PBF Energy 2012 Annual Report Download - page 33

failure to do so may increase our costs. Other employees of ours who are not presently represented by a union
may become so represented in the future as well. In addition, our existing labor agreements may not prevent a
strike or work stoppage at any of our facilities in the future, and any work stoppage could negatively affect our
results of operations and financial condition.
Our hedging activities may limit our potential gains, exacerbate potential losses and involve other risks.
We may enter into commodity derivatives contracts to hedge our crude price risk or crack spread risk with
respect to a portion of our expected gasoline and distillate production on a rolling basis. Consistent with that
policy we, or MSCG at our request, may hedge some percentage of future crude supply or gasoline and distillate
production. We may enter into hedging arrangements with the intent to secure a minimum fixed cash flow stream
on the volume of products hedged during the hedge term and to protect against volatility in commodity prices.
Our hedging arrangements may fail to fully achieve these objectives for a variety of reasons, including our failure
to have adequate hedging arrangements, if any, in effect at any particular time and the failure of our hedging
arrangements to produce the anticipated results. We may not be able to procure adequate hedging arrangements
due to a variety of factors. Moreover, such transactions may limit our ability to benefit from favorable changes in
crude oil and refined product prices. In addition, our hedging activities may expose us to the risk of financial loss
in certain circumstances, including instances in which:
• the volumes of our actual use of crude oil or production of the applicable refined products is less than
the volumes subject to the hedging arrangement;
• accidents, interruptions in feedstock transportation, inclement weather or other events cause
unscheduled shutdowns or otherwise adversely affect our refineries, or those of our suppliers or
customers;
• changes in commodity prices have a material impact on collateral and margin requirements under our
hedging arrangements, including resulting in our being subject to margin calls;
• the counterparties to our futures contracts fail to perform under the contracts; or
• a sudden, unexpected event materially impacts the commodity or crack spread subject to the hedging
arrangement.
As a result, the effectiveness of our hedging strategy could have material impact on our financial results.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Quantitative and Qualitative Disclosures About Market Risk.”
In addition, these hedging activities involve basis risk. Basis risk in a hedging arrangement occurs when the
price of the commodity we hedge is more or less variable than the index upon which the hedged commodity is
based, thereby making the hedge less effective. For example, a NYMEX index used for hedging certain volumes
of crude oil or refined products may have more or less variability than the cost or price for such crude oil or
refined products. We generally do not expect to hedge the basis risk inherent in our derivatives contracts.
Our commodity derivative activities could result in period-to-period earnings volatility.
We do not apply hedge accounting to all of our commodity derivative contracts and, as a result, unrealized
gains and losses will be charged to our earnings based on the increase or decrease in the market value of the
unsettled position. These gains and losses may be reflected in our income statement in periods that differ from
when the underlying hedged items (i.e., gross margins) are reflected in our income statement. Such derivative
gains or losses in earnings may produce significant period-to-period earnings volatility that is not necessarily
reflective of our underlying operational performance.
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