PBF Energy 2012 Annual Report Download - page 60

financial statements representing the economic interests of noncontrolling PBF LLC units holders. PBF LLC is
PBF Energy’s predecessor for accounting purposes. The financial statements and results of operations for periods
prior to the completion of PBF Energy’s initial public offering and the related reorganization transactions are
those of PBF LLC.
Tax Receivable Agreement
In connection with our initial public offering, we entered into a tax receivable agreement pursuant to which
we are required to pay the pre-IPO owners of PBF LLC, who exchange their units for PBF Energy Class A
common stock or whose units we purchase, approximately 85% of the cash savings in income taxes that we
realize as a result of the increase in the tax basis of our interest in PBF LLC, including tax benefits attributable to
payments made under the tax receivable agreement. We have recognized a liability for the tax receivable
agreement of $160.0 million reflecting our estimate of the undiscounted amounts that we expect to pay under the
agreement due to exchanges in connection with our initial public offering. Our estimate of the tax agreement
liability is based on forecasts of future taxable income over the anticipated life of our future business operations,
assuming no material changes in the relevant tax law. Periodically, we may adjust the liability based on an
updated estimate of the amounts that we expect to pay, using assumptions consistent with those used in our
concurrent estimate of the deferred tax asset valuation allowance. For example, we must adjust the estimated tax
receivable agreement liability each time we purchase PBF LLC Series A Units or upon an exchange of PBF LLC
Series A Units for our Class A common stock. These periodic adjustments to the tax receivable liability, if any,
may result in adjustments to our income tax expense and deferred tax assets and liabilities.
Factors Affecting Operating Results
Overview
Our earnings and cash flows from operations are primarily affected by the relationship between refined
product prices and the prices for crude oil and other feedstocks. The cost to acquire crude oil and other
feedstocks and the price of refined petroleum products ultimately sold depend on numerous factors beyond our
control, including the supply of, and demand for, crude oil, gasoline, diesel and other refined petroleum products,
which, in turn, depend on, among other factors, changes in global and regional economies, weather conditions,
global and regional political affairs, production levels, the availability of imports, the marketing of competitive
fuels, pipeline capacity, prevailing exchange rates and the extent of government regulation. Our revenue and
operating income fluctuate significantly with movements in industry refined petroleum product prices, our
materials cost fluctuate significantly with movements in crude oil prices and our other operating expenses
fluctuate with movements in the price of energy to meet the power needs of our refineries. In addition, the effect
of changes in crude oil prices on our operating results is influenced by how the prices of refined products adjust
to reflect such changes.
Crude oil and other feedstock costs and the prices of refined petroleum products have historically been
subject to wide fluctuation. Expansion and upgrading of existing facilities and installation of additional refinery
distillation or conversion capacity, price volatility, international political and economic developments and other
factors beyond our control are likely to continue to play an important role in refining industry economics. These
factors can impact, among other things, the level of inventories in the market, resulting in price volatility and a
reduction or increase in product margins. Moreover, the industry typically experiences seasonal fluctuations in
demand for refined petroleum products, such as for gasoline and diesel, during the summer driving season and
for home heating oil during the winter.
Benchmark Refining Margins
In assessing our operating performance, we compare the refining margins (revenue less materials cost) of
each of our refineries against a specific benchmark industry refining margin based on a crack spread. Benchmark
refining margins take into account both crude and refined petroleum product prices. When these prices are
combined in a formula they provide a single value—a gross margin per barrel—that, when multiplied by a
throughput number, provides an approximation of the gross margin generated by refining activities.
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