beginning of period | 1,570.1 | | | 763.1 | |
| Cash and cash equivalents, end of period | $ | 1,441.8 | | | $ | 1,253.0 | |
| | | |
| Supplemental cash flow disclosures | | | |
| Non-cash activities: | | | |
| | | |
| Accrued and unpaid capital expenditures | $ | 64.5 | | | $ | 22.6 | |
| Assets acquired or remeasured under operating and financing leases | (126.5) | | | 690.7 | |
| | | |
| Fair value of the Martinez Contingent Consideration at acquisition | — | | | 77.3 |
| | | |
| Cash paid during the period for: | | | |
Interest (net of capitalized interest of $5.3 million and $9.4 million in 2021 and 2020, respectively) | $ | 173.9 | | | $ | 88.2 | |
| Income taxes | 0.8 | | 0.6 | |
| | | |
See notes to condensed consolidated financial statements.
11
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
PBF Holding Company LLC (“PBF Holding”), a Delaware limited liability company, and PBF Finance Corporation (“PBF Finance”), a wholly-owned subsidiary of PBF Holding, together with the Company’s consolidated subsidiaries, owns and operates oil refineries and related facilities in North America. PBF Holding is a wholly-owned subsidiary of PBF Energy Company LLC (“PBF LLC”). PBF Energy Inc. (“PBF Energy”) is the sole managing member of, and owner of an equity interest representing approximately 99.2% of the outstanding economic interest in, PBF LLC as of September 30, 2021. PBF Investments LLC, Toledo Refining Company LLC, Paulsboro Refining Company LLC (“PRC”), Delaware City Refining Company LLC (“DCR”), Chalmette Refining, L.L.C. (“Chalmette Refining”), PBF Energy Western Region LLC, Torrance Refining Company LLC, Torrance Logistics Company LLC and Martinez Refining Company LLC are PBF LLC’s principal operating subsidiaries and are all wholly-owned subsidiaries of PBF Holding. Collectively, PBF Holding and its consolidated subsidiaries are referred to hereinafter as the “Company”.
PBF Logistics GP LLC (“PBF GP”) serves as the general partner of PBF Logistics LP (“PBFX”). PBF GP is wholly-owned by PBF LLC. In a series of transactions, PBF Holding has distributed certain assets to PBF LLC, which in turn contributed those assets to PBFX (as described in “Note 7 - Related Party Transactions”).
Substantially all of the Company’s operations are in the United States. As of September 30, 2021, the Company’s oil refineries are all engaged in the refining of crude oil and other feedstocks into petroleum products, and have been aggregated to form one reportable segment. To generate earnings and cash flows from operations, the Company is primarily dependent upon processing crude oil and selling refined petroleum products at margins sufficient to cover fixed and variable costs and other expenses. Crude oil and refined petroleum products are commodities, and factors that are largely out of the Company’s control can cause prices to vary over time. The resulting potential margin volatility can have a material effect on the Company’s financial position, earnings and cash flows.
Basis of Presentation
The unaudited condensed consolidated financial information furnished herein reflects all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, considered necessary for a fair presentation of the financial position and the results of operations and cash flows of the Company for the periods presented. All intercompany accounts and transactions have been eliminated in consolidation. These unaudited Condensed Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. These interim Condensed Consolidated Financial Statements should be read in conjunction with the PBF Holding and PBF Finance financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2020. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the full year.
COVID-19 and Market Developments
The impact of the unprecedented global health and economic crisis sparked by the novel coronavirus (“COVID-19”) pandemic, Delta variant and other variants thereof, and related adverse impact on economic and commercial activity resulted in a significant reduction in demand for refined petroleum and petrochemical products starting in the first quarter of 2020. This significant demand reduction has had an adverse impact on the Company’s results of operations and liquidity position. Demand for these products, however, has started to recover throughout the three and nine months ended September 30, 2021 in connection with the lifting or easing of restrictions by many governmental authorities in response to decreasing COVID-19 infection rates and the distribution of COVID-19 vaccines. The Company has adjusted throughput rates across its entire refining system to correlate with the gradual increases in demand, while still running below historic levels.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
It is impossible to estimate the duration or significance of the financial impact that will result from the COVID-19 pandemic. However, the extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition, results of operations and liquidity will depend largely on future developments, including the duration of the outbreak, particularly within the geographic areas where the Company operates, the effectiveness of vaccine programs, and the related impact on overall economic activity, all of which cannot be predicted with certainty at this time.
East Coast Refining Reconfiguration
On December 31, 2020, the Company reconfigured the Delaware City and Paulsboro refineries temporarily idling certain of its major processing units at the Paulsboro refinery, in order to operate the two refineries as one functional unit referred to as the “East Coast Refining System”. The reconfiguration process resulted in lower overall throughput and inventory levels in addition to decreases in capital and operating costs.
Recently Issued Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the effects of reference rate reform on financial reporting”. The amendments in this ASU provide optional guidance to alleviate the burden in accounting for reference rate reform, by allowing certain expedients and exceptions in applying GAAP to contracts, hedging relationship and other transactions affected by the expected market transition from London Interbank Offered Rate and other interbank rates. The amendments in this ASU are effective for all entities at any time beginning on March 12, 2020 through December 31, 2022 and may be applied from the beginning of an interim period that includes the issuance date of the ASU. The Company does not expect that the adoption of this guidance will have a material impact on its Consolidated Financial Statements and related disclosures.
2. ACQUISITIONS
Martinez Acquisition
On February 1, 2020, the Company acquired from Equilon Enterprises LLC d/b/a Shell Oil Products US (the "Seller"), the Martinez refinery and related logistics assets (collectively, the "Martinez Acquisition"), pursuant to a sale and purchase agreement dated June 11, 2019 (the “Sale and Purchase Agreement”). The Martinez refinery, located in Martinez, California, is a high-conversion, dual-coking facility that is strategically positioned in Northern California and provides for operating and commercial synergies with the Torrance refinery located in Southern California.
In addition to refining assets, the Martinez Acquisition includes a number of onsite logistics assets, including a deep-water marine facility, product distribution terminals and refinery crude and product storage facilities.
The aggregate purchase price for the Martinez Acquisition was $1,253.4 million, including final working capital of $216.1 million and the Martinez Contingent Consideration, as defined below. The transaction was financed through a combination of cash on hand, including proceeds from the $1.0 billion in aggregate principal amount of 6.0% senior unsecured notes due 2028 (the “2028 Senior Notes”), and borrowings under PBF Holding’s asset-based revolving credit agreement (the “Revolving Credit Facility”).
The Company accounted for the Martinez Acquisition as a business combination under GAAP whereby it recognizes assets acquired and liabilities assumed in an acquisition at their estimated fair values as of the date of acquisition.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The total purchase consideration and the fair values of the assets and liabilities at the acquisition date were as follows:
| | | | | |
| (in millions) | Purchase Price |
| Gross purchase price | $ | 960.0 | |
| Working capital, including post close adjustments | 216.1 | |
| Contingent consideration (a) | 77.3 | |
| Total consideration | $ | 1,253.4 | |
___________________
(a) The Martinez Acquisition included an obligation for the Company to make post-closing earn-out payments to the Seller based on certain earnings thresholds of the Martinez refinery (as set forth in the Sale and Purchase Agreement), for a period of up to four years following the acquisition closing date (the “Martinez Contingent Consideration”). The Company recorded the Martinez Contingent Consideration based on its estimated fair value of $77.3 million at the acquisition date, which was recorded within “Other long-term liabilities” within the Condensed Consolidated Balance Sheets. Subsequent changes in the fair value of the Martinez Contingent Consideration are recorded in the Condensed Consolidated Statement of Operations.
The following table summarizes the final amounts recognized for assets acquired and liabilities assumed as of the acquisition date:
| | | | | |
| (in millions) | Fair Value Allocation |
| Inventories | $ | 224.1 | |
| Prepaid and other current assets | 5.4 | |
| Property, plant and equipment | 987.9 | |
| Operating lease right of use assets (a) | 7.8 | |
| Financing lease right of use assets (a) | 63.5 | |
| Deferred charges and other assets, net | 63.7 | |
| Accrued expenses | (1.4) | |
| Current operating lease liabilities | (1.9) | |
| Current financing lease liabilities (b) | (6.0) | |
| Long-term operating lease liabilities | (5.9) | |
| Long-term financing lease liabilities | (57.5) | |
| Other long-term liabilities - Environmental obligation | (26.3) | |
| Fair value of net assets acquired | $ | 1,253.4 | |
____________________________
(a) Operating and Financing lease right of use assets are recorded in Lease right of use assets - third-party within the Condensed Consolidated Balance Sheets.
(b) Current financing lease liabilities are recorded in Accrued expenses within the Condensed Consolidated Balance Sheets.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s Condensed Consolidated Financial Statements for the nine months ended September 30, 2021 include the results of operations of the Martinez refinery and related logistics assets subsequent to the Martinez Acquisition whereas the same period in 2020 includes the results of operations of such assets from the date of the Martinez Acquisition on February 1, 2020 to September 30, 2020. On an unaudited pro-forma basis, the revenues and net income (loss) of the Company, assuming the acquisition had occurred on January 1, 2019, are shown below. The unaudited pro-forma information does not purport to present what the Company’s actual results would have been had the Martinez Acquisition occurred on January 1, 2019, nor is the financial information indicative of the results of future operations. The unaudited pro-forma financial information includes the depreciation and amortization expense related to the Martinez Acquisition and interest expense associated with the related financing.
| | | | | | | | | |
| | | Nine Months Ended September 30, 2020 |
| (Unaudited, in millions) |
| | | |
| Pro-forma revenues | | | $ | 11,772.1 | |
| Pro-forma net loss attributable to PBF Holding | | | (1,443.8) | |
| | | |
| | | |
| | | |
Acquisition Expenses
There were no acquisition costs for the three and nine months ended September 30, 2021. The Company incurred acquisition-related costs of $0.2 million and $10.9 million for the three and nine months ended September 30, 2020, respectively, consisting primarily of consulting and legal expenses related to the Martinez Acquisition. These costs are included in General and administrative expenses within the Condensed Consolidated Statements of Operations.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. CURRENT EXPECTED CREDIT LOSSES
Credit Losses
The Company has exposure to credit losses primarily through its sales of refined products. The Company evaluates creditworthiness on an individual customer basis. The Company utilizes a financial review model for purposes of evaluating creditworthiness which is based on information from financial statements and credit reports. The financial review model enables the Company to assess the customer’s risk profile and determine credit limits on the basis of their financial strength, including but not limited to, their liquidity, leverage, debt serviceability, longevity and how they pay their bills. The Company may require security in the form of letters of credit or cash payments in advance of product delivery for certain customers that are deemed higher risk.
The Company’s payment terms on its trade receivables are relatively short, generally 30 days or less for a substantial majority of its refined products. As a result, the Company’s collection risk is mitigated to a certain extent by the fact that sales are collected in a relatively short period of time, allowing for the ability to reduce exposure on defaults if collection issues are identified. Notwithstanding, the Company reviews each customer’s credit risk profile at least annually or more frequently if warranted. Following the widespread market disruption that has resulted from the COVID-19 pandemic and related governmental responses, the Company has been performing ongoing credit reviews of its customers including monitoring for any negative credit events such as customer bankruptcy or insolvency events. As a result, the Company has adjusted payment terms or limited available trade credit for certain customers, as well as for customers within industries that are deemed to be at higher risk.
The Company performs a quarterly allowance for doubtful accounts analysis to assess whether an allowance needs to be recorded for any outstanding trade receivables. In estimating credit losses, management reviews accounts that are past due, have known disputes or have experienced any negative credit events that may result in future collectability issues. There was no allowance for doubtful accounts recorded as of September 30, 2021 or December 31, 2020.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. INVENTORIES
Inventories consisted of the following:
| | | | | | | | | | | | | | | | | |
| September 30, 2021 |
| (in millions) | Titled Inventory | | Inventory Intermediation Agreements | | Total |
| Crude oil and feedstocks | $ | 1,277.7 | | | $ | — | | | $ | 1,277.7 | |
| Refined products and blendstocks | 1,059.0 | | | 355.5 | | | 1,414.5 | |
| Warehouse stock and other | 139.2 | | | — | | | 139.2 | |
| $ | 2,475.9 | | | $ | 355.5 | | | $ | 2,831.4 | |
| Lower of cost or market adjustment | — | | | — | | | — | |
| Total inventories | $ | 2,475.9 | | | $ | 355.5 | | | $ | 2,831.4 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| (in millions) | Titled Inventory | | Inventory Intermediation Agreements | | Total |
| Crude oil and feedstocks | $ | 1,018.9 | | | $ | — | | | $ | 1,018.9 | |
| Refined products and blendstocks | 933.7 | | | 266.5 | | | 1,200.2 | |
| Warehouse stock and other | 136.7 | | | — | | | 136.7 | |
| $ | 2,089.3 | | | $ | 266.5 | | | $ | 2,355.8 | |
| Lower of cost or market adjustment | (572.4) | | | (97.2) | | | (669.6) | |
| Total inventories | $ | 1,516.9 | | | $ | 169.3 | | | $ | 1,686.2 | |
Inventory under the amended and restated inventory intermediation agreements with J. Aron & Company, a subsidiary of The Goldman Sachs Group, Inc. (“J. Aron”) (as amended and restated from time to time, the “Inventory Intermediation Agreements”), includes crude oil, intermediate and certain finished products (the “J. Aron Products”) purchased or produced by the Paulsboro and Delaware City refineries, and sold to counterparties in connection with such agreements. As of September 30, 2021, this inventory is held in the Company’s storage tanks at the Delaware City and Paulsboro refineries and at a PBFX storage facility (collectively, the “J. Aron Storage Tanks”).
At September 30, 2021 the replacement value of inventories exceeded the last-in, first-out carrying value. During the nine months ended September 30, 2021, the Company recorded an adjustment to value its inventories to the lower of cost or market which increased income from operations by $669.6 million, reflecting no lower of cost or market (“LCM”) inventory reserve at September 30, 2021 in comparison with an LCM inventory reserve of $669.6 million at December 31, 2020.
During the three months ended September 30, 2020, the Company recorded an adjustment to value its inventories to the lower of cost or market which increased income from operations by $9.9 million, reflecting the net change in the LCM inventory reserve from $1,103.0 million at June 30, 2020 to $1,093.1 million at September 30, 2020. During the nine months ended September 30, 2020, the Company recorded an adjustment to value its inventories to the lower of cost or market which decreased income from operations by $691.5 million, reflecting the net change in the LCM inventory reserve from $401.6 million at December 31, 2019 to $1,093.1 million at September 30, 2020.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. ACCRUED EXPENSES
Accrued expenses consisted of the following:
| | | | | | | | | | | |
| (in millions) | September 30, 2021 | | December 31, 2020 |
| Inventory-related accruals | $ | 1,408.6 | | | $ | 695.0 | |
| Renewable energy credit and emissions obligations (a) | 1,308.8 | | | 528.1 | |
| Inventory intermediation agreements (b) | 290.9 | | | 225.8 | |
Excise and sales tax payable | 118.3 | | | 119.7 | |
| Accrued transportation costs | 77.7 | | | 72.1 | |
| Accrued interest | 65.3 | | | 40.2 | |
| Accrued utilities | 62.8 | | | 58.6 | |
| Accrued refinery maintenance and support costs | 47.1 | | | 35.7 | |
| Accrued salaries and benefits | 46.6 | | | 40.1 | |
| Accrued capital expenditures | 27.7 | | | 14.4 | |
| Environmental liabilities | 12.2 | | | 11.4 | |
| Current finance lease liabilities | 10.6 | | | 14.4 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Customer deposits | 4.1 | | | 4.0 | |
| Other | 31.0 | | | 22.3 | |
| Total accrued expenses | $ | 3,511.7 | | | $ | 1,881.8 | |
__________________________
(a) The Company is subject to obligations to purchase Renewable Identification Numbers (“RINs”) required to comply with the Renewable Fuel Standard. The Company’s overall RINs obligation is based on a percentage of domestic shipments of on-road fuels as established by Environmental Protection Agency. To the degree the Company is unable to blend the required amount of biofuels to satisfy its RINs obligation, RINs must be purchased on the open market to avoid penalties and fines. The Company records its RINs obligation on a net basis in Accrued expenses when its 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. In addition, the Company is subject to obligations to comply with federal and state legislative and regulatory measures, including regulations in the state of California pursuant to Assembly Bill 32 (“AB 32”), to address environmental compliance and greenhouse gas and other emissions. These requirements include incremental costs to operate and maintain our facilities as well as to implement and manage new emission controls and programs. Renewable energy credit and emissions obligations fluctuate with the volume of applicable product sales and timing of credit purchases. Renewable energy credit and emissions obligations are categorized as Level 2, and are measured at fair value based on quoted prices from an independent pricing service.
(b) The Company has the obligation to repurchase the J. Aron Products that are held in its J. Aron Storage Tanks in accordance with the Inventory Intermediation Agreements with J. Aron. As of September 30, 2021 and December 31, 2020, a liability is recognized for the Inventory Intermediation Agreements and is recorded at market price for the J. Aron owned inventory held in the Company’s J. Aron Storage Tanks under the Inventory Intermediation Agreements, with any change in the market price being recorded in Cost of products and other.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. CREDIT FACILITIES AND DEBT
Debt outstanding consists of the following: | | | | | | | | | | | | | | |
| (in millions) | | September 30, 2021 | | December 31, 2020 |
| 2025 Senior Secured Notes | | $ | 1,250.0 | | | $ | 1,250.0 | |
| 2028 Senior Notes | | 882.3 | | | 1,000.0 | |
| 2025 Senior Notes | | 690.0 | | | 725.0 | |
| Revolving Credit Facility | | 900.0 | | | 900.0 | |
| PBF Rail Term Loan | | 1.9 | | | 7.4 | |
| Catalyst financing arrangements | | 70.4 | | | 102.5 | |
| | 3,794.6 | | | 3,984.9 | |
| Less—Current debt | | (89.1) | | | (7.4) | |
| Unamortized premium | | 0.5 | | | 0.6 | |
| Unamortized deferred financing costs | | (35.1) | | | (45.3) | |
| Long-term debt | | $ | 3,670.9 | | | $ | 3,932.8 | |
Extinguishment of Debt
During the three months ended September 30, 2021, the Company made a number of open market repurchases of its 2028 Senior Notes and its 7.25% senior unsecured notes due 2025 (the “2025 Senior Notes”) that resulted in the extinguishment of $117.7 million in principal of the 2028 Senior Notes and $35.0 million in principal of the 2025 Senior Notes. Total cash consideration paid to repurchase the principal amount outstanding of the 2028 Senior Notes and the 2025 Senior Notes, excluding accrued interest, totaled $90.9 million and the Company recognized a $60.3 million gain on the extinguishment of debt during the three and nine months ended September 30, 2021.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. RELATED PARTY TRANSACTIONS
Transactions and Agreements with PBFX
The Company entered into agreements with PBFX that establish fees for certain general and administrative services, and operational and maintenance services provided by the Company to PBFX. In addition, the Company executed terminal, pipeline and storage services agreements with PBFX under which PBFX provides commercial transportation, terminaling, storage and pipeline services to the Company. These agreements with PBFX include:
Contribution Agreements
Immediately prior to the closing of certain contribution agreements, which PBF LLC entered into with PBFX (collectively referred to as the “Contribution Agreements”), the Company contributed certain assets to PBF LLC. PBF LLC in turn contributed those assets to PBFX pursuant to the Contribution Agreements. Certain proceeds received by PBF LLC from PBFX in accordance with the Contribution Agreements were subsequently contributed by PBF LLC to the Company.
Commercial Agreements
The Company has entered into long-term, fee-based commercial agreements with PBFX relating to assets associated with the Contribution Agreements, the majority of which include a minimum volume commitment and are supported by contractual fee escalations for inflation adjustments and certain increases in operating costs. Under these agreements, PBFX provides various pipeline, rail and truck terminaling and storage services to the Company and the Company has committed to provide PBFX with minimum fees based on minimum monthly throughput volumes. The Company believes the terms and conditions under these agreements, as well as the Omnibus Agreement and the Services Agreement (each as defined below) with PBFX, are generally no less favorable to either party than those that could have been negotiated with unaffiliated parties with respect to similar services.
Other Agreements
In addition to the commercial agreements described above, the Company has entered into an omnibus agreement with PBFX, PBF GP and PBF LLC, which has been amended and restated in connection with certain Contribution Agreements (as amended, the “Omnibus Agreement”). The Omnibus Agreement addresses the payment of an annual fee for the provision of various general and administrative services and reimbursement of salary and benefit costs for certain PBF Energy employees.
Additionally, the Company and certain of its subsidiaries have entered into an operation and management services and secondment agreement with PBFX (as amended, the “Services Agreement”), pursuant to which the Company and its subsidiaries provide PBFX with the personnel necessary for PBFX to perform its obligations under its commercial agreements. PBFX reimburses the Company for the use of such employees and the provision of certain infrastructure-related services to the extent applicable to its operations, including storm water discharge and waste water treatment, steam, potable water, access to certain roads and grounds, sanitary sewer access, electrical power, emergency response, filter press, fuel gas, API solids treatment, fire water and compressed air. The Services Agreement will terminate upon the termination of the Omnibus Agreement, provided that PBFX may terminate any service upon 30-days’ notice.
Refer to the Company’s 2020 Annual Report on Form 10-K (“Note 11 - Related Party Transactions” of the Notes to Consolidated Financial Statements) for a more complete description of the agreements with PBFX that were entered into prior to 2021. No new material agreements or amendments were entered into during the nine months ended September 30, 2021.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Summary of Transactions with PBFX
A summary of the Company’s affiliate transactions with PBFX is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in millions) | 2021 | | 2020 | | 2021 | | 2020 |
| Reimbursements under affiliate agreements: | | | | | | | |
| Services Agreement | $ | 2.2 | | | $ | 2.2 | | | $ | 6.5 | | | $ | 6.5 | |
| Omnibus Agreement | 1.8 | | | 1.9 | | | 5.5 | | | 5.8 | |
| Total expenses under affiliate agreements | 75.5 | | | 70.8 | | | 226.5 | | | 218.7 | |
Total reimbursements under the Omnibus Agreement are included in General and administrative expenses and reimbursements under the Services Agreement and expenses under affiliate agreements are included in Cost of products and other in the Company’s Condensed Consolidated Statements of Operations.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES
In the ordinary conduct of the Company’s business, the Company is from time to time subject to lawsuits, investigations and claims, including class action proceedings, mass tort actions, tort actions, environmental claims and employee-related matters. The outcome of these matters cannot always be predicted accurately, but the Company accrues liabilities for these matters if the Company has determined that it is probable a loss has been incurred and the loss can be reasonably estimated. For such ongoing matters for which we have not recorded a liability but losses are reasonably possible, we are unable to estimate a range of possible losses at this time due to various reasons that may include but are not limited to, matters being in an early stage and not fully developed through pleadings, discovery or court proceedings, number of potential claimants being unknown or uncertainty regarding a number of different factors underlying the potential claims. However, the ultimate resolution of one or more of these contingencies could result in an adverse outcome that may have a material effect on our financial position, results of operations or cash flows.
Environmental Matters
The Company’s refineries, pipelines and related operations are subject to extensive and frequently changing federal, state and local laws and regulations, including, but not limited to, those relating to the discharge of materials into the environment or that otherwise relate to the protection of the environment (including in response to the potential impacts of climate change), waste management and the characteristics and the compositions of fuels. Compliance with existing and anticipated laws and regulations can increase the overall cost of operating the refineries, including remediation, operating costs and capital costs to construct, maintain and upgrade equipment and facilities.
These laws and permits raise potential exposure to future claims and lawsuits involving environmental and safety matters which could include soil and water contamination, air pollution, personal injury and property damage allegedly caused by substances which the Company manufactured, handled, used, released or disposed of, transported, or that relate to pre-existing conditions for which the Company has assumed responsibility. The Company believes that its current operations are in compliance with existing environmental and safety requirements. However, there have been and will continue to be ongoing discussions about environmental and safety matters between the Company and federal and state authorities, including notices of violations, citations and other enforcement actions, some of which have resulted or may result in changes to operating procedures and in capital expenditures. While it is often difficult to quantify future environmental or safety related expenditures, the Company anticipates that continuing capital investments and changes in operating procedures will be required for the foreseeable future to comply with existing and new requirements, as well as evolving interpretations and more strict enforcement of existing laws and regulations.
In connection with the acquisition of the Torrance refinery and related logistics assets, the Company assumed certain pre-existing environmental liabilities totaling $109.0 million as of September 30, 2021 ($113.7 million as of December 31, 2020), related to certain environmental remediation obligations to address existing soil and groundwater contamination and monitoring activities and other clean-up activities, which reflects the current estimated cost of the remediation obligations. The current portion of the environmental liability is recorded in Accrued expenses and the non-current portion is recorded in Other long-term liabilities.
The aggregate environmental liability reflected in the Company’s Condensed Consolidated Balance Sheets was $146.4 million and $151.9 million at September 30, 2021 and December 31, 2020, respectively, of which $134.2 million and $140.5 million, respectively, were classified as Other long-term liabilities. These liabilities include remediation and monitoring costs expected to be incurred over an extended period of time. Estimated liabilities could increase in the future when the results of ongoing investigations become known, are considered probable and can be reasonably estimated.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Contingent Consideration
In connection with the Martinez Acquisition, the Sale and Purchase Agreement includes an earn-out provision based on certain earnings thresholds of the Martinez refinery. Pursuant to the agreement, the Company will make payments to the Seller based on future earnings at the Martinez refinery in excess of certain thresholds, as defined in the agreement, for a period of up to four years following the acquisition closing date. The Company recorded the acquisition date fair value of the earn-out provision as contingent consideration within “Other long-term liabilities” within the Company’s Condensed Consolidated Balance Sheets. Subsequent changes in the fair value of the Martinez Contingent Consideration are recorded in the Condensed Consolidated Statement of Operations. The value of the Martinez Contingent Consideration was estimated to be $23.6 million as of September 30, 2021 and zero as of December 31, 2020, representing anticipated future earn-out payments, if any.
9. LEASES
The Company leases office space, office equipment, refinery support facilities and equipment, railcars and other logistics assets primarily under non-cancelable operating leases, with terms typically ranging from one to twenty years, subject to certain renewal options as applicable. The Company considers those renewal or termination options that are reasonably certain to be exercised in the determination of the lease term and initial measurement of lease liabilities and right-of-use assets. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Interest expense for finance leases is incurred based on the carrying value of the lease liability. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company must discount lease payments based on an estimate of its incremental borrowing rate.
For substantially all classes of underlying assets, the Company has elected the practical expedient not to separate lease and non-lease components, which allows for combining the components if certain criteria are met. For certain leases of refinery support facilities, the Company accounts for the non-lease service component separately. There are no material residual value guarantees associated with any of the Company’s leases. There are no significant restrictions or covenants included in the Company’s lease agreements other than those that are customary in such arrangements. Certain of the Company’s leases, primarily for the Company’s commercial and logistics asset classes, include provisions for variable payments. These variable payments are typically determined based on a measure of throughput or actual days the asset has operated during the contract term or another measure of usage and are not included in the initial measurement of lease liabilities and right of use assets.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Lease Position as of September 30, 2021 and December 31, 2020
The table below provides the lease related assets and liabilities recorded on the Company’s Condensed Consolidated Balance Sheets for the periods presented:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Classification on the Balance Sheet | | September 30, 2021 | | December 31, 2020 |
| Assets | | | | | | |
| Operating lease assets - third party | | Lease right of use assets - third party | | $ | 651.3 | | | $ | 836.3 | |
| Operating lease assets - affiliate | | Lease right of use assets - affiliate | | 507.6 | | | 571.0 | |
| Finance lease assets | | Lease right of use assets - third party | | 68.7 | | | 80.4 | |
| Total lease right of use assets | | | | $ | 1,227.6 | | | $ | 1,487.7 | |
| | | | | | |
| Liabilities | | | | | | |
| Current liabilities: | | | | | | |
| Operating lease liabilities - third party | | Current operating lease liabilities - third party | | $ | 64.3 | | | $ | 78.3 | |
| Operating lease liabilities - affiliate | | Current operating lease liabilities - affiliate | | 89.4 | | | 85.6 | |
| Finance lease liabilities - third party | | Accrued expenses | | 10.6 | | | 14.4 | |
| Noncurrent liabilities: | | | | | | |
| Operating lease liabilities - third party | | Long-term operating lease liabilities - third party | | 585.6 | | | 755.9 | |
| Operating lease liabilities - affiliate | | Long-term operating lease liabilities - affiliate | | 418.3 | | | 485.4 | |
| Finance lease liabilities - third party | | Long-term financing lease liabilities - third-party | | 61.4 | | | 68.3 | |
| Total lease liabilities | | | | $ | 1,229.6 | | | $ | 1,487.9 | |
Lease Costs
The table below provides certain information related to costs for the Company’s leases for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Lease Costs (in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
| Components of total lease costs: | | | | | | | | |
| Finance lease costs | | | | | | | | |
| Amortization of lease right of use assets | | $ | 3.9 | | | $ | 3.7 | | | $ | 11.7 | | | $ | 10.2 | |
| Interest on lease liabilities | | 1.0 | | | 1.1 | | | 3.2 | | | 3.1 | |
| Operating lease costs | | 74.3 | | | 79.3 | | | 225.5 | | | 214.0 | |
| Short-term lease costs | | 15.5 | | | 23.1 | | | 44.0 | | | 71.7 | |
| Variable lease costs | | 8.8 | | | 6.6 | | | 23.0 | | | 25.4 | |
| Total lease costs | | $ | 103.5 | | | $ | 113.8 | | | $ | 307.4 | | | $ | 324.4 | |
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Other Information
The table below provides supplemental cash flow information related to leases for the periods presented (in millions):
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows for operating leases | | $ | 224.8 | | | $ | 215.2 | |
| Operating cash flows for finance leases | | 3.2 | | | 3.1 | |
| Financing cash flows for finance leases | | 10.7 | | | 8.9 | |
| Supplemental non-cash changes to lease liabilities from obtaining or remeasuring right of use assets | | $ | (126.5) | | | $ | 690.7 | |
Lease Term and Discount Rate
The table below presents certain information related to the weighted average remaining lease term and weighted average discount rate for the Company’s leases as of September 30, 2021:
| | | | | | | | | | |
| Weighted average remaining lease term - operating leases | | 9.9 years | | |
| Weighted average remaining lease term - finance leases | | 6.7 years | | |
| | | | |
| Weighted average discount rate - operating leases | | 13.3 | % | | |
| Weighted average discount rate - finance leases | | 5.6 | % | | |
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Undiscounted Cash Flows
The table below reconciles the fixed component of the undiscounted cash flows for each of the periods presented to the lease liabilities recorded on the Condensed Consolidated Balance Sheets as of September 30, 2021:
| | | | | | | | | | | | | | |
Amounts due within twelve months of September 30, (in millions) | | Finance Leases | | Operating Leases |
| 2021 | | $ | 14.3 | | | $ | 281.8 | |
| 2022 | | 12.8 | | | 260.8 | |
| 2023 | | 12.8 | | | 242.3 | |
| 2024 | | 11.8 | | | 213.8 | |
| 2025 | | 11.1 | | | 185.1 | |
| Thereafter | | 23.4 | | | 934.3 | |
| Total minimum lease payments | | 86.2 | | | 2,118.1 | |
| Less: effect of discounting | | 14.2 | | | 960.5 | |
| Present value of future minimum lease payments | | 72.0 | | | 1,157.6 | |
| Less: current obligations under leases | | 10.6 | | | 153.7 | |
| Long-term lease obligations | | $ | 61.4 | | | $ | 1,003.9 | |
As of September 30, 2021, the Company has entered into certain leases that have not yet commenced. Such leases include a 15-year lease for water treatment equipment, with future lease payments estimated to total approximately $34.1 million, and a 7-year lease for mildew catalyst, with future lease payments estimated to total approximately $24.2 million. No other such leases that have not yet commenced, either individually or in the aggregate, are material. There are no material lease arrangements in which the Company is the lessor.
In the normal course of business, the Company enters into certain affiliate lease arrangements with PBFX for the use of certain storage, terminaling and pipeline assets. The Company believes that the terms and conditions under these leases are generally no less favorable to either party than those that could have been negotiated with unaffiliated parties with respect to similar services. The terms for these affiliate leases generally range from seven to fifteen years. The Company uses the same methodology for discounting the lease payments on affiliate leases as it does for third-party leases as described above. For the three and nine months ended September 30, 2021, the Company incurred operating lease costs related to affiliate operating leases of $32.3 million and $96.8 million, respectively. For the three and nine months ended September 30, 2020, the Company incurred operating lease costs related to affiliate operating leases of $32.3 million and $96.8 million, respectively.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. EMPLOYEE BENEFIT PLANS
Effective February 1, 2020, the Company amended the PBF Energy Pension Plan to, among other things, incorporate into the plan all employees who became employed at the Company’s Martinez, California location on February 1, 2020, in connection with the Martinez Acquisition. The components of net periodic benefit cost related to the Company’s defined benefit plans consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Pension Benefits | 2021 | | 2020 | | 2021 | | 2020 |
| Components of net periodic benefit cost: | | | | | | | |
| Service cost | $ | 14.4 | | | $ | 15.0 | | | $ | 43.1 | | | $ | 43.9 | |
| Interest cost | 1.3 | | | 1.8 | | | 4.0 | | | 5.3 | |
| Expected return on plan assets | (3.6) | | | (3.2) | | | (10.7) | | | (9.4) | |
| Amortization of prior service cost and actuarial loss | 0.1 | | | 0.1 | | | 0.1 | | | 0.2 | |
| Net periodic benefit cost | $ | 12.2 | | | $ | 13.7 | | | $ | 36.5 | | | $ | 40.0 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Post-Retirement Medical Plan | 2021 | | 2020 | | 2021 | | 2020 |
| Components of net periodic benefit cost: | | | | | | | |
| Service cost | $ | 0.3 | | | $ | 0.3 | | | $ | 0.8 | | | $ | 0.8 | |
| Interest cost | 0.1 | | | 0.1 | | | 0.2 | | | 0.3 | |
| Amortization of prior service cost and actuarial loss | 0.1 | | | 0.1 | | | 0.5 | | | 0.4 | |
| Net periodic benefit cost | $ | 0.5 | | | $ | 0.5 | | | $ | 1.5 | | | $ | 1.5 | |
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. REVENUES
In accordance with FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
The following table provides information relating to the Company’s revenues from external customers for each product or group of similar products for the periods presented:
| | | | | | | | | | | |
| Three Months Ended September 30, |
| (in millions) | 2021 | | 2020 |
| Gasoline and distillates | $ | 6,143.4 | | | $ | 3,121.8 | |
| Feedstocks and other | 380.3 | | | 196.4 | |
| Asphalt and blackoils | 329.2 | | | 206.5 | |
| Chemicals | 240.7 | | | 81.7 | |
| Lubricants | 79.7 | | | 42.8 | |
| Total Revenues | $ | 7,173.3 | | | $ | 3,649.2 | |
| | | |
| Nine Months Ended September 30, |
| (in millions) | 2021 | | 2020 |
| Gasoline and distillates | $ | 16,364.1 | | | $ | 9,728.1 | |
| Feedstocks and other | 883.2 | | | 723.0 | |
| Asphalt and blackoils | 843.0 | | | 577.6 | |
| Chemicals | 665.8 | | | 240.0 | |
| Lubricants | 213.6 | | | 139.6 | |
| Total Revenues | $ | 18,969.7 | | | $ | 11,408.3 | |
The Company’s revenues are generated from the sale of refined petroleum products. These revenues are largely based on the current spot (market) prices of the products sold, which represent consideration specifically allocable to the products being sold on a given day, and the Company recognizes those revenues upon delivery and transfer of title to the products to our customers. The time at which delivery and transfer of title occurs is the point when the Company’s control of the products is transferred to the Company’s customers and when its performance obligation to its customers is fulfilled. Delivery and transfer of title are specifically agreed to between the Company and customers within the contracts. The Company also has contracts which contain fixed pricing, tiered pricing, minimum volume features with makeup periods, or other factors that have not materially been affected by ASC 606.
Deferred Revenue
The Company records deferred revenue when cash payments are received or are due in advance of performance, including amounts which are refundable. Deferred revenue was $39.6 million and $45.1 million as of September 30, 2021 and December 31, 2020, respectively. Fluctuations in the deferred revenue balance are primarily driven by the timing and extent of cash payments received or due in advance of satisfying the Company’s performance obligations.
The Company’s payment terms vary by type and location of customers and the products offered. The period between invoicing and when payment is due is not significant (i.e. generally within two months). For certain products or services and customer types, the Company requires payment before the products or services are delivered to the customer.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES
PBF Holding is a limited liability company treated as a “flow-through” entity for income tax purposes. Accordingly, there is generally no benefit or expense for federal or state income tax in the PBF Holding financial statements apart from the income tax attributable to the two subsidiaries acquired in connection with the acquisition of Chalmette Refining and the Company’s wholly-owned Canadian subsidiary, PBF Energy Limited, which are treated as C-Corporations for income tax purposes, with the tax provision calculated based on the effective tax rate for the periods presented.
The reported income tax provision in the PBF Holding Condensed Consolidated Financial Statements of Operations consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
| Current income tax benefit | | $ | (0.2) | | | $ | — | | | $ | (1.3) | | | $ | — | |
| Deferred income tax (benefit) expense | | (1.8) | | | (1.2) | | | (15.6) | | | 8.6 | |
| Total income tax (benefit) expense | | $ | (2.0) | | | $ | (1.2) | | | $ | (16.9) | | | $ | 8.6 | |
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
13. FAIR VALUE MEASUREMENTS
The tables below present information about the Company’s financial assets and liabilities measured and recorded at fair value on a recurring basis and indicate the fair value hierarchy of the inputs utilized to determine the fair values as of September 30, 2021 and December 31, 2020.
The Company has elected to offset the fair value amounts recognized for multiple derivative contracts executed with the same counterparty; however, fair value amounts by hierarchy level are presented on a gross basis in the tables below. The Company has posted cash margin with various counterparties to support hedging and trading activities. The cash margin posted is required by counterparties as collateral deposits and cannot be offset against the fair value of open contracts except in the event of default. The Company has no derivative contracts that are subject to master netting arrangements that are reflected gross on the Condensed Consolidated Balance Sheets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2021 |
| Fair Value Hierarchy | | Total Gross Fair Value | | Effect of Counter-party Netting | | Net Carrying Value on Balance Sheet |
| (in millions) | Level 1 | | Level 2 | | Level 3 | | |
| Assets: | | | | | | | | | | | |
| Money market funds | $ | 335.2 | | | $ | — | | | $ | — | | | $ | 335.2 | | | N/A | | $ | 335.2 | |
| | | | | | | | | | | |
| Commodity contracts | 46.5 | | | 1.2 | | | — | | | 47.7 | | | (47.7) | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | |
| Commodity contracts | 88.1 | | | — | | | — | | | 88.1 | | | (47.7) | | | 40.4 | |
| Catalyst obligations | — | | | 70.4 | | | — | | | 70.4 | | | — | | | 70.4 | |
| Renewable energy credit and emissions obligations | — | | | 1,308.8 | | | — | | | 1,308.8 | | | — | | | 1,308.8 | |
| Contingent consideration obligation | — | | | — | | | 23.6 | | | 23.6 | | | — | | | 23.6 | |
| Derivatives included with inventory intermediation agreement obligations | — | | | (34.7) | | | — | | | (34.7) | | | — | | | (34.7) | |
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Fair Value Hierarchy | | Total Gross Fair Value | | Effect of Counter-party Netting | | Net Carrying Value on Balance Sheet |
| (in millions) | Level 1 | | Level 2 | | Level 3 | |
| Assets: | | | | | | | | | | | |
| Money market funds | $ | 402.3 | | | $ | — | | | $ | — | | | $ | 402.3 | | | N/A | | $ | 402.3 | |
| | | | | | | | | | | |
| Commodity contracts | 2.5 | | | 3.5 | | | — | | | 6.0 | | | (6.0) | | | — | |
| Derivatives included with inventory intermediation agreement obligations | — | | | 11.3 | | | — | | | 11.3 | | | — | | | 11.3 | |
| | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | |
| Commodity contracts | 2.3 | | | 6.7 | | | — | | | 9.0 | | | (6.0) | | | 3.0 | |
| Catalyst obligations | — | | | 102.5 | | | — | | | 102.5 | | | — | | | 102.5 | |
| Renewable energy credit and emissions obligations | — | | | 528.1 | | | — | | | 528.1 | | | — | | | 528.1 | |
| Contingent consideration obligation | — | | | — | | | — | | | — | | | — | | | — | |
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The valuation methods used to measure financial instruments at fair value are as follows:
•Money market funds categorized in Level 1 of the fair value hierarchy are measured at fair value based on quoted market prices and included within Cash and cash equivalents.
•The commodity contracts categorized in Level 1 of the fair value hierarchy are measured at fair value based on quoted prices in an active market. The commodity contracts categorized in Level 2 of the fair value hierarchy are measured at fair value using a market approach based upon future commodity prices for similar instruments quoted in active markets.
•The derivatives included with inventory intermediation agreement obligations and the catalyst obligations are categorized in Level 2 of the fair value hierarchy and are measured at fair value using a market approach based upon commodity prices for similar instruments quoted in active markets.
•Renewable energy credit and emissions obligations primarily represent our liability for the purchase of (i) biofuel credits (primarily RINs in the U.S.) needed to satisfy our obligation to blend biofuels into the products we produce and (ii) emission credits under the AB 32 and similar programs (collectively, the cap-and-trade systems). To the degree we are unable to blend biofuels (such as ethanol and biodiesel) at percentages required under the biofuel programs, we must purchase biofuel credits to comply with these programs. Under the cap-and-trade systems, we must purchase emission credits to comply with these systems. The liability for environmental credits is based on our deficit for such credits as of the balance sheet date, if any, after considering any credits acquired or under contract, and is equal to the product of the credits deficit and the market price of these credits as of the balance sheet date. The environmental credit obligations are categorized in Level 2 of the fair value hierarchy and are measured at fair value using a market approach based on quoted prices from an independent pricing service.
•When applicable, commodity contracts categorized in Level 3 of the fair value hierarchy consist of commodity price swap contracts that relate to forecasted purchases of crude oil for which quoted forward market prices are not readily available due to market illiquidity. The forward prices used to value these swaps are derived using broker quotes, prices from other third-party sources and other available market based data.
•The contingent consideration obligation at September 30, 2021 and December 31, 2020 are categorized in Level 3 of the fair value hierarchy and are estimated using discounted cash flow models based on management’s estimate of the future cash flows related to the earn-out periods.
Non-qualified pension plan assets are measured at fair value using a market approach based on published net asset values of mutual funds as a practical expedient. As of September 30, 2021 and December 31, 2020, $20.9 million and $21.2 million, respectively, were included within Deferred charges and other assets, net for these non-qualified pension plan assets.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes the changes in fair value measurements categorized in Level 3 of the fair value hierarchy, which primarily includes the change in estimated future earnings related to the Martinez Contingent Consideration:
| | | | | | | | | | | | | | | | | | | | |
| | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in millions) | 2021 | | 2020 | | 2021 | 2020 |
| Balance at beginning of period | $ | 24.3 | | | $ | 12.4 | | | $ | — | | $ | — | |
| Additions | — | | | — | | | — | | 77.3 | |
| Accretion on discounted liabilities | — | | | 0.5 | | | — | | 2.0 | |
| Settlements | — | | | 0.3 | | | — | | 0.7 | |
| Unrealized (gain) loss included in earnings | (0.7) | | | (14.4) | | | 23.6 | | (81.2) | |
| | | | | | |
| | | | | | |
| Balance at end of period | $ | 23.6 | | | $ | (1.2) | | | $ | 23.6 | | $ | (1.2) | |
There were no transfers between levels during the three and nine months ended September 30, 2021 or the three and nine months ended September 30, 2020.
Fair value of debt
The table below summarizes the carrying value and fair value of debt as of September 30, 2021 and December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| (in millions) | Carrying
value | | Fair
value | | Carrying
value | | Fair
value |
| 2025 Senior Secured Notes (a) | $ | 1,250.0 | | | $ | 1,119.5 | | | $ | 1,250.0 | | | $ | 1,232.9 | |
| 2028 Senior Notes (a) | 882.3 | | | 559.6 | | | 1,000.0 | | | 562.5 | |
| 2025 Senior Notes (a) | 690.0 | | | 453.6 | | | 725.0 | | | 475.3 | |
| | | | | | | |
| Revolving Credit Facility (b) | 900.0 | | | 900.0 | | | 900.0 | | | 900.0 | |
| PBF Rail Term Loan (b) | 1.9 | | | 1.9 | | | 7.4 | | | 7.4 | |
| | | | | | | |
| Catalyst financing arrangements (c) | 70.4 | | | 70.4 | | | 102.5 | | | 102.5 | |
| 3,794.6 | | | 3,105.0 | | | 3,984.9 | | | 3,280.6 | |
| Less - Current debt | (89.1) | | | (89.1) | | | (7.4) | | | (7.4) | |
| Unamortized premium | 0.5 | | | n/a | | 0.6 | | | n/a |
| Less - Unamortized deferred financing costs | (35.1) | | | n/a | | (45.3) | | | n/a |
| Long-term debt | $ | 3,670.9 | | | $ | 3,015.9 | | | $ | 3,932.8 | | | $ | 3,273.2 | |
(a)The estimated fair value, categorized as a Level 2 measurement, was calculated based on the present value of future expected payments utilizing implied current market interest rates based on quoted prices of the outstanding senior notes.
(b)The estimated fair value approximates carrying value, categorized as a Level 2 measurement, as these borrowings bear interest based upon short-term floating market interest rates.
(c)Catalyst financing arrangements are valued using a market approach based upon commodity prices for similar instruments quoted in active markets and are categorized as a Level 2 measurement. The Company has elected the fair value option for accounting for its catalyst repurchase obligations as the Company’s liability is directly impacted by the change in fair value of the underlying catalyst.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
14. DERIVATIVES
The Company uses derivative instruments to mitigate certain exposures to commodity price risk. The Company entered into the Inventory Intermediation Agreements that contain purchase obligations for certain volumes of crude oil, intermediates and refined products. The purchase obligations related to crude oil, intermediates and refined products under these agreements are derivative instruments that have been designated as fair value hedges in order to hedge the commodity price volatility of certain refinery inventory. The fair value of these purchase obligation derivatives is based on market prices of the underlying crude oil, intermediates and refined products. The level of activity for these derivatives is based on the level of operating inventories.
As of September 30, 2021 and December 31, 2020, there were no barrels of crude oil and feedstocks outstanding under these derivative instruments designated as fair value hedges. As of September 30, 2021, there were 2,679,289 barrels of intermediates and refined products (2,604,736 barrels at December 31, 2020) outstanding under these derivative instruments designated as fair value hedges. These volumes represent the notional value of the contract.
The Company also enters into economic hedges primarily consisting of commodity derivative contracts that are not designated as hedges and are used to manage price volatility in certain crude oil and feedstock inventories as well as crude oil, feedstock, and refined product sales or purchases. The objective in entering into economic hedges is consistent with the objectives discussed above for fair value hedges. As of September 30, 2021, there were 18,057,000 barrels of crude oil and 5,033,400 barrels of refined products (7,183,000 and 2,810,000, respectively, as of December 31, 2020), outstanding under short and long term commodity derivative contracts not designated as hedges representing the notional value of the contracts.
The Company also uses derivative instruments to mitigate the risk associated with the price of credits needed to comply with various governmental and regulatory environmental compliance programs. For such contracts that represent derivatives, the Company elects the normal purchase normal sale exception under ASC 815, Derivatives and Hedging, and therefore does not record them at fair value.
The following tables provide information regarding the fair values of derivative instruments as of September 30, 2021 and December 31, 2020, and the line items in the Condensed Consolidated Balance Sheets in which fair values are reflected.
| | | | | | | | |
Description |
Balance Sheet Location | Fair Value
Asset/(Liability) |
| | (in millions) |
| Derivatives designated as hedging instruments: | | |
| September 30, 2021: | | |
| | |
| Derivatives included with the inventory intermediation agreement obligations | Accrued expenses | $ | (34.7) | |
| December 31, 2020: | | |
| | |
| Derivatives included with the inventory intermediation agreement obligations | Accrued expenses | $ | 11.3 | |
| | |
Derivatives not designated as hedging instruments: | | |
| September 30, 2021: | | |
| Commodity contracts | Accounts receivable | $ | (40.4) | |
| | |
| December 31, 2020: | | |
| Commodity contracts | Accounts receivable | $ | (3.0) | |
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information regarding gains or losses recognized in income on derivative instruments and the line items in the Condensed Consolidated Statements of Operations in which such gains and losses are reflected.
| | | | | | | | |
| Description | Location of Gain or (Loss) Recognized in Income on Derivatives | Gain or (Loss)
Recognized in
Income on Derivatives |
| | (in millions) |
| Derivatives designated as hedging instruments: | | |
| For the three months ended September 30, 2021: | | |
| | |
| Derivatives included with the inventory intermediation agreement obligations | Cost of products and other | $ | (3.8) | |
| For the three months ended September 30, 2020: | | |
| | |
| Derivatives included with the inventory intermediation agreement obligations | Cost of products and other | $ | (6.6) | |
| For the nine months ended September 30, 2021: | | |
| | |
| Derivatives included with the inventory intermediation agreement obligations | Cost of products and other | $ | (46.0) | |
| For the nine months ended September 30, 2020: | | |
| | |
| Derivatives included with the inventory intermediation agreement obligations | Cost of products and other | $ | 19.1 | |
| | |
| Derivatives not designated as hedging instruments: | | |
| For the three months ended September 30, 2021: | | |
| Commodity contracts | Cost of products and other | $ | (33.2) | |
| For the three months ended September 30, 2020: | | |
| Commodity contracts | Cost of products and other | $ | (9.1) | |
| For the nine months ended September 30, 2021: | | |
| Commodity contracts | Cost of products and other | $ | (67.7) | |
| For the nine months ended September 30, 2020: | | |
| Commodity contracts | Cost of products and other | $ | 55.9 | |
| | |
| Hedged items designated in fair value hedges: | | |
| For the three months ended September 30, 2021: | | |
| | |
| Crude oil, intermediate and refined product inventory | Cost of products and other | $ | 3.8 | |
| For the three months ended September 30, 2020: | | |
| | |
| Crude oil, intermediate and refined product inventory | Cost of products and other | $ | 6.6 | |
| For the nine months ended September 30, 2021: | | |
| | |
| Crude oil, intermediate and refined product inventory | Cost of products and other | $ | 46.0 | |
| For the nine months ended September 30, 2020: | | |
| | |
| Crude oil, intermediate and refined product inventory | Cost of products and other | $ | (19.1) | |
The Company had no ineffectiveness related to fair value hedges for the three and nine months ended September 30, 2021 or the three and nine months ended September 30, 2020.
PBF HOLDING COMPANY LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
15. SUBSEQUENT EVENTS
Inventory Intermediation Agreement
On October 25, 2021, PBF Holding and its subsidiaries, DCR, PRC and Chalmette Refining (collectively, the “PBF Entities”), entered into a third amended and restated inventory intermediation agreement (the “Third Inventory Intermediation Agreement”) with J. Aron, pursuant to which the terms of the existing Inventory Intermediation Agreements were amended and restated in their entirely, including, among other things, pricing and an extension of terms. The Third Inventory Intermediation Agreement extends the term to December 31, 2024, which term may be further extended by mutual consent of the parties to December 31, 2025.
Pursuant to the Third Inventory Intermediation Agreement, J. Aron will continue to purchase and hold title to the J. Aron Products purchased or produced by the Paulsboro and Delaware City refineries (and, at the election of the PBF Entities, the Chalmette refinery) (the "Refineries") and delivered into storage tanks at the Refineries (the "Storage Tanks"). Furthermore, J. Aron agrees to sell the J. Aron Products back to PRC and DCR (and, at the election of the PBF Entities, Chalmette Refining) as the J. Aron Products are discharged out of the Storage Tanks. J. Aron has the right to store the J. Aron Products purchased in tanks under the Third Inventory Intermediation Agreement and will retain these storage rights for the term of the agreements. The Company intends to utilize the crude oil and will market and sell the refined products independently to third parties.
Extinguishment of Debt
In October 2021, the Company repurchased an additional $76.3 million of outstanding 2028 Senior Notes and 2025 Senior Notes for cash consideration of approximately $55.9 million. These notes are reflected as Current debt on the Condensed Consolidated Balance Sheet and were repurchased using cash on hand at September 30, 2021. The related gain on extinguishment of approximately $20.0 million will be recognized in the fourth quarter of 2021 in the Condensed Consolidated Statement of Operations.
In October 2021, the Company settled one of its precious metal financing arrangements at its Delaware City Refinery with cash on hand as of September 30, 2021. The related financing obligation of approximately $10.9 million as of September 30, 2021 is included in Current debt in the Condensed Consolidated Balance Sheet as of September 30, 2021.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited financial statements of PBF Holding included in the Annual Report on Form 10-K for the year ended December 31, 2020 and the unaudited financial statements and related notes included in this report. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. Please see “Cautionary Note Regarding Forward-Looking Statements.”
Unless the context indicates otherwise, the terms “we,” “us,” and “our” refer to PBF Holding and its consolidated subsidiaries.
Overview
We are one of the largest independent petroleum refiners and suppliers of unbranded transportation fuels, heating oil, petrochemical feedstocks, lubricants and other petroleum products in the United States. We sell our products throughout the Northeast, Midwest, Gulf Coast and West Coast of the United States, as well as in other regions of the United States, Canada and Mexico and are able to ship products to other international destinations. As of September 30, 2021, we own and operate six domestic oil refineries and related assets. Based on the current configuration our refineries have a combined processing capacity, known as throughput, of approximately 1,000,000 barrels per day (“bpd”), and a weighted-average Nelson Complexity Index of 13.2 based on current operating conditions. The complexity and throughput capacity of our refineries are subject to change dependent upon configuration changes we make to respond to market conditions, as well as a result of investments made to improve our facilities and maintain compliance with environmental and governmental regulations. Our six oil refineries are aggregated into one reportable segment.
Our six refineries are located in Delaware City, Delaware, Paulsboro, New Jersey, Toledo, Ohio, Chalmette, Louisiana, Torrance, California and Martinez, California. In 2020, we reconfigured our Delaware City and Paulsboro refineries (the “East Coast Refining Reconfiguration”), temporarily idling certain of our major processing units at the Paulsboro refinery, in order to operate the two refineries as one functional unit that we refer to as the “East Coast Refining System”. Each refinery is briefly described in the table below:
| | | | | | | | | | | | | | | | | | | | |
| Refinery | Region | Nelson Complexity Index(1) | Throughput Capacity (in bpd)(1) | PADD | Crude Processed (2) | Source (2) |
| Delaware City | East Coast | 13.6 | 180,000 | 1 | light sweet through heavy sour | water, rail |
| Paulsboro | East Coast | 10.4(3) | 105,000(3) | 1 | light sweet through heavy sour | water |
| Toledo | Mid-Continent | 11.0 | 180,000 | 2 | light sweet | pipeline, truck, rail |
| Chalmette | Gulf Coast | 13.0 | 185,000 | 3 | light sweet through heavy sour | water, pipeline |
| Torrance | West Coast | 13.8 | 166,000 | 5 | medium and heavy | pipeline, water, truck |
| Martinez | West Coast | 16.1 | 157,000 | 5 | medium and heavy | pipeline and water |
________
(1) Reflects operating conditions at each refinery as of the date of this filing. Changes in complexity and throughput capacity reflect the result of current market conditions such as our East Coast Refining Reconfiguration, in addition to investments made to improve our facilities and maintain compliance with environmental and governmental regulations. Configurations at each of our refineries are evaluated and updated accordingly.
(2) Reflects the typical crude and feedstocks and related sources utilized under normal operating conditions and prevailing market environments.
(3) Under normal operating conditions and prevailing market environments, our Nelson Complexity Index and throughput capacity for the Paulsboro refinery would be 13.1 and 180,000, respectively. As a result of the East Coast Refining Reconfiguration, our Nelson Complexity Index and throughput capacity were reduced.
We are a wholly-owned subsidiary of PBF LLC and an indirect subsidiary of PBF Energy. PBF Finance is a wholly-owned subsidiary of PBF Holding. We are the parent company for PBF LLC’s refinery operating subsidiaries.
Business Developments
Recent significant business developments affecting us are discussed below.
COVID-19
The outbreak of the COVID-19 pandemic negatively impacted worldwide economic and commercial activity and financial markets starting in the first quarter of 2020. The COVID-19 pandemic, the Delta variant and other variants thereof, and the related governmental and consumer responses resulted in significant business and operational disruptions, including business and school closures, supply chain disruptions, travel restrictions, stay-at-home orders and limitations on the availability of workforces and has resulted in significantly lower global demand for refined petroleum and petrochemical products. We have seen the demand for these products starting to rebound in 2021 as a result of the lifting or easing of governmental restrictions in response to decreasing COVID-19 infection rates and the distribution of COVID-19 vaccines. Despite these signs of improvements, the resulting economic consequences of the COVID-19 pandemic remains uncertain and will depend on the ongoing severity, location and duration of the outbreak, the effectiveness of the vaccine programs and other actions undertaken by national, regional and local governments and health officials to contain the virus or treat its effects, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume.
We are actively responding to the impacts from these matters on our business. Starting in late March 2020, we reduced the amount of crude oil processed at our refineries in response to the decreased demand for our products and we temporarily idled various units at certain of our refineries to optimize our production in light of prevailing market conditions. We have been operating our refineries at reduced rates, while constantly monitoring and adjusting our production to correlate to increases in product demand. Throughput across our refineries was higher in the three and nine months ended September 2021 in comparison to the three and nine months ended September 2020, reflecting gradual improvement in market conditions. We expect near-term throughput to be in the 880,000 to 940,000 barrel per day range for our refining system. Despite the measures we have taken, we have been, and likely will continue to be, adversely impacted by the COVID-19 pandemic for the foreseeable future. We are unable to predict the ultimate outcome of the economic impact of the COVID-19 pandemic and can provide no assurance that measures taken to mitigate the impact of the COVID-19 pandemic will be effective.
We continue to adjust our operational plans to the evolving market conditions and continue to monitor and maintain lower operating expenses through significant reductions in discretionary activities and third-party services. We successfully reconfigured our East Coast Refining System to maintain the most profitable elements of two refineries while reducing costs and improving our competitive position. Our overall market outlook for the fourth quarter of 2021 remains constructive, with continued gradual improvement in demand, and our full-year capital expenditures are expected to be within a range of approximately $400.0 million to $450.0 million. Should market conditions change from our current expectations, we expect that we will review our capital requirements and adjust as needed.
Adoption of Rule 6-5
On July 21, 2021, the board of Bay Area Air Quality Management District (“BAAQMD”) voted to adopt Proposed Amended Rule (“PAR”) 6-5 requiring compliance with more stringent standards for particulate emissions from Fluid Catalytic Cracking (“FCC”) units at refineries in the Bay Area by 2026. The regulation, which impacts our Martinez refinery, does not require that any specific technology be utilized to meet the new standards. We have a previously approved capital project that will significantly lower the particulate emissions from Martinez's FCC and we have identified and will be evaluating potential process changes that could potentially reduce emissions further in advance of the compliance date. If these measures prove ineffective, the costs incurred by us to achieve the new emissions standards at our Martinez refinery within the required timeframe may be significant, and there can be no assurance that the measures we implement will achieve the required emissions reductions.
Factors Affecting Comparability Between Periods
Our results 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.
COVID-19 and Market Developments
The impact of the unprecedented global health and economic crisis sparked by the COVID-19 pandemic was amplified late in the quarter ended March 31, 2020 due to movements made by the world’s largest oil producers to increase market share. This created simultaneous shocks in oil supply and demand resulting in an economic challenge to our industry which has not occurred since our formation. This combination resulted in significant demand reduction for our refined products and atypical volatility in oil commodity prices. In 2021, as a result of the lifting or easing of restrictions by many governmental authorities in response to decreasing COVID-19 infection rates and the distribution of COVID-19 vaccines, the demand for refined petroleum products has started to recover, consequently improving our refining margins in comparison to the prior year. While our results for the three and nine months ended September 30, 2021 continue to be impacted by lower demand for refined products, we have experienced gradual improvements when compared to the same periods in 2020 and favorable impacts on our revenues, cost of products sold, operating income and liquidity. Although we currently continue to operate our refineries at reduced rates, throughput rates across our refining system have increased in the current year to correlate with the gradual increases in demand.
East Coast Refining Reconfiguration
On December 31, 2020, we completed the East Coast Refining Reconfiguration. As part of the reconfiguration process, we temporarily idled certain of our major processing units at the Paulsboro refinery, resulting in lower overall throughput and inventory levels in addition to decreases in capital and operating costs. Based on this reconfiguration, our East Coast throughput capacity is approximately 285,000 barrels per day.
Debt and Credit Facilities
Senior Notes
During the three months ended September 30, 2021, we made a number of open market repurchases of our 2028 Senior Notes (as defined below) and our 7.25% senior unsecured notes due 2025 (the “2025 Senior Notes”) that resulted in the extinguishment of $117.7 million in principal of the 2028 Senior Notes and $35.0 million in principal of the 2025 Senior Notes. Total cash consideration paid to repurchase the principal amount outstanding of the 2028 Senior Notes and the 2025 Senior Notes, excluding accrued interest, totaled $90.9 million and we recognized a $60.3 million gain on the extinguishment of debt during the three and nine months ended September 30, 2021.
On May 13, 2020, we issued $1.0 billion in aggregate principal amount of 9.25% senior secured notes due 2025 (the “initial 2025 Senior Secured Notes”). The net proceeds from this offering were approximately $982.9 million after deducting the initial purchasers’ discount and offering expenses. We used the net proceeds for general corporate purposes.
On December 21, 2020, we issued an additional $250.0 million in aggregate principal amount of 9.25% senior secured notes due 2025, in a tack-on offering (together with the initial 2025 Senior Secured Notes, the “2025 Senior Secured Notes”). The net proceeds from this offering were approximately $245.7 million after deducting the initial purchasers’ discount and offering expenses. We used the net proceeds for general corporate purposes.
On January 24, 2020, we issued $1.0 billion in aggregate principal amount of 6.00% senior unsecured notes due 2028 (the “2028 Senior Notes”). The net proceeds from this offering were approximately $987.0 million after deducting the initial purchasers’ discount and offering expenses. We used $517.5 million of the proceeds to fully redeem our 7.00% senior notes due 2023 (the “2023 Senior Notes”) and the balance to fund a portion of the cash consideration for the Martinez Acquisition (as defined below).
On February 14, 2020, we exercised our rights 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. The difference between the carrying value of the 2023 Senior Notes on the date they were redeemed and the amount for which they were redeemed was $22.2 million and was classified as Loss on extinguishment of debt in the Condensed Consolidated Statement of Operations as of September 30, 2020.
Revolving Credit Facility
During the nine months ended September 30, 2020, we used advances under our asset-based revolving credit agreement (the “Revolving Credit Facility”) to fund a portion of the Martinez Acquisition (as defined below) and for other general corporate purposes. The outstanding borrowings under the Revolving Credit Facility as of both September 30, 2021 and December 31, 2020 were $900.0 million.
Catalyst Financing Obligations
During the three months ended September 30, 2021, we settled one of our precious metal financing arrangements, which represented a reduction in debt of approximately $18.5 million.
On September 25, 2020, we closed on agreements to sell a portion of our precious metals catalyst to certain major commercial banks for approximately $51.9 million and subsequently leased the catalyst back. The precious metals financing arrangements cover a portion of the catalyst used in our East Coast Refining System, and the Martinez and Toledo refineries. The volumes of the precious metal catalyst and the interest rates are fixed over the term of each financing arrangement. We are obligated to repurchase the precious metals catalyst at fair market value upon expiration of these leases.
Martinez Acquisition
We acquired the Martinez refinery and related logistics assets from Equilon Enterprises LLC d/b/a Shell Oil Products US (“Shell”) on February 1, 2020 (the “Martinez Acquisition”) for an aggregate purchase price of $1,253.4 million, including final working capital of $216.1 million and the obligation to make certain post-closing earn-out payments to Shell based on certain earnings thresholds of the Martinez refinery for a period of up to four years (the “Martinez Contingent Consideration”). The transaction was financed through a combination of cash on hand, including proceeds from the 2028 Senior Notes, and borrowings under the Revolving Credit Facility.
The Martinez refinery is located on an 860-acre site in the City of Martinez, 30 miles northeast of San Francisco, California. The refinery is a high-conversion 157,000 bpd, dual-coking facility with a Nelson Complexity Index of 16.1, making it one of the most complex refineries in the United States. The facility is strategically positioned in Northern California and provides for operating and commercial synergies with the Torrance refinery located in Southern California. In addition to refining assets, the Martinez Acquisition includes a number of high-quality onsite logistics assets including a deep-water marine facility, product distribution terminals and refinery crude and product storage facilities with approximately 8.8 million barrels of shell capacity.
Severance Costs
Following the onset of the COVID-19 pandemic, we implemented a number of cost reduction initiatives to strengthen our financial flexibility and rationalize overhead expenses, including workforce reduction. During the second quarter of 2020, we reduced headcount across our refineries, which resulted in approximately $12.9 million of severance related costs included in General and administrative expenses.
Sale of Hydrogen Plants
On April 17, 2020, we closed on the sale of five hydrogen plants to Air Products and Chemicals, Inc. (“Air Products”) in a sale-leaseback transaction for gross cash proceeds of $530.0 million and recognized a gain of $471.1 million. In connection with the sale, we entered into a transition services agreement, which was followed by the execution of long-term supply agreements in August 2020, through which Air Products will exclusively supply hydrogen, steam, carbon dioxide and other products to the Martinez, Torrance and Delaware City refineries for a term of fifteen years.
Agreements with PBFX
PBFX is a fee-based, growth-oriented, publicly traded Delaware master limited partnership formed by our indirect parent company, PBF Energy, to own or lease, operate, develop and acquire crude oil, refined petroleum products and natural gas terminals, pipelines, storage facilities and similar logistics assets. PBFX engages in the receiving, handling, storage and transferring of crude oil, refined products, natural gas and intermediates from sources located throughout the United States and Canada for PBF Energy in support of certain of our refineries, as well as for third-party customers.
We have entered into a series of agreements with PBFX, including contribution, commercial and operational agreements. Refer to “Note 7 - Related Party Transactions” of our Notes to Condensed Consolidated Financial Statements for descriptions of these agreements and their impact to our operations. Related party transactions that have an impact on the comparability of our period to period financial performance and financial condition are listed below.
Summary of Transactions with PBFX
A summary of transactions with PBFX is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Reimbursements under affiliate agreements: | | | | | | | |
| Services Agreement | $ | 2.2 | | | $ | 2.2 | | | $ | 6.5 | | | $ | 6.5 | |
| Omnibus Agreement | 1.8 | | | 1.9 | | | 5.5 | | | 5.8 | |
| Total expenses under affiliate agreements | 75.5 | | | 70.8 | | | 226.5 | | | 218.7 | |
Results of Operations
The following tables reflect our financial and operating highlights for the three and nine months ended September 30, 2021 and 2020 (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Revenues | $ | 7,173.3 | | | $ | 3,649.2 | | | $ | 18,969.7 | | | $ | 11,408.3 | |
| Cost and expenses: | | | | | | | |
| Cost of products and other | 6,445.8 | | | 3,446.1 | | | 16,880.7 | | | 11,300.3 | |
| Operating expenses (excluding depreciation and amortization expense as reflected below) | 507.6 | | | 452.4 | | | 1,430.1 | | | 1,383.6 | |
| Depreciation and amortization expense | 103.0 | | | 115.9 | | | 310.0 | | | 332.4 | |
| Cost of sales | 7,056.4 | | | 4,014.4 | | | 18,620.8 | | | 13,016.3 | |
| General and administrative expenses (excluding depreciation and amortization expense as reflected below) | 59.7 | | | 42.0 | | | 150.5 | | | 173.5 | |
| Depreciation and amortization expense | 3.4 | | | 2.7 | | | 10.1 | | | 8.4 | |
| Change in fair value of contingent consideration | (0.7) | | | (13.9) | | | 23.6 | | | (79.3) | |
| | | | | | | |
| Loss (gain) on sale of assets | 0.2 | | | 1.7 | | | (0.4) | | | (469.4) | |
| Total cost and expenses | 7,119.0 | | | 4,046.9 | | | 18,804.6 | | | 12,649.5 | |
| | | | | | | |
| Income (loss) from operations | 54.3 | | | (397.7) | | | 165.1 | | | (1,241.2) | |
| | | | | | | |
| Other income (expense): | | | | | | | |
| Interest expense, net | (71.5) | | | (59.0) | | | (211.0) | | | (148.3) | |
| Change in fair value of catalyst obligations | 17.8 | | | (2.4) | | | 13.6 | | | 4.2 | |
| Gain (loss) on extinguishment of debt | 60.3 | | | — | | | 60.3 | | | (22.2) | |
| Other non-service components of net periodic benefit cost | 2.0 | | | 1.1 | | | 5.9 | | | 3.2 | |
| Income (loss) before income taxes | 62.9 | | | (458.0) | | | 33.9 | | | (1,404.3) | |
| Income tax (benefit) expense | (2.0) | | | (1.2) | | | (16.9) | | | 8.6 | |
| Net income (loss) | 64.9 | | | (456.8) | | | 50.8 | | | (1,412.9) | |
| Less: net income (loss) attributable to noncontrolling interests | (0.1) | | | (0.1) | | | 2.3 | | | (0.1) | |
| Net income (loss) attributable to PBF Holding Company LLC | $ | 65.0 | | | $ | (456.7) | | | $ | 48.5 | | | $ | (1,412.8) | |
| | | | | | | |
| Consolidated gross margin | $ | 116.9 | | | $ | (365.2) | | | $ | 348.9 | | | $ | (1,608.0) | |
Gross refining margin (1) | $ | 727.5 | | | $ | 203.1 | | | $ | 2,089.0 | | | $ | 108.0 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
_____________________
(1) See Non-GAAP Financial Measures.
| | | | | | | | | | | | | | | | | | | | | | | |
Operating Highlights | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Key Operating Information | | | | | | | |
| Production (bpd in thousands) | 867.7 | | | 716.7 | | | 839.7 | | | 750.2 | |
| Crude oil and feedstocks throughput (bpd in thousands) | 848.3 | | | 706.1 | | | 823.2 | | | 744.6 | |
| Total crude oil and feedstocks throughput (millions of barrels) | 78.0 | | | 65.0 | | | 224.7 | | | 204.0 | |
| Consolidated gross margin per barrel of throughput | $ | 1.50 | | | $ | (5.62) | | | $ | 1.56 | | | $ | (7.88) | |
Gross refining margin, excluding special items, per barrel of throughput (1) | $ | 9.32 | | | $ | 2.98 | | | $ | 6.32 | | | $ | 3.92 | |
| Refinery operating expense, per barrel of throughput | $ | 6.50 | | | $ | 6.96 | | | $ | 6.36 | | | $ | 6.78 | |
| | | | | | | |
Crude and feedstocks (% of total throughput) (2) | | | | | | | |
| Heavy | 32 | % | | 43 | % | | 34 | % | | 43 | % |
| Medium | 32 | % | | 25 | % | | 29 | % | | 26 | % |
| Light | 19 | % | | 18 | % | | 20 | % | | 17 | % |
| Other feedstocks and blends | 17 | % | | 14 | % | | 17 | % | | 14 | % |
| Total throughput | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| | | | | | | |
| Yield (% of total throughput) | | | | | | | |
| Gasoline and gasoline blendstocks | 52 | % | | 54 | % | | 53 | % | | 50 | % |
| Distillates and distillate blendstocks | 29 | % | | 28 | % | | 30 | % | | 31 | % |
| Lubes | 1 | % | | 1 | % | | 1 | % | | 1 | % |
| Chemicals | 2 | % | | 1 | % | | 2 | % | | 1 | % |
| Other | 18 | % | | 18 | % | | 16 | % | | 18 | % |
| Total yield | 102 | % | | 102 | % | | 102 | % | | 101 | % |
_____________________
(1) See Non-GAAP Financial Measures.
(2) We define heavy crude oil as crude oil with American 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.
The table below summarizes certain market indicators relating to our operating results as reported by Platts.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (dollars per barrel, except as noted) |
| Dated Brent crude oil | $ | 73.45 | | | $ | 43.05 | | | $ | 67.93 | | | $ | 40.74 | |
| West Texas Intermediate (WTI) crude oil | $ | 70.54 | | | $ | 40.91 | | | $ | 65.06 | | | $ | 38.12 | |
| Light Louisiana Sweet (LLS) crude oil | $ | 71.46 | | | $ | 42.46 | | | $ | 66.68 | | | $ | 40.13 | |
| Alaska North Slope (ANS) crude oil | $ | 72.66 | | | $ | 42.75 | | | $ | 67.53 | | | $ | 41.32 | |
| Crack Spreads | | | | | | | |
| Dated Brent (NYH) 2-1-1 | $ | 18.66 | | | $ | 8.30 | | | $ | 16.09 | | | $ | 9.30 | |
| WTI (Chicago) 4-3-1 | $ | 19.60 | | | $ | 7.08 | | | $ | 16.73 | | | $ | 6.56 | |
| LLS (Gulf Coast) 2-1-1 | $ | 18.13 | | | $ | 6.53 | | | $ | 15.40 | | | $ | 7.79 | |
| ANS (West Coast-LA) 4-3-1 | $ | 21.54 | | | $ | 11.70 | | | $ | 19.58 | | | $ | 11.41 | |
| ANS (West Coast-SF) 3-2-1 | $ | 23.27 | | | $ | 10.88 | | | $ | 19.22 | | | $ | 9.77 | |
| Crude Oil Differentials | | | | | | | |
| Dated Brent (foreign) less WTI | $ | 2.91 | | | $ | 2.14 | | | $ | 2.87 | | | $ | 2.62 | |
| Dated Brent less Maya (heavy, sour) | $ | 7.26 | | | $ | 3.88 | | | $ | 5.93 | | | $ | 5.95 | |
| Dated Brent less WTS (sour) | $ | 2.91 | | | $ | 2.09 | | | $ | 2.53 | | | $ | 2.72 | |
| Dated Brent less ASCI (sour) | $ | 4.79 | | | $ | 1.38 | | | $ | 3.58 | | | $ | 1.99 | |
| WTI less WCS (heavy, sour) | $ | 13.59 | | | $ | 9.29 | | | $ | 13.00 | | | $ | 10.58 | |
| WTI less Bakken (light, sweet) | $ | (0.48) | | | $ | 1.23 | | | $ | 0.07 | | | $ | 2.57 | |
| WTI less Syncrude (light, sweet) | $ | 2.47 | | | $ | 1.94 | | | $ | 1.66 | | | $ | 1.58 | |
| WTI less LLS (light, sweet) | $ | (0.92) | | | $ | (1.55) | | | $ | (1.63) | | | $ | (2.01) | |
| WTI less ANS (light, sweet) | $ | (2.12) | | | $ | (1.84) | | | $ | (2.48) | | | $ | (3.20) | |
| Natural gas (dollars per MMBTU) | $ | 4.32 | | | $ | 2.12 | | | $ | 3.35 | | | $ | 1.92 | |
Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020
Overview— Net income was $64.9 million for the three months ended September 30, 2021 compared to net loss of $456.8 million for the three months ended September 30, 2020.
Our results for the three months ended September 30, 2021 were positively impacted by a gain on the extinguishment of debt associated with the repurchase of a portion of our 2028 Senior Notes and 2025 Senior Notes of $60.3 million, and a change in fair value of the Martinez Contingent Consideration of $0.7 million. Our results for the three months ended September 30, 2020 were positively impacted by special items consisting of a non-cash lower of cost or market (“LCM”) inventory adjustment of approximately $9.9 million and the change in the fair value of the contingent consideration related to the Martinez Acquisition of $13.9 million.
Excluding the impact of these special items, our results were positively impacted by increases in the demand for our refined products and improved margins for refined products, which have positively impacted our revenues, cost of products sold and operating income. Our results for the three months ended September 30, 2020 were significantly impacted by the COVID-19 pandemic, evidenced by overall lower throughput volumes and barrels sold at the majority of our refineries, as well as lower refining margins.
Revenues— Revenues totaled $7.2 billion for the three months ended September 30, 2021 compared to $3.6 billion for the three months ended September 30, 2020, an increase of approximately $3.6 billion, or 100.0%. Revenues per barrel were $83.29 and $49.33 for the three months ended September 30, 2021 and 2020, respectively, an increase of 68.8% directly related to higher hydrocarbon commodity prices. For the three months ended September 30, 2021, the total throughput rates at our East Coast, Mid-Continent, Gulf Coast and West Coast refineries averaged approximately 259,800 bpd, 146,000 bpd, 145,300 bpd and 297,200 bpd, respectively. For the three months ended September 30, 2020, the total throughput rates at our East Coast, Mid-Continent, Gulf Coast and West Coast refineries averaged approximately 251,400 bpd, 108,400 bpd, 125,600 bpd and 220,700 bpd, respectively. For the three months ended September 30, 2021, the total barrels sold at our East Coast, Mid-Continent, Gulf Coast and West Coast refineries averaged approximately 299,300 bpd, 152,800 bpd, 152,000 bpd and 332,100 bpd, respectively. For the three months ended September 30, 2020, the total barrels sold at our East Coast, Mid-Continent, Gulf Coast and West Coast refineries averaged approximately 287,500 bpd, 118,000 bpd, 137,400 bpd and 261,200 bpd, respectively.
The throughput rates at our refineries were higher in the three months ended September 30, 2021 compared to the same period in 2020. We operated our refineries at reduced rates beginning in March 2020, and, based on current market conditions, we have adjusted throughput rates across our entire refining system to correlate with the gradual increases in demand during the three months ended September 30, 2021, while still running below historic levels. We plan on continuing to operate our refineries at lower utilization levels until such time that sustained product demand justifies higher production. Total refined product barrels sold were higher than throughput rates, reflecting sales from inventory as well as sales and purchases of refined products outside our refineries.
Consolidated Gross Margin— Consolidated gross margin totaled $116.9 million for the three months ended September 30, 2021 compared to $(365.2) million for the three months ended September 30, 2020, an increase of approximately $482.1 million. Gross refining margin (as described below in Non-GAAP Financial Measures) totaled $727.5 million, or $9.32 per barrel of throughput for the three months ended September 30, 2021 compared to $203.1 million, or $3.13 per barrel of throughput for the three months ended September 30, 2020, an increase of approximately $524.4 million. Gross refining margin excluding special items totaled $727.5 million or $9.32 per barrel of throughput for the three months ended September 30, 2021 compared to $193.2 million or $2.98 per barrel of throughput for the three months ended September 30, 2020, an increase of $534.3 million.
Consolidated gross margin and gross refining margin were not impacted by special items for the three months ended September 30, 2021. When compared to the same period in 2020, results were positively impacted by the increase in refined product margins, favorable movements in certain crude differentials and an overall increase in throughput rates. For the three months ended September 30, 2020, special items impacting our margin calculations included a non-cash LCM inventory benefit of approximately $9.9 million on a net basis, resulting from an increase in crude oil and refined product prices.
Additionally, our results continue to be impacted by significant costs to comply with the Renewable Fuel Standard. Total Renewable Fuel Standard compliance costs were $73.1 million for the three months ended September 30, 2021 in comparison to $86.6 million for three months ended months ended September 30, 2020.
Overall average industry margins were higher during the three months ended September 30, 2021 in comparison to the same period in 2020, primarily due to varying timing and extent of the impacts of the COVID-19 pandemic on regional demand and commodity prices. During the three months ended September 30, 2021, commodity prices increased and we started to experience an increase in demand for our products in connection with the lifting or easing of restrictions by many governmental authorities in response to decreasing COVID-19 infection rates and the distribution of COVID-19 vaccines.
Favorable movements in 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.
On the East Coast, the Dated Brent (NYH) 2-1-1 industry crack spread was approximately $18.66 per barrel, or 124.8% higher, in the three months ended September 30, 2021, as compared to $8.30 per barrel in the same period in 2020. Our margins were positively impacted from our refinery specific slate on the East Coast by strengthening Dated Brent/Maya differential, which increased by $3.38 per barrel, slightly offset by weakened WTI/Bakken differentials, which decreased by $1.71 per barrel, in comparison to the same period in 2020. The WTI/WCS differential increased to $13.59 per barrel in the three months ended September 30, 2021 compared to $9.29 in the same period in 2020, which favorably impacted our cost of heavy Canadian crude.
Across the Mid-Continent, the WTI (Chicago) 4-3-1 industry crack spread was $19.60 per barrel, or 176.8% higher, in the three months ended September 30, 2021 as compared to $7.08 per barrel in the same period in 2020. Additionally, the WTI/Syncrude differential averaged $2.47 per barrel during the three months ended September 30, 2021 as compared to $1.94 per barrel in the same period of 2020. Our margins were negatively impacted from our refinery specific slate in the Mid-Continent by a decreasing WTI/Bakken differential, which averaged a premium of $0.48 per barrel in the three months ended September 30, 2021, as compared to a discount of $1.23 per barrel in the same period in 2020.
On the Gulf Coast, the LLS (Gulf Coast) 2-1-1 industry crack spread was $18.13 per barrel, or 177.6% higher, in the three months ended September 30, 2021 as compared to $6.53 per barrel in the same period in 2020. Margins on the Gulf Coast were positively impacted from our refinery specific slate by a strengthening WTI/LLS differential, which averaged a discount of $0.92 per barrel during the three months ended September 30, 2021 as compared to a premium of $1.55 per barrel in the same period of 2020.
On the West Coast the ANS (West Coast) 4-3-1 industry crack spread was $21.54 per barrel, or 84.1% higher, in the three months ended September 30, 2021 as compared to $11.70 per barrel in the same period in 2020. Additionally, the ANS (West Coast) 3-2-1 industry crack spread was $23.27 per barrel, or 113.9% higher, in the three months ended September 30, 2021 as compared to $10.88 per barrel in the same period in 2020. Our margins on the West Coast were negatively impacted from our refinery specific slate by weakened WTI/ANS differential, which averaged a premium of $2.12 per barrel during the three months ended September 30, 2021 as compared to a premium of $1.84 per barrel in the same period of 2020.
Operating Expenses— Operating expenses totaled $507.6 million, or $6.50 per barrel of throughput, for the three months ended September 30, 2021 compared to $452.4 million, or $6.96 per barrel of throughput, for the three months ended September 30, 2020, an increase of $55.2 million, or 12.2%. Increases in operating expenses were mainly attributable to higher energy costs as a result of increases in both natural gas volumes and price across our refineries when compared to the same period in 2020. Additionally, we experienced higher maintenance and operational costs due to increased production when compared to the same period in 2020.
General and Administrative Expenses— General and administrative expenses totaled $59.7 million for the three months ended September 30, 2021 compared to $42.0 million for the three months ended September 30, 2020, an increase of approximately $17.7 million or 42.1%. The increase in general and administrative expenses for the three months ended September 30, 2021 in comparison to the three months ended September 30, 2020 is primarily related to higher salaries, wages and benefits. Our general and administrative expenses are comprised of personnel, facilities and other infrastructure costs necessary to support our refineries.
Gain on Sale of Assets— There was a loss of $0.2 million and $1.7 million for the three months ended September 30, 2021 and September 30, 2020, respectively, related to the sale of non-operating refinery assets.
Depreciation and Amortization Expense— Depreciation and amortization expense totaled $106.4 million for the three months ended September 30, 2021 (including $103.0 million recorded within Cost of sales) compared to $118.6 million for the three months ended September 30, 2020 (including $115.9 million recorded within Cost of sales), a decrease of $12.2 million. The decrease was a result of reduced depreciation and amortization expense associated with certain units idled as a result of the East Coast Refining Reconfiguration.
Change in Fair Value of Contingent Consideration— Change in fair value of contingent consideration represented a gain of $0.7 million and $13.9 million for the three months ended September 30, 2021 and September 30, 2020, respectively. These gains relate to changes in estimated fair value of the Martinez Contingent Consideration associated with the acquisition related earn-out obligations.
Change in Fair Value of Catalyst Obligations— Change in fair value of catalyst obligations represented a gain of $17.8 million for the three months ended September 30, 2021 compared to a loss of $2.4 million for the three months ended September 30, 2020. 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 upon lease termination.
Gain (loss) on extinguishment of debt— Gain on extinguishment of debt of $60.3 million incurred in the three months ended September 30, 2021 relates to the repurchase of a portion of our 2028 Senior Notes and 2025 Senior Notes. There were no such costs in the same period of 2020.
Interest Expense, net— Interest expense totaled $71.5 million for the three months ended September 30, 2021 compared to $59.0 million for the three months ended September 30, 2020, an increase of approximately $12.5 million. This net increase is mainly attributable to higher interest costs associated with the issuance of the 2025 Senior Secured Notes in May 2020 and December 2020. Interest expense includes interest on long-term debt, costs related to the sale and leaseback of our precious metal catalysts, financing costs associated with the amended and restated inventory intermediation agreements (“Inventory Intermediation Agreements”) with J. Aron, letter of credit fees associated with the purchase of certain crude oils and the amortization of deferred financing costs.
Income Tax Expense— As PBF Holding is a limited liability company treated as a “flow-through” entity for income tax purposes, our Condensed Consolidated Financial Statements generally do not include a benefit or expense for income taxes for the three months ended September 30, 2021 and September 30, 2020, respectively, apart from the income tax attributable to two subsidiaries acquired in connection with the Chalmette refinery in the fourth quarter of 2015 and PBF Energy Limited (“PBF Ltd.”). These subsidiaries are treated as C-Corporations for income tax purposes. An income tax benefit of $2.0 million was recorded for the three months ended September 30, 2021 in comparison to an income tax benefit of $1.2 million recorded for the three months ended September 30, 2020, primarily attributable to the results of PBF Ltd.
Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020
Overview— Net income was $50.8 million for the nine months ended September 30, 2021 compared to a net loss of $1,412.9 million for the nine months ended September 30, 2020.
Our results for the nine months ended September 30, 2021 were positively impacted by special items consisting of a non-cash LCM inventory adjustment of approximately $669.6 million and a gain on the extinguishment of debt associated with the repurchase of a portion of our 2028 Senior Notes and 2025 Senior Notes of $60.3 million, offset by a change in fair value of the Martinez Contingent Consideration of $23.6 million. Our results for the nine months ended September 30, 2020 were negatively impacted by special items consisting of a non-cash LCM inventory adjustment of approximately $691.5 million, debt extinguishment costs associated with the early redemption of our 2023 Senior Notes of $22.2 million and severance costs related to reductions in workforce of $12.9 million. These unfavorable impacts were partially offset by the gain on the sale of hydrogen plants of $471.1 million and the change in the fair value of the Martinez Contingent Consideration of $79.3 million. The LCM inventory adjustments were recorded due to movements in the price of crude oil and refined products in the periods presented.
Excluding the impact of these special items, our results were positively impacted by increases in the demand for our refined products and improved margins for refined products, which have positively impacted our revenues, cost of products sold and operating income. When comparing our results to the nine months ended September 30, 2020, demand for our products has started to recover, evidenced by higher throughput volumes and barrels sold at the majority of our refineries, as well as overall higher refining margins. Additionally, our results for the nine months ended September 30, 2021 were positively impacted by lower general and administrative expenses when compared to the same period in 2020. During the nine months ended September 30, 2020 our results were negatively impacted by higher general and administrative expenses associated with severance charges and integration costs associated with the Martinez Acquisition.
Revenues— Revenues totaled $19.0 billion for the nine months ended September 30, 2021 compared to $11.4 billion for the nine months ended September 30, 2020, an increase of approximately $7.6 billion, or 66.7%. Revenues per barrel were $76.79 and $48.45 for the nine months ended September 30, 2021 and 2020, respectively, an increase of 58.5% directly related to higher hydrocarbon commodity prices. For the nine months ended September 30, 2021, the total throughput rates at our East Coast, Mid-Continent, Gulf Coast and West Coast refineries averaged approximately 250,900 bpd, 138,000 bpd, 158,000 bpd and 276,300 bpd, respectively. For the nine months ended September 30, 2020, the total throughput rates at our East Coast, Mid-Continent, Gulf Coast and West Coast refineries averaged approximately 274,300 bpd, 91,900 bpd, 144,000 bpd and 234,400 bpd, respectively. For the nine months ended September 30, 2021, total barrels sold at our East Coast, Mid-Continent, Gulf Coast and West Coast refineries averaged approximately 285,700 bpd, 144,100 bpd, 165,800 bpd and 309,400 bpd, respectively. For the nine months ended September 30, 2020, total barrels sold at our East Coast, Mid-Continent, Gulf Coast and West Coast refineries averaged approximately 310,100 bpd, 113,800 bpd, 169,000 bpd and 266,500 bpd, respectively.
The throughput rates at the majority of our refineries were higher in the nine months ended September 30, 2021 compared to the same period in 2020, with the exception of lower rates in the East Coast as a result of the East Coast Refining Reconfiguration in the fourth quarter of 2020. We operated our refineries at reduced rates beginning in March 2020, and, based on current market conditions, we have adjusted throughput rates across our entire refining system to correlate with the gradual increases in demand experienced during the nine months ended September 30, 2021, while still running below historic levels. We plan on continuing to operate our refineries at lower utilization levels until such time that sustained product demand justifies higher production. Total refined product barrels sold were higher than throughput rates, reflecting sales from inventory as well as sales and purchases of refined products outside our refineries.
Consolidated Gross Margin— Consolidated gross margin totaled $348.9 million for the nine months ended September 30, 2021, compared to $(1,608.0) million for the nine months ended September 30, 2020, an increase of approximately $1,956.9 million. Gross refining margin (as described below in Non-GAAP Financial Measures) totaled $2,089.0 million, or $9.30 per barrel of throughput for the nine months ended September 30, 2021 compared to $108.0 million, or $0.53 per barrel of throughput for the nine months ended September 30, 2020, an increase of approximately $1,981.0 million. Gross refining margin excluding special items totaled $1,419.4 million or $6.32 per barrel of throughput for the nine months ended September 30, 2021 compared to $799.5 million or $3.92 per barrel of throughput for the nine months ended September 30, 2020, an increase of $619.9 million.
Consolidated gross margin and gross refining margin were positively impacted by a non-cash LCM adjustment of approximately $669.6 million on a net basis resulting from the increase in crude oil and refined product prices from the year ended December 31, 2020 to the end of the third quarter of 2021. Gross refining margin excluding the impact of special items increased due to favorable movements in certain crude differentials, and an overall increase in throughput rates and refining margins. For the nine months ended September 30, 2020, special items impacting our margin calculations included a non-cash LCM inventory charge of approximately $691.5 million on a net basis, resulting from a decrease in crude oil and refined product prices.
Additionally, our results continue to be impacted by significant costs to comply with the Renewable Fuel Standard. Total Renewable Fuel Standard compliance costs were $653.8 million for the nine months ended September 30, 2021 in comparison to $183.4 million for the nine months ended September 30, 2020.
Average industry margins were mostly favorable during the nine months ended September 30, 2021 in comparison to the same period in 2020, primarily due to varying timing and extent of the impacts of the COVID-19 pandemic on regional demand and commodity prices. During the nine months ended September 30, 2021, we started to experience an increase in demand for our products in connection with the lifting or easing of restrictions by many governmental authorities in response to decreasing COVID-19 infection rates and the distribution of COVID-19 vaccines.
Favorable movements in 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.
On the East Coast, the Dated Brent (NYH) 2-1-1 industry crack spread was approximately $16.09 per barrel, or 73.0% higher, in the nine months ended September 30, 2021, as compared to $9.30 per barrel in the same period in 2020. Our margins were negatively impacted from our refinery specific slate on the East Coast by weakened Dated Brent/Maya and WTI/Bakken differentials, which decreased by $0.02 per barrel and $2.50 per barrel, respectively, in comparison to the same period in 2020. The WTI/WCS differential increased to $13.00 per barrel in 2021 compared to $10.58 in 2020, which favorably impacted our cost of heavy Canadian crude.
Across the Mid-Continent, the WTI (Chicago) 4-3-1 industry crack spread was $16.73 per barrel, or 155.0% higher, in the nine months ended September 30, 2021 as compared to $6.56 per barrel in the same period in 2020. Our margins were negatively impacted from our refinery specific slate in the Mid-Continent by a decreasing WTI/Bakken differential, which averaged $0.07 per barrel in the nine months ended September 30, 2021, as compared to $2.57 per barrel in the same period in 2020. This decrease was slightly offset by strengthening WTI/Syncrude differential which averaged $1.66 per barrel during the nine months ended September 30, 2021 as compared to $1.58 per barrel in the same period of 2020.
On the Gulf Coast, the LLS (Gulf Coast) 2-1-1 industry crack spread was $15.40 per barrel, or 97.7% higher, in the nine months ended September 30, 2021 as compared to $7.79 per barrel in the same period in 2020. Margins on the Gulf Coast were positively impacted from our refinery specific slate by a strengthening WTI/LLS differential, which averaged a premium of $1.63 per barrel during the nine months ended September 30, 2021 as compared to a premium of $2.01 per barrel in the same period of 2020.
On the West Coast, the ANS (West Coast) 4-3-1 industry crack spread was $19.58 per barrel, or 71.6% higher, in the nine months ended September 30, 2021 as compared to $11.41 per barrel in the same period in 2020. Additionally (West Coast) 3-2-1 industry crack spread was $19.22 per barrel, or 96.7% higher, in the nine months ended September 30, 2021 as compared to $9.77 per barrel in the same period in 2020. Our margins on the West Coast were positively impacted from our refinery specific slate by a strengthening WTI/ANS differential, which averaged a premium of $2.48 per barrel during the nine months ended September 30, 2021 as compared to a premium of $3.20 per barrel in the same period of 2020.
Operating Expenses— Operating expenses totaled $1,430.1 million, or $6.36 per barrel of throughput, for the nine months ended September 30, 2021 compared to $1,383.6 million, or $6.78 per barrel of throughput, for the nine months ended September 30, 2020, an increase of approximately $46.5 million, or 3.4%. Increase in operating expenses were mainly attributable to increases in natural gas volumes and price across our refineries when compared to the same period in 2020. Additionally, we experienced higher maintenance and operational costs due to increased production when compared to the same period in 2020. These increases were partially offset by cost reductions associated with the East Coast Refining Reconfiguration (East Coast operating expenses decreased by $29.2 million when compared to the same period in 2020) as well as reductions in discretionary activities and third-party services, which are in line with our cost reduction initiatives taken to strengthen our financial flexibility.
General and Administrative Expenses— General and administrative expenses totaled $150.5 million for the nine months ended September 30, 2021 compared to $173.5 million for the nine months ended September 30, 2020, a decrease of approximately $23.0 million or 13.3%. The decrease in general and administrative expenses for the nine months ended September 30, 2021 in comparison to the nine months ended September 30, 2020 primarily related to reductions in outside service costs and lower salaries, wages and benefits. Additionally, general and administrative expenses for the nine months ended September 30, 2020 included headcount reduction severance costs across the refineries as well as integration costs pertaining to the Martinez Acquisition. 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— There was a gain of $0.4 million for the nine months ended September 30, 2021 related primarily to the sale of non-operating refinery assets. There was a gain of $469.4 million for the nine months ended September 30, 2020 primarily related to the sale of five hydrogen plants.
Depreciation and Amortization Expense— Depreciation and amortization expense totaled $320.1 million for the nine months ended September 30, 2021 (including $310.0 million recorded within Cost of sales) compared to $340.8 million for the nine months ended September 30, 2020 (including $332.4 million recorded within Cost of sales), a decrease of approximately $20.7 million. The decrease was a result of reduced depreciation and amortization expense associated with certain units idled as a result of the East Coast Refining Reconfiguration.
Change in Fair Value of Contingent Consideration— Change in fair value of contingent consideration represented a loss of $23.6 million for the nine months ended September 30, 2021 in comparison to a gain of $79.3 million for the nine months ended September 30, 2020. These losses and gains were related to the changes in estimated fair value of the Martinez Contingent Consideration associated with the acquisition related earn-out obligations.
Change in Fair Value of Catalyst Obligations— Change in fair value of catalyst obligations represented a gain of $13.6 million for the nine months ended September 30, 2021 compared to a gain of $4.2 million for the nine months ended September 30, 2020. These gains 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 upon lease termination.
Gain (loss) on extinguishment of debt— We incurred a gain on extinguishment of debt of $60.3 million in the nine months ended September 30, 2021 related to the repurchase of a portion of our 2028 Senior Notes and 2025 Senior Notes. We incurred debt extinguishment costs of $22.2 million in the nine months ended September 30, 2020 related to the redemption of our 2023 Senior Notes.
Interest Expense, net— Interest expense totaled $211.0 million for the nine months ended September 30, 2021 compared to $148.3 million for the nine months ended September 30, 2020, an increase of approximately $62.7 million. This net increase is mainly attributable to higher interest costs associated with the issuance of the 2025 Senior Secured Notes in May 2020 and December 2020. Interest expense includes interest on long-term debt, 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.
Income Tax Expense— As PBF Holding is a limited liability company treated as a “flow-through” entity for income tax purposes, our Condensed Consolidated Financial Statements generally do not include a benefit or expense for income taxes for the nine months ended September 30, 2021 and September 30, 2020, respectively, apart from the income tax attributable to two subsidiaries acquired in connection with the acquisition of the Chalmette refinery in the fourth quarter of 2015 and PBF Ltd. These subsidiaries are treated as C-Corporations for income tax purposes. An income tax benefit of $16.9 million was recorded for the nine months ended September 30, 2021 in comparison to an income tax expense of $8.6 million recorded for the nine months ended September 30, 2020, primarily attributable to the results of PBF Ltd.
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 accounting principles generally accepted in the United States of America (“GAAP”), and our calculations thereof may not be comparable to similarly entitled measures reported by other companies.
Special Items
The Non-GAAP measures presented include EBITDA excluding special items and gross refining margin excluding special items. Special items for the periods presented relate to LCM inventory adjustments, changes in fair value of contingent consideration, (gain) loss on extinguishment of debt, gain on sale of hydrogen plants and severance costs related to reduction in workforce. See “Notes to Non-GAAP Financial Measures” below for more details on all special items disclosed. 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.
Gross Refining Margin and Gross Refining Margin Excluding Special Items
Gross refining margin is defined as consolidated gross margin excluding refinery depreciation and operating expenses. 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.
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):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2021 | | 2020 |
| $ | | per barrel of throughput | | $ | | per barrel of throughput |
| Calculation of consolidated gross margin: | | | | | | | |
| Revenues | $ | 7,173.3 | | | $ | 91.92 | | | $ | 3,649.2 | | | $ | 56.17 | |
| Less: Cost of sales | 7,056.4 | | | 90.42 | | | 4,014.4 | | | 61.79 | |
| Consolidated gross margin | $ | 116.9 | | | $ | 1.50 | | | $ | (365.2) | | | $ | (5.62) | |
| Reconciliation of consolidated gross margin to gross refining margin and gross refining margin excluding special items: | | | | | | | |
| Consolidated gross margin | $ | 116.9 | | | $ | 1.50 | | | $ | (365.2) | | | $ | (5.62) | |
| Add: Refinery operating expense | 507.6 | | | 6.50 | | | 452.4 | | | 6.96 | |
| Add: Refinery depreciation expense | 103.0 | | | 1.32 | | | 115.9 | | | 1.79 | |
| Gross refining margin | $ | 727.5 | | | $ | 9.32 | | | $ | 203.1 | | | $ | 3.13 | |
Special items:(1) | | | | | | | |
| Add: Non-cash LCM inventory adjustment | — | | | — | | | (9.9) | | | (0.15) | |
| | | | | | | |
| Gross refining margin excluding special items | $ | 727.5 | | | $ | 9.32 | | | $ | 193.2 | | | $ | 2.98 | |
| | | | | | | |
| Nine Months Ended September 30, |
| 2021 | | 2020 |
| $ | | per barrel of throughput | | $ | | per barrel of throughput |
| Calculation of consolidated gross margin: | | | | | | | |
| Revenues | $ | 18,969.7 | | | $ | 84.42 | | | $ | 11,408.3 | | | $ | 55.92 | |
| Less: Cost of sales | 18,620.8 | | | 82.86 | | | 13,016.3 | | | 63.80 | |
| Consolidated gross margin | $ | 348.9 | | | $ | 1.56 | | | $ | (1,608.0) | | | $ | (7.88) | |
| Reconciliation of consolidated gross margin to gross refining margin and gross refining margin excluding special items: | | | | | | | |
| Consolidated gross margin | $ | 348.9 | | | $ | 1.56 | | | $ | (1,608.0) | | | $ | (7.88) | |
| Add: Refinery operating expense | 1,430.1 | | | 6.36 | | | 1,383.6 | | | 6.78 | |
| Add: Refinery depreciation expense | 310.0 | | | 1.38 | | | 332.4 | | | 1.63 | |
| Gross refining margin | $ | 2,089.0 | | | $ | 9.30 | | | $ | 108.0 | | | $ | 0.53 | |
Special items:(1) | | | | | | | |
| Add: Non-cash LCM inventory adjustment | (669.6) | | | (2.98) | | | 691.5 | | | 3.39 | |
| Gross refining margin excluding special items | $ | 1,419.4 | | | $ | 6.32 | | | $ | 799.5 | | | $ | 3.92 | |
| | | | | | | |
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See Notes to Non-GAAP Financial Measures.
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, gain on sale of hydrogen plants, the write down of inventory to the LCM, (gain) loss on extinguishment of debt related to refinancing activities, change in the fair value of contingent consideration 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.
The following tables reconcile net income (loss) as reflected in our results of operations to EBITDA, EBITDA excluding special items and Adjusted EBITDA for the periods presented (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | | |
| Reconciliation of net income (loss) to EBITDA and EBITDA excluding special items: | | | | | | | |
| Net income (loss) | $ | 64.9 | | | $ | (456.8) | | | $ | 50.8 | | | $ | (1,412.9) | |
| Add: Depreciation and amortization expense | 106.4 | | | 118.6 | | | 320.1 | | | 340.8 | |
| Add: Interest expense, net | 71.5 | | | 59.0 | | | 211.0 | | | 148.3 | |
| Add: Income tax (benefit) expense | (2.0) | | | (1.2) | | | (16.9) | | | 8.6 | |
| EBITDA | $ | 240.8 | | | $ | (280.4) | | | $ | 565.0 | | | $ | (915.2) | |
Special Items:(1) | | | | | | | |
| Add: Non-cash LCM inventory adjustment | — | | | (9.9) | | | (669.6) | | | 691.5 | |
| Add: Change in fair value of contingent consideration | (0.7) | | | (13.9) | | | 23.6 | | | (79.3) | |
| Add: Gain on sale of hydrogen plants | — | | | — | | | — | | | (471.1) | |
| Add: Severance costs | — | | | — | | | — | | | 12.9 | |
| Add: (Gain) loss on extinguishment of debt | (60.3) | | | — | | | (60.3) | | | 22.2 | |
| | | | | | | |
| EBITDA excluding special items | $ | 179.8 | | | $ | (304.2) | | | $ | (141.3) | | | $ | (739.0) | |
| | | | | | | | | |
| Reconciliation of EBITDA to Adjusted EBITDA: | | | | | | | |
| EBITDA | $ | 240.8 | | | $ | (280.4) | | | $ | 565.0 | | | $ | (915.2) | |
| Add: Stock-based compensation | 6.1 | | | 9.5 | | | 20.1 | | | 25.9 | |
| Add: Change in fair value of catalyst obligations | (17.8) | | | 2.4 | | | (13.6) | | | (4.2) | |
Add: Non-cash LCM inventory adjustment (1) | — | | | (9.9) | | | (669.6) | | | 691.5 | |
Add: Change in fair value of contingent consideration (1) | (0.7) | | | (13.9) | | | 23.6 | | | (79.3) | |
Add: Gain on sale of hydrogen plants (1) | — | | | — | | | — | | | (471.1) | |
Add: Severance costs (1) | — | | | — | | | — | | | 12.9 | |
Add: (Gain) loss on extinguishment of debt (1) | (60.3) | | | — | | | (60.3) | | | 22.2 | |
| Adjusted EBITDA | $ | 168.1 | | | $ | (292.3) | | | $ | (134.8) | | | $ | (717.3) | |
——————————
See Notes to Non-GAAP Financial Measures.
Notes to Non-GAAP Financial Measures
The following notes are applicable to the Non-GAAP Financial Measures above:
(1) 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 last-in, first-out (“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 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):
| | | | | | | | | | | |
| 2021 | | 2020 |
| January 1, | $ | 669.6 | | | $ | 401.6 | |
| | | |
| June 30, | — | | | 1,103.0 | |
| September 30, | — | | | 1,093.1 | |
The following table includes the corresponding impact of changes in the LCM inventory reserve on both income (loss) from operations and net income (loss) for the periods presented (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| |
| 2021 | | 2020 | | 2021 | | 2020 |
| Net LCM inventory adjustment benefit (charge) in both income (loss) from operations and net income (loss) | $ | — | | | $ | 9.9 | | | $ | 669.6 | | | $ | (691.5) | |
Change in Fair Value of Contingent Consideration - During the three months ended September 30, 2021, we recorded a change in fair value of the contingent consideration related to the Martinez Contingent Consideration which increased income from operations and net income by $0.7 million. During the nine months ended September 30, 2021, we recorded a change in fair value of the contingent consideration related to the Martinez Contingent Consideration which decreased income from operations and net income by $23.6 million. During the three months ended September 30, 2020 we recorded a change in the fair value of the contingent consideration related to the Martinez Contingent Consideration which increased income from operations and net income by $13.9 million, respectively. During the nine months ended September 30, 2020, we recorded a change in the fair value of the contingent consideration related to the Martinez Contingent Consideration which increased income from operations and net income by $79.3 million.
Gain on Sale of Hydrogen Plants - During the nine months ended September 30, 2020, we recorded a gain on the sale of five hydrogen plants. The gain increased income from operations and net income by $471.1 million There was no such gain during the three or nine months ended September 30, 2021.
Severance Costs - During the nine months ended September 30, 2020, we recorded a severance charge related to a reduction in our workforce that decreased income from operations and net income by $12.9 million. There were no such costs in any of the other periods presented.
(Gain) Loss on Extinguishment of debt - During the three and nine months ended September 30, 2021, we recorded a gain on extinguishment of debt related to the repurchase of a portion of the 2028 Senior Notes and the 2025 Senior Notes which increased income before income taxes and net income by $60.3 million. During the nine months ended September 30, 2020, we recorded debt extinguishment costs of $22.2 million related to the redemption of the 2023 Senior Notes. There were no such costs in any of the other periods presented.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are our cash flows from operations, cash and cash equivalents and borrowing availability under our credit facilities, as described below. Starting in the first quarter of 2020, the COVID-19 pandemic and the related worldwide economic slowdown, including travel restrictions and stay-at-home orders, resulted in significant decreases in the demand for and market prices of our products, which in turn negatively impacted our results of operations and overall liquidity. In the current year, demand for refined petroleum products has started to recover following the lifting or easing of these restrictions by many governmental authorities in response to decreasing COVID-19 infection rates and the distribution of COVID-19 vaccines. We continue to be focused on assessing and adapting to the challenging operating environment and evaluating our strategic measures to improve liquidity and strengthen our balance sheet. Our response to the current economic environment and its impact on our liquidity is more fully described in the “Liquidity” section below.
Cash Flow Analysis
Cash Flows from Operating Activities
Net cash provided by operating activities was $184.9 million for the nine months ended September 30, 2021 compared to net cash used in operating activities of $935.0 million for the nine months ended September 30, 2020. Our overall increase in cash provided by operating activities was primarily driven by our accrued expense increase in renewable energy credit and emissions obligations as a result of our increase in the unfunded RINs obligation as of September 30, 2021. Our operating cash flows for the nine months ended September 30, 2021 include our net income of $50.8 million, net changes in operating assets and liabilities reflecting cash proceeds of $434.5 million, depreciation and amortization of $331.4 million, net non-cash charges related to the change in the fair value of our inventory repurchase obligations of $46.0 million, pension and other post-retirement benefits costs of $38.0 million, change in the fair value of the contingent consideration associated with the Martinez Acquisition of $23.6 million, and stock-based compensation of $20.1 million, partially offset by a non-cash benefit of $669.6 million relating to an LCM inventory adjustment, gain on extinguishment of debt related to the repurchase of a portion of our 2028 Senior Notes and 2025 Senior Notes of $60.3 million, deferred income taxes of $15.6 million, change in the fair value of our catalyst obligations of $13.6 million and gain on sale of assets of $0.4 million. Our operating cash flows for the nine months ended September 30, 2020 included our net loss of $1,412.9 million, gain on sale of assets mainly related to the sale of the hydrogen plants of $469.4 million, net non-cash charges relating to the change in the fair value of our inventory repurchase obligations of $19.1 million, change in the fair value of the contingent consideration associated with the Martinez Acquisition of $79.3 million, and a change in the fair value of our catalyst obligations of $4.2 million, offset by depreciation and amortization of $352.0 million, a non-cash charge of $691.5 million relating to an LCM inventory adjustment, pension and other post-retirement benefits costs of $41.5 million, stock-based compensation of $25.9 million, deferred income taxes of $8.6 million and debt extinguishment costs related to the early redemption of our 2023 Senior Notes of $22.2 million. In
addition, net change in operating assets and liabilities reflects uses of cash of $91.8 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 $220.3 million for the nine months ended September 30, 2021 compared to net cash used in investing activities of $980.7 million for the nine months ended September 30, 2020. The net cash flows used in investing activities for the nine months ended September 30, 2021 was comprised of cash outflows of capital expenditures totaling $135.1 million, expenditures for refinery turnarounds of $64.6 million, and expenditures for other assets of $20.6 million. Net cash used in investing activities for the nine months ended September 30, 2020 was comprised of cash outflows of $1,176.2 million used to fund the Martinez Acquisition, capital expenditures totaling $148.4 million, expenditures for refinery turnarounds of $175.8 million, and expenditures for other assets of $9.7 million, partially offset by proceeds from sale of assets of $529.4 million.
Cash Flows from Financing Activities
Net cash used in financing activities was $92.9 million for the nine months ended September 30, 2021 compared to net cash provided by financing activities of $2,405.6 million for the nine months ended September 30, 2020. For the nine months ended September 30, 2021, net cash used in financing activities consisted primarily of $90.9 million related to the repurchase of the principal amount outstanding of the 2028 Senior Notes and the 2025 Senior Notes, excluding accrued interest, net settlements of precious metal catalyst obligations of $18.5 million, payments on finance leases of $10.7 million, principal amortization payments of the PBF Rail Term Loan of $5.5 million, and distributions to members of $2.7 million, partially offset by proceeds from contributions from PBF LLC of $28.0 million, proceeds from insurance premium financing of $7.0 million, and deferred financing costs and other of $0.4 million. For the nine months ended September 30, 2020, net cash provided by financing activities consisted of cash proceeds of $982.9 million from the issuance of the 2025 Senior Secured Notes net of related issuance costs, cash proceeds of $469.9 million from the issuance of the 2028 Senior Notes net of cash paid to redeem the 2023 Senior Notes and related issuance costs, proceeds from contributions from PBF LLC of $33.4 million, net borrowings under our Revolving Credit Facility of $900.0 million, proceeds from catalyst financing arrangements of $51.9 million and proceeds from insurance premium financing of $12.7 million, partially offset by distributions to members of $22.2 million, net settlements of precious metal catalyst obligations of $8.8 million, principal amortization payments of the PBF Rail Term Loan of $5.4 million, deferred financing costs and other of $0.1 million, and payments on finance leases of $8.9 million.
Debt and Credit Facility
Long-Term Debt Related Transactions
During the three months ended September 30, 2021, we executed various transactions that resulted in the extinguishment of approximately $246.2 million of our debt obligations. The reduction in debt consisted of a number of open market repurchases of our 2028 Senior Notes and 2025 Senior Notes that resulted in the extinguishment of $117.7 million in principal of the 2028 Senior Notes and $35.0 million in principal of the 2025 Senior Notes. Total cash consideration paid to extinguish the notes totaled $90.9 million and resulted in a $60.3 million gain recognized in our Condensed Consolidated Statement of Operations. We also settled one of our precious metal financing arrangements in September of 2021, resulting in an approximate $18.5 million decrease to our long-term debt obligation as of September 30, 2021.
We may, at any time and from time to time, seek to continue to repurchase or retire our outstanding debt securities through cash purchases (and/or exchanges for equity or debt), in open-market purchases, block trades, privately negotiated transactions or otherwise, upon such terms and at such prices as we may determine. We will evaluate any such transactions in light of then-existing market conditions, taking into account our current liquidity and prospects for future access to capital, the trading prices of our debt securities, legal requirements and contractual restrictions and economic and market conditions. The amounts involved in any such transactions, individually or in the aggregate, may be material. We are not obligated to repurchase any of our debt securities other than as set forth in the applicable indentures, and repurchases may be suspended or discontinued at any time without prior notice.
Revolving Credit Facility
The Revolving Credit Facility has a maximum commitment available to us of $3.4 billion and matures in May 2023. Borrowings under the Revolving Credit Facility bear interest at the Alternative Base Rate plus the Applicable Margin or at the Adjusted London Interbank Offered Rate (“LIBOR”) plus the Applicable Margin, all as defined in the agreement governing the Revolving Credit Facility (the “Revolving Credit Agreement”). In addition, an accordion feature allows for commitments of up to $3.5 billion.
On February 18, 2020, in connection with the entry into a $300.0 million uncommitted receivables purchase facility (the “Receivables Facility”), we amended the Revolving Credit Facility and entered into a related intercreditor agreement to allow us to sell certain Eligible Receivables, as defined in the Revolving Credit Agreement, derived from the sale of refined products over truck racks. Under the Receivables Facility, we sell such receivables to a bank subject to bank approval and certain conditions. The sales of receivables under the Receivables Facility are absolute and irrevocable but subject to certain repurchase obligations under certain circumstances.
Senior Notes
On January 24, 2020, we entered into an indenture among our wholly-owned subsidiary, PBF Finance (together with us, the “Issuers”), the guarantors named therein (collectively the “Guarantors”), Wilmington Trust, National Association, as Trustee and Deutsche Bank Trust Company Americas, under which the Issuers issued $1.0 billion in aggregate principal amount of the 2028 Senior Notes. The Issuers received net proceeds of approximately $987.0 million from the offering after deducting the initial purchasers’ discount and offering expenses. We used the net proceeds primarily to fully redeem the 2023 Senior Notes, including accrued and unpaid interest, on February 14, 2020, and to fund a portion of the cash consideration for the Martinez Acquisition.
On May 13, 2020, we entered into an indenture among the Issuers, the Guarantors, and Wilmington Trust, National Association, as Trustee, Paying Agent, Registrar, Transfer Agent, Authenticating Agent and Notes Collateral Agent, under which the Issuers issued $1.0 billion in aggregate principal amount of the 2025 Senior Secured Notes. The Issuers received net proceeds of approximately $982.9 million from the offering after deducting the initial purchasers’ discount and offering expenses. We used the net proceeds for general corporate purposes. On December 21, 2020, we issued $250.0 million, in a tack-on offering, in aggregate principal amount of the additional 2025 Senior Secured Notes. The net proceeds from this offering were approximately $245.7 million after deducting the initial purchasers’ discount and offering expenses. We used the net proceeds for general corporate purposes.
We are in compliance as of September 30, 2021 with all covenants, including financial covenants, in all of our debt agreements.
Liquidity
As of September 30, 2021, our operational liquidity was more than $2.6 billion, which consists of $1.4 billion of cash, and more than $1.2 billion of borrowing availability under our Revolving Credit Facility, which includes our cash on hand.
Due to the unprecedented events caused by the COVID-19 pandemic and the negative impact on our liquidity, we executed a plan to strengthen our balance sheet and increase our flexibility and responsiveness by incorporating certain adjustments to our operations and other cost saving measures. We remain committed to our plan in the current year with notable events within the past twelve months highlighted below:
•Extinguishment of $229.0 million of our 2028 Senior Notes and 2025 Senior Notes to date, which will result in annual cash interest savings of approximately $14.4 million;
•In October 2021, we executed the long-term extension of the third amended and restated intermediation agreement (the “Third Inventory Intermediation Agreement”) with J. Aron through 2024, covering certain crude oil, intermediate and finished products across our East Coast and Chalmette refineries;
•On December 31, 2020, we completed the operational reconfiguration of our East Coast Refining System comprised of our Delaware City and Paulsboro refineries. The reconfiguration resulted in the temporary idling of certain Paulsboro refinery units and overall lower throughput and inventory levels. Recurring annual operating and capital expenditures savings are expected to be approximately $100.0 million and $50.0 million, respectively, relative to average historic levels;
•Implemented and/or continued various cost reduction and cash preservation initiatives, including a significant decrease in 2021 planned capital expenditures and reducing 2021 operating expenses driven by minimizing discretionary activities and third-party services; and
•Continued the temporary suspension of PBF Energy’s quarterly dividend of $0.30 per share, anticipated to preserve approximately $35.0 million of cash each quarter, to support the balance sheet.
We are actively responding to the impacts of the COVID-19 pandemic and ongoing rebalancing in the global oil markets. We continue to adjust our operational plans to the evolving market conditions and continue to target and execute expense reduction measures. We also remain committed to assessing other opportunities that could help improve our liquidity, including by further reducing debt and/or potential sales of non-operating assets or other real property, although there can be no assurance that we will do so.
While it is impossible to estimate the duration or complete financial impact of the COVID-19 pandemic, we believe that the strategic actions we have taken, plus our cash flows from operations and available capital resources, will be sufficient to meet our and our subsidiaries’ capital expenditures, working capital needs, and debt service requirements, for the next twelve months. We cannot assure you that our assumptions used to estimate our liquidity requirements will be correct because the impact that the COVID-19 pandemic is having on us and our industry is ongoing and unprecedented. The extent of the impact of the COVID-19 pandemic on our business, financial condition, results of operations and liquidity will depend largely on future developments, including the severity, location and duration of the outbreak, the effectiveness of the vaccine programs and other actions undertaken by national, regional and local governments and health officials to contain the virus or treat its effects, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume in the remainder of 2021 or thereafter. As a result, we may require additional capital, and, from time to time, may pursue funding strategies in the capital markets or through private transactions to strengthen our liquidity and/or fund strategic initiatives. Such additional financing may not be available at favorable terms or at all.
We may incur additional indebtedness in the future, including additional secured indebtedness, subject to the satisfaction of any debt incurrence and, if applicable, lien incurrence limitation covenants in our existing financing agreements. Although we were in compliance with incurrence covenants during the nine months ended September 30, 2021, to the extent that any of our activities triggered these covenants, there are no assurances that conditions could not change significantly, and that such changes could adversely impact our ability to meet some of these incurrence covenants at the time that we needed to. Failure to meet the incurrence covenants could impose certain incremental restrictions on, among other matters, our ability to incur new debt (including secured debt) and also may limit the extent to which we make new investments, repurchase our outstanding debt or incur new liens.
Working Capital
Our working capital at September 30, 2021 was $1,135.0 million, consisting of $5,449.6 million in total current assets and $4,314.6 million in total current liabilities. Our working capital at December 31, 2020 was $1,265.4 million, consisting of $3,819.1 million in total current assets and $2,553.7 million in total current liabilities.
Capital Spending
Capital spending was $220.3 million for the nine months ended September 30, 2021, which primarily included costs associated with safety related enhancements and facility improvements at our refineries. We currently expect our net refining capital expenditures during 2021 to be within a range of approximately $400.0 million to $450.0 million for facility improvements, maintenance and turnarounds with the intention of satisfying all required safety, environmental and regulatory capital commitments.
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, if open terms are exceeded, and arrange for shipment. We pay for the crude when invoiced, at which time any applicable letters of credit are lifted. We have a contract with Saudi Arabian Oil Company (“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 acquisition of the Chalmette refinery we entered into a contract with Petróleos de Venezuela S.A. (“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 when PDVSA suspended deliveries due to the parties’ inability to agree to mutually acceptable payment terms and because of U.S. government sanctions against PDVSA. Notwithstanding the suspension, the U.S. government sanctions imposed against PDVSA and Venezuela prevented us from purchasing crude oil under this agreement. In connection with the closing of the acquisition of the Torrance refinery, 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.
We have entered into various five-year crude supply agreements with Shell for approximately 145,000 bpd, in the aggregate, to support our West Coast and Mid-Continent refinery operations. In addition, we have entered into certain offtake agreements for our West Coast system with the same counterparty for clean products with varying terms up to 15 years.
Inventory Intermediation Agreement
On October 25, 2021, PBF Holding and its subsidiaries, Delaware City Refining Company (“DCR”), Paulsboro Refining Company (“PRC”) and Chalmette Refining, L.L.C. (“Chalmette Refining”, and together with PBF Holding, DCR and PRC, the “PBF Entities”), entered into the Third Inventory Intermediation Agreement with J. Aron, pursuant to which the terms of the existing Inventory Intermediation Agreements were amended and restated in their entirely, including, among other things, pricing and an extension of terms. The Third Inventory Intermediation Agreement extends the term to December 31, 2024, which term may be further extended by mutual consent of the parties to December 31, 2025. If not extended or replaced, at expiration, we will be required to repurchase the inventories outstanding under the Third Inventory Intermediation Agreement at that time. We intend to either extend or replace the Third Inventory Intermediation Agreement prior to its expiration.
At September 30, 2021, the LIFO value of the J. Aron Products included within Inventory in our Condensed Consolidated Balance Sheets was $355.5 million. We accrue a corresponding liability for such crude oil, intermediates and finished products.
Off-Balance Sheet Arrangements and Contractual Obligations and Commitments
We have no off-balance sheet arrangements as of September 30, 2021, other than outstanding letters of credit of approximately $424.4 million.
Distribution Policy
In cases when there is sufficient cash and cash equivalents and borrowing capacity, we are permitted under our debt agreements to make distributions; however, our ability to continue to comply with our debt covenants is, to a significant degree, subject to our operating results, which are dependent on a number of factors outside of our control.
We make, from time to time, distributions to PBF LLC, if necessary, in order for PBF LLC to make pro rata distributions to its members, including PBF Energy, necessary to fund in excess of one year’s cash dividend payments by PBF Energy. In response to the adverse impact caused by the COVID-19 pandemic, PBF Energy, among other things, suspended its quarterly dividend of $0.30 per share. While it is impossible to estimate the duration or ultimate financial impact of the COVID-19 pandemic on our business, we will continue to monitor and evaluate our distribution policy as market conditions develop and our business outlook becomes clearer.
Supplemental Guarantor Financial Information
As of September 30, 2021, PBF Services Company, DCR, PBF Power Marketing LLC, PRC, Toledo Refining Company LLC, Chalmette Refining, PBF Western Region LLC, Torrance Refining Company LLC (“Torrance Refining”), Martinez Refining Company LLC (“MRC”), PBF International Inc. and PBF Investments LLC (“PBF Investments”) are 100% owned subsidiaries of PBF Holding and serve as guarantors of the obligations under the 2025 Senior Secured Notes, the 7.25% senior notes due 2025 (the “2025 Senior Notes”) and 2028 Senior Notes. These guarantees are full and unconditional and joint and several. PBF Holding serves as the “Issuer”. The indentures dated May 30, 2017 and January 24, 2020, among PBF Holding, PBF Finance, the guarantors party thereto, Wilmington Trust, National Association, as trustee and Deutsche Bank Trust Company Americans, as Paying Agent, Registrar, Transfer Agent and Authenticating Agent, and the indenture dated May 13, 2020, among PBF Holding, PBF Finance, the guarantors party thereto and Wilmington Trust, National Association, as Trustee, Paying Agent, Registrar, Transfer Agent, Authenticating Agent and Notes Collateral Agent, govern subsidiaries designated as “Guarantor Subsidiaries”. PBF Ltd, PBF Transportation Company LLC, PBF Rail Logistics Company LLC, MOEM Pipeline LLC, Collins Pipeline Company, T&M Terminal Company, Torrance Basin Pipeline Company LLC, Torrance Logistics Company LLC, Torrance Pipeline Company LLC, Martinez Terminal Company LLC, Martinez Pipeline Company LLC and PBFWR Logistics Holdings LLC are consolidated subsidiaries of the Company that are not guarantors of
the 2025 Senior Secured Notes, 2025 Senior Notes and 2028 Senior Notes. The 2025 Senior Secured Notes, 2025 Senior Notes and 2028 Senior Notes were co-issued by PBF Finance. For purposes of the following information, PBF Finance is referred to as “Co-Issuer.” The Co-Issuer has no independent assets or operations.
The following tables present summarized information for the Issuer and the Guarantor Subsidiaries on a combined basis after elimination of (i) intercompany transactions and balances among the Issuer and the Guarantor Subsidiaries and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor.
| | | | | | | | | | | |
| Summarized Balance Sheets (in millions) | September 30,
2021 | | December 31,
2020 |
| ASSETS | | | |
Current Assets (1) | $ | 5,225.0 | | | $ | 3,559.0 | |
| Non-Current Assets | 5,678.1 | | | 5,990.0 | |
| Due from non-guarantor subsidiaries | 15,511.5 | | | 13,813.0 | |
| | | |
| LIABILITIES AND EQUITY | | | |
Current liabilities (1) | $ | 4,033.5 | | | $ | 2,350.0 | |
| Long-term liabilities | 4,887.2 | | | 5,411.0 | |
| Due to non-guarantor subsidiaries | 15,436.4 | | | 13,770.0 | |
| | | |
(1) Includes $4.0 million and $63.2 million of accounts receivable and accounts payable, respectively, related to transactions with PBFX as of September 30, 2021. Includes $4.9 million and $53.2 million of accounts receivable and accounts payable, respectively, related to transactions with PBFX as of December 31, 2020. Refer to “Note 7 - Related Party Transactions” of our Notes to Condensed Consolidated Financial Statements for further information. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| Summarized Statements of Operations (in millions) | 2021 | | 2020 | | 2021 | | 2020 |
| Revenues | $ | 7,067.9 | | | $ | 3,585.7 | | | $ | 18,758.9 | | | $ | 11,156.2 | |
| Cost of sales | 6,375.2 | | | 3,664.8 | | | 16,762.2 | | | 11,960.4 | |
| Gross margin | 692.7 | | | (79.1) | | | 1,996.7 | | | (804.2) | |
| Income (loss) from operations | 633.9 | | | (112.2) | | | 1,815.3 | | | (434.8) | |
| | | | | | | |
| Net income (loss) | 636.5 | | | (182.1) | | | 1,632.3 | | | (589.5) | |
| Net income (loss) attributable to PBF Holding Company LLC | 635.6 | | | (182.1) | | | 1,629.0 | | | (589.5) | |
| | | | | | | |
Non-guarantor intercompany sales with the Issuer and Guarantor subsidiaries | $ | 594.9 | | | $ | 279.4 | | | $ | 1,637.6 | | | $ | 835.9 | |
Non-guarantor intercompany cost of sales with the Issuer and Guarantor subsidiaries | 24.1 | | | 4.8 | | | 56.9 | | | 12.5 | |
Affiliate revenues related to transactions with PBFX (1) | 4.0 | | | 4.1 | | | 12.0 | | | 12.3 | |
Affiliate expenses related to transactions with PBFX (1) | 75.5 | | | 70.8 | | | 226.5 | | | 218.7 | |
(1) Refer to “Note 7 - Related Party Transactions” of our Notes to Condensed Consolidated Financial Statements for further information. |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, including changes in commodity prices and interest rates. Our primary commodity price risk is associated with the difference between the prices we sell our refined products and the prices we pay for crude oil and other feedstocks. We may use derivative instruments to manage the risks from changes in the prices of crude oil and refined products, natural gas, interest rates, or to capture market opportunities.
Commodity Price Risk
Our earnings, cash flow and liquidity are significantly affected by a variety of factors beyond our control, including the supply of, and demand for, crude oil, other feedstocks, refined products and natural gas. The supply of and demand for these commodities depend on, among other factors, changes in domestic and foreign economies, weather conditions, domestic and foreign political affairs, planned and unplanned downtime in refineries, pipelines and production facilities, production levels, the availability of imports, the marketing of competitive and alternative fuels, and the extent of government regulation. As a result, the prices of these commodities can be volatile. Our revenues fluctuate significantly with movements in industry refined product prices, our cost of sales fluctuates significantly with movements in crude oil and feedstock prices and our operating expenses fluctuate with movements in the price of natural gas. We manage our exposure to these commodity price risks through our supply and offtake agreements as well as through the use of various commodity derivative instruments.
We may use non-trading derivative instruments to manage exposure to commodity price risks associated with the purchase or sale of crude oil and feedstocks, finished products and natural gas outside of our supply and offtake agreements. The derivative instruments we use include physical commodity contracts and exchange-traded and over-the-counter financial instruments. We mark-to-market our commodity derivative instruments and recognize the changes in their fair value in our statements of operations.
The negative impact of the unprecedented global health and economic crisis sparked by the COVID-19 pandemic, combined with uncertainty around future output levels of the world’s largest oil producers increased unpredictability in oil supply and demand resulting in an economic challenge to our industry which has not occurred since our formation. This combination resulted in significant reduction in demand for our refined products and abnormal volatility in oil commodity prices. Demand for and market prices of most of our products started to recover following the lifting or easing of these restrictions by many governmental authorities in response to decreasing COVID-19 infection rates and the distribution of the COVID-19 vaccines at the beginning of 2021.
At September 30, 2021 and December 31, 2020, we had gross open commodity derivative contracts representing 23.1 million barrels and 10.0 million barrels, respectively, with an unrealized net loss of $40.4 million and $3.0 million, respectively. The open commodity derivative contracts as of September 30, 2021 expire at various times during 2021 and 2022.
We carry inventories of crude oil, intermediates and refined products (“hydrocarbon inventories”) on our Condensed Consolidated Balance Sheets, the values of which are subject to fluctuations in market prices. Our hydrocarbon inventories totaled approximately 33.7 million barrels and 28.2 million barrels at September 30, 2021 and December 31, 2020, respectively. The average cost of our hydrocarbon inventories was approximately $79.80 and $78.64 per barrel on a LIFO basis at September 30, 2021 and December 31, 2020, respectively. The December 31, 2020 results exclude the net impact of an LCM inventory adjustment of approximately $669.6 million, whereas at September 30, 2021, the replacement value of inventory exceeded the LIFO carrying value on a converted basis. If market prices of our inventory decline to a level below our average cost, we may be required to write down the carrying value of our hydrocarbon inventories to market.
Our predominant variable operating cost is energy, which is comprised primarily of natural gas and electricity. We are therefore sensitive to movements in natural gas prices. Assuming normal operating conditions, we expect our annual consumption to range from 75 million to 95 million MMBTUs of natural gas in total amongst our six refineries. Accordingly, a $1.00 per MMBTU change in natural gas prices would increase or decrease our natural gas costs by approximately $75.0 million to $95.0 million.
Compliance Program Price Risk
We are exposed to market risks related to our obligation to buy and the volatility in the price of credits needed to comply with various governmental and regulatory compliance programs, which includes RINs, required to comply with the Renewable Fuel Standard. Our overall RINs obligation is based on a percentage of our domestic shipments of on-road fuels as established by Environmental Protection Agency (“EPA”). To the degree we are unable to blend the required amount of biofuels to satisfy our RINs obligation, we must purchase RINs on the open market. To mitigate the impact of the market risk relating to our obligations on our results of operations and cash flows, we may elect to purchase RINs or other environmental credits at the times we deem the price of these instruments to be favorable.
In addition, we are exposed to risks associated with complying with federal and state legislative and regulatory measures to address greenhouse gas and other emissions. Requirements to reduce emissions could result in increased costs to operate and maintain our facilities as well as implement and manage new emission controls and programs put in place. For example, in September 2016, the state of California enacted AB 32, which further reduces greenhouse gas emissions targets to 40% below 1990 levels by 2030. Compliance with such emission standards may require the purchase of emission credits or similar instruments.
Certain of these compliance contracts or instruments qualify as derivative instruments. We generally elect the normal purchase normal sale exception under Financial Accounting Standards Board Accounting Standards Codification 815, Derivatives and Hedging, for such instruments, and therefore do not record these contracts at their fair value.
Interest Rate Risk
The maximum commitment under our Revolving Credit Facility is $3.4 billion. Borrowings under the Revolving Credit Facility bear interest either at the Alternative Base Rate plus the Applicable Margin or at Adjusted LIBOR plus the Applicable Margin, all as defined in the Revolving Credit Agreement. At September 30, 2021, we had $900.0 million outstanding in variable interest debt. If this facility was fully drawn, a 1.0% change in the interest rate would increase or decrease our interest expense by approximately $23.3 million annually.
We also have interest rate exposure in connection with our Inventory Intermediation Agreements under which we pay a time value of money charge based on LIBOR.
Credit Risk
We are subject to risk of losses resulting from nonpayment or nonperformance by our counterparties. We continue to closely monitor the creditworthiness of customers to whom we grant credit and establish credit limits in accordance with our credit policy.
We continually monitor our market risk exposure, including the impact and developments related to the COVID-19 pandemic which has introduced significant volatility in the financial markets.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted evaluations under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934 as amended (the “Exchange Act”)) as of September 30, 2021. Based upon these evaluations, as required by Exchange Act Rule 13a-15(b), the principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are effective as of September 30, 2021.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal controls over financial reporting during the quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On December 28, 2016, the Delaware Department of Natural Resources and Environmental Control issued the Coastal Zone Act permit for the ethanol project (the “Ethanol Permit”) to DCR allowing the utilization of existing tanks and existing marine loading equipment at their existing facilities to enable denatured ethanol to be loaded from storage tanks to marine vessels and shipped to offsite facilities. On January 13, 2017, the issuance of the Ethanol Permit was appealed by two environmental groups. On February 27, 2017, the Coastal Zone Industrial Control Board (the “Coastal Zone Board”) held a public hearing and dismissed the appeal, determining that the appellants did not have standing. The appellants filed an appeal of the Coastal Zone Board’s decision with the Delaware Superior Court (the “Superior Court”) on March 30, 2017. On January 19, 2018, the Superior Court rendered an Opinion regarding the decision of the Coastal Zone Board to dismiss the appeal of the Ethanol Permit for the ethanol project. The judge determined that the record created by the Coastal Zone Board was insufficient for the Superior Court to make a decision, and therefore remanded the case back to the Coastal Zone Board to address the deficiency in the record. Specifically, the Superior Court directed the Coastal Zone Board to address any evidence concerning whether the appellants’ claimed injuries would be affected by the increased quantity of ethanol shipments. On remand, the Coastal Zone Board met on January 28, 2019 and reversed its previous decision on standing ruling that the appellants have standing to appeal the issuance of the Ethanol Permit. The parties to the action filed a joint motion with the Coastal Zone Board, requesting that the Coastal Zone Board concur with the parties’ proposal to secure from the Superior Court confirmation that all rights and claims are preserved for any subsequent appeal to the Superior Court, and that the matter then be scheduled for a hearing on the merits before the Coastal Zone Board. The Coastal Zone Board notified the parties in January of 2020 that it concurred with the parties’ proposed course of action. The appellants and DCR subsequently filed a motion with the Superior Court requesting relief consistent with what was described to the Coastal Zone Board. In March of 2020, the Superior Court issued a letter relinquishing jurisdiction over the matter and concurring with the parties’ proposal to allow the case to proceed to a hearing on the merits before the Coastal Zone Board. The parties must now jointly propose to the Coastal Zone Board a schedule for prehearing activity and a merits hearing to resolve the matter. The parties must, therefore, submit to the Coastal Zone Board a joint proposed schedule to govern future proceedings related to the merits hearing to resolve the matter.
On September 11, 2020, DCR received two Citations and Notification of Penalties, with sub-parts, from the Occupational Safety and Health Administration of the U.S. Department of Labor (“OSHA”) related to a combustion incident occurring on March 11, 2020. The citation seeks to impose penalties in the amount of $401,923 related to alleged violations of the Occupation Safety and Health Act of 1970. An informal conference with OSHA on October 2, 2020 was unsuccessful in resolving the matter, and, as a result, DCR filed a Notice of Contest with OSHA contesting the citations in their entirety at the end of the informal conference. OSHA filed its Complaint on December 13, 2020, and DCR filed its response on January 4, 2021. OSHA and DCR participated in mandatory meditation on February 2, 2021, which was unsuccessful. On February 25, 2021, the Occupational Safety and Health Review Commission granted the parties’ Joint Motion for Additional Time for the Parties to Discuss Settlement. The Court has since granted multiple additional extensions. On May 27, 2021, the parties notified the court that settlement negotiations are continuing and have continued to provide updates on the settlement negotiations; if the settlement negotiations are unsuccessful, the matter will proceed to litigation.
In connection with the acquisition of the Torrance refinery and related logistics assets, we assumed certain pre-existing environmental liabilities related to certain environmental remediation obligations to address existing soil and groundwater contamination and monitoring activities, which reflect the estimated cost of the remediation obligations. In addition, in connection with the acquisition of the Torrance refinery and related logistics assets, we purchased a ten year, $100.0 million environmental insurance policy to insure against unknown environmental liabilities. Furthermore, in connection with the acquisition, we assumed responsibility for certain specified environmental matters that occurred prior to our ownership of the refinery and logistics assets, including specified incidents and/or Notices of Violations (“NOVs”) issued by regulatory agencies in various years before our ownership, including the South Coast Air Quality Management District (“SCAQMD”) and the Division of Occupational Safety and Health of the State of California (“Cal/OSHA”).
Subsequent to the acquisition, further NOVs were issued by the SCAQMD, Cal/OSHA, the City of Torrance, the City of Torrance Fire Department, and the Los Angeles County Sanitation District related to alleged operational violations, emission discharges and/or flaring incidents at the refinery and the logistics assets both before and after our acquisition. EPA in November 2016 conducted a Risk Management Plan (“RMP”) inspection following the acquisition related to Torrance operations and issued preliminary findings in March 2017 concerning RMP potential operational violations. Since EPA’s issuance of the preliminary findings in March 2017, we have been in substantive discussions to resolve the preliminary findings. Effective January 9, 2020, we and EPA entered into a Consent Agreement and Final Order (“CAFO”), effective as of January 9, 2020, which contains no admission by us for any alleged violations in the CAFO, includes a release from all alleged violations in the CAFO, required the payment of a penalty of $125,000 in January 2020 and also requires the implementation of a supplemental environmental project (“SEP”) of at least $219,000 that must be completed by December 15, 2021. The SEP will consist of configuring the northeast fire water monitor to automatically deploy water upon detection of a release.
EPA and the California Department of Toxic Substances Control (“DTSC”) in December 2016 conducted a Resource Conservation and Recovery Act (“RCRA”) inspection following the acquisition related to Torrance operations and also issued in March 2017 preliminary findings concerning RCRA potential operational violations. On June 14, 2018, the Torrance refinery and DTSC reached settlement regarding the oil bearing materials. Following this settlement, in June 2018, DTSC referred the remaining alleged RCRA violations from EPA’s and DTSC’s December 2016 inspection to the California Attorney General. On April 7, 2021, we were notified that these alleged remaining six federal RCRA violations had been referred to EPA for resolution. On June 2, 2021, EPA conducted a follow-up inspection to the December 2016 RCRA inspection. On August 13, 2021, we received EPA’s follow up report appearing to show that the six federal RCRA findings were closed with no further enforcement action. We have followed up with the EPA to confirm the report’s conclusions. The alleged remaining state RCRA violation is still pending with the California Attorney General.
On February 4, 2021, we received a letter from the SCAQMD proposing to settle a NOV relating to 15 Title V deviations alleged to have occurred in the second half of 2017 for $1.3 million. On October 8, 2021, we reached settlement in principle with the SCAQMD to pay a penalty of $250,000 for 14 of the Title V deviations and a penalty of $1.3 million for the remaining deviation, which for this deviation covers a period of 2017 through 2021. The parties are currently drafting the appropriate settlement agreements.
As the ultimate outcomes of the matters discussed above are uncertain, we cannot currently estimate the final amount or timing of their resolution but any such amount is not expected to have a material impact on our financial position, results of operations or cash flows, individually or in the aggregate.
On February 17, 2017, in Arnold Goldstein, et al. v. Exxon Mobil Corporation, et al., we and PBF LLC, and our subsidiaries, PBF Western Region LLC and Torrance Refining Company LLC and the manager of our Torrance refinery along with ExxonMobil were named as defendants in a class action and representative action complaint filed on behalf of Arnold Goldstein, John Covas, Gisela Janette La Bella and others similarly situated. The complaint was filed in the Superior Court of the State of California, County of Los Angeles and alleges negligence, strict liability, ultra-hazardous activity, a continuing private nuisance, a permanent private
nuisance, a continuing public nuisance, a permanent public nuisance and trespass resulting from the February 18, 2015 electrostatic precipitator (“ESP”) explosion at the Torrance refinery which was then owned and operated by ExxonMobil. The operation of the Torrance refinery by the PBF entities subsequent to our acquisition in July 2016 is also referenced in the complaint. To the extent that plaintiffs’ claims relate to the ESP explosion, ExxonMobil retained responsibility for any liabilities that would arise from the lawsuit pursuant to the agreement relating to the acquisition of the Torrance refinery. On July 2, 2018, the court granted leave to plaintiffs to file a Second Amended Complaint alleging groundwater contamination. With the filing of the Second Amended Complaint, plaintiffs added an additional plaintiff, Hany Youssef. On March 18, 2019, the class certification hearing was held and the court took the matter under submission. On April 1, 2019, the court issued an order denying class certification. On April 15, 2019, plaintiffs filed a Petition for Permission to Appeal the Order Denying Motion for Class Certification. On May 3, 2019, plaintiffs filed a Motion with the Central District Court for Leave to File a Renewed Motion for Class Certification. On May 22, 2019, the judge granted plaintiffs’ motion. We filed our opposition to the motion on July 29, 2019. The plaintiffs’ motion was heard on September 23, 2019. On October 15, 2019, the judge granted certification to two limited classes of property owners with Youssef as the sole class representative and named plaintiff, rejecting two other proposed subclasses based on negligence and on strict liability for ultrahazardous activities. The certified subclasses relate to trespass claims for ground contamination and nuisance for air emissions. On February 5, 2021, our motion for Limited Extension of Discovery Cut-Off and a Motion by plaintiffs for Leave to File Third Amended Complaint were heard by the court. On February 9, 2021, the court issued an order taking both motions under submission pending additional discovery and briefing related to plaintiff Youssef and whether a new class representative should be substituted. The court has also ordered that the rebuttal expert disclosure deadline, the expert discovery cut-off, the motion hearing cut-off, and all other case deadlines be stayed pending the court’s decision as to whether the case can proceed with a new class representative and whether defendants will be permitted to conduct additional soil vapor sampling in the ground subclass area. On March 6, 2021, plaintiff Youssef’s second deposition was taken. On March 22, 2021, based on plaintiff Youssef’s deposition, we filed our brief requesting the court dismiss plaintiff Youssef’s claims for nuisance and trespass and deny plaintiffs’ motion for leave to file a third amended complaint to substitute a new named plaintiff or class representative. On April 5, 2021, plaintiffs filed a brief regarding their motion. On May 5, 2021, the Court granted plaintiffs leave to amend their complaint for the third time to substitute Navarro for Youssef. On May 12, 2021, plaintiffs filed their Third Amended Complaint (“TAC”) that contained significant changes and new claims, including individual claims, that were not included in the motion for leave to amend plaintiffs presented to the Court. On June 9, 2021, we filed a Motion to Dismiss/Strike the TAC. On June 23, 2021, plaintiffs filed their opposition to our Motion to Dismiss/Strike, to which we filed our reply on July 2, 2021. A hearing on the Motion to Dismiss/Strike the TAC was held on August 2, 2021 and the court ordered that the TAC be struck and that the parties meet and confer with respect to the complaint. After meeting and conferring, plaintiffs agreed to submit a corrected TAC with changes reflecting the removal of Youssef and the substitution of Navarro as the named Plaintiff. On August 23, 2021, the Court approved the parties’ stipulation to take Navarro’s deposition on September 23, 2021. Also, on August 23, 2021, the Court approved the parties’ stipulation to continue the pretrial dates with the new deadlines as follows: defendants to take discovery as to Navarro’s adequacy to serve as the class representative due on October 1, 2021; plaintiffs’ motion to substitute class representative due on October 8, 2021; defendants’ opposition to motion to substitute class representative due on October 29, 2021; plaintiffs’ reply in support of motion to substitute class representative due on November 15, 2021; hearing on motion for substitution of class representative scheduled for November 22, 2021, or such other date as ordered by the Court; and the parties to submit a proposed trial schedule, if necessary, within fourteen days of the court’s order on Plaintiffs’ motion to substitute class representative. On September 7, 2021, we filed our Answer to the corrected TAC. On September 23, 2021, Navarro’s deposition was taken. On October 8, 2021, plaintiffs filed their Motion to Appoint Navarro as Class Representative. Our opposition to this motion is due October 29, 2021. We presently believe the outcome will not have a material impact on our financial position, results of operations, or cash flows.
On September 7, 2018, in Jeprece Roussell, et al. v. PBF Consultants, LLC, et al., the plaintiff filed an action in the 19th Judicial District Court for the Parish of East Baton Rouge, alleging numerous causes of action, including wrongful death, premises liability, negligence, and gross negligence against PBF Holding, PBFX Operating Company LLC, Chalmette Refining, two individual employees of the Chalmette refinery (the “PBF Defendants”), two entities, PBF Consultants, LLC (“PBF Consultants”) and PBF Investments that are Louisiana companies that are not associated with our companies, as well as Clean Harbors, Inc. and Clean Harbors Environmental Services, Inc. (collectively, “Clean Harbors”), Mr. Roussell’s employer. Mr. Roussell was fatally injured on March 31, 2018 while employed by Clean Harbors and performing clay removal work activities inside a clay treating vessel located at the Chalmette refinery. Plaintiff seeks unspecified compensatory damages for pain and suffering, past and future mental anguish, impairment, past and future economic loss, attorney’s fees and court costs. On October 8, 2021, we and our insurers reached an agreement in principle to settle this litigation and the related matters and we are awaiting the execution of settlement documents and dismissal of the lawsuit. Our portion of the settlement was accrued as of September 30, 2021 and did not have a material impact on our financial position, results of operations, or cash flows.
On September 7, 2021, MRC filed a Verified Petition for Writ of Mandate and Complaint for Declaratory and Injunctive Relief against the BAAQMD requesting the Court to declare as invalid, unenforceable, and ultra vires the BAAMQD’s July 21, 2021, adoption of amendments to “Regulation 6-5: Particulate Emissions from Refinery Fluidized Catalytic Cracking Units - 2021 Amendment” (“Rule 6-5 Amendment”). MRC is also seeking a writ of mandate ordering the BAAQMD to vacate and rescind the adoption of the Rule 6-5 Amendment, as well as appropriate declaratory relief, injunctive relief, and reasonable costs incurred by MRC to bring this Petition/Complaint. In the Petition/Complaint MRC alleges that: its feasible alternative Particulate Matter (“PM”) reduction proposal that would achieve significant PM reductions while avoiding the significant costs and environmental impacts of the BAAQMD’s adopted PM limit, was improperly removed from consideration and not presented to the BAAQMD Board when the Rule 6-5 Amendment was adopted with the current PM standard; when adopting the Rule 6-5 Amendment, the BAAQMD flagrantly ignored numerous mandatory requirements of the California Environmental Quality Act and the California Health and Safety Code; the BAAQMD’s adoption of the Rule 6-5 Amendment also violated California common law; and these failings render the Rule 6-5 Amendment ultra vires, illegal, and unenforceable. A mandatory settlement conference with the BAAQMD was held on October 27, 2021. We presently believe the outcome will not have a material impact on our financial position, results of operations, or cash flows.
We are subject to obligations to purchase RINs. On February 15, 2017, we received notification that EPA records indicated that PBF Holding used potentially invalid RINs that were in fact verified under EPA’s RIN Quality Assurance Program (“QAP”) by an independent auditor as QAP A RINs. Under the regulations use of potentially invalid QAP A RINs provides the user with an affirmative defense from civil penalties, provided certain conditions are met. We have asserted the affirmative defense and, if accepted by EPA, will not be required to replace these RINs and will not be subject to civil penalties under the program. It is reasonably possible that EPA will not accept our defense and may assess penalties in these matters, but any such amount is not expected to have a material impact on our financial position, results of operations, or cash flows.
The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), also known as “Superfund,” imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the current or former owner or operator of the disposal site or sites where the release occurred and companies that disposed of or arranged for the disposal of the hazardous substances. Under CERCLA, such persons may be subject to joint and several liability for investigation and the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. As discussed more fully above, certain of our sites are subject to these laws and we may be held liable for investigation and remediation costs or claims for natural resource damages. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances or other pollutants released into the environment. Analogous state laws impose similar responsibilities and liabilities on responsible parties. In our current normal operations, we have generated waste, some of which falls within the statutory definition of a “hazardous substance” and some of which may have been disposed of at sites that may require cleanup under Superfund.
Item 1A. Risk Factors
The following risk factor supplements and/or updates the risk factor previously disclosed in “Item 1A. Risk Factors” of our 2020 Annual Report on Form 10-K.
We may incur significant liability under, or costs and capital expenditures to comply with, environmental and health and safety regulations, which are complex and change frequently.
Our operations are subject to federal, state and local laws regulating, among other things, the use and/or handling of petroleum and other regulated materials, the emission and discharge of materials into the environment, waste management, and remediation of discharges of petroleum and petroleum products, characteristics and composition of gasoline and distillates and other matters otherwise relating to the protection of the environment and the health and safety of the surrounding community. Our operations are also subject to extensive laws and regulations relating to occupational health and safety.
We cannot predict what additional environmental, health and safety legislation or regulations may be adopted in the future, or how existing or future laws or regulations may be administered or interpreted with respect to our operations. Many of these laws and regulations have become increasingly stringent over time, and the cost of compliance with these requirements can be expected to increase over time. For example, on July 21, 2021, the board of BAAQMD voted to adopt PAR 6-5 requiring compliance with more stringent standards for particulate emissions from FCC units at refineries in the Bay Area by 2026. The regulation does not require that any specific technology be utilized to meet the new standards. The costs incurred by us to achieve the new emissions standards at our Martinez refinery within the required timeframe may be significant, and there can be no assurance that the measures we implement will achieve the required emissions reductions.
Certain environmental laws impose strict, and in certain circumstances, joint and several, liability for costs of investigation and cleanup of spills, discharges or releases on owners and operators of, as well as persons who arrange for treatment or disposal of regulated materials at, contaminated sites. Under these laws, we may incur liability or be required to pay penalties for past contamination, and third parties may assert claims against us for damages allegedly arising out of any past or future contamination. The potential penalties and clean-up costs for past or future spills, discharges or releases, the failure of prior owners of our facilities to complete their clean-up obligations, the liability to third parties for damage to their property, or the need to address newly-discovered information or conditions that may require a response could be significant, and the payment of these amounts could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Item 6. Exhibits
The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report and such Exhibit Index is incorporated herein by reference.
EXHIBIT INDEX | | | | | | | | |
Exhibit
Number | | Description |
| | |
| | Third Amended and Restated Inventory Intermediation Agreement dated as of October 25, 2021, among J. Aron & Company LLC, PBF Holding Company LLC, Delaware City Refining Company LLC, Paulsboro Refining Company LLC and Chalmette Refining, L.L.C. (incorporated by reference to Exhibit 10.1 filed with PBF Energy Inc.’s Current Report on Form 8-K dated October 28, 2021 (File No. 001-35764)). |
| | |
| | List of Guarantor Subsidiaries |
| | |
| | Certification of Thomas J. Nimbley, Chief Executive Officer of PBF Holding Company LLC pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certification of Erik Young, Chief Financial Officer of PBF Holding Company LLC pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certification of Thomas J. Nimbley, Chief Executive Officer of PBF Holding Company LLC pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certification of Erik Young, Chief Financial Officer of PBF Holding Company LLC pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| 101.INS | | XBRL Instance Document. |
| | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document. |
| | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
| | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
—————————— | | | | | |
| * | Filed herewith. |
| † | Portions of the exhibits have been omitted because such information is both (i) not material and (ii) could be competitively harmful if publicly disclosed. |
| (1) | This exhibit should not be deemed to be “filed” for purposes of Section 18 of the Exchange Act. |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | | | |
| | PBF Holding Company LLC |
| | | | |
| | | | |
| Date: | November 2, 2021 | | By: | /s/ Erik Young |
| | | | Erik Young
Senior Vice President, Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) |
| | | | |
| | PBF Finance Corporation |
| | | | |
| | | | |
| Date: | November 2, 2021 | | By: | /s/ Erik Young |
| | | | Erik Young
Senior Vice President, Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) |