PBF Energy 2012 Annual Report Download - page 85

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. The assumptions used in the forecasts are subject to
substantial uncertainty about our future business operations and the actual payments that we are required to make
under the tax receivable agreement could differ materially from current estimate. 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. Such adjustments will be based on forecasts of future taxable
income and our future business operations at the time of such purchases or exchanges. 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. 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.
Recent Accounting Pronouncements
There are no recently issued accounting pronouncements requiring adoption subsequent to December 31,
2012 that would have a significant impact on our results of operations or financial position.
ITEM 7A. 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, interest rates, or to capture market opportunities.
Commodity Price Risk
In order to realize value from our processing capacity, we must achieve a positive spread between the cost
of raw materials and the value of finished products (i.e., refinery gross product margin or crack spread). The
physical commodities that comprise our raw materials and finished goods are typically bought and sold at a spot
or index price that can be highly variable.
The prices of crude oil, refined products and other commodities are subject to fluctuations in response to
changes in supply, demand, market uncertainty and a variety of additional factors that are beyond our control.
The crude and feedstock supply agreements for our Paulsboro and Delaware City refineries allow us to take title
to and price our crude oil at locations in close proximity to our refineries, as opposed to the crude oil origination
point, reducing the time we are exposed to market fluctuations before the finished refined products are sold. Our
offtake agreements with MSCG for our Paulsboro and Delaware City refineries allow us to sell our light finished
products and certain intermediates and lube base oils as they are produced.
We carry inventories of crude oil, intermediates and refined products (“hydrocarbon inventories”) on our
balance sheet, the values of which are subject to fluctuations in market prices. Our hydrocarbon inventories
totaled approximately 14.4 million barrels and 14.6 million barrels at December 31, 2012 and 2011, respectively.
The average cost of our hydrocarbon inventories was approximately $101.89 and $101.93 per barrel on a LIFO
basis at December 31, 2012 and 2011, respectively. If market prices decline to a level below the 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 annually consume a total of approximately 37 million MMBTUs of natural gas amongst our three refineries.
Accordingly, a $1.00 per MMBTU change in natural gas prices would increase or decrease our natural gas costs
by approximately $37 million.
We periodically use non-trading derivative instruments to manage exposure to commodity price risks
associated with the purchase or sale of crude oil, finished products and natural gas to fuel our refinery operations.
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