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EX-32.2 - EXHIBIT 32.2 - PBF Energy Inc.q317exhibit322-energy.htm
EX-32.1 - EXHIBIT 32.1 - PBF Energy Inc.q317exhibit321-energy.htm
EX-31.2 - EXHIBIT 31.2 - PBF Energy Inc.q317exhibit312-energy.htm
EX-31.1 - EXHIBIT 31.1 - PBF Energy Inc.q317exhibit311-energy.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark one)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2017
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: 001-35764
 
PBF ENERGY INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
45-3763855 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
One Sylvan Way, Second Floor
Parsippany, New Jersey
 
07054
(Address of principal executive offices)
 
(Zip Code)
(973) 455-7500
(Registrant’s telephone number, including area code)
 
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.  Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [x] 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.
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
Emerging growth company o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
As of October 31, 2017, PBF Energy Inc. had outstanding 110,036,773 shares of Class A common stock and 27 shares of Class B common stock.
 




PBF ENERGY INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017
TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
ITEM 3.
 
 
ITEM 4.
 
 
 
 
 
 
 
 
 
ITEM 1.
 
 
ITEM 2.
 
 
ITEM 6.

This Quarterly Report on Form 10-Q is filed by PBF Energy Inc. (“PBF Energy”) which is a holding company whose primary asset is an equity interest in PBF Energy Company LLC (“PBF LLC”). PBF Energy is the sole managing member of, and owner of an equity interest representing approximately 96.6% of the outstanding economic interests in PBF LLC as of September 30, 2017. PBF Energy operates and controls all of the business and affairs and consolidates the financial results of PBF LLC and its subsidiaries. PBF LLC is a holding company for the companies that directly and indirectly own and operate our business. PBF Holding Company LLC (“PBF Holding”) is a wholly-owned subsidiary of PBF LLC and PBF Finance Corporation (“PBF Finance”) is a wholly-owned subsidiary of PBF Holding. As of September 30, 2017, PBF LLC also holds a 44.1% limited partner interest, a non-economic general partner interest and all of the incentive distribution rights in PBF Logistics LP (“PBFX” or the “Partnership”), a publicly traded master limited partnership. PBF Energy, through its ownership of PBF LLC, consolidates the financial results of PBFX and its subsidiaries and records a noncontrolling interest in its consolidated financial statements representing the economic interests of PBFX’s unit holders other than PBF LLC. Collectively, PBF Energy and its consolidated subsidiaries, including PBF LLC, PBF Holding, and PBFX are referred to hereinafter as the “Company” unless the context otherwise requires.


2



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain “forward-looking statements”, as defined in the Private Securities Litigation Reform Act of 1995 (“PSLRA”), of expected future developments that involve risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” 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 strategies, objectives, intentions, resources and expectations regarding future industry trends are forward-looking statements made under the safe harbor provisions of the PSLRA except to the extent such statements relate to the operations of a partnership or limited liability company. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results.
Important factors that could cause actual results to differ materially from our expectations, which we refer to as “cautionary statements,” are disclosed under “Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-Q and the Annual Report on Form 10-K for the year ended December 31, 2016 of PBF Energy Inc., which we refer to as our 2016 Annual Report on Form 10-K, and in our other filings with the SEC. 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:
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;
our supply and inventory intermediation arrangements expose us to counterparty credit and performance risk;
termination of our A&R Intermediation Agreements with J. Aron, which could have a material adverse effect on our liquidity, as we would be required to finance our intermediate and refined products inventory covered by the agreements. Additionally, we are obligated to repurchase from J. Aron certain intermediates and finished products located at the Paulsboro and Delaware City refineries’ storage tanks upon termination of these agreements;
restrictive covenants in our indebtedness that may adversely affect our operational flexibility;
payments to the current and former holders of PBF LLC Series A Units and PBF LLC Series B Units under our tax receivable agreement for certain tax benefits we may claim;
our assumptions regarding payments arising under PBF Energy’s tax receivable agreement and other arrangements relating to our organizational structure are subject to change due to various factors, including, among other factors, the timing of exchanges of PBF LLC Series A Units for shares of our Class A common

3



stock as contemplated by the tax receivable agreement, the price of our Class A common stock at the time of such exchanges, the extent to which such exchanges are taxable, and the amount and timing of our income;
our expectations and timing with respect to our acquisition activity and whether such acquisitions are accretive or dilutive to shareholders;
our expectations with respect to our capital improvement and turnaround projects;
the status of an air permit to transfer crude through the Delaware City refinery’s dock;
the impact of disruptions to crude or feedstock supply to any of our refineries, including disruptions due to problems at PBFX or with third party logistics infrastructure or operations, including pipeline, marine and rail transportation;
the possibility that we might reduce or not make further dividend payments;
the inability of our subsidiaries to freely pay dividends or make distributions to us;
the impact of current and future laws, rulings and governmental regulations, including the implementation of rules and regulations regarding transportation of crude oil by rail;
the effectiveness of our crude oil sourcing strategies, including our crude by rail strategy and related commitments;
adverse impacts related to legislation by the federal government lifting the restrictions on exporting U.S. crude oil;
adverse impacts from changes in our regulatory environment, such as the effects of compliance with the California Global Warming Solutions Act (also referred to as “AB32”), or from actions taken by environmental interest groups;
market risks related to the volatility in the price of Renewable Identification Numbers (“RINs”) required to comply with the Renewable Fuel Standards and greenhouse gas (“GHG”) emission credits required to comply with various GHG emission programs, such as AB32;
our ability to successfully integrate the completed acquisition of the Torrance refinery and related logistics assets (collectively, the “Torrance Acquisition”) into our business and realize the benefits from such acquisition;
liabilities arising from the Torrance Acquisition that are unforeseen or exceed our expectations;
risk associated with the operation of PBFX as a separate, publicly-traded entity;
potential tax consequences related to our investment in PBFX; and
any decisions we continue to make with respect to our energy-related logistical 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 Quarterly Report on 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 Quarterly Report on 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.

4


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

PBF ENERGY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share data)
 
September 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents (PBFX: $39,420 and $64,221, respectively)
$
300,891

 
$
746,274

Accounts receivable
776,013

 
620,175

Inventories
2,310,692

 
1,863,560

Marketable securities - current (PBFX: $0 and $40,024, respectively)

 
40,024

Prepaid expense and other current assets
58,277

 
137,222

Total current assets
3,445,873

 
3,407,255

Property, plant and equipment, net (PBFX: $675,793 and $608,802, respectively)
3,480,922

 
3,328,770

Deferred tax assets
268,622

 
379,306

Deferred charges and other assets, net
804,040

 
506,596

Total assets
$
7,999,457

 
$
7,621,927

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
447,623

 
$
535,907

Accrued expenses
1,833,555

 
1,467,684

Deferred revenue
4,287

 
13,292

Notes payable
6,831

 

Current portion of long-term debt (PBFX: $0 and $39,664, respectively)

 
39,664

Total current liabilities
2,292,296

 
2,056,547

Long-term debt (PBFX: $533,136 and $532,011, respectively)
2,158,337

 
2,108,570

Payable to related parties pursuant to tax receivable agreement
610,827

 
611,392

Deferred tax liabilities
46,340

 
45,699

Other long-term liabilities
216,295

 
229,035

Total liabilities
5,324,095

 
5,051,243

Commitments and contingencies (Note 10)

 

Equity:
 
 
 
Class A common stock, $0.001 par value, 1,000,000,000 shares authorized, 109,747,548 shares outstanding at September 30, 2017, 109,204,047 shares outstanding at December 31, 2016
94

 
94

Class B common stock, $0.001 par value, 1,000,000 shares authorized, 27 shares outstanding at September 30, 2017, 28 shares outstanding at December 31, 2016

 

Preferred stock, $0.001 par value, 100,000,000 shares authorized, no shares outstanding at September 30, 2017 and December 31, 2016

 

Treasury stock, at cost, 6,104,609 shares outstanding at September 30, 2017 and 6,087,963 shares outstanding at December 31, 2016
(151,547
)
 
(151,547
)
Additional paid in capital
2,259,338

 
2,245,788

Retained earnings/(Accumulated deficit)
27,952

 
(44,852
)
Accumulated other comprehensive loss
(23,539
)
 
(24,439
)
Total PBF Energy Inc. equity
2,112,298

 
2,025,044

Noncontrolling interest
563,064

 
545,640

Total equity
2,675,362

 
2,570,684

Total liabilities and equity
$
7,999,457

 
$
7,621,927


See notes to condensed consolidated financial statements.
5



PBF ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share data)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
5,478,951

 
$
4,513,204

 
$
15,250,649

 
$
11,171,856


 
 
 
 
 
 
 
Cost and expenses:
 
 
 
 
 
 
 
Cost of products and other
4,352,061

 
3,862,580

 
13,154,521

 
9,524,119

Operating expenses (excluding depreciation and amortization expense as reflected below)
402,910

 
412,699

 
1,267,136

 
989,296

Depreciation and amortization expense
75,948

 
54,694

 
197,800

 
158,612

Cost of sales
4,830,919

 
4,329,973

 
14,619,457

 
10,672,027

General and administrative expenses (excluding depreciation and amortization expense as reflected below)
58,275

 
44,020

 
143,195

 
124,975

Depreciation and amortization expense
2,572

 
1,342

 
10,355

 
4,417

Loss on sale of assets
28

 
8,159

 
940

 
11,381

Total cost and expenses
4,891,794

 
4,383,494

 
14,773,947

 
10,812,800

 
 
 
 
 
 
 
 
Income from operations
587,157

 
129,710

 
476,702

 
359,056

 
 
 
 
 
 
 
 
Other income (expenses):
 
 
 
 
 
 
 
Change in tax receivable agreement liability
565

 
(3,143
)
 
565

 
(3,143
)
Change in fair value of catalyst leases
473

 
77

 
(1,011
)
 
(4,556
)
Debt extinguishment costs

 

 
(25,451
)
 

Interest expense, net
(36,990
)
 
(38,527
)
 
(114,871
)
 
(111,994
)
Income before income taxes
551,205

 
88,117

 
335,934

 
239,363

Income tax expense
203,979

 
31,673

 
112,889

 
85,607

Net income
347,226

 
56,444

 
223,045

 
153,756

Less: net income attributable to noncontrolling interests
32,861

 
14,333

 
49,420

 
37,503

Net income attributable to PBF Energy Inc. stockholders
$
314,365

 
$
42,111

 
$
173,625

 
$
116,253

 
 
 
 
 
 
 
 
Weighted-average shares of Class A common stock outstanding
 
 
 
 
 
 
 
Basic
109,724,595

 
97,825,357

 
109,634,921

 
97,823,708

Diluted
113,882,240

 
103,135,799

 
113,791,542

 
103,210,917

Net income available to Class A common stock per share:
 
 
 
 
 
 
 
Basic
$
2.86

 
$
0.43

 
$
1.58

 
$
1.19

Diluted
$
2.85

 
$
0.43

 
$
1.57

 
$
1.19

 
 
 
 
 
 
 
 
Dividends per common share
$
0.30

 
$
0.30

 
$
0.90

 
$
0.90



See notes to condensed consolidated financial statements.
6



PBF ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
347,226

 
$
56,444

 
$
223,045

 
$
153,756

Other comprehensive income:
 
 
 
 

 

Unrealized (loss) gain on available for sale securities
(1
)
 
(76
)
 
69

 
329

Net gain on pension and other post-retirement benefits
288

 
502

 
862

 
1,134

Total other comprehensive income
287

 
426

 
931

 
1,463

Comprehensive income
347,513

 
56,870

 
223,976

 
155,219

Less: comprehensive income attributable to noncontrolling interests
32,871

 
14,354

 
49,452

 
37,574

Comprehensive income attributable to PBF Energy Inc. stockholders
$
314,642

 
$
42,516

 
$
174,524

 
$
117,645


See notes to condensed consolidated financial statements.
7



PBF ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Nine Months Ended 
 September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
223,045

 
$
153,756

Adjustments to reconcile net income to net cash (used in) provided by operations:
 
 
 
Depreciation and amortization
215,052

 
170,911

Stock-based compensation
18,064

 
16,331

Change in fair value of catalyst leases
1,011

 
4,556

Deferred income taxes
111,325

 
194,431

Change in tax receivable agreement liability
(565
)
 
3,143

Non-cash change in inventory repurchase obligations
(26,659
)
 
29,317

Non-cash lower of cost or market inventory adjustment
(97,943
)
 
(320,833
)
Debt extinguishment costs
25,451

 

Pension and other post-retirement benefit costs
31,682

 
25,894

Loss on sale of assets
940

 
11,381

 
 
 
 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(155,838
)
 
(198,879
)
Inventories
(349,189
)
 
54,052

Prepaid expense and other current assets
78,838

 
(99,127
)
Accounts payable
(102,471
)
 
51,390

Accrued expenses
415,862

 
309,194

Deferred revenue
(9,005
)
 
8,918

Other assets and liabilities
(57,377
)
 
(26,223
)
Net cash provided by operations
322,223

 
388,212

 
 
 
 
Cash flows from investing activities:
 
 
 
Acquisition of Torrance refinery and related logistics assets

 
(971,932
)
Expenditures for property, plant and equipment
(267,151
)
 
(194,625
)
Expenditures for deferred turnaround costs
(341,598
)
 
(138,936
)
Expenditures for other assets
(31,096
)
 
(27,735
)
Expenditures for PBFX Plains Asset Purchase

 
(98,373
)
Expenditures for acquisition of Toledo Terminal by PBFX
(10,097
)
 

Chalmette Acquisition working capital settlement

 
(2,659
)
Purchase of marketable securities
(75,036
)
 
(1,779,997
)
Maturities of marketable securities
115,060

 
1,954,274

Proceeds from sale of assets

 
13,030

Net cash used in investing activities
$
(609,918
)
 
$
(1,246,953
)


See notes to condensed consolidated financial statements.
8



PBF ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited, in thousands)
 
Nine Months Ended 
 September 30,
 
2017
 
2016
Cash flows from financing activities:
 
 
 
Proceeds from issuance of PBFX common units, net of underwriters’ discount and commissions
$

 
$
138,255

Distributions to PBF Energy Company LLC members other than PBF Energy
(3,448
)
 
(4,460
)
Distributions to PBFX public unit holders
(32,261
)
 
(22,563
)
Dividend payments
(98,723
)
 
(88,043
)
Proceeds from 2025 7.25% Senior Notes
725,000

 

Cash paid to extinguish 2020 8.25% Senior Secured Notes
(690,209
)
 

Proceeds from PBFX revolver borrowings

 
174,700

Repayments of PBFX revolver borrowings

 
(30,000
)
Repayments of PBFX Term Loan borrowings
(39,664
)
 
(174,536
)
Repayments of PBF Rail Term Loan
(4,959
)
 

Repayments of Rail Facility revolver borrowings

 
(11,457
)
Proceeds from revolver borrowings
490,000

 
550,000

Repayments of revolver borrowings
(490,000
)
 

Additional catalyst lease

 
7,927

Deferred financing costs and other
(13,424
)
 

Net cash (used in) provided by financing activities
(157,688
)
 
539,823

 
 
 
 
Net decrease in cash and cash equivalents
(445,383
)
 
(318,918
)
Cash and cash equivalents, beginning of period
746,274

 
944,320

Cash and cash equivalents, end of period
$
300,891

 
$
625,402

 
 
 
 
Supplemental cash flow disclosures
 
 
 
Non-cash activities:
 
 
 
Accrued and unpaid capital expenditures
$
36,172

 
$
16,813

Note payable issued for purchase of property, plant and equipment
6,831

 



See notes to condensed consolidated financial statements.
9

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

 
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
PBF Energy Inc. (“PBF Energy”) was formed as a Delaware corporation on November 7, 2011 and is the sole managing member of PBF Energy Company LLC (“PBF LLC”), a Delaware limited liability company, with a controlling interest in PBF LLC and its subsidiaries. PBF Energy consolidates the financial results of PBF LLC and its subsidiaries and records a noncontrolling interest in its consolidated financial statements representing the economic interests of PBF LLC’s members other than PBF Energy.
PBF LLC, together with its consolidated subsidiaries, owns and operates oil refineries and related facilities in North America. PBF Holding Company LLC (“PBF Holding”) is a wholly-owned subsidiary of PBF LLC. PBF Investments LLC (“PBF Investments”), Toledo Refining Company LLC (“Toledo Refining” or “TRC”), Paulsboro Refining Company LLC (“Paulsboro Refining” or “PRC”), Delaware City Refining Company LLC (“Delaware City Refining” or “DCR”), Chalmette Refining, L.L.C. (“Chalmette Refining”), PBF Western Region LLC (“PBF Western Region”), Torrance Refining Company LLC (“Torrance Refining”) and Torrance Logistics Company LLC are PBF LLC’s principal operating subsidiaries and are all wholly-owned subsidiaries of PBF Holding.
As of September 30, 2017, PBF LLC also holds a 44.1% limited partner interest and all of the incentive distribution rights in PBF Logistics LP (“PBFX”), a publicly traded master limited partnership (refer to “Note 2 - PBF Logistics LP”). PBF Logistics GP LLC (“PBF GP”) owns the noneconomic general partner interest and serves as the general partner of PBFX and is wholly-owned by PBF LLC. PBF Energy, through its ownership of PBF LLC, consolidates the financial results of PBFX and its subsidiaries and records a noncontrolling interest in its consolidated financial statements representing the economic interests of PBFX’s unit holders other than PBF LLC. Collectively, PBF Energy and its consolidated subsidiaries, including PBF LLC, PBF Holding, and PBFX are referred to hereinafter as the “Company” unless the context otherwise requires.
As of September 30, 2017, the Company owns 109,747,548 PBF LLC Series C Units and the Company’s current and former executive officers and directors and certain employees and others beneficially own 3,825,508 PBF LLC Series A Units. As of September 30, 2017, the holders of the Company’s issued and outstanding shares of Class A common stock have 96.6% of the voting power in the Company and the members of PBF LLC other than PBF Energy through their holdings of Class B common stock have the remaining 3.4% of the voting power in the Company.
Substantially all of the Company’s operations are in the United States. The Company operates in two reportable business segments: Refining and Logistics. The Company’s oil refineries are all engaged in the refining of crude oil and other feedstocks into petroleum products, and are aggregated into the Refining segment. PBFX is a publicly traded master limited partnership that was formed to operate logistical assets such as crude oil and refined petroleum products terminals, pipelines, and storage facilities. PBFX’s operations are aggregated into the Logistics 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 largely out of the Company’s control can cause prices to vary over time. The potential margin volatility can have a material effect on the Company’s financial position, earnings and cash flow.
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

10

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

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 financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2016 of PBF Energy. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year.
Change in Presentation
During the third quarter of 2017, the Company determined that it would revise the presentation of certain line items on its consolidated statements of operations to enhance its disclosure under the requirements of Rule 5-03 of Regulation S-X. The revised presentation is comprised of the inclusion of a subtotal within costs and expenses referred to as “Cost of sales” and the reclassification of total depreciation and amortization expense between such amounts attributable to cost of sales and other operating costs and expenses. The amount of depreciation and amortization expense that is presented separately within the “Cost of Sales” subtotal represents depreciation and amortization of refining and logistics assets that are integral to the refinery production process.
The historical comparative information has been revised to conform to the current presentation. This revised presentation does not have an effect on the Company’s historical consolidated income from operations or net income, nor does it have any impact on its consolidated balance sheets, statements of comprehensive income or statements of cash flows. Presented below is a summary of the effects of this revised presentation on the Company’s historical statements of operations for the three and nine months ended September 30, 2016 (in thousands):
 
Three Months Ended September 30, 2016
 
As Previously Reported
 
Adjustments
 
As Reclassified
Cost and expenses:
 
 
 
 
 
Cost of products and other
$
3,862,580

 

 
$
3,862,580

Operating expenses (excluding depreciation and amortization expense as reflected below)
412,699

 

 
412,699

Depreciation and amortization expense

 
54,694

 
54,694

Cost of sales
 
 
 
 
4,329,973

General and administrative expenses (excluding depreciation and amortization expense as reflected below)
44,020

 

 
44,020

Depreciation and amortization expense
56,036

 
(54,694)

 
1,342

Loss on sale of assets
8,159

 

 
8,159

Total cost and expenses
$
4,383,494

 
 
 
$
4,383,494

 
Nine Months Ended September 30, 2016
 
As Previously Reported
 
Adjustments
 
As Reclassified
Cost and expenses:
 
 
 
 
 
Cost of products and other
$
9,524,119

 

 
$
9,524,119

Operating expenses (excluding depreciation and amortization expense as reflected below)
989,296

 

 
989,296

Depreciation and amortization expense

 
158,612

 
158,612

Cost of sales
 
 
 
 
10,672,027

General and administrative expenses (excluding depreciation and amortization expense as reflected below)
124,975

 

 
124,975

Depreciation and amortization expense
163,029

 
(158,612)

 
4,417

Loss on sale of assets
11,381

 

 
11,381

Total cost and expenses
$
10,812,800

 
 
 
$
10,812,800


11

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

Cost Classifications
Cost of products and other consists of the cost of crude oil, other feedstocks, blendstocks and purchased refined products and the related in-bound freight and transportation costs.
Operating expenses (excluding depreciation and amortization) consists of direct costs of labor, maintenance and services, utilities, property taxes, environmental compliance costs and other direct operating costs incurred in connection with our refining operations. Such expenses exclude depreciation related to refining and logistics assets that are integral to the refinery production process, which is presented separately as Depreciation and amortization expense as a component of Cost of sales on the Company’s condensed consolidated statements of operations.
Reclassification
Certain amounts previously reported in the Company's condensed consolidated financial statements for prior periods have been reclassified to conform to the 2017 presentation. These reclassifications, in addition to the changes in “Cost and expenses” described above, include certain details about accrued expenses and equity in those respective footnotes.
Recently Adopted Accounting Guidance
Effective January 1, 2017, the Company adopted Accounting Standard Update (“ASU”) No. 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2016-06”). ASU 2016-6 was issued in March 2016 by the Financial Accounting Standards Board (“FASB”) to increase consistency in practice in applying guidance on determining if an embedded derivative is clearly and closely related to the economic characteristics of the host contract, specifically for assessing whether call (put) options that can accelerate the repayment of principal on a debt instrument meet the clearly and closely related criterion. The Company’s adoption of this guidance did not materially impact its consolidated financial statements.
Effective January 1, 2017, the Company adopted ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 was issued by the FASB in March 2016 to simplify certain aspects of the accounting for share-based payments to employees. The guidance in ASU 2016-09 requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled rather than recording excess tax benefits or deficiencies in additional paid-in capital. The guidance in ASU 2016-09 also allows an employer to repurchase more of an employee’s shares than it could prior to its adoption for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The Company’s adoption of this guidance did not materially impact its consolidated financial statements.
Effective January 1, 2017, the Company adopted ASU No. 2016-17, “Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control” (“ASU 2016-17”). ASU 2016-17 was issued by the FASB in October 2016 to amend the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (“VIE”) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The amendments in this ASU do not change the characteristics of a primary beneficiary in current GAAP. The amendments in this ASU require that a reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, include all of its direct variable interests in a VIE and, on a proportionate basis, its indirect variable interests in a VIE held through related parties, including related parties that are under common control with the reporting entity. The Company’s adoption of this guidance did not materially impact its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”), which provides guidance to assist entities with evaluating when a set of transferred assets and activities is a business. Under ASU 2017-01, it is expected that the definition of a business will be narrowed and more consistently applied. ASU 2017-01 is effective for annual periods beginning after

12

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

December 15, 2017, including interim periods within those periods. The amendments in this ASU should be applied prospectively on or after the effective date. Early adoption of ASU 2017-01 is permitted and the Company early adopted the new standard in its consolidated financial statements and related disclosures effective January 1, 2017. The Company’s adoption of this guidance did not materially impact its consolidated financial statements.
Recent Accounting Pronouncements
In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (“ASU 2015-14”), which defers the effective date of ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”) for all entities by one year. Additional ASUs have been issued in 2016 and 2017 that provide certain implementation guidance related to ASU 2014-09 (collectively, the Company refers to ASU 2014-09 and these additional ASUs as the “Updated Revenue Recognition Guidance”). The Updated Revenue Recognition Guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective. Under ASU 2015-14, this guidance becomes effective for interim and annual periods beginning after December 15, 2017 and permits the use of either the retrospective or modified retrospective transition method. Under ASU 2015-14, early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company has established a working group to assess the Updated Revenue Recognition Guidance, including its impact on the Company’s business processes, accounting systems, controls and financial statement disclosures. The Company will adopt this new standard effective January 1, 2018, using the modified retrospective application. Under that method, the cumulative effect of initially applying the standard is recognized as an adjustment to the opening balance of retained earnings, and revenues reported in the periods prior to the date of adoption are not changed. The working group is progressing through its implementation plan and continues to evaluate the impact of this new standard on the Company’s consolidated financial statements and related disclosures. Additionally, the Company has begun training the relevant staff at its corporate headquarters and refineries on the Updated Revenue Recognition Guidance, including the potential impacts on internal reporting and disclosure requirements. Although the Company’s analysis of the new standard is still in process and interpretative and industry specific guidance is still developing, based on the results to date, we have reached tentative conclusions for most contract types and do not believe revenue recognition patterns will change materially. However, it is expected that the new standard will have some impact on presentation and disclosures in its financial statements and internal controls.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), to increase the transparency and comparability about leases among entities. The new guidance requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts.  It also requires additional disclosures about leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and requires a modified retrospective approach to adoption. Early adoption is permitted. The Company has established a working group to study and lead implementation of the new guidance in ASU 2016-02. This working group was formed during 2016 and has begun the process of compiling a central repository for all leases entered into by the Company and its subsidiaries for further analysis as the implementation project progresses. The Company will not early adopt this new guidance. The working group continues to evaluate the impact of this new standard on its consolidated financial statements and related disclosures. At this time, the Company has identified that the most significant impacts of this new guidance will be to bring nearly all leases on its balance sheet with “right of use assets” and “lease obligation liabilities” as well as accelerating the interest expense component of financing leases. While the assessment of the impacts arising from this standard is progressing, it remains in its early stages. Accordingly, the Company has not fully determined the impacts on its business processes, controls or financial statement disclosures.
In March 2017, the FASB issued ASU No. 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”), which provides guidance to improve the reporting of net benefit cost in the income statement and on the components eligible for capitalization in assets. Under the new guidance, employers will present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in

13

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

assets. Additionally, under this guidance, employers will present the other components of the net periodic benefit cost separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, if one is presented. These components will not be eligible for capitalization in assets. Employers will apply the guidance on the presentation of the components of net periodic benefit cost in the income statement retrospectively. The guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component will be applied prospectively. The guidance includes a practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in their pension and other postretirement benefit plan note to the financial statements. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company does not expect the adoption of this new standard to have a material impact on its consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), which provides guidance to increase clarity and reduce both diversity in practice and cost and complexity when applying the existing accounting guidance on changes to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 require an entity to account for the effects of a modification unless all the following are met: (i) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The guidance in ASU 2017-09 should be applied prospectively. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company will apply the guidance prospectively for any modifications to its stock compensation plans occurring after the effective date of the new standard.
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). The amendments in ASU 2017-12 more closely align the results of cash flow and fair value hedge accounting with risk management activities through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. The amendments in ASU 2017-12 address specific limitations in current GAAP by expanding hedge accounting for both nonfinancial and financial risk components and by refining the measurement of hedge results to better reflect an entity’s hedging strategies. Thus, the amendments in ASU 2017-12 will enable an entity to better portray the economic results of hedging activities for certain fair value and cash flow hedges and will avoid mismatches in earnings by allowing for greater precision when measuring changes in fair value of the hedged item for certain fair value hedges. Additionally, by aligning the timing of recognition of hedge results with the earnings effect of the hedged item for cash flow and net investment hedges, and by including the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is presented, the results of an entity’s hedging program and the cost of executing that program will be more visible to users of financial statements. The guidance in ASU 2017-12 concerning amendments to cash flow and net investment hedge relationships that exist on the date of adoption should be applied using a modified retrospective approach (i.e., with a cumulative effect adjustment recorded to the opening balance of retained earnings as of the initial application date). The guidance in ASU 2017-12 also provides transition relief to make it easier for entities to apply certain amendments to existing hedges (including fair value hedges) where the hedge documentation needs to be modified. The presentation and disclosure requirements of ASU 2017-12 should be applied prospectively. The amendments in this ASU are effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.
2. PBF LOGISTICS LP
PBFX is a fee-based, growth-oriented, Delaware master limited partnership formed by PBF Energy to own or lease, operate, develop and acquire crude oil and refined petroleum products terminals, pipelines, storage facilities

14

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

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 its refineries, as well as for third party customers. As of September 30, 2017, a substantial majority of PBFX’s revenue is derived from long-term, fee-based commercial agreements with PBF Holding, which include minimum volume commitments, for receiving, handling, storing and transferring crude oil, refined products and natural gas. PBF Energy also has agreements with PBFX that establish fees for certain general and administrative services and operational and maintenance services provided by PBF Holding to PBFX. These transactions, other than those with third parties, are eliminated by PBF Energy in consolidation.
PBFX, a variable interest entity, is consolidated by PBF Energy through its ownership of PBF LLC. PBF LLC, through its ownership of PBF GP, has the sole ability to direct the activities of PBFX that most significantly impact its economic performance. PBF LLC is considered to be the primary beneficiary of PBFX for accounting purposes.
As of September 30, 2017, PBF LLC holds a 44.1% limited partner interest in PBFX consisting of 18,459,497 common units, with the remaining 55.9% limited partner interest held by public unit holders. PBF LLC also owns all of the incentive distribution rights (“IDRs”) and indirectly owns a non-economic general partner interest in PBFX through its wholly-owned subsidiary, PBF GP, the general partner of PBFX. The IDRs entitle PBF LLC to receive increasing percentages, up to a maximum of 50.0%, of the cash PBFX distributes from operating surplus in excess of $0.345 per unit per quarter. As a result of the payment on May 31, 2017 by PBFX of its distribution for the first quarter of 2017, the financial tests required for conversion of all of PBFX’s outstanding subordinated units into common units have been satisfied. As a result, all of PBFX’s subordinated units, which were owned by PBF LLC, converted on a one-for-one basis into common units effective June 1, 2017. The conversion of the subordinated units did not impact the amount of cash distributions paid by PBFX or the total number of its outstanding units. The subordinated units were issued by PBFX in connection with its initial public offering in May 2014.
PBFX Plains Asset Purchase
On April 29, 2016, PBFX purchased four refined product terminals located in the greater Philadelphia region (the “East Coast Terminals”) from an affiliate of Plains All American Pipeline, L.P. for total cash consideration of $100,000 (the “PBFX Plains Asset Purchase”).
TVPC Contribution Agreement
On August 31, 2016, PBFX entered into a contribution agreement (the “TVPC Contribution Agreement”) between PBFX and PBF LLC. Pursuant to the TVPC Contribution Agreement, PBFX acquired from PBF LLC 50% of the issued and outstanding limited liability company interests of Torrance Valley Pipeline Company LLC (“TVPC”), whose assets consist of the San Joaquin Valley Pipeline system (which was acquired as a part of the Torrance Acquisition, as defined in “Note 3 - Acquisitions”), including the M55, M1 and M70 pipeline systems including pipeline stations with storage capacity and truck unloading capability (collectively, the “Torrance Valley Pipeline”).
PNGPC Contribution Agreement
On February 15, 2017, PBFX entered into a contribution agreement (the “PNGPC Contribution Agreement”) between PBFX and PBF LLC. Pursuant to the PNGPC Contribution Agreement, PBF LLC contributed to PBFX’s wholly owned subsidiary PBFX Operating Company LLC (“PBFX Op Co”) all of the issued and outstanding limited liability company interests of Paulsboro Natural Gas Pipeline Company LLC (“PNGPC”). PNGPC owns and operates an existing interstate natural gas pipeline that originates in Delaware County, Pennsylvania, at an interconnection with Texas Eastern pipeline that runs under the Delaware River and terminates at the delivery point to PBF Holding’s Paulsboro refinery, and is subject to regulation by the Federal Energy Regulatory Commission (“FERC”). In connection with the PNGPC Contribution Agreement, PBFX constructed a new pipeline to replace the existing pipeline, which commenced services in August 2017. In consideration for the PNGPC limited liability company interests, PBFX delivered to PBF LLC (i) an $11,600 intercompany promissory note in favor of Paulsboro Refining Company LLC, a wholly owned subsidiary of PBF Holding (the “Promissory Note”), (ii) an expansion

15

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

rights and right of first refusal agreement in favor of PBF LLC with respect to the New Pipeline and (iii) an assignment and assumption agreement with respect to certain outstanding litigation involving PNGPC and the existing pipeline.
Chalmette Storage Tank Lease
Effective February 2017, PBF Holding and PBFX Op Co entered into a ten-year storage services agreement (the “Chalmette Storage Agreement”) under which PBFX, through PBFX Op Co, assumed construction of a crude oil storage tank at PBF Holding's Chalmette Refinery (the “Chalmette Storage Tank”), commencing upon the earlier of November 1, 2017 or the completion of construction of the Chalmette Storage Tank which is currently expected to be completed in November 2017. PBFX Op Co and Chalmette Refining have entered into a twenty-year lease for the premises upon which the tank is located and a project management agreement pursuant to which Chalmette Refining is managing the construction of the tank.
Toledo Terminal Acquisition
On April 17, 2017, PBFX’s wholly-owned subsidiary, PBF Logistics Products Terminals LLC, acquired the Toledo, Ohio refined products terminal assets (the “Toledo Terminal”) from Sunoco Logistics L.P. for an aggregate purchase price of $10,000, plus working capital. The Toledo Terminal is directly connected to, and currently supplied by, PBF Holding’s Toledo Refinery.
3. ACQUISITIONS
Torrance Acquisition
On July 1, 2016, the Company acquired from ExxonMobil Oil Corporation and its subsidiary, Mobil Pacific Pipe Line Company, the Torrance refinery and related logistics assets (collectively, the “Torrance Acquisition”). The Torrance refinery, located in Torrance, California, is a high-conversion, delayed-coking refinery. The facility is strategically positioned in Southern California with advantaged logistics connectivity that offers flexible raw material sourcing and product distribution opportunities primarily in the California, Las Vegas and Phoenix area markets. The Torrance Acquisition provided the Company with a broader more diversified asset base and increased the number of operating refineries from four to five and expanded the Company’s combined crude oil throughput capacity. The acquisition also provided the Company with a presence in the PADD 5 market.
In addition to refining assets, the transaction included a number of high-quality logistics assets including a sophisticated network of crude and products pipelines, product distribution terminals and refinery crude and product storage facilities. The most significant of the logistics assets is a crude gathering and transportation system which delivers San Joaquin Valley crude oil directly from the field to the refinery. Additionally, included in the transaction were several pipelines which provide access to sources of crude oil including the Ports of Long Beach and Los Angeles, as well as clean product outlets with a direct pipeline supplying jet fuel to the Los Angeles airport.
The aggregate purchase price for the Torrance Acquisition was $521,350 in cash after post-closing purchase price adjustments, plus final working capital of $450,582. In addition, the Company assumed certain pre-existing environmental and regulatory emission credit obligations in connection with the Torrance Acquisition. The transaction was financed through a combination of cash on hand, including proceeds from certain equity offerings, and borrowings under PBF Holding’s asset based revolving credit agreement (the “Revolving Loan”).
The Company accounted for the Torrance Acquisition as a business combination under GAAP whereby the Company recognizes assets acquired and liabilities assumed in an acquisition at their estimated fair values as of the date of acquisition. The final purchase price and fair value allocation were completed as of June 30, 2017. During the measurement period, which ended in June 2017, adjustments were made to the Company’s preliminary fair value estimates related primarily to Property, plant and equipment and Other long-term liabilities reflecting the finalization of the Company’s assessment of the costs and duration of certain assumed pre-existing environmental obligations.

16

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

The total purchase consideration and the fair values of the assets and liabilities at the acquisition date were as follows:
 
Purchase Price
Gross purchase price
$
537,500

Working capital
450,582

Post close purchase price adjustments
(16,150
)
Total consideration
$
971,932

The following table summarizes the amounts recognized for assets acquired and liabilities assumed as of the acquisition date:
 
Fair Value Allocation
Inventories
$
404,542

Prepaid expenses and other current assets
982

Property, plant and equipment
704,633

Deferred charges and other assets, net
68,053

Accounts payable
(2,688
)
Accrued expenses
(64,137
)
Other long-term liabilities
(139,453
)
Fair value of net assets acquired
$
971,932

The Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2017 include the results of operations of the Torrance refinery and related logistics assets subsequent to the Torrance Acquisition. The Company’s condensed consolidated financial statements for the prior year include the results of operations of such assets from the date of the Torrance Acquisition on July 1, 2016 to September 30, 2016 during which period the Torrance refinery and related logistics assets contributed revenues of $928,225 and net income of $51,457. On an unaudited pro forma basis, the revenues and net income of the Company assuming the Torrance Acquisition had occurred on January 1, 2015, are shown below. The unaudited pro forma information does not purport to present what the Company’s actual results would have been had the acquisition occurred on January 1, 2015, nor is the financial information indicative of the results of future operations. The unaudited pro forma financial information includes the depreciation and amortization expense attributable to the Torrance Acquisition and interest expense associated with the related financing.
 
Nine Months Ended September 30, 2016
Pro forma revenues
$
12,250,867

Pro forma net loss attributable to PBF Energy Inc. stockholders
$
(3,704
)
Pro forma net loss available to Class A common stock per share:
 
Basic
$
(0.04
)
Diluted
$
(0.04
)
The unaudited amount of revenues and net loss above have been calculated after conforming accounting policies of the Torrance refinery and related logistics assets to those of the Company and certain one-time adjustments.

17

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

Chalmette Acquisition
On November 1, 2015, the Company acquired from ExxonMobil, Mobil Pipe Line Company and PDV Chalmette, L.L.C., 100% of the ownership interests of Chalmette Refining, which owns the Chalmette refinery and related logistics assets (collectively, the “Chalmette Acquisition”). While the Company’s condensed consolidated financial statements for both the three and nine months ended September 30, 2017 and 2016 include the results of operations of Chalmette Refining, the final working capital settlement for the Chalmette Acquisition was finalized in the first quarter of 2016. Additionally, certain acquisition related costs for the Chalmette Acquisition were recorded in the first quarter of 2016.
Acquisition Expenses
The Company incurred acquisition related costs consisting primarily of consulting and legal expenses related to completed, pending and non-consummated acquisitions. These costs were $50 and $1,021 in the three and nine months ended September 30, 2017, respectively, and $5,222 and $17,510 in three and nine months ended September 30, 2016, respectively. These costs are included in the condensed consolidated statements of operations in General and administrative expenses.
4. EQUITY
Noncontrolling Interest in PBF LLC
PBF Energy is the sole managing member of, and has a controlling interest in, PBF LLC. As the sole managing member of PBF LLC, PBF Energy operates and controls all of the business and affairs of PBF LLC and its subsidiaries. As of September 30, 2017 and December 31, 2016, PBF Energy’s equity interest in PBF LLC represented approximately 96.6% and 96.5%, respectively, of the outstanding interests.
PBF Energy consolidates the financial results of PBF LLC and its subsidiaries, and records a noncontrolling interest for the economic interest in PBF Energy held by the members of PBF LLC other than PBF Energy. Noncontrolling interest on the consolidated statements of operations includes the portion of net income or loss attributable to the economic interest in PBF Energy held by the members of PBF LLC other than PBF Energy. Noncontrolling interest on the consolidated balance sheets represents the portion of net assets of PBF Energy attributable to the members of PBF LLC other than PBF Energy.
The noncontrolling interest ownership percentages of PBF Energy as of September 30, 2017 and December 31, 2016 are calculated as follows:
 
Holders of PBF LLC Series A Units
 
Outstanding Shares of PBF Energy Class A Common Stock
 
Total *
December 31, 2016
3,920,902

 
109,204,047

 
113,124,949

 
3.5
%
 
96.5
%
 
100.0
%
September 30, 2017
3,825,508

 
109,747,548

 
113,573,056

 
3.4
%
 
96.6
%
 
100.0
%
——————————
*
Assumes all of the holders of PBF LLC Series A Units exchange their PBF LLC Series A Units for shares of PBF Energy’s Class A common stock on a one-for-one basis.
Noncontrolling Interest in PBFX
PBF LLC holds a 44.1% limited partner interest in PBFX and owns all of PBFX’s IDRs, with the remaining 55.9% limited partner interest owned by public common unit holders as of September 30, 2017. PBF LLC is also the sole member of PBF GP, the general partner of PBFX.

18

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

PBF Energy, through its ownership of PBF LLC, consolidates the financial results of PBFX, and records a noncontrolling interest for the economic interest in PBFX held by the public common unit holders. Noncontrolling interest on the consolidated statements of operations includes the portion of net income or loss attributable to the economic interest in PBFX held by the public common unit holders of PBFX other than PBF Energy (through its ownership in PBF LLC). Noncontrolling interest on the condensed consolidated balance sheets includes the portion of net assets of PBFX attributable to the public common unit holders of PBFX.
The noncontrolling interest ownership percentages of PBFX as of September 30, 2017 and December 31, 2016, are calculated as follows:

Units of PBFX Held by the Public

Units of PBFX Held by PBF LLC (Including Subordinated Units)

Total
December 31, 2016
23,271,174

 
18,459,497

 
41,730,671


55.8
%
 
44.2
%
 
100.0
%
September 30, 2017
23,435,349

 
18,459,497

 
41,894,846

 
55.9
%
 
44.1
%
 
100.0
%
Noncontrolling Interest in PBF Holding
In connection with the Chalmette Acquisition, PBF Holding recorded noncontrolling interests in two subsidiaries of Chalmette Refining. PBF Holding, through Chalmette Refining, owns an 80% ownership interest in both Collins Pipeline Company and T&M Terminal Company. For the three months ended September 30, 2017 and 2016 the Company recorded a noncontrolling interest in the (loss) earnings of these subsidiaries of $(6) and $45, respectively. For the nine months ended September 30, 2017 and 2016 the Company recorded a noncontrolling interest in the earnings of these subsidiaries of $374 and $438, respectively.
Changes in Equity and Noncontrolling Interests
The following tables summarize the changes in equity for the controlling and noncontrolling interests of PBF Energy for the nine months ended September 30, 2017 and 2016: 
 
PBF Energy Inc. Equity
 
Noncontrolling
Interest in PBF LLC

Noncontrolling Interest in PBF Holding
 
Noncontrolling
Interest in PBFX
 
Total Equity
Balance at January 1, 2017
$
2,025,044

 
$
98,671

 
$
12,513

 
$
434,456

 
$
2,570,684

Comprehensive income
174,524

 
9,701

 
374

 
39,377

 
223,976

Dividends and distributions
(98,723
)
 
(3,448
)
 

 
(33,090
)
 
(135,261
)
Equity-based compensation awards
13,549

 

 

 
4,515

 
18,064

Exercise of PBF LLC options and warrants, net

 

 

 

 

Other
(2,096
)
 

 

 
(5
)
 
(2,101
)
Balance at September 30, 2017
$
2,112,298

 
$
104,924

 
$
12,887

 
$
445,253

 
$
2,675,362



19

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

 
PBF Energy Inc. Equity
 
Noncontrolling
Interest in PBF LLC
 
Noncontrolling
Interest in PBF Holding
 
Noncontrolling
Interest in PBFX
 
Total Equity
Balance at January 1, 2016
$
1,647,297

 
$
91,018

 
$
17,225

 
$
340,317

 
$
2,095,857

Comprehensive income
117,645

 
10,386

 
438

 
26,750

 
155,219

Dividends and distributions
(88,043
)
 
(4,460
)
 

 
(23,234
)
 
(115,737
)
Issuance of additional PBFX common units
54,944

 

 

 
83,311

 
138,255

Equity-based compensation awards
12,658

 

 

 
3,673

 
16,331

Exercise of PBF LLC options and warrants, net
1,058

 
(232
)
 

 

 
826

Other
(5,438
)
 
(30
)
 
(4,943
)
 
(980
)
 
(11,391
)
Balance at September 30, 2016
$
1,740,121

 
$
96,682

 
$
12,720

 
$
429,837

 
$
2,279,360

Share Activity
The following table presents the changes in PBF Energy Class A common stock and treasury stock outstanding:
 
Nine Months Ended September 30,
 
2017
 
2016
 
Class A Common Stock
 
Treasury Stock
 
Class A Common Stock
 
Treasury Stock
Balance at beginning of period
109,204,047

 
6,087,963

 
97,781,933

 
6,056,719

Treasury stock purchases (1)
(16,646
)
 
16,646

 
(26,379
)
 
26,379

Stock based compensation
429,825

 

 
28,987

 

Exercise of options and warrants
12,500

 

 
1,650

 

Exchange of PBF LLC Series A units for shares of Class A common stock
117,822

 

 
38,957

 

Balance at end of period
109,747,548

 
6,104,609

 
97,825,148

 
6,083,098

_____
(1) Includes shares repurchased from participants in connection with the vesting of equity awards granted under the Company’s stock compensation plans to cover employee income tax liabilities.

20

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

5. INVENTORIES
Inventories consisted of the following:
September 30, 2017
 
Titled Inventory
 
Inventory Intermediation Arrangements
 
Total
Crude oil and feedstocks
$
1,302,162

 
$

 
$
1,302,162

Refined products and blendstocks
1,065,608

 
343,904

 
1,409,512

Warehouse stock and other
97,063

 

 
97,063

 
$
2,464,833

 
$
343,904

 
$
2,808,737

Lower of cost or market adjustment
(404,227
)
 
(93,818
)
 
(498,045
)
Total inventories
$
2,060,606

 
$
250,086

 
$
2,310,692

December 31, 2016
 
Titled Inventory
 
Inventory Intermediation Arrangements
 
Total
Crude oil and feedstocks
$
1,102,007

 
$

 
$
1,102,007

Refined products and blendstocks
915,397

 
352,464

 
1,267,861

Warehouse stock and other
89,680

 

 
89,680

 
$
2,107,084

 
$
352,464

 
$
2,459,548

Lower of cost or market adjustment
(492,415
)
 
(103,573
)
 
(595,988
)
Total inventories
$
1,614,669

 
$
248,891

 
$
1,863,560

Inventory under inventory intermediation arrangements included certain light finished products sold to counterparties and stored in the Paulsboro and Delaware City refineries’ storage facilities in connection with the amended and restated inventory intermediation agreements (as amended in the second and third quarters of 2017, the “A&R Intermediation Agreements”) with J. Aron & Company, a subsidiary of The Goldman Sachs Group, Inc. (“J. Aron”).
During the three months ended September 30, 2017, the Company recorded an adjustment to value its inventories to the lower of cost or market (“LCM”) which increased operating income and net income by $265,077 and $160,743, respectively, reflecting the net change in the lower of cost or market inventory reserve from $763,122 at June 30, 2017 to $498,045 at September 30, 2017. During the nine months ended September 30, 2017, the Company recorded an adjustment to value its inventories to the lower of cost or market which increased operating income and net income by $97,943 and $59,393, respectively, reflecting the net change in the lower of cost or market inventory reserve from $595,988 at December 31, 2016 to $498,045 at September 30, 2017.
During the three months ended September 30, 2016, the Company recorded an adjustment to value its inventories to the lower of cost or market which increased operating income and net income by $103,990 and $62,810, respectively, reflecting the net change in the lower of cost or market inventory reserve from $900,493 at June 30, 2016 to $796,503 at September 30, 2016. During the nine months ended September 30, 2016, the Company recorded an adjustment to value its inventories to the lower of cost or market which increased operating income and net income by $320,833 and $193,783, respectively, reflecting the net change in the lower of cost or market inventory reserve from $1,117,336 at December 31, 2015 to $796,503 at September 30, 2016.

21

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
 
September 30,
2017
 
December 31,
2016
Inventory-related accruals
$
984,702

 
$
810,027

Inventory intermediation arrangements
282,640

 
225,524

Renewable energy credit and emissions obligations
138,717

 
70,158

Excise and sales tax payable
91,042

 
86,046

Accrued transportation costs
90,933

 
89,830

Customer deposits
45,548

 
9,215

Accrued interest
40,689

 
28,570

Accrued utilities
36,274

 
44,190

Accrued refinery maintenance and support costs
36,098

 
28,670

Accrued salaries and benefits
32,709

 
17,466

Accrued capital expenditures
21,985

 
35,149

Environmental liabilities
8,545

 
9,434

Other
23,673

 
13,405

Total accrued expenses
$
1,833,555

 
$
1,467,684

 
The Company has the obligation to repurchase certain intermediates and finished products that are held in the Company’s refinery storage tanks at the Delaware City and Paulsboro refineries in accordance with the A&R Intermediation Agreements with J. Aron. As of September 30, 2017 and December 31, 2016, a liability is recognized for the inventory intermediation arrangements and is recorded at market price for the J. Aron owned inventory held in the Company’s storage tanks under the A&R Intermediation Agreements, with any change in the market price being recorded in Cost of products and other.
The Company is subject to obligations to purchase Renewable Identification Numbers (“RINs”) required to comply with the Renewable Fuels Standard. The Company’s overall RINs obligation is based on a percentage of domestic shipments of on-road fuels as established by the Environmental Protection Agency (“EPA”). 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 expenses 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 to address environmental compliance and greenhouse gas and other emissions, including AB32 in California. These requirements include incremental costs to operate and maintain our facilities as well as to implement and manage new emission controls and programs, which have contributed to the increase in accrued environmental liabilities and emission obligations following the Torrance Acquisition. Renewable energy credit and emissions obligations fluctuate with the volume of applicable product sales and timing of credit purchases.
7. DEBT
Senior Notes
On May 30, 2017, PBF Holding entered into an Indenture (the “Indenture”) among PBF Holding and PBF Holding’s wholly-owned subsidiary, PBF Finance Corporation (“PBF Finance” and, together with PBF Holding, the “Issuers”), the guarantors named therein (collectively the “Guarantors”) and Wilmington Trust, National Association, as Trustee, under which the Issuers issued $725,000 in aggregate principal amount of 7.25% senior

22

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

notes due 2025 (the “2025 Senior Notes”). The Issuers received net proceeds of approximately $711,576 from the offering after deducting the initial purchasers’ discount and estimated offering expenses. The Company used the net proceeds to fund the cash tender offer (the “Tender Offer”) for any and all of its outstanding 8.25% senior secured notes due 2020 (the “2020 Senior Secured Notes”), to pay the related redemption price and accrued and unpaid interest for any 2020 Senior Secured Notes that remained outstanding after the completion of the Tender Offer, and for general corporate purposes. The difference between the carrying value of the 2020 Senior Secured Notes on the date they were reacquired and the amount for which they were reacquired has been classified as debt extinguishment costs in the condensed consolidated statements of operations.
The 2025 Senior Notes included a registration rights arrangement whereby the Company agreed to file with the SEC and use commercially reasonable efforts to consummate an offer to exchange the 2025 Senior Notes for an issue of registered notes with terms substantially identical to the notes not later than 365 days after the date of the original issuance of the notes. This registration statement was declared effective on October 18, 2017 and it is anticipated that the exchange will be consummated during the fourth quarter of 2017. As such, the Company does not anticipate it will have to transfer any consideration as a result of the registration rights agreement and thus no loss contingency was recorded.
The 2025 Senior Notes are guaranteed on a senior unsecured basis by substantially all of PBF Holding’s subsidiaries. The 2025 Senior Notes and guarantees are senior unsecured obligations and rank equal in right of payment with all of the Issuers’ and the Guarantors’ existing and future senior indebtedness, including PBF Holding’s Revolving Loan and the Issuers’ 7.00% senior notes due 2023 (the “2023 Senior Notes”). The 2025 Senior Notes and the guarantees rank senior in right of payment to the Issuers’ and the Guarantors’ existing and future indebtedness that is expressly subordinated in right of payment thereto. The 2025 Senior Notes and the guarantees are effectively subordinated to any of the Issuers’ and the Guarantors’ existing or future secured indebtedness (including the Revolving Loan) to the extent of the value of the collateral securing such indebtedness. The 2025 Senior Notes and the guarantees are structurally subordinated to any existing or future indebtedness and other obligations of the Issuers’ non-guarantor subsidiaries.
PBF Holding has optional redemption rights to repurchase all or a portion of the 2025 Senior Notes at varying prices no less than 100% of the principal amounts of the notes plus accrued and unpaid interest. The holders of the 2025 Senior Notes have repurchase options exercisable only upon a change in control, certain asset sale transactions, or in event of a default as defined in the Indenture. In addition, the 2025 Senior Notes contain customary terms, events of default and covenants for an issuer of non-investment grade debt securities that limit certain types of additional debt, equity issuances, and payments. Many of these covenants will cease to apply or will be modified if the 2025 Senior Notes are rated investment grade.
Upon the satisfaction and discharge of the 2020 Senior Secured Notes in connection with the closing of the Tender Offer and the redemption described above, a Collateral Fall-Away Event under the indenture governing the 2023 Senior Notes occurred on May 30, 2017, and the 2023 Senior Notes became unsecured and certain covenants were modified, as provided for in the indenture governing the 2023 Senior Notes and related documents.
Notes Payable
In connection with the purchase of a waste water treatment facility servicing the Toledo refinery completed on September 28, 2017, the Company issued a short-term promissory note payable in the amount of $6,831 due June 30, 2018. Payments of $403 on the note will be made monthly with a balloon payment of $3,200 due at maturity.
8. MARKETABLE SECURITIES
The U.S. Treasury securities purchased by the Company with the proceeds from the PBFX initial public offering are used as collateral to secure a three-year, $300,000 term loan facility entered into by PBFX (the “PBFX Term Loan”). As necessary and at the discretion of PBFX, these securities are expected to be liquidated and the proceeds used to fund future capital expenditures. While PBFX does not routinely sell marketable securities prior to their scheduled maturity dates, some of PBFX’s investments may be held and restricted for the purpose of funding future

23

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

capital expenditures and acquisitions, so these investments are classified as available-for-sale marketable securities as they may occasionally be sold prior to their scheduled maturity dates due to the unexpected timing of cash needs. The carrying value of these marketable securities approximates fair value and are measured using Level 1 inputs. The marketable securities were fully liquidated as of September 30, 2017 and the PBFX Term Loan that they collateralized was repaid in full.
As of December 31, 2016, the Company held $40,024 in marketable securities. The gross unrecognized holding gains and losses as of September 30, 2017 and December 31, 2016 were not material. The net realized gains or losses from the sale of marketable securities were not material for the three and nine months ended September 30, 2017 and 2016.
9. INCOME TAXES
PBF Energy files federal and applicable state corporate income tax returns and recognizes income taxes on its pre-tax income, which to-date has consisted primarily of its share of PBF LLC’s pre-tax income (approximately 96.6% as of September 30, 2017 and approximately 96.5% as of December 31, 2016). PBF LLC is organized as a limited liability company and PBFX is a master limited partnership, both of which are treated as “flow-through” entities for federal income tax purposes and therefore are not subject to income taxes apart from the income tax attributable to two subsidiaries of Chalmette Refining and one subsidiary of PBF Holding that are treated as C-Corporations for income tax purposes. As a result, PBF Energy’s condensed consolidated financial statements do not reflect any benefit or provision for income taxes on the pre-tax income or loss attributable to PBF LLC or PBFX apart from the income tax expense (benefit) of $(4,258) and $2,083 for the three and nine months ended September 30, 2017, respectively, and $2,291 and $29,287 for the three and nine months ended September 30, 2016, respectively, attributable to the C-Corporation subsidiaries of Chalmette Refining and the subsidiary of PBF Holding.
The income tax provision (benefit) in the PBF Energy condensed consolidated financial statements of operations consists of the following: 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
 
2017
 
2016
Current income tax expense (benefit)
 
$
190

 
$
(69,406
)
 
$
1,564

 
$
(108,824
)
Deferred income tax expense
 
203,789

 
101,079

 
111,325

 
194,431

Total income tax expense
 
$
203,979

 
$
31,673

 
$
112,889

 
$
85,607



24

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

Income tax (benefit) expense is based on income before taxes attributable to PBF Energy and excludes income before taxes attributable to noncontrolling interests as such interests are generally not subject to income taxes except as noted above. The difference between the Company’s effective income tax rate and the United States statutory rate is reconciled below:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Provision at Federal statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
 
35.0
 %
Increase (decrease) attributable to flow-through of certain tax adjustments:
 
 
 
 
 
 
 

State income taxes (net of federal income tax)
4.5
 %
 
4.6
 %
 
4.3
 %
 
4.6
 %
Nondeductible/nontaxable items
(0.2
)%
 
(0.1
)%
 
0.2
 %
 
0.1
 %
Manufacturer’s benefit deduction
 %
 
7.9
 %
 
 %
 
2.9
 %
Rate differential from foreign jurisdictions
0.3
 %
 
(1.3
)%
 
(0.1
)%
 
1.1
 %
Provision to return adjustment
(0.1
)%
 
(1.8
)%
 
(0.2
)%
 
(0.7
)%
Foreign tax rate change
 %
 
 %
 
0.3
 %
 
 %
Other
(0.1
)%
 
(1.2
)%
 
(0.1
)%
 
(0.5
)%
Effective tax rate
39.4
 %
 
43.1
 %
 
39.4
 %
 
42.5
 %
The Company’s effective income tax rate for the three and nine months ended September 30, 2017, including the impact of income attributable to noncontrolling interests of $32,861 and $49,420, respectively, was 37.0% and 33.6%, respectively. The Company’s effective income tax rate for the three and nine months ended September 30, 2016, including the impact of income attributable to noncontrolling interests of $14,333 and $37,503, respectively, was 35.9% and 35.8%, respectively.
PBF Energy has determined there are no material uncertain tax positions as of September 30, 2017. PBF Energy does not have any unrecognized tax benefits.
10. COMMITMENTS AND CONTINGENCIES
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, 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.
In connection with the Paulsboro refinery acquisition, the Company assumed certain environmental remediation obligations. The Paulsboro environmental liability of $10,809 recorded as of September 30, 2017 ($10,792 as of December 31, 2016) represents the present value of expected future costs discounted at a rate of 8.0%. The current portion of the environmental liability is recorded in Accrued expenses and the non-current portion is recorded in Other long-term liabilities. This liability is self-guaranteed by the Company.
In connection with the acquisition of the Delaware City assets, Valero Energy Corporation (“Valero”) remains responsible for certain pre-acquisition environmental obligations up to $20,000 and the predecessor to Valero in ownership of the refinery retains other historical obligations.
In connection with the acquisition of the Delaware City assets and the Paulsboro refinery, the Company and Valero purchased ten year, $75,000 environmental insurance policies to insure against unknown environmental liabilities

25

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

at each site. In connection with the Toledo refinery acquisition, Sunoco, Inc. (R&M) (“Sunoco”) remains responsible for environmental remediation for conditions that existed on the closing date for twenty years from March 1, 2011, subject to certain limitations.
In connection with the acquisition of the Chalmette refinery, the Company obtained $3,936 in financial assurance (in the form of a surety bond) to cover estimated potential site remediation costs associated with an agreed to Administrative Order of Consent with the EPA. The estimated cost assumes remedial activities will continue for a minimum of 30 years. Further, in connection with the acquisition of the Chalmette refinery, the Company purchased a ten year, $100,000 environmental insurance policy to insure against unknown environmental liabilities at the refinery.
In connection with the PBFX Plains Asset Purchase, PBFX is responsible for the environmental remediation costs for conditions that existed on the closing date up to a maximum of $250 per year for 10 years, with Plains All American Pipeline, L.P. remaining responsible for any and all additional costs above such amounts during such period. The environmental liability of $2,049 recorded as of September 30, 2017 ($2,173 as of December 31, 2016) represents the present value of expected future costs discounted at a rate of 1.83%. The current portion of the environmental liability is recorded in Accrued expenses and the non-current portion is recorded in Other long-term liabilities.
As of November 1, 2015, the Company acquired Chalmette Refining, which was in discussions with the Louisiana Department of Environmental Quality (“LDEQ”) to resolve self-reported deviations from refinery operations relating to certain Clean Air Act Title V permit conditions, limits and other requirements. LDEQ commenced an enforcement action against Chalmette Refining on November 14, 2014 by issuing a Consolidated Compliance Order and Notice of Potential Penalty (the “Order”) covering deviations from 2009 and 2010. Chalmette Refining and LDEQ subsequently entered into a dispute resolution agreement, the enforcement of which has been suspended while negotiations are ongoing, which may include the resolution of deviations outside the periods covered by the Order. In February 2017, Chalmette Refining and the LDEQ met to resolve the issues under the Order, including the assessment of an administrative penalty against Chalmette Refining. Although a resolution has not been finalized, the administrative penalty is anticipated to be approximately $700, including beneficial environmental projects. To the extent the administrative penalty exceeds such amount, it is not expected to be material to the Company.
On December 23, 2016, the Delaware City refinery received a Notice of Violation (“NOV”) from DNREC concerning a potential violation of the DNREC order authorizing the shipment of crude oil by barge from the refinery. The NOV alleges that DCR made shipments to locations other than the Paulsboro refinery in violation of the order and requests certain additional information. On February 7, 2017, DCR responded to the NOV. On March 10, 2017, DNREC issued a $150 fine in a Notice of Penalty Assessment and Secretary’s Order to the Delaware City refinery for violating the 2013 Secretary’s Order. DNREC determined that the Delaware City refinery had violated the order by failing to make timely and full disclosure to DNREC about the nature and extent of those shipments, and had misrepresented the number of shipments that went to other facilities. The penalty assessment and Secretary’s Order conclude that the 2013 Secretary’s Order was violated by the Delaware City refinery by shipping crude oil from the Delaware City terminal to three locations other than the Paulsboro refinery, on 15 days in 2014, making a total of 17 separate barge shipments containing approximately 35.7 million gallons of crude oil in total. On April 28, 2017, DCR appealed the Notice of Penalty Assessment and Secretary’s Order. The hearing of the appeal is scheduled for February 2018. To the extent that the penalty and Secretary’s Order are upheld, there will not be a material adverse effect on the Company’s financial position, results of operations or cash flows.
On December 28, 2016, DNREC issued a Coastal Zone Act permit (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 Board held a public hearing and dismissed the appeal, determining that the appellants did not have standing. The final opinion and order of the Board was issued March 16, 2017. The appellants filed an appeal of the Board’s decision with the Delaware Superior Court on March 30, 2017. On September 28, 2017, the Delaware

26

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

Superior Court issued it scheduling order governing briefing in the appeal of the Coastal Zone Board’s decision to sustain the permit issued for the ethanol project. The filing of briefs has been scheduled for October and November 2017.
On October 19, 2017, the Delaware City Refinery received approval from DNREC for the construction and operation of the ethanol marketing project to allow for a combined total loading of up to 10,000 bpd, on an annual average basis, of ethanol on to marine vessels at the marine piers and the terminal truck loading rack, subject to certain operational and emissions limitations as well as other conditions. On the same date, Delaware City Logistics Company LLC received DNREC approval for the construction of (i) four additional loading arms for each of lanes 4, 10 and 11 for purposes of loading ethanol at its truck loading rack and (ii) a vapor vacuum control system for loading lanes connected to the existing vapor recovery unit located at its terminal in Delaware City. This approval is also subject to certain operational and emission limitations as well as other conditions.
On February 3, 2011, EPA sent a request for information pursuant to Section 114 of the Clean Air Act to the Paulsboro refinery with respect to compliance with EPA standards governing flaring. The refinery and the EPA have reached agreement on settlement, which includes a civil penalty of $180. On July 13, 2017, the U.S. Department of Justice filed with the Court the motion to enter the consent decree. On September 19, 2017, the Court approved the consent decree and in connection therewith the Paulsboro refinery has paid a penalty of $180.
In connection with the acquisition of the Torrance refinery and related logistics assets, the Company assumed certain pre-existing environmental liabilities totaling $138,511 as of September 30, 2017 ($142,456 as of December 31, 2016), related to certain environmental remediation obligations to address existing soil and groundwater contamination and monitoring 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. In addition, in connection with the acquisition of the Torrance refinery and related logistics assets, the Company purchased a ten year, $100,000 environmental insurance policy to insure against unknown environmental liabilities. Furthermore, in connection with the acquisition, the Company assumed responsibility for certain specified environmental matters that occurred prior to the Company’s ownership of the refinery and the logistics assets, including specified incidents and/or NOVs issued by regulatory agencies in various years before the Company’s ownership, including the Southern California Air Quality Management District (“SCAQMD”) and the Division of Occupational Safety and Health of the State of California (“Cal/OSHA”).
Additionally, subsequent to the acquisition, further NOVs were issued by the SCAQMD, Cal/OSHA, the City of Torrance and the City of Torrance Fire Department related to alleged operational violations, emission discharges and/or flaring incidents at the refinery and the logistics assets before and after the Company’s acquisition. With the exception of one NOV for which a proposed settlement is less than $100, no settlement or penalty demands have been received to date with respect to the other NOVs. As the ultimate outcomes are uncertain, the Company cannot currently estimate the final amount or timing of their resolution. It is reasonably possible that SCAQMD, Cal/OSHA and/or the City of Torrance will assess penalties in the other matters in excess of $100 but any such amount is not expected to have a material impact on the Company’s financial position, results of operations or cash flows, individually or in the aggregate.
The Company’s operations and many of the products it manufactures are subject to certain specific requirements of the Clean Air Act (the “CAA”) and related state and local regulations. The CAA contains provisions that require capital expenditures for the installation of certain air pollution control devices at the Company’s refineries. Subsequent rule making authorized by the CAA or similar laws or new agency interpretations of existing rules, may necessitate additional expenditures in future years.
In 2010, New York State adopted a Low-Sulfur Heating Oil mandate that, beginning July 1, 2012, requires all heating oil sold in New York State to contain no more than 15 parts per million (“PPM”) sulfur. Since July 1, 2012, other states in the Northeast market began requiring heating oil sold in their state to contain no more than 15 PPM sulfur. Currently, all of the Northeastern states and Washington DC have adopted sulfur controls on heating oil. Most of the Northeastern states will now require heating oil with 15 PPM or less sulfur by July 1, 2018 (except

27

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

for Pennsylvania and Maryland - where less than 500 ppm sulfur is required). All of the heating oil the Company currently produces meets these specifications. The mandate and other requirements do not currently have a material impact on the Company’s financial position, results of operations or cash flows.
The EPA issued the final Tier 3 Gasoline standards on March 3, 2014 under the CAA. This final rule establishes more stringent vehicle emission standards and further reduces the sulfur content of gasoline starting in January 2017.  The new standard is set at 10 PPM sulfur in gasoline on an annual average basis starting January 1, 2017, with a credit trading program to provide compliance flexibility. The EPA responded to industry comments on the proposed rule and maintained the per gallon sulfur cap on gasoline at the existing 80 PPM cap. The refineries are complying with these new requirements as planned, either directly or using flexibility provided by sulfur credits generated or purchased in advance as an economic optimization. The standards set by the new rule are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
The EPA published the final 2014-2016 standards under the Renewable Fuels Standard (“RFS”) late in 2015 and issued final 2017 RFS standards in November 2016. In July 2017, the EPA issued proposed 2018 RFS standards that, while the Company is still reviewing, appear to slightly reduce renewable volume standards from final 2017 levels. It is not clear that renewable fuel producers will be able to produce the volumes of these fuels required for blending in accordance with the 2017 standards. The final 2017 cellulosic standard is at approximately 135% of the 2016 standard. It is likely that cellulosic RIN production will be lower than needed forcing obligated parties, such as the Company, to purchase cellulosic “waiver credits” to comply in 2017 (the waiver credit option by regulation is only available for the cellulosic standard). The advanced and total RIN requirements were raised (by 7% and 3%, respectively) above the original proposed level in May 2016. Production of advanced RINs has been below what is needed for compliance in 2016. Obligated parties, such as the Company, will likely be relying on the nesting feature of the biodiesel RIN to comply with the advanced standard in 2017. While the Company believes that total RIN production will be adequate for 2016 needs, the new 2017 standard will put obligated parties up against the E10 blendwall leaving little flexibility. Compliance in 2017 will likely rely on obligated parties drawing down the supply of excess RINs collectively known as the “RIN bank” and could tighten the RIN market potentially raising RIN prices further. The Company is supporting a proposal to change the point of obligation under the RFS program to the “blender” of renewable fuels, of which the new presidential administration may be supportive. Depending on how the new administration addresses this proposal and any future changes to the RFS 2 program, there could be a material impact on the Company’s cost of compliance with RFS 2.
In addition, on December 1, 2015 the EPA finalized revisions to an existing air regulation concerning Maximum Achievable Control Technologies (“MACT”) for Petroleum Refineries. The regulation requires additional continuous monitoring systems for eligible process safety valves relieving to atmosphere, minimum flare gas heat (Btu) content, and delayed coke drum vent controls to be installed by January 30, 2019. In addition, a program for ambient fence line monitoring for benzene will need to be implemented by January 30, 2018. The Company is currently evaluating the final standards to evaluate the impact of this regulation, and at this time does not anticipate it will have a material impact on the Company’s financial position, results of operations or cash flows.
The EPA published a Final Rule to the Clean Water Act (“CWA”) Section 316(b) in August 2014 regarding cooling water intake structures, which includes requirements for petroleum refineries. The purpose of this rule is to prevent fish from being trapped against cooling water intake screens (impingement) and to prevent fish from being drawn through cooling water systems (entrainment). Facilities will be required to implement Best Technology Available (“BTA”) as soon as possible, but state agencies have the discretion to establish implementation time lines. The Company continues to evaluate the impact of this regulation, and at this time does not anticipate it having a material impact on the Company’s financial position, results of operations or cash flows.
As a result of the Torrance Acquisition, the Company is subject to greenhouse gas emission control regulations in the state of California pursuant to Assembly Bill 32 (“AB32”). AB32 imposes a statewide cap on greenhouse gas emissions, including emissions from transportation fuels, with the aim of returning the state to 1990 emission levels by 2020. AB32 is implemented through two market mechanisms including the Low Carbon Fuel Standard (“LCFS”) and Cap and Trade, which was extended for an additional 10 years to 2030 in July 2017. The Company is responsible for the AB32 obligations related to the Torrance refinery beginning on July 1, 2016 and must purchase emission

28

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

credits to comply with these obligations. Additionally, in September 2016, the state of California enacted Senate Bill 32 (“SB32”) which further reduces greenhouse gas emissions targets to 40 percent below 1990 levels by 2030.
However, subsequent to the acquisition, the Company is recovering the majority of these costs from its customers, and as such does not expect this obligation to materially impact the Company’s financial position, results of operations, or cash flows. To the degree there are unfavorable changes to AB32 or SB32 regulations or the Company is unable to recover such compliance costs from customers, these regulations could have a material adverse effect on our financial position, results of operations and cash flows.
On February 15, 2017, the Company received a notification that EPA records indicated that PBF Holding used potentially invalid RINs that were in fact verified under the 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 provided the user with an affirmative defense from civil penalties provided certain conditions are met. The Company has asserted the affirmative defense and if accepted by the 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 the EPA will not accept the Company’s defense and may assess penalties in these matters but any such amount is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
The Company is also currently subject to certain other existing environmental claims and proceedings. The Company believes that there is only a remote possibility that future costs related to any of these other known contingent liability exposures would have a material impact on its financial position, results of operations or cash flows.
PBF LLC Limited Liability Company Agreement
The holders of limited liability company interests in PBF LLC, including PBF Energy, generally have to include for purposes of calculating their U.S. federal, state and local income taxes their share of any taxable income of PBF LLC, regardless of whether such holders receive cash distributions from PBF LLC. PBF Energy ultimately may not receive cash distributions from PBF LLC equal to its share of such taxable income or even equal to the actual tax due with respect to that income. For example, PBF LLC is required to include in taxable income PBF LLC’s allocable share of PBFX’s taxable income and gains (such share to be determined pursuant to the partnership agreement of PBFX), regardless of the amount of cash distributions received by PBF LLC from PBFX, and such taxable income and gains will flow-through to PBF Energy to the extent of its allocable share of the taxable income of PBF LLC. As a result, at certain times, the amount of cash otherwise ultimately available to PBF Energy on account of its indirect interest in PBFX may not be sufficient for PBF Energy to pay the amount of taxes it will owe on account of its indirect interests in PBFX.
Taxable income of PBF LLC generally is allocated to the holders of PBF LLC units (including PBF Energy) pro-rata in accordance with their respective share of the net profits and net losses of PBF LLC. In general, PBF LLC is required to make periodic tax distributions to the members of PBF LLC, including PBF Energy, pro-rata in accordance with their respective percentage interests for such period (as determined under the amended and restated limited liability company agreement of PBF LLC), subject to available cash and applicable law and contractual restrictions (including pursuant to our debt instruments) and based on certain assumptions. Generally, these tax distributions are required to be in an amount equal to our estimate of the taxable income of PBF LLC for the year multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate resident in New York, New York (taking into account the nondeductibility of certain expenses). If, with respect to any given calendar year, the aggregate periodic tax distributions were less than the actual taxable income of PBF LLC multiplied by the assumed tax rate, PBF LLC is required to make a “true up” tax distribution, no later than March 15 of the following year, equal to such difference, subject to the available cash and borrowings of PBF LLC. PBF LLC generally obtains funding to pay its tax distributions by causing PBF Holding to distribute cash to PBF LLC and from distributions it receives from PBFX.

29

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

Tax Receivable Agreement
PBF Energy entered into a tax receivable agreement with the PBF LLC Series A and PBF LLC Series B Unit holders (the “Tax Receivable Agreement”) that provides for the payment by PBF Energy to such persons of an amount equal to 85% of the amount of the benefits, if any, that PBF Energy is deemed to realize as a result of (i) increases in tax basis, as described below, and (ii) certain other tax benefits related to entering into the Tax Receivable Agreement, including tax benefits attributable to payments under the Tax Receivable Agreement. For purposes of the Tax Receivable Agreement, the benefits deemed realized by PBF Energy will be computed by comparing the actual income tax liability of PBF Energy (calculated with certain assumptions) to the amount of such taxes that PBF Energy would have been required to pay had there been no increase to the tax basis of the assets of PBF LLC as a result of purchases or exchanges of PBF LLC Series A Units for shares of PBF Energy’s Class A common stock and had PBF Energy not entered into the Tax Receivable Agreement. The term of the Tax Receivable Agreement will continue until all such tax benefits have been utilized or expired unless: (i) PBF Energy exercises its right to terminate the Tax Receivable Agreement, (ii) PBF Energy breaches any of its material obligations under the Tax Receivable Agreement or (iii) certain changes of control occur, in which case all obligations under the Tax Receivable Agreement will generally be accelerated and due as calculated under certain assumptions.
The payment obligations under the Tax Receivable Agreement are obligations of PBF Energy and not of PBF LLC, PBF Holding or PBFX. In general, PBF Energy expects to obtain funding for these annual payments from PBF LLC, primarily through tax distributions, which PBF LLC makes on a pro-rata basis to its owners. Such owners include PBF Energy, which holds a 96.6% interest in PBF LLC as of September 30, 2017 (96.5% as of December 31, 2016).
As of September 30, 2017, the Company has recognized a liability for the tax receivable agreement of $610,827 ($611,392 as of December 31, 2016) reflecting the estimate of the undiscounted amounts that the Company expects to pay under the agreement.
11. DIVIDENDS AND DISTRIBUTIONS
With respect to dividends and distributions paid during the nine months ended September 30, 2017, PBF LLC made aggregate non-tax quarterly distributions of $0.90 per unit to its members, of which $98,723 was distributed pro-rata to PBF Energy and the balance was distributed to its other members. PBF Energy used this $98,723 to pay quarterly cash dividends of $0.30 per share of Class A common stock on March 13, 2017, May 31, 2017 and August 31, 2017.

With respect to distributions paid during the nine months ended September 30, 2017, PBFX paid a distribution on outstanding common and subordinated units of $0.45 per unit on March 13, 2017, $0.46 on May 31, 2017 and $0.47 on August 31, 2017, of which $30,533 was distributed to PBF LLC and the balance was distributed to its public unit holders.


30

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

12. EMPLOYEE BENEFIT PLANS
The components of net periodic benefit cost related to the Company’s defined benefit plans consisted of the following:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Pension Benefits
 
2017
 
2016
 
2017

2016
Components of net periodic benefit cost:
 
 
 
 
 
 
 
 
Service cost
 
$
10,142

 
$
10,064

 
$
30,429

 
$
24,743

Interest cost
 
1,084

 
772

 
3,252

 
2,323

Expected return on plan assets
 
(1,441
)
 
(1,234
)
 
(4,325
)
 
(3,447
)
Amortization of prior service cost
 
13

 
13

 
39

 
39

Amortization of actuarial loss (gain)
 
113

 
328

 
339

 
716

Net periodic benefit cost
 
$
9,911

 
$
9,943

 
$
29,734

 
$
24,374

 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Post-Retirement Medical Plan
 
2017
 
2016
 
2017
 
2016
Components of net periodic benefit cost:
 
 
 
 
 
 
 
 
Service cost
 
$
316

 
$
304

 
$
948

 
$
743

Interest cost
 
172

 
131

 
516

 
398

Amortization of prior service cost
 
162

 
161

 
484

 
379

Amortization of actuarial loss (gain)
 

 

 

 

Net periodic benefit cost
 
$
650

 
$
596

 
$
1,948

 
$
1,520



31

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

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, 2017 and December 31, 2016.
We have 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. We have 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. We have no derivative contracts that are subject to master netting arrangements that are reflected gross on the balance sheet.
 
As of September 30, 2017
 
Fair Value Hierarchy
 
Total Gross Fair Value
 
Effect of Counter-party Netting
 
Net Carrying Value on Balance Sheet
 
Level 1
 
Level 2
 
Level 3
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
24,829

 
$

 
$

 
$
24,829

 
N/A

 
$
24,829

Commodity contracts
18,257

 
4,248

 

 
22,505

 
(22,505
)
 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
11,671

 
15,850

 

 
27,521

 
(22,505
)
 
5,016

Catalyst lease obligations

 
46,981

 

 
46,981

 

 
46,981

Derivatives included with inventory intermediation agreement obligations

 
20,601

 

 
20,601

 

 
20,601

 
As of December 31, 2016
 
Fair Value Hierarchy
 
Total Gross Fair Value
 
Effect of Counter-party Netting
 
Net Carrying Value on Balance Sheet
 
Level 1
 
Level 2
 
Level 3
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
342,837

 
$

 
$

 
$
342,837

 
N/A

 
$
342,837

Marketable securities
40,024

 

 

 
40,024

 
N/A

 
40,024

Commodity contracts
948

 
35

 

 
983

 
(983
)
 

Derivatives included with inventory intermediation agreement obligations

 
6,058

 

 
6,058

 

 
6,058

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
859

 
3,548

 
84

 
4,491

 
(983
)
 
3,508

Catalyst lease obligations

 
45,969

 

 
45,969

 

 
45,969


32

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

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.
Marketable securities, consisting primarily of US Treasury securities, categorized in Level 1 of the fair value hierarchy are measured at fair value based on quoted market prices.
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 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 were derived using broker quotes, prices from other third party sources and other available market based data.
The derivatives included with inventory intermediation agreement obligations and the catalyst lease 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.

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, 2017 and December 31, 2016, $9,642 and $9,440, respectively, were included within Deferred charges and other assets, net for these non-qualified pension plan assets.
The table below summarizes the changes in fair value measurements of commodity contracts categorized in Level 3 of the fair value hierarchy:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
 
2017
 
2016
Balance at beginning of period
 
$

 
$
493

 
$
(84
)
 
$
3,543

Purchases
 

 

 

 

Settlements
 

 
(90
)
 
45

 
(1,093
)
Unrealized gain (loss) included in earnings
 

 
(21
)
 
39

 
(2,068
)
Transfers into Level 3
 

 

 

 

Transfers out of Level 3
 

 

 

 

Balance at end of period
 
$

 
$
382

 
$

 
$
382


There were no transfers between levels during the three and nine months ended September 30, 2017 or 2016.

33

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

Fair value of debt
The table below summarizes the fair value and carrying value of debt as of September 30, 2017 and December 31, 2016.
 
September 30, 2017
 
December 31, 2016
 
Carrying
value
 
Fair
 value
 
Carrying
 value
 
Fair
value
Senior secured notes due 2020 (a)
$

 
$

 
$
670,867

 
$
696,098

Senior notes due 2023 (a) (d)
500,000

 
514,575

 
500,000

 
498,801

Senior notes due 2025 (a)
725,000

 
740,982

 

 

PBFX Senior Notes (a)
350,000

 
362,148

 
350,000

 
346,135

PBFX Term Loan (b)

 

 
39,664

 
39,664

PBF Rail Term Loan (b)
30,041

 
30,041

 
35,000

 
35,000

Catalyst leases (c)
46,981

 
46,981

 
45,969

 
45,969

PBFX Revolving Credit Facility (b)
189,200

 
189,200

 
189,200

 
189,200

Revolving Loan (b)
350,000

 
350,000

 
350,000

 
350,000

 
2,191,222

 
2,233,927

 
2,180,700

 
2,200,867

Less - Current maturities

 

 
39,664

 
39,664

Less - Unamortized deferred financing costs
32,885

 
n/a

 
32,466

 
n/a

Long-term debt
$
2,158,337

 
$
2,233,927

 
$
2,108,570

 
$
2,161,203


(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 senior secured notes, senior notes and the PBFX 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 leases 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 lease repurchase obligations as the Company’s liability is directly impacted by the change in fair value of the underlying catalyst.
(d) As discussed in “Note 7 - Debt”, these notes became unsecured following the Collateral Fall-Away Event on May 30, 2017.

14. DERIVATIVES
The Company uses derivative instruments to mitigate certain exposures to commodity price risk. The Company entered into the A&R Intermediation Agreements that contain purchase obligations for certain volumes of intermediates and refined products. The purchase obligations related to 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 intermediates and refined products. The level of activity for these derivatives is based on the level of operating inventories.
As of September 30, 2017, there were 3,306,154 barrels of intermediates and refined products (2,942,348 barrels at December 31, 2016) outstanding under these derivative instruments designated as fair value hedges. These volumes represent the notional value of the contract.

34

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

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, 2017, there were 37,496,000 barrels of crude oil and 8,163,000 barrels of refined products (5,950,000 and 2,831,000, respectively, as of December 31, 2016), outstanding under short and long term commodity derivative contracts not designated as hedges representing the notional value of the contracts.
The following tables provide information about the fair values of these derivative instruments as of September 30, 2017 and December 31, 2016 and the line items in the condensed consolidated balance sheet in which the fair values are reflected.
Description

Balance Sheet Location
Fair Value
Asset/(Liability)
Derivatives designated as hedging instruments:
 
 
September 30, 2017:
 
 
Derivatives included with the inventory intermediation agreement obligations
Accrued expenses
$
(20,601
)
December 31, 2016:
 
 
Derivatives included with the inventory intermediation agreement obligations
Accrued expenses
$
6,058

 
 
 
Derivatives not designated as hedging instruments:
 
 
September 30, 2017:
 
 
Commodity contracts
Accrued expenses
$
(5,016
)
December 31, 2016:
 
 
Commodity contracts
Accrued expenses
$
3,508


35

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

The following table provides information about the gains or losses recognized in income on these 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
Derivatives designated as hedging instruments:
 
 
For the three months ended September 30, 2017:
 
 
Derivatives included with the inventory intermediation agreement obligations
Cost of products and other

$
(29,766
)
For the three months ended September 30, 2016:
 
 
Derivatives included with the inventory intermediation agreement obligations
Cost of products and other

$
(3,145
)
For the nine months ended September 30, 2017:
 
 
Derivatives included with the inventory intermediation agreement obligations
Cost of products and other

$
(26,659
)
For the nine months ended September 30, 2016:
 
 
Derivatives included with the inventory intermediation agreement obligations
Cost of products and other

$
(29,317
)
 
 
 
Derivatives not designated as hedging instruments:
 
 
For the three months ended September 30, 2017:
 
 
Commodity contracts
Cost of products and other

$
(17,291
)
For the three months ended September 30, 2016:
 
 
Commodity contracts
Cost of products and other

$
(15,559
)
For the nine months ended September 30, 2017:
 
 
Commodity contracts
Cost of products and other

$
(2,606
)
For the nine months ended September 30, 2016:
 
 
Commodity contracts
Cost of products and other

$
(54,646
)
 
 
 
Hedged items designated in fair value hedges:
 
 
For the three months ended September 30, 2017:
 
 
Intermediate and refined product inventory
Cost of products and other

$
29,766

For the three months ended September 30, 2016:
 
 
Intermediate and refined product inventory
Cost of products and other

$
3,145

For the nine months ended September 30, 2017:
 
 
Intermediate and refined product inventory
Cost of products and other

$
26,659

For the nine months ended September 30, 2016:
 
 
Intermediate and refined product inventory
Cost of products and other

$
29,317


The Company had no ineffectiveness related to the Company’s fair value hedges for the three and nine months ended September 30, 2017 or 2016.


36

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

15. SEGMENT INFORMATION
The Company’s operations are organized into two reportable segments, Refining and Logistics. Operations that are not included in the Refining and Logistics segments are included in Corporate. Intersegment transactions are eliminated in the consolidated financial statements and are included in Eliminations.
Refining
The Company’s Refining Segment includes the operations of its five refineries, including certain related logistics assets that are not owned by PBFX. The Company’s refineries are located in Toledo, Ohio, Delaware City, Delaware, Paulsboro, New Jersey, New Orleans, Louisiana and Torrance, California. The refineries produce unbranded transportation fuels, heating oil, petrochemical feedstocks, lubricants and other petroleum products in the United States. The Company purchases crude oil, other feedstocks and blending components from various third-party suppliers. The Company sells products throughout the Northeast, Midwest, Gulf Coast and West Coast of the United States, as well as in other regions of the United States and Canada, and is able to ship products to other international destinations.
Logistics
The Company formed PBFX, a publicly traded master limited partnership, to own or lease, operate, develop and acquire crude oil and refined petroleum products terminals, pipelines, storage facilities and similar logistics assets. PBFX’s assets primarily consist of rail and truck terminals and unloading racks, tank farms and pipelines that were acquired from or contributed by PBF LLC and are located at, or nearby, the Company’s refineries. PBFX provides various rail, truck and marine terminaling services, pipeline transportation services and storage services to PBF Holding and/or its subsidiaries and third party customers through fee-based commercial agreements. PBFX currently does not generate significant third party revenue and intersegment related-party revenues are eliminated in consolidation. From a PBF Energy perspective, the Company’s chief operating decision maker evaluates the Logistics segment as a whole without regard to any of PBFX’s individual segments.
The Company evaluates the performance of its segments based primarily on income from operations. Income from operations includes those revenues and expenses that are directly attributable to management of the respective segment. The Logistics segment’s revenues include intersegment transactions with the Company’s Refining segment at prices the Company believes are substantially equivalent to the prices that could have been negotiated with unaffiliated parties with respect to similar services. Activities of the Company’s business that are not included in the two operating segments are included in Corporate. Such activities consist primarily of corporate staff operations and other items that are not specific to the normal operations of the two operating segments. The Company does not allocate non-operating income and expense items, including income taxes, to the individual segments. The Refinery segment’s operating subsidiaries and PBFX are primarily pass-through entities with respect to income taxes.
Total assets of each segment consist of property, plant and equipment, inventories, cash and cash equivalents, accounts receivables and other assets directly associated with the segment’s operations. Corporate assets consist primarily of deferred tax assets, property, plant and equipment and other assets not directly related to the Company’s refinery and logistic operations.
Disclosures regarding the Company’s reportable segments with reconciliations to consolidated totals for the three and nine months ended September 30, 2017 and September 30, 2016 are presented below. In connection with the contribution by PBF LLC of the limited liability interests of PNGPC to PBFX, the accompanying segment information has been retrospectively adjusted to include the historical results of PNGPC in the Logistics segment for all periods presented prior to such contribution.

37

PBF ENERGY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE, UNIT, PER SHARE, PER UNIT AND BARREL DATA)

 
Three Months Ended September 30, 2017
 
Refining
 
Logistics
 
Corporate
 
Eliminations
 
Consolidated Total