Real-time Form 4 intelligence. Smarter insider tracking.
YoY shift: Neutral
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.05pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.07pp
Flat
Net-tone change vs last year's 10-K.
MD&A
-0.03pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
cyberattacks+5
litigation+4
cyberattack+4
adversely+3
damage+3
Positive rising
able+3
enhanced+3
satisfactory+2
opportunities+1
despite+1
Risk Factors (Item 1A)
21,853 words
ITEM 1A. RISK FACTORS
Summary of Risk Factors
Investing in our common units involves a degree of risk. These risks are discussed more fully below and include, but are not limited to, the following, any of which could have a material adverse effect on our financial condition, results of operations and cash flows.
Risks Related to the COVID-19 Pandemic
• The COVID-19 pandemic and its effects on our business, results of operations, financial condition, cash flows or our ability to service debt obligations.
Risks Related to Our Business
• PBF Energy accounts for a substantial majority of our revenue, which subjects us to its business risk, including if our commercial and service agreements are suspended, reduced or terminated.
• We may be unable to pay the minimum quarterly distribution to holders of our common units.
• A cyberattack on, or other failure of, our technology infrastructure could have a material adverse effect on our financial condition, results of operations and cash flows.
• Our ability to expand may be limited if PBF Energy’s business does not grow, if we are not to fully execute our growth plan due to a of access to capital markets or if we are to make acquisitions on economically acceptable terms.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
termination+10
impairment+6
cyberattacks+1
contends+1
terminate+1
Positive rising
gain+11
improve+1
improved+1
satisfy+1
despite+1
MD&A (Item 7)
11,679 words
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information concerning our results of operations and financial condition should be read in conjunction with “Item 1. Business,” “Item 1A. Risk Factors,” “Item 2. Properties” and “Item 8. Financial Statements and Supplementary Data,” respectively, included in this Form 10-K.
IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain “forward-looking statements,” as defined in the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates” or similar expressions that relate to our strategy, plans or intentions. All statements we make relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results or to our expectations regarding future industry trends are forward-looking statements. In addition, we, through our senior management, from time to time, make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to risks and uncertainties that may change at any time; therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we that it is very to predict the impact of known factors, and, of course, it is for us to anticipate all factors that could affect our actual results.
• If we are unable to obtain needed capital or financing on satisfactory terms to fund our expansion, our ability to make distributions may be diminished, or our financial leverages could increase.
• PBF Energy’s level of indebtedness, the terms of its borrowings and any future credit ratings could adversely affect our ability to grow our business, our ability to make cash distributions to our unitholders, and our current and future credit ratings, profile and ability to obtain credit in the future.
• Enhancedscrutiny on ESG matters may negatively impact our business and our and PBF Energy’s access to capital markets.
• Our logistics operations and PBF Energy’s refining operations are subject to many risks and operational hazards.
• Our insurance policies do not cover all losses, costs or liabilities that we may experience, and insurance companies that currently insure companies in the energy industry may cease to do so or substantially increase premiums.
• Our right of first offer and purchase option under certain circumstances to acquire certain assets from PBF Energy and our right to use certain of PBF Energy’s existing assets is subject to risks and uncertainty, and ultimately we may not acquire or have a right to use any of those assets.
• We could incur substantial costs or disruptions in our business if we cannot obtain or maintain necessary permits and authorizations or otherwise comply with health, safety, environmental and other laws and regulations.
• Changes in laws or standards affecting the transportation of North American crude oil by rail could significantly reduce volumes throughput at our facilities, and, as a result, our revenue could decline.
• Climate change and regulation of emissions of GHGs could force us to incur increased capital and operating costs and could have a material adverse effect on our business.
• Our business may suffer if any of our or PBF Energy’s senior executives or other key employees discontinue employment with us or PBF Energy. Furthermore, a shortage of skilled labor or disruptions in our labor force (including our unionized workforce) may make it difficult for us to maintain labor productivity.
Risks Related to Our Indebtedness
• The Revolving Credit Facility (as defined below) and the indenture governing the 2023 Notes (as defined below) each contains restrictions which could adversely affect our business, financial condition, results of operations and our ability to service our indebtedness.
• Our current and future debt levels may limit our flexibility to obtain financing and to pursue other business opportunities.
• We may not be able to secure necessary financing at satisfactory terms.
• Increases in interest rates could adversely impact the price of our common units, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions.
• We do not have the same flexibility as other types of organizations to accumulate cash which may limit cash available to service our debt, to repay them at maturity or be able to repurchase the 2023 Notes upon a change of control triggering event.
• Payment of principal and interest on the 2023 Notes is effectively subordinated to our senior secured debt to the extent of the value of the assets securing the debt and structurally subordinated as to the indebtedness of any of our subsidiaries that do not guarantee the 2023 Notes.
• The subsidiary guarantees of the 2023 Notes could be deemed fraudulent conveyances under certain circumstances, and a court may try to subordinate or void the subsidiary guarantees.
Risks Inherent in an Investment in Us
• Our general partner and its affiliates, including PBF Energy, have conflicts of interest with us, may compete with us and have limited fiduciary duties to us and our unitholders.
• Our partnership agreement replaces our general partner’s fiduciary duties to holders of our common units with contractual standards governing its duties and restricts the remedies available to holders of our common units.
• Holders of our common units have limited voting rights (with restrictions on unitholders owning 20% or more of our common units), are not entitled to elect our general partner or its directors and cannot currently remove our general partner without its consent.
• Our general partner interest or the control of our general partner may be transferred to a third party and we may issue additional units, each without unitholder approval .
• PBF Energy may sell units in the public or private markets, and has a limited call right, each of which may have adverse impact on the trading price of the common units or may require you to sell your units at an undesirable time or price.
• Your liability may not be limited if a court finds that unitholder action constitutes control of our business.
• Unitholders may have liability to repay distributions that were wrongfully distributed to them.
Risks to Common Unitholders
• Our tax treatment depends upon our status as a partnership for U.S. federal income tax purposes and could be subject to change, including on a retroactive basis. If we were treated as a corporation for U.S. federal income tax purposes, our distributable cash flow would be substantially reduced.
• If the IRS were to contest the U.S. federal income tax positions we take, including treating each purchaser as having the same tax benefit without regard to the units they purchase and accounting treatment to prorate results based on the first day of each month, it may adversely impact the market for our common units and our cash available for distribution might be substantially reduced.
• Our unitholders’ share of our income is taxable to them for federal income tax purposes even if they do not receive any cash distributions from us and tax gain or loss on the disposition of our units could be more or less than expected. Additionally, unitholders may be subject to additional limitations and may be subject to state and local taxes and return filings requirements.
Risk Factors
Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. If any of the following risks were actually to occur, our business, financial condition, results of operations and our cash flows could be materially adversely affected. In that case, we might not be able to pay distributions on our common units, or the trading price of our common units could decline.
The following are material risks that could affect us, our common units or our common unit holders. If any of these risks were to occur, there could be a material adverse impact on our business, financial condition, results of operations or cash flows. Readers should not consider any descriptions of these factors to be a complete set of all potential risks that could affect us.
Risks Related to the COVID-19 Pandemic
The COVID-19 pandemic had a material adverse impact on our business, including our financial condition, cash flows and results of operations starting in the first quarter of 2020. While we have seen demand return in 2021, there can be no assurance that the COVID-19 pandemic will not adversely impact our business, including our financial condition, cash flows and results of operations going forward.
Due to the COVID-19 pandemic and related extraordinary and volatile market conditions, our business and operating results were negatively impacted, starting in the first quarter of 2020, due to demand destruction as a result of the worldwide economic slowdown and governmental responses, including travel restrictions, stay-at-home orders and limitations on the availability of workforces, inclusive of mandatory quarantine periods. Although certain restrictions related to the COVID-19 pandemic have eased as a result of the distribution of COVID-19 vaccines and other protective measures, and despite demand recovery experienced in 2021, uncertainty continues to exist regarding such measures and potential future impact on our business. There can be no assurance that future periods will not be negatively impacted by the continuing effect of the COVID-19 pandemic, including resurgences and variants of the virus, resulting in a negative impact on our liquidity due to changes in the demand for our services, reductions in third-party and incremental affiliate revenue or the inability of our customers to honor their obligations under our commercial agreements.
Potential impacts related to the COVID-19 pandemic may include but are not limited to the following:
• a change in customer demand for our services, including lower third-party throughput and storage and a decrease in incremental throughput associated with our commercial agreements with PBF Holding;
• a reduction in the availability or productivity of our employees to service our customers;
• a delay in timing for the collections of our receivables for the services we perform;
• an impairment of our goodwill or long-lived assets;
• a decrease in our ability to grow our business through organic projects or third-party acquisitions;
• our inability to meet the covenant requirements of our five-year, $500.0 million amended and restated revolving credit facility (as amended, the “Revolving Credit Facility”) or our $525.0 million in aggregate principal of 6.875% senior notes due 2023 issued by us and our wholly-owned subsidiary PBF Logistics Finance Corporation (“PBF Finance”) (the “2023 Notes”), which may result in our debt becoming due on-demand;
• a negative impact on our liquidity position, which could result in our inability to pay our payables timely, including interest payments due on the 2023 Notes;
• changes or further downgrades to our credit ratings;
• our ability to have sufficient cash from operations to enable us to pay the minimum quarterly distribution, or further reduce or suspend our quarterly distribution; and
• other factors discussed elsewhere in this Form 10-K.
Risks Related to Our Business
PBF Energy accounts for a substantial majority of our revenue, and we are substantially dependent on PBF Energy’s refineries, particularly its Delaware City, Toledo and Torrance refineries. Therefore, we are subject to its business risks. If PBF Energy changes its business strategy, fails to satisfy its obligations under our commercial agreements for any reason or significantly reduces the volumes throughput at our facilities, our revenue could decline, which would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to unitholders.
PBF Energy is our largest customer and accounted for a substantial majority of our revenue for the year ended December 31, 2021. We are substantially dependent on PBF Energy’s refineries, particularly its Delaware City, Toledo and Torrance refineries. We expect that PBF Energy will continue to provide a substantial majority of our revenue for the foreseeable future, and, as a result, we are subject to the risk of nonpayment or nonperformance under our commercial agreements. If PBF Energy were to significantly decrease its use of our logistics assets, because of business or operational difficulties, including labor difficulties, strategic decisions by management or due to catastrophic events, weather or regulatory actions, it is unlikely that we would be able to utilize any additional capacity as a result of this decreased use to service third-party customers without substantial capital outlays and delays, if at all, which could materially and adversely affect our results of operations, financial condition and cash flows. Additionally, any event, whether in our areas of operation or otherwise, that materially and adversely affects PBF Energy’s financial condition, results of operations or cash flows, may adversely affect our ability to sustain or increase cash distributions to our unitholders. Accordingly, we are subject to the operational and business risks of PBF Energy, including, but not limited to, the following:
• the effect of the COVID-19 pandemic, including resurgences and variants of the virus, as well as related governmental and consumer responses on PBF Energy’s business, financial condition and results of operations;
• supply, demand, prices and other market conditions for PBF Energy’s products or crude oil, including volatility in commodity prices or constraints arising from federal, state or local governmental actions or environmental and/or social activists that reduce crude oil production or availability in the regions in which PBF Energy operates its pipelines and facilities;
• the effectiveness of PBF Energy’s crude oil sourcing strategies, including PBF Energy’s crude by rail strategy and related commitments;
• PBF Energy’s obligation to buy Renewable Identification Numbers (“RINs”) and market risks related to the volatility in the price of RINs required to comply with the Renewable Fuel Standard and GHG emission credits required to comply with various GHG emission programs, such as Assembly Bill 32 (“AB 32”);
• PBF Energy’s ability to operate its business efficiently, manage capital expenditures and costs (including general and administrative expenses) and generate earnings and cash flow;
• PBF Energy’s expectations with respect to its capital improvement and turnaround projects;
• the impact of current and future laws, rulings and governmental regulations, including restrictions on the exploration and/or production of crude oil in the state of California, the implementation of rules and regulations regarding transportation of crude oil by rail or in response to the potential impacts of climate change, decarbonization and future energy transition;
• adverse impact related to legislation by the federal government lifting the restrictions on exporting U.S. crude oil;
• PBF Energy’s ability to target and execute expense reduction measures and achieveopportunities to improve its liquidity, including continued repurchases of PBF Energy’s outstanding debt securities or otherwise further reducing PBF Energy’s debt, and/or potential sales of non-operating assets or other real property;
• political pressure and influence of environmental groups and other stakeholders on decisions and policies related to the refining and processing of crude oil and refined products, and the related adverse impacts from changes in PBF Energy’s regulatory environment, such as the effects of compliance with AB 32, or from actions taken by environmental interest groups;
• the risk of cyberattacks;
• PBF Energy’s increased dependence on technology;
• the effects of competition in PBF Energy’s markets;
• the possibility that PBF Energy may not reinstate their dividend payments;
• the inability of PBF Energy’s subsidiaries, including us, to freely pay dividends or make distributions to PBF Energy;
• PBF Energy’s ability to make acquisitions or investments, including in renewable diesel production, and to realize the benefits from such acquisitions or investments;
• liabilities arising from recent acquisitions or investments that are unforeseen or exceed PBF Energy’s expectations;
• PBF Energy’s expectations and timing with respect to its acquisition activity and whether such acquisitions are accretive or dilutive to its shareholders;
• adverse developments in PBF Energy’s relationship with both its key employees and unionized employees;
• PBF Energy’s substantial indebtedness, including the impact of potential downgrades to PBF Energy’s corporate credit rating, secured notes and unsecured notes;
• changes in currency exchange rates, interest rates and capital costs;
• restrictive covenants in PBF Energy’s indebtedness that may adversely affect its operational flexibility;
• counterparty credit and performance risk exposure related to PBF Energy’s supply and inventory intermediation arrangement;
• termination of PBF Energy’s inventory intermediation agreement, which could have a material adverse effect on its liquidity, as PBF Energy would be required to finance its crude oil, intermediate and refined products inventory covered by the agreement. Additionally, PBF Energy is obligated to repurchase from the counterparty certain crude oil, intermediates and finished products upon termination of the agreement;
• payments by PBF Energy to the current and former holders of PBF LLC Series A Units and PBF LLC Series B Units under PBF Energy’s tax receivable agreement for certain tax benefits it may claim;
• PBF Energy’s assumptions regarding payments arising under its tax receivable agreement and other arrangements relating to its 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 PBF Energy Class A common stock as contemplated by the tax receivable agreement, the price of PBF Energy Class A common stock at the time of such exchanges, the extent to which such exchanges are taxable, and the amount and timing of PBF Energy’s income;
• the impact of disruptions to crude or feedstock supply to any of PBF Energy’s refineries, including disruptions related to us or with third-party logistics infrastructure or operations, including pipeline, marine and rail transportation;
• risks associated with our operations as a separate, publicly-traded entity;
• potential tax consequences related to PBF Energy’s investment in us; and
• any decisions PBF Energy continues to make with respect to its energy-related logistical assets that may be transferred to us.
Such risks may impact us as we significantly rely on revenue generated from our operations that are located in PBF Energy’s facilities, particularly such operations related to its Delaware City, Toledo and Torrance refineries. Due to our lack of diversification in assets and geographic location, an adverse development in our businesses or areas of operations, including adverse developments due to catastrophic events, weather, cyberattacks, regulatory action and decreases in demand for crude oil and refined products, could have a significantly greater impact on our results of operations and cash available for distribution to our common unitholders than if we maintained more diverse assets and locations. Such events may constitute force majeure events under our commercial agreements, potentially resulting in the suspension, reduction or termination of one or more commercial agreements in the impacted geographic area.
We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to holders of our common units.
We have made and intend to continue to make a minimum quarterly distribution to the holders of our common units of at least $0.30 per unit, or $1.20 per unit on an annualized basis. In order to pay the minimum quarterly distribution, we will require available cash of approximately $19.0 million per quarter, or approximately $76.0 million per year, based on the number of common units outstanding at December 31, 2021. We may not have sufficient available cash from operating surplus each quarter to enable us to pay the minimum quarterly distribution. The amount of cash we can distribute to our unitholders principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:
• the volume of crude oil throughput;
• our entitlement to payments associated with MVCs;
• the fees we charge on throughput volumes;
• the level of our operating, maintenance and general and administrative costs;
• prevailing economic conditions; and
• continued operation of our facilities.
In addition, the actual amount of cash we will have available for distribution will depend on other factors, some of which are beyond our control, including:
• the level and timing of capital expenditures we incur;
• the amount of our operating and general and administrative expenses, including reimbursements to our general partner and its affiliates, including PBF Energy, in respect of those expenses and payment of the administrative fees under the Omnibus Agreement and Services Agreement for services provided to us by our general partner and its affiliates, including PBF Energy;
• the cost of acquisitions, if any;
• our debt service requirements and other liabilities;
• fluctuations in our working capital needs;
• our ability to borrow funds and access capital markets;
• restrictions contained in the indenture covering the 2023 Notes, the Revolving Credit Facility and other debt service requirements;
• the amount of cash reserves established by our general partner; and
• other business risks affecting our cash levels.
If we are unable to renew or extend the various commercial agreements we have with PBF Energy, our ability to make distributions to our unitholders may be reduced.
The term of PBF Energy’s obligations under each of our commercial agreements ranges from one to fifteen years. If we are unable to renew or extend such commercial agreements or if we are unable to generate additional revenue from third parties, our ability to make cash distributions to unitholders may be reduced. Additionally, even if we were to renew or extend our commercial agreements, PBF Energy is under no obligation to renew or extend such agreements on the same terms. The renewal or extension of such agreements with reduced MVCs or rates could also have an impact on our ability to make cash distributions to unitholders. For example, throughput volumes at certain of our assets have been below MVCs in recent periods. PBF Energy may seek to renew or extend its commercial agreements with us for these assets with reduced MVCs or rates, or PBF Energy may not seek to renew or extend these commercial agreements upon expiration. Any such change in these or our other commercial agreements that would reduce the MVCs or include other less favorable terms could have a material adverse effect on our financial condition, results of operations, cash flows and our ability to make distributions to unitholders.
Certain of our commercial agreements with PBF Energy and the Services Agreement contain provisions that allow our counterparty to such agreement to suspend, reduce or terminate its obligations under such agreement in certain circumstances, including events of force majeure, which would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to unitholders.
Certain of our commercial agreements with PBF Energy and the Services Agreement contain provisions that allow our counterparty to such agreement to suspend, reduce or terminate its obligations to us under such agreement, including the requirement to pay the fees associated with the applicable MVCs, if certain events occur, including (i) a material breach of the agreement by us, (ii) PBF Energy deciding to permanently or indefinitely suspend crude oil refining operations at its refineries for which we provide services or (iii) the occurrence of certain force majeure events that would prevent us or PBF Energy from performing our or its obligations under the applicable agreement. In such circumstances, PBF Energy has the discretion to decide to suspend, reduce or terminate its obligations notwithstanding the fact that its decision may significantly and adversely affect us. For instance, under certain of our commercial agreements with PBF Energy, if PBF Energy decides to permanently or indefinitely suspend refining operations at the refinery served under the applicable agreement for a period that continues for at least twelve consecutive months, then it may terminate the agreement on no less than twelve months’ prior written notice to us. Furthermore, under such agreements, PBF Energy has the right to suspend or reduce its obligations at the refinery served under the applicable agreement for the duration of a force majeure event affecting its assets with respect to any affected services and may terminate the agreements with respect to such services if the force majeure event lasts in excess of twelve months. In addition, if the force majeure event occurs on our assets at any time, PBF Energy has the right to suspend or reduce its obligations for the duration of the force majeure event with respect to any affected services. As defined in our commercial agreements with PBF Energy, force majeure events include any acts or occurrences that prevent services from being performed either by us or PBF Energy under the applicable agreement, such as:
• acts of God;
• strikes, lockouts or other industrial disturbances;
• acts of the public enemy, wars, terrorism, blockades, insurrections, riots or civil disturbances;
• storms, floods, washouts or other interruptions caused by acts of nature or the environment;
• arrests or the order of any court or governmental authority claiming or having jurisdiction while the same is in force and effect;
• civil disturbances, explosions, fires, breakage leaks, releases, accidents to machinery, vessels, storage tanks, lines of pipe, rail lines and equipment;
• any inability to obtain or unavoidabledelay in obtaining material or equipment;
• any inability to obtain or distribute crude oil, feedstocks, other products or materials necessary for operation because of a failure of third-party logistics systems; and
• any other causes not reasonably within the control of the party claimingsuspension and which by the exercise of commercially reasonable efforts such party is unable to prevent or overcome.
Accordingly, under our commercial agreements with PBF Energy, there exists a broad range of events that could result in our no longer being able to utilize our facilities and PBF Energy no longer having an obligation to meet its MVCs or pay the full amount of fees or other amounts otherwise owing under these agreements. Furthermore, a single event relating to one of PBF Energy’s refineries could have such an impact on a number of our commercial agreements with PBF Energy. Any reduction, suspension or termination of any of our commercial agreements could have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to unitholders.
A cyberattack on, or other failure of, our technology infrastructure could affect our and PBF Energy’s business and assets, and have a material adverse effect on our and PBF Energy’s financial condition, results of operations and cash flows.
We and PBF Energy are becoming increasingly dependent on our technology infrastructure and certain critical information systems which process, transmit and store electronic information, including information we use to safely and effectively operate our respective assets and businesses. These information systems include data network and telecommunications, internet access, our websites, and various computer hardware equipment and software applications, including those that are critical to the safe operation of our pipelines and terminals. We have invested, and expect to continue to invest, significant time, manpower and capital in our technology infrastructure and information systems. These information systems are subject to damage or interruption from a number of potential sources including natural disasters, software viruses or other malware, power failures, cybersecurity threats to gainunauthorized access to sensitive information, cyberattacks, which may render data systems unusable, and physical threats to the security of our and PBF Energy’s facilities and infrastructure or third-party facilities and infrastructure. Additionally, our business is highly dependent on financial, accounting and other data processing systems and other communications and information systems, including such systems of PBF Energy that we utilize pursuant to the Omnibus Agreement. We process a large number of transactions on a daily basis and rely upon the proper functioning of computer systems. Furthermore, we and PBF Energy rely on information systems across our respective operations, including the management of supply chain and various other processes and transactions. As a result, a disruption on any information systems at our operating locations, or at PBF Energy’s refineries, pipelines or terminals, may cause disruptions to our collective operations.
The potential for such security threats or system failures has subjected our operations to increased risks that could have a material adverse effect on our business. To the extent that these information systems are under our control, we and PBF Energy have implemented measures such as virus protection software, emergency recovery processes and a formal disaster recovery plan to address the outlined risks. However, security measures for information systems cannot be guaranteed to be failsafe, and our formal disaster recovery plan and other implemented measures may not prevent delays or other complications that could arise from an information systems failure. If a key system was hacked or otherwise interfered with by an unauthorized user, or was to fail or experience unscheduleddowntime for any reason, even if only for a short period, or any compromise of our data security or our inability to use or access these information systems at critical points in time could unfavorably impact the timely and efficient operation of our business, damage our reputation and subject us to additional costs and liabilities. As a result of the COVID-19 pandemic, the increase in companies and individuals working remotely has increased the frequency and scope of cyberattacks and the risk of potential cybersecurity incidents, both deliberate attacks and unintentional events. While, to date, we have not had a significant cybersecurity breach or attack that had a material impact on our business or results of operations, if we or PBF Energy were to be subject to a material successful cyber intrusion, it could result in remediation or service restoration costs, increased cyber protection costs, lost revenues, litigation or regulatory actions by governmental authorities, increased insurance premiums, reputational damage and damage to our competitiveness, financial condition, results of operations and cash flows.
Cyberattacksagainst us or others in our industry could result in additional regulations, and U.S. government warnings have indicated that infrastructure assets, including pipelines, may be specifically targeted by certain groups. These attacks include, without limitation, malicious software, ransomware, attempts to gainunauthorized access to data, and other electronic security breaches. These attacks may be perpetrated by state-sponsored groups, “hacktivists,” criminal organizations or private individuals (including employee malfeasance). Current efforts by the federal government, including the Strengthening the Cybersecurity of Federal Networks and Critical Infrastructure executive order, the issuance of new cybersecurity requirements for critical pipeline owners and operators issued by the Department of Homeland Security’s Transportation Security Administration following a cyberattack on a major petroleum pipeline in 2021, and any potential future regulations could lead to increased regulatory compliance costs, insurance coverage cost or capital expenditures. We cannot predict the potential impact to our business or the energy industry resulting from additional regulations.
Further, our business interruption insurance may not compensate us adequately for losses that may occur. We do not carry insurance specifically for cybersecurity events; however, certain of our insurance policies may allow for coverage for a cyber-event resulting in ensuing property damage from an otherwise insured peril. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position, results of operations and cash flows. In addition, the proceeds of any such insurance may not be paid in a timely manner and may be insufficient if such an event were to occur.
Any political instability, military strikes, sustained military campaigns, terrorist activity, changes in foreign policy or other catastrophic events may negatively affect our and PBF Energy’s operations, financial condition, results of operations, cash flows, and our ability to make distributions to our unitholders.
Any political instability, military strikes, sustained military campaigns, terrorist activity, changes in foreign policy or other catastrophic events in areas or regions of the world where we operate or where PBF Energy acquires crude oil and other raw materials or sells its refined products may affect our business in unpredictable ways, including forcing us to increase security measures and causing disruptions of supplies and distribution markets. We may also be subject to U.S. trade and economic sanctions laws, which change frequently as a result of foreign policy developments, and which may necessitate changes to PBF Energy’s crude oil acquisition activities. Further, like other industrial companies, our facilities or PBF Energy’s facilities may be the target of terrorist activity or subject to catastrophic events such as natural disasters and pandemic illness. Any act of war, terrorism or other catastrophic event that results in damage to any of our logistics assets or PBF Energy’s refineries or third-party facilities upon which we or PBF Energy are dependent for our business operations could have a material adverse effect on our business, results of operations and financial condition.
Our ability to expand may be limited if PBF Energy’s business does not grow or if PBF Energy further scales back operations at its facilities.
Part of our growth strategy depends on the growth of PBF Energy’s business. We believe our growth will be driven in part by identifying and executing organic expansion projects that will result in increased throughput volumes from PBF Energy and third parties. Our prospects for organic growth currently include projects that we expect PBF Energy to undertake, and that we expect to have an opportunity to purchase from PBF Energy. In addition, our organic growth opportunities will be limited if PBF Energy is unable to successfully acquire new assets for which our execution of organic projects is needed. Additionally, if PBF Energy focuses on other growth areas or does not make capital expenditures to fund the organic growth of its logistics operations, we may not be able to fully execute our growth strategy. Furthermore, our ability to expand could be negatively impacted if PBF Energy decides to idle additional assets at its facilities.
We may not be able to significantly develop third-party revenue due to competition and other factors, which could limit our ability to grow and may extend our dependence on PBF Energy.
Our ability to develop third-party revenue is subject to numerous factors beyond our control, including competition from third parties and the extent to which we have available capacity when third-party customers require it.
In addition, with respect to our facilities collocated at a PBF Energy refinery, our ability to obtain third-party customers will be partially dependent on our ability to make connections to third-party facilities and pipelines. If we do not or are unable to make connections to third-party facilities and pipelines, the throughput at our facilities may be limited to the demand from PBF Energy’s refineries. Furthermore, to the extent that we have capacity at our products terminals available for third-party volumes, competition from other products terminals owned by our competitors may limit our ability to utilize this available capacity.
We can provide no assurance that we will be able to attract material third-party revenue to our existing or future assets. Our efforts to establish our reputation and attract new unaffiliated customers may be adversely affected by our relationship with PBF Energy and our desire to provide services pursuant to fee-based contracts. Our existing and potential third-party customers may prefer to obtain services under contracts through which we could be required to assume direct commodity exposure.
If we are unable to obtain necessary capital or financing on satisfactory terms to fund expansions of our asset base, our ability to make quarterly cash distributions may be diminished or our financial leverage could increase. We do not currently have any commitments with our affiliates to provide direct or indirect financial assistance to us.
In order to expand our asset base, we invest in expansion capital expenditures. If we do not incur sufficient or effective expansion capital expenditures, we will be unable to expand our business operations and may be unable to maintain or raise the level of our quarterly cash distributions. Without financing, we would be required to use cash from our operations or sell additional common units or other limited partner interests in order to fund our expansion capital expenditures. Using cash from operations will reduce cash available for distribution to our common unitholders. Our ability to obtain financing or to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering as well as the covenants in our debt agreements, general economic conditions and contingencies and uncertainties that are beyond our control. Even if we are successful in obtaining funding for expansion capital expenditures through equity or debt financing, the terms thereof could limit our ability to pay distributions to our common unitholders. Incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional limited partner interests may result in significant common unitholder dilution thus increasing the aggregate amount of cash required to maintain the then-current distribution rate, which could materially decrease our ability to pay distributions at the then-current distribution rate.
PBF Energy’s level of indebtedness, the terms of its borrowings or any future downgrades to their credit ratings could adversely and directly affect our credit rating and partnership profile, in addition to our ability to grow our business, our ability to make cash distributions to our unitholders and our ability to secure debt in the future.
PBF Energy has a significant amount of debt. As of December 31, 2021, PBF Energy had total debt of $4,330.8 million, excluding unamortized deferred debt issuance costs of $35.0 million. PBF Energy’s significant level of debt could increase its and our vulnerability to general adverse economic and industry conditions and require PBF Energy to dedicate a substantial portion of its cash flow from operations to service its debt and lease obligations, thereby reducing the availability of its cash flow to fund its growth strategy, including capital expenditures, acquisitions and other business opportunities. Furthermore, a higher level of indebtedness at PBF Energy increases the risk that it may default on its obligations, including under its commercial agreements with us. The covenants contained in the agreements governing PBF Energy’s outstanding and future indebtedness may limit its ability to borrow additional funds for development and make certain investments and may directly or indirectly impact our operations in a similar manner. For example, PBF Energy’s indebtedness requires that any transactions PBF Energy enters into with us must be on terms no less favorable to PBF Energy than those that could have been obtained with an unrelated person.
Our credit rating may be adversely affected by the leverage or any further adverse changes in the credit rating of PBF Energy, or its subsidiaries, or of the debt held by such entities, as credit rating agencies such as Moody’s Investors Service, Inc., Standard & Poor’s Financial Services LLC and Fitch Ratings, Inc. may consider the leverage and credit profile of PBF Energy and its affiliates because of their ownership interest in and control of us and because PBF Energy currently accounts for a substantial majority of our revenue. Further adverse effects on our credit rating may increase our cost of borrowing or hinder our ability to raise financing in the capital markets, which could impair our ability to grow our business and make cash distributions to our unitholders.
In the event PBF Energy were to default under certain of its debt obligations, we could be materially adversely affected. We have no control over whether PBF Energy remains in compliance with the provisions of its debt obligations, except as such provisions may otherwise directly pertain to us. Further, any debt arrangements that PBF Energy or any of its affiliates enter into in the future, including any amendments to existing credit facilities, may include additional or more restrictive limitations on PBF Energy that may impact our ability to conduct our business with them. These additional restrictions could adversely affect our ability to finance our future operations or capital needs or engage in, expand or pursue other business activities.
Enhancedscrutiny on ESG matters may negatively impact our business and our and PBF Energy’s access to capital markets.
Enhancedscrutiny on ESG matters may impact our business as it relates to the use of refined products, climate change, increasing public expectations on companies to address climate change, and potential use of substitutes or replacements to PBF Energy’s products may result in increased costs, reduced demand for our products, reduced profits, increased regulations and litigation, and adverse impacts on our unit price and access to capital markets. In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings for evaluating companies on their approach to ESG matters. Such ratings are used by some investors to inform and advise their investment and voting decisions. Also, some stakeholders may advocate for divestment of fossil fuel investments and encourage lenders to limit funding to companies engaged in the manufacturing of refined products. Unfavorable ESG ratings and investment community divestment initiatives may lead to negative investor and public sentiment toward the Partnership or its affiliates and to the diversion of capital from our industry, which could have a negative impact on our common unit price and our access to and costs of capital.
Our logistics operations and PBF Energy’s refining operations are subject to many risks and operational hazards, some of which may result in business interruptions and shutdowns of our or PBF Energy’s facilities and may result in liability for damages, particularly if not fully covered by insurance. If a significant accident or event occurs that results in a business interruption or shutdown activity for which we are not adequately insured, our operations and financial results could be adversely affected.
Our logistics operations are subject to all of the risks and operational hazards inherent in processing crude oil and receiving, handling, storing and transferring crude oil, refined products, natural gas and intermediates, including:
• damages to our facilities, related equipment and surrounding properties caused by floods, fires, severe weather, explosions and other natural disasters and acts of terrorism;
• interruption of service or processing capability due to a major accident, power outage, cyberattack, act of terrorism or other unforeseen events;
• the inability of third-party facilities on which our operations are dependent, including PBF Energy’s facilities, to complete capital projects and to restart timely refining operations following a suspension or shutdown;
• failure to restart processing operations timely following a suspension or shutdown event;
• mechanical or structural failures at our facilities or at third-party facilities on which our operations are dependent, including PBF Energy’s facilities;
• curtailments of operations relative to severe seasonal weather;
• inadvertentdamage to our facilities from construction, farm and utility equipment; and
• other hazards.
These risks could result in substantial losses due to personal injury and/or loss of life, severedamage to and destruction of property and equipment and pollution or other environmental damage, as well as business interruptions or shutdowns of our facilities. Any such event or unplannedshutdown could have a material adverse effect on our business, financial condition and results of operations. In addition, PBF Energy’s refining operations, on which our operations are substantially dependent and over which we have no control, are subject to similar operational hazards and risks inherent in refining crude oil. A significant accident at our facilities or at PBF Energy’s facilities could result in seriousinjury or death to employees of PBF Energy or its affiliates or contractors, could expose us to significant liability for personal injuryclaims and reputational risk and could affect PBF Energy’s ability and/or requirement to satisfy the MVCs under our commercial agreements.
Our insurance policies do not cover all losses, costs or liabilities that we may experience, and insurance companies that currently insure companies in the energy industry may cease to do so or substantially increase premiums.
We maintain insurance or are covered by insurance policies maintained by PBF Energy or its affiliates. These insurance policies provide limited coverage for some, but not all, of the potential risks and liabilities associated with our business. To the extent we are covered by insurance policies maintained by PBF Energy or its affiliates, our coverage is subject to the deductibles and limits under those policies and to the extent PBF Energy or its affiliates experience losses under these insurance policies, the limits of our coverage may be decreased. In addition, we are not insured against all potential losses, costs or liabilities. We could sufferlosses for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. We and PBF Energy may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our or PBF Energy’s insurance policies may increase substantially. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. For example, coverage for hurricane damage can be limited, and coverage for terrorism risks can include broad exclusions. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position.
The energy industry is highly capital intensive, and the entire or partial loss of individual facilities or multiple facilities can result in significant costs to both energy industry companies, such as us, and their insurance carriers. In recent years, several large energy industry claims have resulted in significant increases in the level of premium costs and deductible periods for participants in the energy industry. As a result of large energy industry claims, insurance companies that have historically participated in underwriting energy-related facilities may discontinue that practice, may reduce the insurance capacity they are willing to offer or demand significantly higher premiums or deductible periods to cover these facilities. If significant changes in the number or financial solvency of insurance underwriters for the energy industry occur, or if other adverse conditions over which we have no control prevail in the insurance market, we may be unable to obtain and maintain adequate insurance at a reasonable cost.
Our insurance program may include a number of insurance carriers. Significant disruptions in financial markets could lead to a deterioration in the financial condition of many financial institutions, including insurance companies; therefore, we may not be able to obtain the full amount of our insurance coverage for insured events.
Our right of first offer to acquire certain assets that PBF Energy may acquire or construct in the future is subject to risks and uncertainty, and ultimately we may not acquire any of those assets.
The Omnibus Agreement provides us with a right of first offer for a period of ten years after the closing of the IPO on certain of PBF Energy’s existing logistics assets and certain assets that it may acquire or construct in the future, subject to certain exceptions. The consummation and timing of any future acquisitions pursuant to this right will depend upon, among other things, PBF Energy’s willingness to offer subject assets for sale and obtain any necessary consents, our ability to negotiate acceptable purchase agreements and commercial agreements with respect to such assets and our ability to obtain financing on acceptable terms. We can offer no assurance that we will be able to successfully consummate any future acquisitions pursuant to our right of first offer, and PBF Energy is under no obligation to accept any offer that we may choose to make. In addition, certain of the right of first offer assets may require substantial capital expenditures in order to maintain compliance with applicable regulatory requirements or otherwise make them suitable for our commercial needs. For these or a variety of other reasons, we may decide not to exercise our right of first offer if and when any assets are offered for sale, and our decision will not be subject to unitholder approval. In addition, the Omnibus Agreement and our right of first offer may be terminated by PBF Energy at any time in the event that PBF LLC or its affiliates no longer controls our general partner.
Our purchase option under certain circumstances to acquire, and our right to use, certain of PBF Energy’s existing assets is subject to risks and uncertainty, and ultimately we may not acquire or have a right to use any of those assets.
Our commercial agreements provide us with options to purchase and use certain assets at PBF Energy’s refineries related to our business in the event PBF Energy were to shut them down. In the event PBF Energy shuts down any of the refineries and our option becomes exercisable, the consummation and timing of any future acquisitions pursuant to our purchase option will depend upon, among other things, our ability to obtain any necessary consents, to negotiate acceptable purchase agreements and commercial agreements with respect to such assets and to obtain financing on acceptable terms. We can offer no assurance that we will be able to successfully consummate any future acquisitions pursuant to this purchase option. In addition, certain of the assets covered by this purchase option and our right of use may require substantial capital expenditures in order to maintain compliance with applicable regulatory requirements or otherwise make them suitable for our commercial needs. For these or a variety of other reasons, we may decide not to exercise this purchase option if PBF Energy shuts down any of its refineries or major assets within its refineries, or to exercise our right of use if and when we have capacity in excess of PBF Energy’s throughput volumes, as applicable, and our decision to exercise any purchase options or right of use will not be subject to unitholder approval. Refer to Note 13 “Related Party Transactions” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K for further discussion regarding the commercial agreements with PBF Holding.
We may not be able to fully execute our growth plan if we are unable to access the capital markets on economically acceptable terms or experience increased competition for investment opportunities.
Our growth plan includes growing through strategic acquisitions, whether through acquisitions from PBF Energy or third parties, and through strategic organic projects. In order to fund our growth plan, we may, from time to time, have to acquire substantial new capital to finance our acquisitions or organic growth projects. If we are unable to access the capital markets on economically acceptable terms, we may not be able to fully execute our growth plan.
Additionally, we may not be able to execute our growth plan if we experience increased competition for third-party investment opportunities, or if our organic growth projects are no longer economical due to market influences.
If we are unable to make acquisitions on economically acceptable terms from PBF Energy or third parties, our future growth would be limited, and any acquisitions we undertake may reduce, rather than increase, our cash flows and ability to make distributions to unitholders.
A portion of our strategy to grow our business and increase distributions to unitholders is dependent on our ability to execute acquisitions that result in positive cash flow to the Partnership. If we are unable to execute acquisitions from PBF Energy or third parties for any reason, including if we are unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts, or if we are unable to obtain financing for these acquisitions on economically acceptable terms, we are outbid by competitors or we or the seller are unable to obtain any necessary consents, our future growth and ability to increase distributions to unitholders will be limited. Furthermore, even if we do consummate acquisitions that we believe will be accretive, they may in fact result in a decrease in cash flow. Any acquisition involves potential risks, including, among other things:
• our ability to identify and accurately estimate assumptions regarding revenues, costs and potential synergies;
• the existence of unforeseen assumed obligations;
• limitations on rights to indemnity from the seller;
• accuracy and completeness of our estimated overall costs of equity or debt;
• the diversion of management’s attention from other business concerns;
• unforeseendifficulties operating in new product areas or new geographic areas; and
• loss of key customers, or employee turnover at the acquired businesses.
If we consummate any future acquisitions, our capitalization and results of operations may change significantly, and unitholders may not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources.
We may be unsuccessful in integrating the operations of the assets and businesses we acquire with our existing operations, and in realizing all or any part of the anticipated benefits of any such acquisitions.
From time to time, we expect to evaluate and acquire assets and businesses that we believe complement our existing assets and businesses. Acquisitions, including dropdown transactions from PBF Energy, may require substantial capital or the incurrence of substantial indebtedness. Our capitalization and results of operations may change significantly as a result of future acquisitions. Acquisitions and business expansions involve numerous risks, including difficulties in the assimilation of the assets and operations of the acquired businesses, inefficiencies and difficulties that arise because of unfamiliarity with new assets and the businesses associated with them and new geographic areas and the diversion of management’s attention from other business concerns. Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience unanticipateddelays in realizing the benefits of an acquisition. Also, following an acquisition, we may discover previously unknown liabilities associated with the acquired business or assets for which we have no recourse under applicable indemnification provisions.
Our expansion of existing assets and construction of new assets, including execution of organic growth projects, may not result in revenue increases and will be subject to regulatory, environmental, political, legal and economic risks, which could adversely affect our operations and financial condition.
A portion of our strategy to grow and increase distributions to unitholders is dependent on our ability to expand existing assets and to construct additional assets, including execution of organic growth projects. We have no material commitments for expansion or construction projects as of December 31, 2021. Organic growth projects such as the construction of a pipeline or terminal or the expansion of our existing terminals or pipelines involves numerous regulatory, environmental, political and legal uncertainties, most of which are beyond our control. If we undertake these types of projects, they may not be completed on schedule or at all, or in line with budgeted cost. Moreover, we may not receive sufficient long-term contractual commitments from customers to provide the revenue needed to support such projects. Even if we receive such commitments, we may not realize an increase in revenue for an extended period of time. For instance, if we build a pipeline, the construction may occur over an extended period of time, thus delaying material increases in revenue until after completion of the project. Moreover, we may construct facilities to capture anticipated future growth in production in a region or gain access to crude oil supplies at lower costs and such growth or access may not materialize. As a result, new facilities may not be able to attract enough throughput to achieve our expected investment return, which could adversely affect our results of operations and financial condition and our ability to make distributions to our unitholders.
We do not own all of the land on which our facilities are located, which could result in disruptions to our operations.
We do not own all of the land on which our facilities have been constructed, and we are therefore subject to the possibility of more onerous terms and/or increased costs to retain necessary land use if we do not have valid rights of way, if such rights of way lapse or terminate or if our facilities are not properly located within the boundaries of such rights of way. Although some of these rights are perpetual in nature, we occasionally obtain the rights to construct and operate our facilities on land owned by third parties and governmental agencies for a specific period of time. If we are unsuccessful in renegotiating rights of way, we may have to relocate our facilities. A loss of rights of way or a relocation could have a material adverse effect on our business, financial condition, results of operations and cash flows and our ability to make distributions to our unitholders.
Whether we have the power of eminent domain varies from state to state, depending upon the laws of the particular state. We must compensate landowners for the use of their property and, in eminent domain actions, such compensation may be determined by a court. Our inability to exercise the power of eminent domain could negatively affect our business if we were to lose the right to use or occupy the property on which our facilities are located.
We could incur substantial costs or disruptions in our business if we cannot obtain or maintain necessary permits and authorizations or otherwise comply with health, safety, environmental and other laws and regulations. Compliance with or liability for violation of, existing or future laws, regulations and other requirements could significantly increase our costs of doing business, thereby adversely affecting our profitability.
Our operations require numerous permits and authorizations under various laws and regulations enforced by the EPA, the DOT, OSHA, the FRA, as well as numerous other state, local and federal agencies. These authorizations and permits are subject to revocation, renewal or modification and can require operational changes to limit impacts or potential impacts on the environment and/or health and safety. A violation of authorization or permit conditions or other legal or regulatory requirements could result in substantial fines, criminal sanctions, permit revocations, injunctions, and/or facility shutdowns. In addition, major modifications of our operations could require modifications to our existing permits or upgrades to our existing pollution control equipment. Any or all of these matters could have a negative effect on our business, results of operations and cash flows.
We may incur significant liability for costs and capital expenditures to comply with environmental and health and safety regulations, which are complex and change frequently.
Our operations are subject to federal, state and local laws regulating, among other things, the handling of petroleum, petroleum products and other regulated materials, the emission and discharge of materials into the environment, waste management, and remediation of discharges of petroleum and petroleum products, characteristics and composition of gasoline and distillates and other matters otherwise relating to the protection of the environment. Our operations are also subject to extensive laws and regulations relating to occupational health and safety.
We cannot predict what additional environmental, health and safety legislation or regulations may be adopted in the future, or how existing or future laws or regulations may be administered or interpreted with respect to our operations. Many of these laws and regulations are becoming increasingly stringent, and the cost of compliance with these requirements can be expected to increase over time.
Certain environmental laws impose strict, and in certain circumstances, joint and several, liability for costs of investigation and cleanup of such spills, discharges or releases on owners and operators of, as well as persons who arrange for treatment or disposal of regulated materials at contaminated sites. Under these laws, we may incur liability or be required to pay penalties for past contamination, and third parties may assert claimsagainst us for damagesallegedly arising out of any past or future contamination. The potential penalties and clean-up costs for past or future releases or spills, the failure of prior owners of our facilities to complete their clean-up obligations, the liability to third parties for damage to their property, or the need to address newly-discovered information or conditions that may require a response could be significant, and the payment of these amounts could have a material adverse effect on our business, financial condition and results of operations.
Refer to Note 12 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K for further discussion on health, safety, environmental and other laws and regulations.
Changes in laws or standards affecting the transportation of North American crude oil by rail could significantly reduce volumes throughput at our facilities, and, as a result, our revenue could decline, which would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to unitholders.
Investigations into past rail accidents involving the transport of crude oil have prompted government agencies and other interested parties to call for increased regulation of the transport of crude oil by rail including in the areas of crude oil constituents, rail car design, routing of trains and other matters. Regulation governing shipments of petroleum crude oil by rail requires shippers to properly test and classify petroleum crude oil and further requires shippers to treat Class 3 petroleum crude oil transported by rail in tank cars as a Packing Group I or II hazardous material only, which creates further classification and testing requirements, along with more severepenalties for violations. The DOT issued additional rules and regulations that require rail carriers to provide certain notifications to state agencies along routes utilized by trains over a certain length carrying crude oil, enhance safety training standards under the Rail Safety Improvement Act of 2008, require each railroad or contractor to develop and submit a training program to perform regular oversight and annual written reviews and establish enhanced tank car standards and operational controls for high-hazard flammable trains. These rules and any further changes in law, regulations or industry standards that require us to reduce the volatile or flammable constituents in crude oil that is transported by rail, alter the design or standards for rail cars we use, change the routing or scheduling of trains carrying crude oil or any other changes that detrimentally affect the economics of delivering North American crude oil by rail to PBF Energy’s or subsequently to third-party refineries, could increase our costs, which could have a material adverse effect on our financial condition, results of operations, cash flows and our ability to service our indebtedness.
Regulation of emissions of GHGs could force us to incur increased capital and operating costs and could have a material adverse effect on our results of operations and financial condition.
The EPA has taken steps to regulate GHGs under the CAA. The EPA has already adopted regulations limiting emissions of GHGs from motor vehicles, addressing the permitting of GHG emissions from stationary sources, and requiring the reporting of GHG emissions from specified large GHG emission sources, including refineries. These and similar regulations could require us to incur costs to monitor and report GHG emissions or reduce GHG emissions associated with our operations. In addition, various states, individually as well as in some cases on a regional basis, have taken steps to control GHG emissions, including adoption of GHG reporting requirements, cap and trade systems and renewable portfolio standards. Efforts have also been undertaken to delay, limit or prohibit the EPA and possibly state action to regulate GHG emissions, and it is not possible at this time to predict the ultimate form, timing or extent of federal or state regulation. In the event we do incur increased costs as a result of increased efforts to control GHG emissions, we may not be able to pass on any of these costs to our customers. Such requirements also could adversely affect demand for commodities that we handle, transport and store. Any increased costs or reduced demand could materially and adversely affect our business and results of operations.
Climate change could have a material adverse impact on our operations and adversely affect our facilities.
Some scientists have concluded that increasing concentrations of GHGs in the earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, floods and other climatic events. We believe the issue of climate change will likely continue to receive scientific and political attention, with the potential for further laws and regulations that could materially adversely affect our ongoing operations.
In addition, as many of our facilities are located near coastal areas, rising sea levels may disrupt our ability to operate those facilities or transport crude oil and refined products. Extended periods of such disruption could have an adverse effect on our results of operations. We could also incur substantial costs to protect or repair these facilities.
Environmental clean-up and remediation costs of our sites and environmental litigation could decrease our net cash flow, reduce our results of operations and impair our financial condition.
We may be subject to liability for the investigation and clean-up of environmental contamination at each of the properties that we own, lease, occupy or operate. We may become involved in litigation or other proceedings related to the foregoing. If we were to be held responsible for damages in any such litigation or proceedings, such costs may not be covered by insurance and may be material.
We may also face liability arising from current or future claimsalleging personal injury or property damage due to exposure to chemicals or other regulated materials, such as various perfluorinated compounds, including perfluorooctanoate, perfluorooctane sulfonate, perfluorohexane sulfonate, or other per-and polyfluoroalkyl substances (collectively, “PFAS”), asbestos, benzene, silica dust and petroleum hydrocarbons, at or from our facilities. We may also face liability for personal injury, property damage, natural resource damage or clean-up costs for the alleged migration of contamination from our properties. A significant increase in the number or success of these claims could materially adversely affect our business, financial condition, results of operations and cash flow. Recently, we have been voluntarily cooperating with various local, state and federal agencies in their review of the environmental and health effects of PFAS and additional PFAS-related laws may be developed at the local, state and federal that could lead to our incurring liability for damages or other costs, civil or criminal proceedings, the imposition of fines and penalties, or other remedies or otherwise affect our business. Governmental inquiries or lawsuits involving PFAS could lead to our incurring liability for damages or other costs, civil or criminal proceedings, the imposition of fines and penalties, or other remedies, as well as restrictions on or added costs for our business operations going forward, including in the form of restrictions on discharges at our manufacturing facilities or otherwise. We may be subject to asserted or unasserted claims and governmental regulatory proceedings and inquiries related to the use of PFAS in a variety of jurisdictions.
Our business may suffer if any of our or PBF Energy’s senior executives or other key employees discontinue employment with us or PBF Energy. Furthermore, a shortage of skilled labor or disruptions in our labor force may make it difficult for us to maintain labor productivity.
Our future success depends to a large extent on the services of our, and our general partner’s, senior executives and other key employees and the same is true of PBF Energy and its senior executives and key employees. Our business depends on our continuing ability to recruit, train and retain highly qualified employees in all areas of our operations, including engineering, accounting, business operations, finance and other key back-office and mid-office personnel, or those of PBF Energy that we rely upon. Furthermore, our operations require skilled and experienced employees with proficiency in multiple tasks. The competition for these employees is intense, and the loss of these executives or employees could harm our business. If any of these executives or other key personnel resigns or becomes unable to continue in his or her present role and is not adequately replaced, either by us or PBF Energy, our business operations could be materially adversely affected.
A portion of our and PBF Energy’s workforce is unionized, and we may face labor disruptions that would interfere with our operations.
At the East Coast Terminals and the East Coast Storage Assets, most hourly employees are covered by collective bargaining agreements with the USW. The agreement with the USW covering the East Coast Terminals is scheduled to expire in April 2024. The agreement with the USW covering the East Coast Storage Assets expired in January 2022. Terms related to a new collective bargaining agreement have been agreed to on local bargaining issues and are pending settlement of the National Oil Bargaining Program, which will set contract term, wages, health care contributions and any other agreed upon issues prior to being executed. During this interim period, the terms of the expired agreement will remain in place under rolling 24-hour extensions until a new agreement is finalized. Additionally, PBF Energy’s refineries, with which we do business, utilize unionized employees. The Delaware City, Toledo, Chalmette, Torrance and Martinez refineries are covered by agreements with the USW. Similarly, at the Paulsboro Refinery, hourly employees are represented by the IOW. Future negotiations as our collective agreements expire may result in labor unrest for which a strike or work stoppage is possible. Strikes and/or work stoppages could negatively affect our operational and financial results and may increase operating expenses at the refineries.
Risks Related to Our Indebtedness
The 2023 Notes and the Revolving Credit Facility contain restrictions which could adversely affect our business, financial condition, results of operations and our ability to service our indebtedness.
We are dependent upon the earnings and cash flows generated by our operations in order to meet our debt service obligations. The Revolving Credit Facility and the indenture governing the 2023 Notes each contain, and any future financing agreements may contain, operating and financial restrictions and covenants that could restrict our ability to finance future operations or capital needs, or to expand or pursue our business activities, which may, in turn, limit our ability to service our indebtedness. For example, the Revolving Credit Facility and the indenture that governs the 2023 Notes restrict our ability to, among other things:
• make investments;
• incur or guarantee additional indebtedness or issue preferred units;
• pay dividends or make distributions on units or redeem or repurchase our subordinated debt;
• create liens;
• incur dividend or other payment restrictions affecting subsidiaries;
• sell assets;
• merge or consolidate with other entities; and
• enter into transactions with affiliates.
Furthermore, the Revolving Credit Facility contains covenants requiring us to maintain certain financial ratios.
The provisions of the Revolving Credit Facility and the indenture that governs the 2023 Notes may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our existing debt could result in an event of default that could enable our lenders, subject to the terms and conditions of such debt, to declare the outstanding principal, together with accrued interest, to be immediately due and payable. If we were unable to repay the accelerated amounts, our lenders could proceed against the collateral granted to them to secure such debt. If the payment of our debt is accelerated, defaults under our other debt instruments, if any, may be triggered, and our assets may be insufficient to repay such debt in full and the holders of our units could experience a partial or total loss of their investment. Refer to “Liquidity and Capital Resources—Credit Facilities” included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K for further information.
Our current and future debt levels may limit our flexibility to obtain financing and to pursue other business opportunities.
Our level of indebtedness could have important consequences to us, including the following:
• our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired, or such financing may not be available on favorable terms;
• covenants contained in our existing and future credit and debt arrangements will require us to meet financial tests that may affect our flexibility in planning for and reacting to changes in our business, including possible acquisition opportunities;
• a substantial portion of our cash flow is required to make principal and interest payments on our indebtedness, reducing the funds that would otherwise be available for operations, future business opportunities and payments of our debt obligations, including the 2023 Notes;
• our debt level will make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our business or the economy generally; and
• our flexibility in responding to changing business and economic conditions may be limited.
Any of these factors could result in a material adverse effect on our business, financial condition, results of operations, business prospects and ability to satisfy our obligations under the 2023 Notes.
Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets or seeking additional equity capital. We may not be able to effect any of these actions on satisfactory terms or at all. The amount of cash we have available for distribution to holders of our common units depends primarily on our cash flow rather than on our profitability, which may prevent us from making distributions, even during periods in which we record net income.
Any borrowings and letters of credit issued under the Revolving Credit Facility will be secured and, as a result, effectively senior to the 2023 Notes and guarantees of the 2023 Notes by the guarantors, to the extent of the value of the collateral securing that indebtedness. In addition, the holders of any future debt we may incur that ranks equally with the 2023 Notes will be entitled to share ratably with the holders of the 2023 Notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding up of the Partnership. This may have the effect of reducing the amount of proceeds paid to holders of the 2023 Notes in such events.
We may not be able to secure necessary financing on acceptable terms, or at all.
The 2023 Notes and the Revolving Credit Facility both have maturity dates in 2023. We can make no assurance that we will be able to refinance our outstanding indebtedness on satisfactory terms prior to their maturity dates. Market disruptions, such as those experienced in relation to the COVID-19 pandemic, may increase our cost of borrowing or adversely affect our ability to refinance our obligations as they become due. Further, ESG concerns and other pressures on the oil and gas industry could lead to increased costs of financing or limit our access to the capital markets. If we are unable to refinance our indebtedness or access additional credit, or if short-term or long-term borrowing costs significantly increase, our ability to finance current operations and meet our short-term and long-term obligations could be adversely affected.
Increases in interest rates could adversely impact the price of our common units, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.
Interest rates on future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our unit price is impacted by the level of our cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our common units, and a rising interest rate environment could have an adverse impact on the price of our common units, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.
We do not have the same flexibility as other types of organizations to accumulate cash which may limit cash available to service the Revolving Credit Facility or the 2023 Notes or to repay them at maturity.
Subject to the limitations on restricted payments contained in the Revolving Credit Facility, in the indenture governing the 2023 Notes and any other indebtedness, we distribute all of our “available cash” each quarter to our unitholders of record on the applicable record date.
Available cash generally means, for any quarter, all cash on hand at the end of that quarter:
• less , the amount of cash reserves established by our general partner to:
◦ provide for the proper conduct of our business (including cash reserves for our future capital expenditures and anticipated future debt service requirements subsequent to that quarter);
◦ comply with applicable law, any of our debt instruments or other agreements; or
◦ provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters (provided that our general partner may not establish cash reserves for distributions if the effect of the establishment of such reserves will prevent us from distributing the minimum quarterly distribution on all common units and any cumulative arrearages on such common units for the current quarter);
• plus , if our general partner so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made subsequent to the end of such quarter.
The purpose and effect of the last bullet point above is to allow our general partner, if it so decides, to use cash from working capital borrowings made after the end of the quarter but on or before the date of determination of available cash for that quarter to pay distributions to unitholders. Under our partnership agreement, working capital borrowings are generally borrowings that are made under a credit facility, commercial paper facility or similar financing arrangement, and in all cases are used solely for working capital purposes or to pay distributions to unitholders, and with the intent of the borrower to repay such borrowings within twelve months with funds other than from additional working capital borrowings.
As a result, we do not accumulate significant amounts of cash and thus do not have the same flexibility as corporations or other entities that do not pay dividends, or distributions, or have complete flexibility regarding the amounts they will distribute to their equity holders. The timing and amount of our distributions could significantly reduce the cash available to pay the principal, premium (if any) and interest on the Revolving Credit Facility or the 2023 Notes. The board of directors of our general partner will determine the amount and timing of such distributions and has broad discretion to establish and make additions to our reserves or the reserves of our operating subsidiaries as it determines are necessary or appropriate.
Although our payment obligations to our unitholders are subordinate to our payment obligations with respect to the Revolving Credit Facility or the 2023 Notes, the value of our units may decrease in correlation with decreases in the amount we distribute per unit. Accordingly, if we experience a liquidity problem in the future, we may not be able to issue equity to recapitalize.
Payment of principal and interest on the 2023 Notes is effectively subordinated to our senior secured debt to the extent of the value of the assets securing the debt and structurally subordinated as to the indebtedness of any of our subsidiaries that do not guarantee the 2023 Notes.
The 2023 Notes are our senior unsecured debt and rank equally in right of payment with all of our other existing and future unsubordinated debt. The 2023 Notes are effectively junior to all our existing and future secured debt, including the Revolving Credit Facility, to the extent of the value of the assets securing the debt, and to the existing and future secured debt of any subsidiaries that guarantee the 2023 Notes to the extent of the value of the assets securing the debt and structurally subordinated to any debt of our subsidiaries that do not guarantee the 2023 Notes. Holders of our secured obligations, including obligations under the Revolving Credit Facility, will have claims that are prior to claims of holders of the 2023 Notes with respect to the assets securing those obligations. In the event of liquidation, dissolution, reorganization, bankruptcy or any similar proceeding, our assets and those of our subsidiaries will be available to pay obligations on the 2023 Notes and the guarantees only after holders of our senior secured debt have been paid the value of the assets securing such debt.
In addition, although all of our existing subsidiaries, other than PBF Finance, initially guarantee the 2023 Notes, in the future, under certain circumstances, the guarantees are subject to release and we may have subsidiaries that are not guarantors. In that case, the 2023 Notes would be structurally junior to the claims of all creditors, including trade creditors and tort claimants, of our subsidiaries that are not guarantors. In the event of the liquidation, dissolution, reorganization, bankruptcy or similar proceeding of the business of a subsidiary that is not a guarantor, creditors of that subsidiary would generally have the right to be paid in full before any distribution is made to us or the holders of the 2023 Notes. Accordingly, there may not be sufficient funds remaining to pay amounts due on all or any of the 2023 Notes.
Further, although PBF LLC provides a limited guarantee of collection of the principal amount of the 2023 Notes, under the terms of such guarantee, PBF LLC will generally not have any obligation to make principal payments with respect to the 2023 Notes unless and until all remedies, including in the context of bankruptcy proceedings, have first been fully exhausted against us with respect to such payment obligations, and holders of the 2023 Notes are still owed amounts in respect of the principal of the 2023 Notes. In addition, PBF LLC is not subject to any of the covenants under the indenture governing the 2023 Notes.
The subsidiary guarantees of the 2023 Notes could be deemed fraudulent conveyances under certain circumstances, and a court may try to subordinate or void the subsidiary guarantees.
Under U.S. bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee can be voided, or claims under a guarantee may be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee:
• received less than reasonably equivalent value or fair consideration for the incurrence of the guarantee and was insolvent or rendered insolvent by reason of such incurrence;
• was engaged in a business or transaction for which the guarantor’s remaining assets constituted unreasonably small capital; or
• intended to incur, or believed that it would incur, debts beyond its ability to pay those debts as they mature.
In addition, any payment by that guarantor under a guarantee could be voided and required to be returned to the guarantor or to a fund for the benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a subsidiary guarantor would be considered insolvent if:
• the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets;
• the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability, including contingent liabilities, on its existing debts as they become absolute and mature; or
• it could not pay its debts as they became due.
We cannot assure you as to what standard for measuring insolvency a court would apply or that a court would agree with our conclusions.
We may not be able to repurchase the 2023 Notes upon a change of control triggering event, and a change of control triggering event could result in us facing substantial repayment obligations under the Revolving Credit Facility and the 2023 Notes.
Upon occurrence of a change of control triggering event, the indenture governing the 2023 Notes provides that holders will have the right to require us to repurchase all or any part of their 2023 Notes with a cash payment equal to 101% of the aggregate principal amount of 2023 Notes repurchased, plus accrued and unpaid interest. Additionally, our ability to repurchase the 2023 Notes upon such a change of control triggering event would be limited by our access to funds at the time of the repurchase and the terms of our other debt agreements. In addition, the Revolving Credit Facility contains provisions relating to change of control of our general partner, our partnership and our operating subsidiaries. Upon a change of control triggering event, we may be required immediately to repay the outstanding principal, any accrued and unpaid interest on and any other amounts owed by us under the Revolving Credit Facility, the 2023 Notes and any other outstanding indebtedness. The source of funds for these repayments would be our available cash or cash generated from other sources. However, we cannot assure holders that we will have sufficient funds available or that we will be permitted by our other debt instruments to fulfill these obligations upon a change of control in the future, in which case the lenders under the Revolving Credit Facility would have the right to foreclose on our assets, which would have a material adverse effect on us. Furthermore, certain change of control events would constitute an event of default under the agreement governing the Revolving Credit Facility and we might not be able to obtain a waiver of such defaults. There is no restriction in our partnership agreement on the ability of our general partner to enter into a transaction which would trigger the change of control provisions of the Revolving Credit Facility or the indenture governing the 2023 Notes.
Risks Inherent in an Investment in Us
Our general partner and its affiliates, including PBF Energy, have conflicts of interest with us and limited fiduciary duties to us and our unitholders, and they may favor their own interests to the detriment of us and our other common unitholders.
PBF Energy owns and controls our general partner and appoints all of the officers and directors of our general partner. All of the officers and certain of the directors of our general partner are also officers of PBF Energy. Although our general partner has a duty to manage us in a manner that is beneficial to us and our unitholders, the directors and officers of our general partner have a fiduciary duty to manage our general partner in a manner that is beneficial to PBF Energy. Conflicts of interest will arise between PBF Energy and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of PBF Energy over our interests and the interests of our unitholders. These conflicts include the following situations, among others:
• Neither our partnership agreement nor any other agreement requires PBF Energy to pursue a business strategy that favors us or utilizes our assets, including whether to increase or decrease refinery production, whether to shut down or reconfigure a refinery or what markets to pursue or grow. The directors and officers of PBF Energy have a fiduciary duty to make these decisions in the best interests of the stockholders of PBF Energy, which may be contrary to our interests. PBF Energy may choose to shift the focus of its investment and growth to areas not served by our assets.
• PBF Energy, as our primary customer, has an economic incentive to cause us not to seek higher service fees, even if such higher rates or fees would reflect rates and fees that could be obtained in arm’s-length, third-party transactions.
• Our general partner is allowed to take into account the interests of parties other than us, such as PBF Energy, in resolving conflicts of interest.
• All officers and certain directors of our general partner are also officers of PBF Energy and owe fiduciary duties to PBF Energy. These officers will devote significant time to the business of PBF Energy and will be compensated accordingly.
• PBF Energy may be constrained by the terms of its debt instruments from taking actions, or refraining from taking actions, that may be in our best interest.
• Our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties, limits our general partner’s liabilities and restricts the remedies available to our unitholders for actions that, without such limitations, might constitute breaches of fiduciary duty.
• Except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval.
• Disputes may arise under our commercial agreements with PBF Energy.
• Our general partner determines the amount and timing of asset purchases and sales, borrowings, issuances of additional partnership units and the creation, reduction or increase of cash reserves, each of which can affect the amount of cash available for distribution to our unitholders.
• Our general partner determines the amount and timing of any capital expenditures and whether a capital expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion, investment or regulatory capital expenditure, which does not reduce operating surplus. This determination can affect the amount of cash that is distributed to our unitholders.
• Our general partner determines which costs incurred by it are reimbursable by us.
• Our general partner may cause us to borrow funds in order to permit the payment of cash distributions.
• Our partnership agreement permits us to classify up to $20.0 million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions to PBF LLC.
• Our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf.
• Our general partner intends to limit its liability regarding our contractual and other obligations.
• PBF Energy and its controlled affiliates may exercise their right to call and purchase all of the common units not owned by them if they own more than 80% of the common units.
• Our general partner controls the enforcement of the obligations that it and its affiliates owe to us, including PBF Energy’s obligations under the Omnibus Agreement and its commercial agreements with us.
• Our general partner decides whether to retain separate counsel, accountants or others to perform services for us.
PBF Energy may compete with us.
PBF Energy may compete with us. Under the Omnibus Agreement, PBF Energy and its affiliates agree not to engage in, whether by acquisition or otherwise, the business of owning or operating any crude oil, refined products or natural gas pipelines, terminals or storage facilities in the U.S. that are not within, directly connected to, substantially dedicated to, or otherwise an integral part of, any refinery owned, acquired or constructed by PBF Energy. This restriction, however, does not apply to:
• any assets owned by PBF Energy at the closing of the IPO (including replacements or expansions of those assets);
• any assets acquired or constructed by PBF Energy that are within, substantially dedicated to, or an integral part of any refinery owned, acquired or constructed by PBF Energy;
• any asset or business that PBF Energy acquires or constructs that has a fair market value of less than $25.0 million;
• any asset or business that PBF Energy acquires or constructs that has a fair market value of $25.0 million or more if the Partnership has been offered the opportunity and has elected not to purchase such asset, group of assets or business;
• any logistics asset that PBF Energy acquires or constructs that has a fair market value of $25.0 million or more but comprises less than half of the fair market value (as determined in good faith by PBF Energy) of the total asset package acquired or constructed by PBF Energy;
• the purchase and ownership of a non-controlling interest in any publicly traded entity; and
• the ownership of the equity interests in us, our general partner and our affiliates.
As a result, PBF Energy has the ability to construct assets which directly compete with our assets. The limitations on the ability of PBF Energy to compete with us are terminable by either party if PBF Energy ceases to control our general partner.
Pursuant to the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including PBF Energy and its executive officers and directors. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our common unitholders.
If you are not an eligible holder, your common units may be subject to redemption.
We have adopted certain requirements regarding those investors who may own our common units. Eligible holders are limited partners whose (i) federal income tax status is not reasonably likely to have a material adverse effect on the rates that can be charged by us on assets that are subject to regulation by the FERC or an analogous regulatory body and (ii) nationality, citizenship or other related status would not create a substantial risk of cancellation or forfeiture of any property in which we have an interest, in each case as determined by our general partner with the advice of counsel. If you are not an eligible holder, in certain circumstances as set forth in our partnership agreement, your units may be redeemed by us at the then current market price. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner.
It is our policy to distribute a significant portion of our cash available for distribution to our partners, which could limit our ability to grow and make acquisitions.
We distribute most of our cash available for distribution, which may cause our growth to proceed at a slower pace than that of businesses that reinvest their cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to our common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may impact the cash that we have available to distribute to our unitholders or otherwise invest in or grow our business.
Our partnership agreement does not contain a requirement for us to pay distributions to our unitholders, and there is no guarantee that we will pay the minimum quarterly distribution, or any distribution, in any quarter.
The market price of our common units may fluctuate significantly, which could cause the value of your investment to decline.
The market price of our common units may decline and will likely continue to be influenced by many factors, some of which are beyond our control, including:
• the level of our quarterly distributions;
• our quarterly or annual earnings or those of other companies in our industry;
• announcements by us or our competitors of significant contracts or acquisitions;
• changes in accounting standards, policies, guidance, interpretations or principles;
• changes in tax laws and regulations;
• general economic conditions, including interest rates and governmental policies impacting interest rates;
• the failure of securities analysts to cover our common units or changes in financial estimates by analysts; and
• future sales of our common units.
These and other factors may cause the market price of our units to decrease significantly, which in turn would adversely affect the value of your investment.
In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigationagainst those companies. Such litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which could significantly harm our profitability and reputation.
Our partnership agreement replaces our general partner’s fiduciary duties to holders of our common units with contractual standards governing its duties.
Our partnership agreement contains provisions that eliminate the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law and replaces those duties with several different contractual standards. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, free of any duties to us and our unitholders other than the implied contractual covenant of good faith and fair dealing, which means that a court will enforce the reasonable expectations of the partners where the language in our partnership agreement does not provide for a clear course of action. This provision entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:
• how to allocate business opportunities among us and its other affiliates;
• whether to exercise its limited call right;
• whether to seek approval of the resolution of a conflict of interest by the conflicts committee of the board of directors of our general partner; and
• whether or not to consent to any merger or consolidation of the partnership or amendment to the partnership agreement.
Our partnership agreement restricts the remedies available to holders of our common units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.
Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement provides that:
• whenever our general partner, the board of directors of our general partner or any committee thereof (including the conflicts committee) makes a determination or takes, or declines to take, any other action in their respective capacities, our general partner, the board of directors of our general partner and any committee thereof (including the conflicts committee), as applicable, is required to make such determination, or take or decline to take such other action, in good faith, meaning that it subjectively believed that the decision was in the best interests of our partnership, and, except as specifically provided by our partnership agreement, will not be subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;
• our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as such decisions are made in good faith;
• our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and
• our general partner will not be in breach of its obligations under our partnership agreement (including any duties to us or our unitholders) if a transaction with an affiliate or the resolution of a conflict of interest is:
◦ approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval;
◦ approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates;
◦ determined by the board of directors of our general partner to be on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or
◦ determined by the board of directors of our general partner to be fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.
In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our general partner or the conflicts committee must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee and the board of directors of our general partner determines that the resolution or course of action taken with respect to the affiliate transaction or conflict of interest satisfies either of the standards set forth in the third and fourth sub-bullets above, then it will be presumed that, in making its decision, the board of directors of our general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership challenging such determination, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption.
The administrative services fee and reimbursements due to our general partner and its affiliates for services provided to us or on our behalf will reduce our cash available for distribution to our common unitholders. The amount and timing of such reimbursements will be determined by our general partner.
Prior to making any distribution on our common units, we will reimburse our general partner and its affiliates, including PBF Energy, for costs and expenses they incur and payments they make on our behalf. Prior to making distributions, we will pay our general partner and its affiliates an annual fee for the provision of centralized administrative services and employees and reimburse our general partner and its affiliates for direct or allocated costs and expenses incurred on our behalf pursuant to the Omnibus Agreement, which we currently estimate, as of January 1, 2022, will total $8.3 million annually, inclusive of estimated obligations under the Omnibus Agreement to reimburse PBF LLC for certain compensation and benefit costs of employees who devote more than 50% of their time to us for the year ending December 31, 2022. In addition, prior to making distributions, we expect to pay an annual fee of $8.7 million to PBF Holding for the provision of certain personnel and utilities and other infrastructure-related services with respect to our business pursuant to the Services Agreement. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of available cash to pay cash distributions to our common unitholders.
Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.
Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders will have no right on an annual or ongoing basis to elect our general partner or its board of directors. Rather, the board of directors of our general partner will be appointed by PBF Energy. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which our common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price. Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.
Even if holders of our common units are dissatisfied, they cannot currently remove our general partner without its consent.
Unitholders currently are unable to remove our general partner without its consent because our general partner and its affiliates, including PBF Energy, own sufficient units to be able to prevent its removal. The vote of the holders of at least 66 2 / 3 % of all outstanding common units voting together as a single class is required to remove our general partner. PBF Energy currently indirectly owns 47.9% of our outstanding common units.
Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.
Unitholders’ voting rights are further restricted by a provision of our partnership agreement providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.
Our general partner interest or the control of our general partner may be transferred to a third-party without unitholder consent.
Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of any assets it may own without the consent of the unitholders. Furthermore, there is no restriction in our partnership agreement on the ability of PBF Energy to transfer its membership interest in our general partner to a third party. The new members of our general partner would then be in a position to replace the board of directors and officers of our general partner with their own choices and to control the decisions taken by the board of directors and officers.
We may issue additional units without unitholder approval, which would dilute unitholder interests.
Our partnership agreement does not limit the number of additional limited partner interests, including limited partner interests that rank senior to the common units that we may issue at any time without the approval of our unitholders. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:
• our existing unitholders’ proportionate ownership interest in us will decrease;
• the amount of cash available for distribution on each unit may decrease;
• the ratio of taxable income to distributions may increase;
• the relative voting strength of each previously outstanding unit may be diminished; and
• the market price of the common units may decline.
PBF Energy may sell units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.
As of December 31, 2021, PBF Energy held 29,953,631 of our common units. In addition, we have agreed to provide PBF Energy with certain registration rights. The sale of these units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.
Our general partner intends to limit its liability regarding our obligations.
Our general partner intends to limit its liability under contractual arrangements so that the counterparties to such arrangements have recourse only against our assets and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement permits our general partner to limit its liability, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.
PBF Energy has a limited call right that may require you to sell your units at an undesirable time or price.
If at any time PBF Energy and its controlled affiliates own more than 80% of our common units, PBF Energy will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price that is not less than their then-current market price, as calculated pursuant to the terms of our partnership agreement. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. PBF Energy owns 47.9% of our outstanding common units as of December 31, 2021.
Your liability may not be limited if a court finds that unitholder action constitutes control of our business.
A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in and outside of Delaware. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the other states in which we do business. You could be liable for any and all of our obligations as if you were a general partner if a court or government agency were to determine that:
• we were conducting business in a state but had not complied with that particular state’s partnership statute; or
• your rights to act with other unitholders to remove or replace our general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constitute “control” of our business.
Unitholders may have liability to repay distributions that were wrongfully distributed to them.
Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of an impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Transferees of common units are liable both for the obligations of the transferor to make contributions to the partnership that were known to the transferee at the time of transfer and for those obligations that were unknown if the liabilities could have been determined from our partnership agreement. Neither liabilities to partners on account of their partnership interest nor liabilities that are non-recourse to the partnership are counted for purposes of determining whether a distribution is permitted.
The NYSE does not require a publicly traded limited partnership like us to comply with certain of its corporate governance requirements.
We currently list our common units on the NYSE, under the symbol “PBFX.” Because we are a publicly traded limited partnership, the NYSE does not require us to have, and we do not intend to have, a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders do not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements.
Tax Risks to Common Unitholders
Our tax treatment depends on qualifying income requirements and our status as a partnership for U.S. federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the IRS were to treat us as a corporation for U.S. federal income tax purposes, which would subject us to entity-level taxation, or if we were otherwise subjected to a material amount of entity-level taxation, then our distributable cash flow to our unitholders would be substantially reduced.
The anticipated after-tax benefit of an investment in our units depends largely on our being treated as a partnership for U.S. federal income tax purposes.
Despite the fact that we are organized as a limited partnership under Delaware law, we will be treated as a corporation for U.S. federal income tax purposes unless we satisfy a “qualifying income” requirement. Based on our current operations, we believe we satisfy the qualifying income requirement. Failing to meet the qualifying income requirement or a change in current law could cause us to be treated as a corporation for U.S. federal income tax purposes or otherwise subject us to taxation as an entity.
If we were treated as a corporation for U.S. federal income tax purposes, we would pay U.S. federal income tax on our income at the corporate tax rate and we would also likely be liable for additional state and local income taxes at varying rates. Distributions to our unitholders would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to our unitholders. Because taxes would be imposed upon us as a corporation, our cash available for distribution to our unitholders would be substantially reduced.
At the state level, several states have been evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation. Imposition of a material amount of any of these taxes in the jurisdictions in which we own assets or conduct business could substantially reduce the cash available for distribution to our unitholders.
If we were treated as a corporation or otherwise subjected to a material amount of entity-level taxation, there would be a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.
The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes or differing interpretations, possibly applied on a retroactive basis.
The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, from time to time members of the U.S. Congress have proposed and considered substantive changes to the existing federal income tax laws, which would affect publicly traded partnerships, including elimination of partnership tax treatment of publicly traded partnerships.
In addition, the Treasury Department has issued, and in the future may issue, regulations interpreting those laws that affect publicly traded partnerships. We believe the income that we treat as qualifying satisfies the requirements under current regulations. However, there can be no assurance that there will not be further changes to U.S. federal income tax laws or the Treasury Department’s interpretation of the qualifying income rules in a manner that could impact our ability to qualify as a partnership for U.S. federal income tax purposes in the future.
We are unable to predict whether any legislation or other tax-related proposals will ultimately be enacted. Any modification to the U.S. federal income tax laws and interpretations thereof may or may not be applied retroactively and could make it more difficult or impossible for us to meet the exception to be treated as a partnership for U.S. federal income tax purposes. Any such changes could negatively impact the value of an investment in our common units.
If the IRS were to contest the U.S. federal income tax positions we take, it may adversely impact the market for our common units and our cash available for distribution to our unitholders might be substantially reduced.
The IRS may adopt positions that differ from the positions that we take, even positions taken with the advice of counsel. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take. A court may not agree with some or all of the positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the prices at which they trade. Moreover, the costs of any contest between us and the IRS will result in a reduction in cash available for distribution to our unitholders and thus will be borne indirectly by our unitholders.
Pursuant to partnership audit rules applicable for partnership tax years beginning after 2017, if the IRS makes audit adjustments to our partnership tax returns, it may assess and collect any taxes (including applicable penalties and interest) resulting from such audit adjustments directly from us. To the extent possible under these rules our general partner may elect to either pay the taxes (including any applicable penalties and interest) directly to the IRS in the year in which the audit is completed or, if we are eligible, issue a revised information statement to each current and former unitholder with respect to an audited and adjusted partnership tax return. Although our general partner may elect to have our current and former unitholders take such audit adjustment into account and pay any resulting taxes (including applicable penalties or interest) in accordance with their interests in us during the tax year under audit, there can be no assurance that such election will be practical, permissible or effective in all circumstances. If we make payments of taxes and any penalties and interest directly to the IRS in the year in which the audit is completed, our cash available for distribution to our unitholders might be substantially reduced, in which case our current unitholders may bear some or all of the tax liability resulting from such audit adjustment, even if the unitholders did not own units in us during the tax year under audit.
Our unitholders’ share of our income is taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.
Each unitholder is treated as a partner to whom we will allocate taxable income even if the unitholder does not receive any cash distributions from us. Unitholders are required to pay U.S. federal income taxes and, in some cases, state and local income taxes, on their share of our taxable income, whether or not they receive cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax due from them with respect to that income.
Tax gain or loss on the disposition of our units could be more or less than expected.
If our unitholders sell units, they will recognize a gain or loss for federal income tax purposes equal to the difference between the amount realized and their tax basis in those units. Because distributions in excess of their allocable share of our net taxable income decrease their tax basis in their units, the amount, if any, of such prior excess distributions with respect to the units a unitholder sells will, in effect, become taxable income to the unitholder if it sells such units at a price greater than its tax basis in those units, even if the price received is less than its original cost. Furthermore, a substantial portion of the amount realized on any sale of units, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our non-recourse liabilities, a unitholder that sells units may incur a tax liability in excess of the amount of cash received from the sale.
Unitholders may be subject to limitations on their ability to deduct interest expense we incur.
Our ability to deduct business interest expense is limited for U.S. federal income tax purposes to an amount equal to the sum of our business interest income and a specified percentage of our “adjusted taxable income” during the taxable year computed without regard to any business interest income or expense. Business interest expense that we are not entitled to fully deduct will be allocated to each unitholder as excess business interest and can be carried forward by the unitholder to successive taxable years and used to offset any excess taxable income allocated by us to the unitholder. Any excess business interest expense allocated to a unitholder will reduce the unitholder’s tax basis in its partnership interest in the year of the allocation even if the expense does not give rise to a deduction to the unitholder in that year.
Tax-exempt entities owning our units face unique tax issues that may result in substantially adverse tax consequences to them.
Investment in our units by tax-exempt entities, such as individual retirement accounts (known as “IRAs”), raises tax issues unique to them. For example, virtually all of our income allocated to entities exempt from U.S. federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them, despite their exempt status. Tax-exempt entities with multiple unrelated trades or businesses cannot aggregate losses from one unrelated trade or business to offset income from another to reduce total unrelated business taxable income. As a result, it may not be possible for tax-exempt entities to utilize losses from an investment in us to offset unrelated business taxable income from another unrelated trade or business and vice versa. Tax-exempt entities should consult a tax advisor before investing in our common units.
Non-U.S. unitholders will be subject to U.S. federal income taxes and withholding with respect to income and gain from owning our units.
Non-U.S. persons are generally taxed and subject to federal income tax filing requirements on income effectively connected with a U.S. trade or business. Income allocated to our unitholders and any gain from the sale of our common units will generally be considered to be “effectively connected” with a U.S. trade or business. As a result, distributions to a non-U.S. unitholder will be subject to withholding at the highest applicable effective tax rate and a non-U.S. unitholder who sells or otherwise disposes of a common unit will also be subject to U.S. federal income tax on the gain realized from the sale or disposition of that common unit.
Moreover, a federal income tax withholding obligation of 10% of the amount realized is imposed upon a non-U.S. person’s sale or exchange of an interest in a partnership that is engaged in a U.S. trade or business. However, the U.S. Treasury and the IRS have suspended application of this withholding rule for dispositions of publicly traded partnership interests, including transfers of our common units, that occur before January 1, 2023. Under applicable Treasury Regulations, such withholding will be required on open market transactions, but in the case of a transfer made through a broker, (i) a partner’s share of liabilities will be excluded from the amount realized, and (ii) the obligation to withhold will be imposed on the broker instead of the transferee. These withholding obligations will apply to transfers of our common units occurring on or after January 1, 2023. Non-U.S. persons should consult a tax advisor before investing in our common units.
We treat each purchaser of our common units as having the same tax benefits without regard to the common units actually purchased. The IRS may challenge this treatment, which could adversely affect the value of our common units.
Because we cannot match transferors and transferees of common units, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to unitholders. It also could affect the timing of these tax benefits or the amount of gain from a unitholder’s sale of common units and could have a negative impact on the value of our common units or result in tax return audit adjustments.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based on the ownership of our common units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based on the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. Although Treasury Regulations allow publicly traded partnerships to use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders, these regulations do not specifically authorize all aspects of the proration method we have adopted. If the IRS were to successfullychallenge our proration method or new Treasury Regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders.
A unitholder whose units are the subject of a securities loan (e.g., a loan to a “short seller” to cover a short sale of units) may be considered to have disposed of those units. If so, such unitholders would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and could recognize gain or loss from the disposition.
Because there are no specific rules governing the U.S. federal income tax consequence of loaning a partnership interest, a unitholder whose units are the subject of a securities loan may be considered to have disposed of the loaned units. In that case, the unitholder may no longer be treated for U.S. federal income tax purposes as a partner with respect to those units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a securities loan are urged to consult a tax adviser to discuss whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from loaning their units.
We have adopted certain valuation methodologies in determining a unitholder’s allocations of income, gain, loss and deduction. The IRS may challenge these methodologies or the resulting allocations, and such a challenge could adversely affect the value of our common units.
In determining the items of income, gain, loss and deduction allocable to our unitholders, we must routinely determine the fair market value of our assets. Although we may from time to time consult with professional appraisers regarding valuation matters, we make many fair market value estimates ourselves using a methodology based on the market value of our common units as a means to determine the fair market value of our assets. The IRS may challenge these valuation methods and the resulting allocations of income, gain, loss and deduction.
A successful IRS challenge to these methods or allocations could adversely affect the timing, character or amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.
As a result of investing in our common units, our unitholders may become subject to state and local taxes and return filing requirements in jurisdictions where we operate or own or acquire properties.
In addition to U.S. federal income taxes, our unitholders will likely be subject to other taxes, including state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or control property now or in the future, even if they do not live in those jurisdictions. Our unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with those requirements. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal income tax. It is our unitholders’ responsibility to file all federal, state and local tax returns.
caution
difficult
impossible
Important factors that could cause actual results to differ materially from our expectations, which we refer to as “cautionary statements,” are disclosed under “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-K. All forward-looking information in this Form 10-K 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:
• changes in general economic conditions, including market and macro-economic disruptions resulting from pandemics, such as the ongoing COVID-19 pandemic, including resurgences and variants of the virus, and related governmental and consumer responses thereto;
• our ability to make, complete and integrate acquisitions from affiliates or third parties, and to realize the benefits from such acquisitions;
• our ability to have sufficient cash from operations to enable us to pay the minimum quarterly distribution;
• competitive conditions in our industry;
• political pressure and influence of environmental groups and other stakeholders on decisions and policies related to the refining, processing and storing of crude oil and refined products;
• actions taken by our customers and competitors;
• the supply of, and demand for, crude oil, refined products, natural gas and logistics services;
• our ability to successfully implement our business plan;
• our dependence on PBF Energy for a substantial majority of our revenue subjects us to the business risks of PBF Energy, which include the possibility that contracts will not be renewed because they are no longer beneficial for PBF Energy;
• a substantial majority of our revenue is generated at PBF Energy’s facilities, particularly associated with PBF Energy’s Delaware City, Toledo and Torrance refineries, and any adverse development at any of these facilities could have a material adverse effect on us;
• our ability to complete internal growth projects on time and on budget;
• the price and availability of debt and equity financing;
• operating hazards and other risks incidental to the processing of crude oil and the receiving, handling, storing and transferring of crude oil, refined products, natural gas and intermediates;
• natural disasters, weather-related delays, casualty losses and other matters beyond our control;
• the threat of cyberattacks;
• our and PBF Energy’s increased dependence on technology;
• interest rates;
• labor relations;
• changes in the availability and cost of capital;
• the effects of existing and future laws and governmental regulations, including those related to the shipment of crude oil by rail or in response to the potential impacts of climate change;
• changes in insurance markets impacting costs and the level and types of coverage available;
• the timing and extent of changes in commodity prices and demand for PBF Energy’s refined products and natural gas and the differential in the prices of various crude oils;
• the suspension, reduction or termination of PBF Energy’s obligations under our commercial agreements;
• disruptions due to equipment interruption or failure at our facilities, PBF Energy’s facilities or third-party facilities on which our business is dependent;
• our general partner and its affiliates, including PBF Energy, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to the detriment of us and our other common unitholders;
• our partnership agreement restricts the remedies available to holders of our common units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty;
• holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors;
• our tax treatment depends on qualifying income requirements and our status as a partnership for U.S. federal income tax purposes, as well as not being subject to a material amount of entity level taxation by individual states;
• changes at any time (including on a retroactive basis) in the tax treatment of publicly traded partnerships, including related impacts on potential dropdown transactions with PBF LLC, or an investment in our common units;
• our unitholders will be required to pay taxes on their share of our taxable income even if they do not receive any cash distributions from us;
• the effects of future litigation; and
• other factors discussed elsewhere in this Form 10-K.
We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Form 10-K may not in fact occur. Accordingly, investors should not place undue reliance on those statements.
Our forward-looking statements speak only as of the date of this Form 10-K or as of the date which they are made. Except as required by applicable law, including the securities laws of the U.S., we undertake no obligation 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.
Overview
We are a fee-based, growth-oriented, Delaware master limited partnership formed in February 2013 by subsidiaries of PBF Energy to own or lease, operate, develop and acquire crude oil and refined products terminals, pipelines, storage facilities and similar logistics assets. PBF GP is our general partner and is wholly-owned by PBF LLC. PBF Energy is the sole managing member of PBF LLC and, as of December 31, 2021, owned 99.2% of the total economic interest in PBF LLC. As of December 31, 2021, PBF LLC held a 47.9% limited partner interest in us, with the remaining 52.1% limited partner interest owned by public unitholders.
Our business includes the assets, liabilities and results of operations of certain crude oil, refined products, natural gas and intermediates terminaling, pipeline, storage and processing assets, including those previously operated and owned by PBF Holding’s subsidiaries and PBF Holding’s previously held subsidiaries. Refer to “Item 1. Business” of this Form 10-K for more detailed information regarding our business and assets.
Business Developments
Refer to “Business Developments” included in “Item 1. Business” of this Form 10-K for a discussion regarding our business developments during the fiscal year 2021.
Principles of Combination and Consolidation and Basis of Presentation
In general, our Predecessor did not historically operate its assets for the purpose of generating revenue independent of other PBF Energy businesses that we support, with the exception of the DCR Products Pipeline and the Paulsboro Lube Oil Terminal. In connection with the closing of the IPO and the Acquisitions from PBF, we entered into commercial and service agreements with subsidiaries of PBF Energy, under which we operate our assets for the purpose of generating fee-based revenue. We receive, handle and transfer crude oil, refined products and natural gas from sources located throughout the U.S. and Canada and store crude oil, refined products and intermediates for PBF Energy in support of its refineries located in Paulsboro, New Jersey; Delaware City, Delaware; Toledo, Ohio; Chalmette, Louisiana; Torrance, California; and Martinez, California. In 2020, PBF Energy reconfigured its Delaware and Paulsboro refineries as part of the East Coast Refining Reconfiguration. We acquired various terminal, pipeline and storage assets from PBF Energy, which are integral components of the crude oil, refined products and natural gas delivery and storage operations at PBF Energy’s refineries. In addition, we generate third-party revenue from certain of our assets.
The consolidated financial statements presented in this Form 10-K include our consolidated financial results as of and for the period ending December 31, 2021.
Business Strategies
We continue to focus on the following strategic areas:
Maintain Safe, Reliable and Efficient Operations.
• Maintain, emphasize and improve the safety, reliability, environmental compliance and efficiency of our operations
• Improve operating performance through preventive maintenance programs, employee training and development programs
Generate Stable, Fee-Based Cash Flows.
• Utilize long-term, fee-based logistics contracts that provide stable, predictable cash flows
• Leverage PBF Energy for a substantial majority of our revenue and continue to seek commercial agreements which include MVCs
• Generate third-party revenue from certain of our assets and seek future third-party growth opportunities
Grow Through Acquisitions and Organic Projects.
• Pursue strategic acquisitions independently and jointly with PBF Energy that complement and grow our asset base
• Pursue strategic organic projects that enhance our existing assets and increase our revenues
• Capitalize on opportunistic dropdown transactions with our parent sponsor that may arise
Seek to Optimize Our Existing Assets and Pursue Third-Party Volumes.
• Enhanceprofitability by increasing throughput volumes from PBF Energy, attracting third-party volumes, improving operating efficiencies and managing costs
How We Evaluate Our Operations
Our management uses a variety of financial and operating metrics to analyze our business and segment performance. These metrics are significant factors in assessing our operating results and profitability and include, but are not limited to, volumes, including terminal and pipeline throughput and storage capacity; operating and maintenance expenses; and EBITDA, EBITDA attributable to PBFX, Adjusted EBITDA and distributable cash flow. We define EBITDA, EBITDA attributable to PBFX, Adjusted EBITDA and distributable cash flow below.
Volumes. The amount of revenue we generate primarily depends on the volumes of crude oil, refined products and natural gas that we throughput at our terminaling and pipeline operations and our available and utilized storage capacity. These volumes are primarily affected by the supply of and demand for crude oil, refined products and natural gas in the markets served directly or indirectly by our assets. Although PBF Energy has MVCs under certain commercial agreements, our results of operations will be impacted by:
• PBF Energy’s utilization of our assets in excess of MVCs;
• our identification and execution of accretive acquisitions and organic expansion projects and capture of incremental PBF Energy or third-party volumes; and
• our increase of throughput or storage volumes at our facilities and additional ancillary services at those terminals and pipelines.
Operating and Maintenance Expenses. Our management seeks to maximize the profitability of our operations by effectively managing operating and maintenance expenses. These expenses are comprised primarily of labor and outside contractor costs, utilities, insurance premiums, repairs and maintenance charges and related property taxes. These expenses generally remain relatively stable across broad ranges of throughput volumes but can fluctuate from period to period depending on the mix of activities performed during that period and the timing of these expenses. We will seek to manage our maintenance expenditures on our assets by scheduling maintenance over time to avoid significant variability in our maintenance expenditures and to minimize their impact on our cash flow.
EBITDA, EBITDA Attributable to PBFX, Adjusted EBITDA and Distributable Cash Flow. We define EBITDA as net income (loss) before net interest expense (including amortization of loan fees and debt premium and accretion on discounted liabilities), income tax expense, depreciation, amortization, impairment expense and change in contingent consideration. We define EBITDA attributable to PBFX as net income (loss) attributable to PBFX before net interest expense (including amortization of loan fees and debt premium and accretion on discounted liabilities), income tax expense, depreciation, amortization, impairment expense and change in contingent consideration attributable to PBFX, which excludes the results of Acquisitions from PBF prior to the effective dates of such transactions and earnings attributable to the CPI Operations LLC (“CPI”) earn-out (the portion of earnings associated with an earn-out provision related to the purchase of CPI). We define Adjusted EBITDA as EBITDA attributable to PBFX excluding acquisition and transaction costs, non-cash unit-based compensation expense and items that meet the conditions of unusual, infrequent and/or non-recurring charges. We define distributable cash flow as EBITDA attributable to PBFX plus non-cash unit-based compensation expense, less cash interest, maintenance capital expenditures attributable to PBFX and income taxes. Distributable cash flow will not reflect changes in working capital balances. EBITDA, EBITDA attributable to PBFX, Adjusted EBITDA and distributable cash flow are not presentations made in accordance with GAAP.
EBITDA, EBITDA attributable to PBFX, Adjusted EBITDA and distributable cash flow are non-GAAP supplemental financial measures that management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:
• our operating performance as compared to other publicly traded partnerships in the midstream energy industry, without regard to historical cost basis or, in the case of EBITDA, financing methods;
• the ability of our assets to generate sufficient cash flow to make distributions to our unitholders;
• our ability to incur and service debt and fund capital expenditures; and
• the viability of acquisitions and other capital expenditure projects and the economic returns on various investment opportunities.
We believe that the presentation of EBITDA, EBITDA attributable to PBFX and Adjusted EBITDA provides useful information to investors in assessing our financial condition and results of operations and assists in evaluating our ongoing operating performance for current and comparative periods. We believe that the presentation of distributable cash flow will provide useful information to investors as it is a widely accepted financial indicator used by investors to compare partnership performance and provides investors with another perspective on the operating performance of our assets and the cash our business is generating. EBITDA, EBITDA attributable to PBFX, Adjusted EBITDA and distributable cash flow should not be considered alternatives to net income, income from operations, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA, EBITDA attributable to PBFX, Adjusted EBITDA and distributable cash flow have important limitations as analytical tools because they exclude some, but not all, items that affect net income and net cash provided by operating activities. Additionally, because EBITDA, EBITDA attributable to PBFX, Adjusted EBITDA and distributable cash flow may be defined differently by other companies in our industry, our definitions of such measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. EBITDA, EBITDA attributable to PBFX, Adjusted EBITDA and distributable cash flow are reconciled to net income and net cash provided by operating activities in this Form 10-K in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”
Factors Affecting the Comparability of Our Financial Results
Our results of operations may not be comparable to our historical results of operations due to certain debt transactions and annual inflation adjustments related to certain of our commercial agreements. Additionally, our results may not be comparable to prior periods due to the impact of the COVID-19 pandemic on our business, including lower throughput volumes at our terminals, as the industry contends with the related economic downturn and volatile commodity market.
Furthermore, our results of operations may not be comparable to our historical results of operations due to the termination of the CPI Processing Agreement (as defined below). In connection with our acquisition of CPI from Crown Point International LLC (“Crown Point”) in October 2018, the purchase and sale agreement included an earn-out provision (the “CPI earn-out”) related to an existing commercial agreement (the “CPI Processing Agreement”), based on the future results of certain acquired idled assets, which recommenced operations in October 2019. In the third quarter of 2020, pursuant to the terms of the CPI Processing Agreement, the counterparty exercised its right to terminate the contract at the conclusion of the initial contract year, effective in the fourth quarter of 2020 (the “CPI Contract Termination”). As a result of the CPI Contract Termination, we recorded an impairment charge of $7.0 million in the third quarter of 2020 to write-down the related processing unit assets and customer contract intangible asset. While the counterparty and the Partnership subsequently agreed to extensions of certain of the originally contracted services under the CPI Processing Agreement, the limited nature of these services affected the comparability of our results of operations, specifically within our Storage segment, on a year-over-year basis. Refer to “Results of Operations” below for further discussion.
On December 30, 2021, we closed on a third-party sale of real property at the East Coast Terminals. We recognized a gain of $2.8 million on the sale, which is included within “Gain on sale of assets” in our Consolidated Statements of Operations. As a result of the sale, our results of operations may not be comparable to our historical results of operations.
Other Factors That Will Significantly Affect Our Results
Supply and Demand for Crude Oil, Refined Products and Natural Gas. We generate revenue by charging fees for receiving, handling, transferring, storing, throughputting and processing crude oil, refined products and natural gas. A majority of our revenue is derived from MVC, fee-based commercial agreements with subsidiaries of PBF Energy with initial terms ranging from one to fifteen years, which enhance the stability of our cash flows. The volume of crude oil, refined products and natural gas that is throughput depends substantially on PBF Energy’s operational needs which are largely impacted by refining margins. Refining margins are greatly dependent upon the price of crude oil or other refinery feedstocks, refined products and natural gas.
Factors driving the prices of petroleum-based commodities include supply and demand for crude oil, gasoline and other refined products. Supply and demand for these products depend on numerous factors outside of our control, including changes in domestic and foreign economies, weather conditions, domestic and foreign political affairs, production levels, logistics constraints, availability of imports, marketing of competitive fuels, crude oil price differentials and government regulation. The impact of the unprecedented global health and economic crisis sparked by the COVID-19 pandemic was amplified late in the first quarter of 2020 due to movements made by the world’s largest oil producers to increase market share. This created simultaneous shocks in oil supply and demand resulting in an economic challenge to our industry which has not occurred since our formation. These factors have resulted in significant demand destruction for refined products and atypical volatility in oil commodity prices. Although the effects may be mitigated by MVC provisions in certain of our commercial contracts, this overall demand destruction and market environment could lead to lower storage or throughput volumes processed at our assets, which could negatively impact our results of operations and cash flows. Demand has continued to improve in 2021 but remains below pre-pandemic levels. While it is impossible to estimate the duration or complete financial impact of the COVID-19 pandemic, a significant portion of the negative impacts and risk to us may be mitigated through our MVCs within the commercial agreements with PBF Holding. Refer to “Item 1A. Risk Factors” of this Form 10-K for more information on factors affecting margins and commodity pricing.
Acquisition and Organic Growth Opportunities. We may acquire additional logistics assets from PBF Energy or third parties. Under our Omnibus Agreement, subject to certain exceptions, we have a right of first offer on certain logistics assets owned by PBF Energy to the extent PBF Energy decides to sell, transfer or otherwise dispose of any of those assets. We also have a right of first offer to acquire additional logistics assets that PBF Energy may construct or acquire in the future. Our commercial agreements provide us with options to purchase certain assets at PBF Holding’s refineries related to our business in the event PBF Energy permanently shuts down PBF Holding’s refineries. In addition, our commercial agreements provide us with the right to use certain assets at PBF Holding’s refineries in the event of a temporary shutdown. Furthermore, we may pursue strategic asset acquisitions from third parties or organic growth projects to the extent such acquisitions or projects complement our or PBF Energy’s existing asset base or provide attractive potential returns. Identifying and executing acquisitions and organic growth projects is a key part of our strategy, and we believe that we are well-positioned to acquire logistics assets from PBF Energy and third parties should such opportunities arise. However, there is no guarantee that we will be able to identify attractive organic growth projects or acquisitions in the future, or be able to consummate any such opportunities identified. Additionally, if we do not complete acquisitions or organic growth projects on economically acceptable terms, our future growth will be limited, and the acquisitions or projects we do complete may reduce, rather than increase, our cash available for distribution. These acquisitions and organic growth projects could also affect the comparability of our results from period to period. We expect to fund future growth capital expenditures primarily from a combination of cash-on-hand, borrowings under the Revolving Credit Facility and the issuance of additional equity or debt securities. To the extent we issue additional units to fund future acquisitions or expansion capital expenditures, the payments of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level.
Third-Party Business. As of December 31, 2021, PBF Holding accounts for a substantial majority of our revenue, and we continue to expect that a majority of our revenue for the foreseeable future will be derived from operations supporting PBF Holding’s refineries. We continue to explore further diversification of our customer base by potentially developing additional third-party throughput volumes in our existing system and continuing to explore expanding our asset portfolio to service third-party customers. Unless we are successful in attracting additional third-party customers, our ability to increase volumes will be dependent on PBF Holding, which has no obligation under our commercial agreements to supply our facilities with additional volumes in excess of its MVCs. If we are unable to increase throughput or storage volumes, future growth may be limited.
Results of Operations
A discussion and analysis of the factors contributing to our results of operations is presented below. The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations but should not serve as the only criteria for predicting our future performance.
Combined Overview. The following tables summarize our results of operations and financial data for the years ended December 31, 2021, 2020 and 2019. The following data should be read in conjunction with our Consolidated Financial Statements and the notes thereto included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.
Year Ended December 31,
(in thousands)
Revenue:
Affiliate
Third-Party
Total revenue
Costs and expenses:
Operating and maintenance expenses
General and administrative expenses
Depreciation and amortization
Impairment expense
Gain on sale of assets
Change in contingent consideration
Total costs and expenses
Income from operations
Other expense:
Interest expense, net
Amortization of loan fees and debt premium
Accretion on discounted liabilities
Net income
Less: Net income attributable to noncontrolling interest
Net income attributable to PBF Logistics LP unitholders
Other data:
EBITDA attributable to PBFX
Adjusted EBITDA
Distributable cash flow
Capital expenditures
Reconciliation of Non-GAAP Financial Measures. As described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How We Evaluate Our Operations,” our management uses EBITDA, EBITDA attributable to PBFX, Adjusted EBITDA and distributable cash flow to analyze our performance. The following table presents a reconciliation of EBITDA, EBITDA attributable to PBFX and distributable cash flow to net income, which is the most directly comparable GAAP financial measure of operating performance on a historical basis, for the periods indicated.
Year Ended December 31,
(in thousands)
Net income
Interest expense, net
Amortization of loan fees and debt premium
Accretion on discounted liabilities
Change in contingent consideration
Impairment expense
Depreciation and amortization
EBITDA
Less: Noncontrolling interest EBITDA
Less: Earnings attributable to the CPI earn-out
EBITDA attributable to PBFX
Non-cash unit-based compensation expense
Cash interest
Maintenance capital expenditures attributable to PBFX
Distributable cash flow
The following table presents a reconciliation of EBITDA, EBITDA attributable to PBFX and distributable cash flow to net cash provided by operating activities, which is the most directly comparable GAAP financial measure of liquidity on a historical basis, for the periods indicated.
Year Ended December 31,
(in thousands)
Net cash provided by operating activities
Change in operating assets and liabilities
Interest expense, net
Gain on sale of assets
Non-cash unit-based compensation expense
EBITDA
Less: Noncontrolling interest EBITDA
Less: Earnings attributable to the CPI earn-out
EBITDA attributable to PBFX
Non-cash unit-based compensation expense
Cash interest
Maintenance capital expenditures attributable to PBFX
Distributable cash flow
The following table presents a reconciliation of EBITDA, EBITDA attributable to PBFX and Adjusted EBITDA to net income, which is the most directly comparable GAAP financial measure of operating performance on a historical basis, for the periods indicated.
Year Ended December 31,
(in thousands)
Net income
Interest expense, net
Amortization of loan fees and debt premium
Accretion on discounted liabilities
Change in contingent consideration
Impairment expense
Depreciation and amortization
EBITDA
Less: Noncontrolling interest EBITDA
Less: Earnings attributable to the CPI earn-out
EBITDA attributable to PBFX
Acquisition and transaction costs
Non-cash unit-based compensation expense
East Coast Terminals environmental remediation costs
Gain on sale of assets
PNGPC tariff true-up adjustment
Adjusted EBITDA
The following table presents a reconciliation of net income attributable to noncontrolling interest and noncontrolling interest EBITDA, for informational purposes, for the periods indicated.
Year Ended December 31,
(in thousands)
Net income attributable to noncontrolling interest
Depreciation and amortization related to noncontrolling interest (a)
Noncontrolling interest EBITDA
(a) Represents 50% of depreciation and amortization for Torrance Valley Pipeline Company LLC (“TVPC”) for the five months ended May 31, 2019. Subsequent to acquiring the remaining 50% equity interest in TVPC on May 31, 2019, we own 100% of the equity interest in TVPC and no longer record a noncontrolling interest.
Summary.
Our net income for the year ended December 31, 2021 increased by approximately $5.9 million, or 4.0%, to $153.3 million from $147.4 million for the year ended December 31, 2020. The increase in net income was primarily due to the following:
• a decrease in depreciation and amortization of approximately $15.9 million, or 29.6%, resulting from the accelerated depreciation and amortization of certain CPI tangible and intangible assets, which were subject to the CPI Contract Termination in 2020;
• a decrease in impairment expense of $7.0 million, or 100.0%, resulting from an impairment charge to write-down the processing unit assets and customer contract intangible asset in connection with the CPI Contract Termination in 2020;
• a decrease in other expenses of approximately $5.8 million, or 12.2%, related to:
◦ a decrease in interest expense of approximately $4.0 million, or 9.1%, as a result of lower borrowings under the Revolving Credit Facility; and
◦ a decrease in accretion on discounted liabilities of approximately $1.8 million, or 98.7%, due to lower outstanding applicable liabilities; and
• an increase in gain on sale of assets of $2.8 million as a result of a third-party sale of real property at the East Coast Terminals in the fourth quarter of 2021;
offset by the following:
• an increase in change in contingent consideration of approximately $17.4 million due to the extension of certain services subject to the CPI earn-out at our East Coast storage facility during the current year, coupled with the reduction of the prior year projected future earn-out liability at the time of the CPI Contract Termination;
• an increase in operating and maintenance expenses of approximately $3.6 million, or 3.6%, as a result of higher utilities expenses due to increased energy usage and increased maintenance activity; and
• a decrease in total revenue of approximately $4.7 million, or 1.3%, primarily attributable to the CPI Contract Termination, offset by inflation rate adjustments implemented in accordance with certain of our commercial agreements (the “Inflation Rate Increase”) in 2021, increased throughput at certain of our assets and affiliate product sales.
EBITDA attributable to PBFX for the year ended December 31, 2021 increased by approximately $4.5 million to $234.5 million from $230.0 million for the year ended December 31, 2020 due to the factors noted above, excluding the impact of depreciation and amortization, impairment expense, interest expense, net, amortization of loan fees and debt premium, accretion on discounted liabilities, change in contingent consideration, noncontrolling interest and earnings attributable to the CPI earn-out.
Adjusted EBITDA for the year ended December 31, 2021 increased by approximately $0.7 million to $237.7 million from $237.0 million for the year ended December 31, 2020 due to the factors noted above, excluding the impact of acquisition and transaction costs, unit-based compensation, certain environmental remediation costs and gain on sale of assets.
Our net income for the year ended December 31, 2020 increased by approximately $39.3 million, or 36.3%, to $147.4 million from $108.2 million for the year ended December 31, 2019. The increase in net income was primarily due to the following:
• an increase in total revenue of approximately $20.0 million, or 5.9%, primarily attributable to the recommencement of operations of certain assets at our East Coast storage facility, operations of recently constructed assets and the 2020 Inflation Rate Increase, offset by lower revenue attributable to certain assets not subject to MVC shortfall payments due to a reduction in throughput volumes as a result of the COVID-19 pandemic, as well as lower pass-through utilities fees;
• a decrease in operating and maintenance expenses of approximately $18.8 million, or 15.8%, as a result of decreased discretionary spending, including maintenance and outside service costs, in response to the COVID-19 pandemic, as well as lower environmental clean-up remediation costs, lower utility expenses due to reduced energy usage and no remediation of product contamination costs in 2020 compared to costs incurred in 2019 for product contamination remediation at one of our terminals, offset by expenses related to the recommencement of operations of certain assets at our East Coast storage facility;
• a decrease in general and administrative expenses of approximately $5.8 million, or 23.5%, as a result of decreased acquisition and transaction costs and unit-based compensation expense;
• a decrease in change in contingent consideration of approximately $13.6 million due to the CPI Contract Termination in 2020 and the resulting reduction of the projected earn-out liability for future periods; and
• a decrease in other expenses of approximately $3.2 million, or 6.3%, related to:
◦ a decrease in interest expense of approximately $2.2 million, or 4.7%, as a result of lower borrowings under the Revolving Credit Facility; and
◦ a decrease in accretion on discounted liabilities of approximately $1.0 million, or 35.4%, due to lower outstanding applicable liabilities;
offset by the following:
• an increase in depreciation and amortization of approximately $15.1 million, or 39.1%, resulting from the accelerated depreciation and amortization of certain CPI tangible and intangible assets, which were subject to the CPI Contract Termination in 2020, as well as the timing of new assets being placed in service; and
• an increase in impairment expense of $7.0 million resulting from an impairment charge to write-down the processing unit assets and customer contract intangible asset in connection with the CPI Contract Termination in 2020.
EBITDA attributable to PBFX for the year ended December 31, 2020 increased by approximately $45.2 million to $230.0 million from $184.8 million for the year ended December 31, 2019 due to the factors noted above, excluding the impact of depreciation and amortization, impairment expense, interest expense, net, amortization of loan fees and debt premium, accretion on discounted liabilities, change in contingent consideration, noncontrolling interest and earnings attributable to the CPI earn-out.
Adjusted EBITDA for the year ended December 31, 2020 increased by approximately $36.0 million to $237.0 million from $201.0 million for the year ended December 31, 2019 due to the factors noted above, excluding the impact of acquisition and transaction costs, unit-based compensation, certain environmental remediation costs and certain tariff true-up adjustments.
Segment Information
Our operations are comprised of operating segments, which are strategic business units that offer different services in various geographical locations. We review operations in two reportable segments: (i) Transportation and Terminaling and (ii) Storage. Decisions concerning the allocation of resources and assessment of operating performance are made based on this segmentation. Management measures the operating performance of each of our reportable segments based on the segment operating income. Segment operating income is defined as net revenue less operating expenses, depreciation and amortization, impairment expense, gain on sale of assets and change in contingent consideration. General and administrative expenses and interest expenses not included in the Transportation and Terminaling and Storage segments are included in Corporate. Segment reporting is further discussed in Note 14 “Segment Information” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.
Transportation and Terminaling Segment
The following table and discussion provide an explanation of our results of operations of the Transportation and Terminaling segment for the years ended December 31, 2021, 2020 and 2019:
Year Ended December 31,
(in thousands, except for total throughput and lease tank capacity)
Revenue:
Affiliate
Third-party
Total revenue
Costs and expenses:
Operating and maintenance expenses
Depreciation and amortization
Gain on sale of assets
Total costs and expenses
Transportation and Terminaling Segment Operating Income
Key Operating Information
Transportation and Terminaling Segment
Terminals
Total throughput (bpd)*
Lease tank capacity (average lease capacity barrels per month)**
Pipelines
Total throughput (bpd)*
Lease tank capacity (average lease capacity barrels per month)**
(*) Calculated as the sum of the average throughput per day for each asset group for the period presented.
(**) Lease capacity is based on tanks in service and average lease capacity available during the period.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Our Transportation and Terminaling operating income for the year ended December 31, 2021 increased by approximately $15.9 million, or 9.4%, to $185.1 million from $169.3 million for the year ended December 31, 2020. The increase in operating income was primarily due to the following:
• an increase in revenue of approximately $13.8 million, or 5.1%, primarily attributable to the 2021 Inflation Rate Increase, increased throughput at certain of our assets and affiliate product sales; and
• an increase in gain on sale of assets of $2.8 million as a result of a third-party sale of real property at the East Coast Terminals in the fourth quarter of 2021;
offset by the following:
• an increase in depreciation and amortization of approximately $0.9 million, or 3.3%, related to the timing of new assets being placed in service.
Operating and maintenance expenses were relatively consistent during the comparative periods with no significant fluctuation activity.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Our Transportation and Terminaling operating income for the year ended December 31, 2020 increased by approximately $6.2 million, or 3.8%, to $169.3 million from $163.0 million for the year ended December 31, 2019. The increase in operating income was primarily due to the following:
• a decrease in operating and maintenance expenses of approximately $18.4 million, or 20.1%, as a result of decreased discretionary spending, including maintenance and outside service costs, in response to the COVID-19 pandemic, as well as lower environmental clean-up remediation costs and lower utility expenses due to reduced energy usage and no remediation of product contamination costs in 2020 compared to costs incurred in 2019 for product contamination remediation at one of our terminals;
offset by the following:
• a decrease in revenue of approximately $11.7 million, or 4.1%, primarily attributable to a reduction in throughput volumes as a result of the COVID-19 pandemic, as well as lower pass-through utilities fees, offset by the 2020 Inflation Rate Increase; and
• an increase in depreciation and amortization of approximately $0.5 million, or 1.7%, related to the timing of acquisitions and new assets being placed in service.
Storage Segment
The following table and discussion provide an explanation of our results of operations of the Storage segment for the years ended December 31, 2021, 2020 and 2019:
Year Ended December 31,
(in thousands, except for storage capacity reserved and total throughput)
Revenue:
Affiliate
Third-party
Total revenue
Costs and expenses:
Operating and maintenance expenses
Depreciation and amortization
Impairment expense
Change in contingent consideration
Total costs and expenses
Storage Segment Operating Income
Key Operating Information
Storage Segment
Storage capacity reserved (average shell capacity barrels per month)*
Total throughput (bpd)**
(*) Storage capacity is based on tanks in service and average shell capacity available during the period.
(**) Calculated as the sum of the average throughput per day for each asset group for the period presented.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Our Storage operating income for the year ended December 31, 2021 decreased by approximately $15.9 million, or 35.4%, to $29.0 million from $44.8 million for the year ended December 31, 2020. The decrease in operating income was primarily due to the following:
• a decrease in revenue of approximately $18.5 million, or 20.8%, primarily attributable to the CPI Contract Termination;
• an increase in change in contingent consideration of approximately $17.4 million due to the extension of certain services subject to the CPI earn-out at our East Coast storage facility during the current year, coupled with the reduction of the prior year projected future earn-out liability at the time of the CPI Contract Termination; and
• an increase in operating and maintenance expenses of approximately $3.8 million, or 14.4%, due to higher utilities expenses as a result of increased energy usage and increased maintenance activity;
offset by the following:
• a decrease in depreciation and amortization of approximately $16.8 million, or 66.3%, due to certain CPI assets being fully depreciated and amortized in the fourth quarter of 2020 as a result of the CPI Contract Termination; and
• a decrease in impairment expense of $7.0 million or 100.0%, resulting from an impairment charge to write-down the processing unit assets and customer contract intangible asset in connection with the CPI Contract Termination in 2020.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Our Storage operating income for the year ended December 31, 2020 increased by approximately $24.1 million, or 116.0%, to $44.8 million from $20.8 million for the year ended December 31, 2019. The increase in operating income was primarily due to the following:
• an increase in revenue of approximately $31.8 million, or 55.3%, primarily attributable to the recommencement of operations of certain assets at our East Coast storage facility and the 2020 Inflation Rate Increase;
• a decrease in change in contingent consideration of approximately $13.6 million due to the CPI Contract Termination in 2020 and the resulting reduction of the projected earn-out liability for future periods; and
• a decrease in operating and maintenance expenses of approximately $0.3 million, or 1.2%, as a result of decreased spending at our facilities due to cost cutting measures taken as a result of the COVID-19 pandemic, including lower maintenance activity, offset by expenses related to the recommencement of operations of certain assets at our East Coast storage facility;
offset by the following:
• an increase in depreciation and amortization of approximately $14.6 million, or 135.7%, resulting from the accelerated depreciation and amortization of certain CPI tangible and intangible assets, which were subject to the CPI Contract Termination in 2020, as well as the timing of acquisitions and new assets being placed in service; and
• an increase in impairment expense of $7.0 million resulting from an impairment charge to write-down the processing unit assets and customer contract intangible asset in connection with the CPI Contract Termination in 2020.
Liquidity and Capital Resources
Due to the COVID-19 pandemic and the current challenging and volatile market conditions, starting in the first quarter of 2020, our business and operating results have been impacted by demand destruction for refined products as a result of the worldwide economic slowdown and governmental and consumer responses, including travel restrictions and stay-at-home orders. Such conditions have improved in 2021 but continue to affect our operations and financial condition due to changes in the usage and level of demand for our services, including a reduction in third-party and incremental affiliate revenue. We expect our ongoing sources of liquidity to include cash generated from operations (a significant portion of which are supported by MVCs in our commercial agreements), borrowings under the Revolving Credit Facility and issuances of additional debt and equity securities as appropriate given market conditions. Additionally, we remain focused on opportunities to support our financial position in the current environment, including limiting capital expenditures, reducing discretionary activities and third-party services and continually assessing our quarterly distribution level. While it is impossible to estimate the duration or complete financial impact of the COVID-19 pandemic and volatile market conditions, we believe our balances of cash, cash equivalents, cash generated from operations, borrowings under the Revolving Credit Facility and potential issuances of debt and equity securities will be sufficient to satisfy cash requirements over the next twelve months and beyond, including our debt service, capital expenditures and distributions on our units. We may also pursue other strategic initiatives to strengthen our financial position, including debt and/or equity securities repurchases, to the extent such initiatives can be funded without impairing our liquidity. Refer to “Item 1A. Risk Factors” of this Form 10-K for further information.
Our largest customer is our affiliate, PBF Holding, a subsidiary of our parent sponsor. PBF Energy has initiated several steps as part of a strategic plan to navigate current volatile markets and preserve or enhance its liquidity, including asset sales, new debt issuances, temporarily idling various units at certain refineries to optimize production, reductions in capital and operating expenditures, suspension of its dividend and exploring other potential opportunistic financing activities. We believe such actions will allow PBF Energy to continue to honor its commercial agreements with us.
In response to the impacts of the COVID-19 pandemic, we reduced our quarterly distribution to our minimum quarterly distribution of $0.30 per unit effective with the distribution for the first quarter of 2020. This reduction represents a strategic shift to build our cash flow coverage, de-lever our business and increase our financial resources as we continue to pursue potential organic growth projects or strategic acquisition opportunities. However, we intend to continue to pay at least the minimum quarterly distribution of $0.30 per unit per quarter, or $1.20 per unit on an annualized basis, which aggregates to approximately $19.0 million per quarter and approximately $76.0 million on an annualized basis based on the number of common units outstanding as of December 31, 2021.
As of December 31, 2021, we had approximately $430.4 million of liquidity, including approximately $33.9 million in cash and cash equivalents, and access to approximately $396.5 million under the Revolving Credit Facility.
The tables below summarize our 2021 and 2020 quarterly distributions related to our quarterly financial results:
Quarter Ended
Declaration Date
Quarterly Distribution per Common Unit
Quarterly Distribution per Common Unit, Annualized
Total Cash Distributions (in thousands) (a)
December 31, 2021
February 10, 2022
September 30, 2021
October 28, 2021
June 30, 2021
July 29, 2021
March 31, 2021
April 29, 2021
December 31, 2020
February 11, 2021
September 30, 2020
October 29, 2020
June 30, 2020
July 31, 2020
March 31, 2020
May 15, 2020
(a) Cash distributions are paid in the quarter subsequent to the period in which the distributions are earned. For the quarter ended December 31, 2021, the total cash distribution was estimated based on vested shares anticipated to be outstanding as of the record date. We do not expect the actual distribution to be materially different.
Credit Facilities
Revolving Credit Facility
The maximum amount available under the Revolving Credit Facility was increased to $500.0 million in July 2018. We have the ability to further increase the maximum amount of the Revolving Credit Facility by an additional $250.0 million, to a total facility size of $750.0 million, subject to receiving increased commitments from its lenders or other financial institutions and satisfaction of certain conditions. Refer to Note 8 “Debt” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K for further information regarding the Revolving Credit Facility, as well as information pertaining to corresponding financial and other covenants. We are in compliance with the financial and other covenants as of December 31, 2021.
During the year ended December 31, 2021, we made net repayments of $100.0 million under the Revolving Credit Facility.
Senior Notes
During 2015 and 2017, we and our wholly-owned subsidiary, PBF Finance, issued a combined $525.0 million aggregate principal amount of the 2023 Notes. The 2023 Notes are guaranteed on a senior unsecured basis by all of our subsidiaries. In addition, PBF LLC provides a limited guarantee of collection of the principal amount of the 2023 Notes, but is not otherwise subject to the covenants of the indenture governing the 2023 Notes. We have the option to repurchase all or a portion of the 2023 Notes at varying prices no less than 100% of the principal amounts of the notes plus accrued and unpaid interest. The holders of the 2023 Notes have the option to require that we repurchase the principal amounts of the 2023 Notes together with any accrued and unpaid interest to the date of redemption only upon a change in control, certain asset sale transactions, or in the event of a default as defined in the indenture governing the 2023 Notes. In addition, the 2023 Notes contain covenants limiting our and our restricted subsidiaries’ ability to make certain types of investments, incur additional debt, issue preferred equity, create liens, make certain payments, sell assets, merge or consolidate with other entities, and enter into transactions with affiliates. We are in compliance with the covenants as of December 31, 2021.
Other
In addition to the Revolving Credit Facility and the 2023 Notes, we also have outstanding letters of credit totaling approximately $3.5 million. These letters of credit result in off-balance sheet liabilities.
Cash Flows
The following table sets forth our cash flows for the periods indicated:
Year Ended December 31,
(in thousands)
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Net change in cash and cash equivalents
Cash Flows from Operating Activities
Net cash provided by operating activities increased by approximately $1.1 million to $187.8 million for the year ended December 31, 2021 compared to $186.6 million for the year ended December 31, 2020. The increase in net cash provided by operating activities was the result of an increase in net income of approximately $5.9 million and an increase in the net changes in operating assets and liabilities of approximately $5.0 million primarily driven by the timing of collection of accounts receivables and liability payments, offset by a net decrease in non-cash charges relating to depreciation and amortization, impairment expense, amortization of loan fees and debt premium, accretion on discounted liabilities, unit-based compensation and change in contingent consideration of approximately $7.0 million and a gain on sale of assets of approximately $2.8 million in 2021.
Net cash provided by operating activities increased by approximately $37.6 million to $186.6 million for the year ended December 31, 2020 compared to $149.0 million for the year ended December 31, 2019. The increase in net cash provided by operating activities was the result of an increase in net income of approximately $39.3 million and a net increase in non-cash charges relating to depreciation and amortization, impairment expense, amortization of loan fees and debt premium, accretion on discounted liabilities, unit-based compensation and change in contingent consideration of approximately $5.7 million, offset by a decrease in the net changes in operating assets and liabilities of approximately $7.3 million primarily driven by the timing of collection of accounts receivables and liability payments.
Cash Flows from Investing Activities
Net cash used in investing activities decreased by approximately $10.9 million to $1.4 million for the year ended December 31, 2021 compared to $12.3 million for the year ended December 31, 2020. The decrease in net cash used in investing activities was due to proceeds from the sale of assets of approximately $7.2 million in 2021 and a decrease in capital expenditures of approximately $3.7 million primarily related to lower maintenance capital spending in the current year.
Net cash used in investing activities decreased by approximately $19.4 million to $12.3 million for the year ended December 31, 2020 compared to $31.7 million for the year ended December 31, 2019. The decrease in net cash used in investing activities was due to a decrease in capital expenditures of approximately $19.4 million primarily related to a reduction in capital spending in 2020 in response to the COVID-19 pandemic and higher capital spend on organic growth projects in 2019 compared to 2020.
Cash Flows from Financing Activities
Net cash used in financing activities increased by approximately $15.7 million to $188.7 million for the year ended December 31, 2021 compared to $173.0 million for the year ended December 31, 2020. Net cash used in financing activities for the year ended December 31, 2021 consisted of net repayments of $100.0 million under the Revolving Credit Facility, distributions to unitholders of $75.0 million, a $12.2 million earn-out payment under the CPI Processing Agreement and deferred financing costs and other of $1.6 million. Net cash used in financing activities for the year ended December 31, 2020 consisted of distributions to unitholders of $88.4 million, net repayments of $83.0 million under the Revolving Credit Facility and deferred financing costs and other of $1.6 million.
Net cash used in financing activities increased by approximately $70.8 million to $173.0 million for the year ended December 31, 2020 compared to $102.2 million for the year ended December 31, 2019. Net cash used in financing activities for the year ended December 31, 2020 consisted of distributions to unitholders of $88.4 million, net repayments of $83.0 million under the Revolving Credit Facility and deferred financing costs and other of $1.6 million. Net cash used in financing activities for the year ended December 31, 2019 consisted of the acquisition of the TVPC noncontrolling interest for $200.0 million, distributions to unitholders of $123.9 million, the deferred payment for the East Coast Storage Assets Acquisition of $32.0 million and distributions to TVPC members of $8.5 million, offset by proceeds from issuance of common units of $132.5 million, net borrowings under the Revolving Credit Facility of $127.0 million and deferred financing costs and other of $2.7 million.
Capital Expenditures
Our capital requirements have consisted of, and are expected to continue to consist of: expansion, maintenance and regulatory capital expenditures. Expansion capital expenditures are expenditures incurred for acquisitions or capital improvements that we expect will increase our operating income or operating capacity over the long term. Examples of expansion capital expenditures include the acquisition of assets, the construction, development or acquisition of equipment at our facilities or projects that provide additional throughput or storage capacity to the extent such capital expenditures are expected to expand our operating capacity or increase our operating income. Maintenance capital expenditures are expenditures (including expenditures for the addition or improvement to, or the replacement of, our capital assets, and for the acquisition of existing, or the construction or development of new, capital assets) made to maintain our long-term operating income or operating capacity. Examples of maintenance capital expenditures are expenditures for the refurbishment and replacement of our transportation, terminaling, storage and processing assets and to maintain equipment reliability, integrity and safety. Regulatory capital expenditures are expenditures made to attain or maintain compliance with regulatory standards (including in response to the potential impacts of climate change). Examples of regulatory capital expenditures are expenditures incurred to address environmental laws or regulations.
Capital expenditures for the periods presented were as follows:
Year Ended December 31,
(in thousands)
Expansion
Maintenance
Regulatory
Total capital expenditures
For the year ended December 31, 2021, our capital expenditures were primarily incurred for growth projects associated with the East Coast Storage Assets and maintenance of the East Coast Terminals, the Torrance Valley Pipeline and the Toledo Storage Facility. For the year ended December 31, 2020, our capital expenditures were primarily incurred for maintenance of the East Coast Terminals, the Toledo Storage Facility and the Torrance Valley Pipeline, as well as growth projects associated with the East Coast Storage Assets. For the year ended December 31, 2019, our capital expenditures were primarily incurred for growth projects associated with the East Coast Storage Assets and the Development Assets and maintenance of the Toledo Storage Facility, the East Coast Terminals and the Torrance Valley Pipeline.
We currently expect to spend an aggregate of between approximately $20.0 million and $25.0 million during 2022 for capital expenditures, of which between approximately $10.0 million and $14.0 million relate to maintenance capital expenditures. We anticipate the forecasted maintenance capital expenditures will be funded primarily with cash from operations and through borrowings under the Revolving Credit Facility as needed. We currently have not included any potential future acquisitions in our budgeted capital expenditures for the twelve months ending December 31, 2022. We may rely on external sources including other borrowings under the Revolving Credit Facility, and issuances of equity and debt securities to fund any significant future expansion.
Material Cash Requirements
Our material cash requirements include the following known contractual and other obligations as of December 31, 2021:
Payments Due by Period
Totals
2023 and 2024
2025 and 2026
2027 and Beyond
(in thousands)
Long-term debt obligations (1)
Interest (2)
Affiliate - services agreements (3)
Environmental obligations (4)
Construction obligations
Contingent consideration (5)
Operating leases and other (6)
Total cash requirements
(1) No principal amounts are due under the 2023 Notes and Revolving Credit Facility until May 2023 and July 2023, respectively.
(2) Includes interest on the 2023 Notes and Revolving Credit Facility based on outstanding indebtedness as of December 31, 2021. Includes commitment fees on the Revolving Credit Facility through July 2023 using rates in effect at December 31, 2021.
(3) Includes annual fixed payments under the Omnibus Agreement and the Services Agreement, as well as estimated obligations under the Omnibus Agreement to reimburse PBF LLC for certain compensation and benefit costs of employees who devote more than 50% of their time to us. Obligations under these agreements are expected to continue through the terms of our existing commercial agreements.
(4) Includes environmental liabilities associated with the East Coast Terminals, the Torrance Valley Pipeline and the East Coast Storage Assets. In accordance with the Contribution Agreement for TVPC, PBF Holding has indemnified us for any and all costs associated with environmental remediation for obligations that existed on or before August 31, 2016, including all known or unknown events.
(5) Includes the estimated contingent consideration amount payable to Crown Point related to the CPI earn-out.
(6) Includes operating leases and rental and franchise payments to secure right of way access across certain East Coast Terminals and Torrance Valley Pipeline assets with various terms and tenures.
Effects of Inflation
Certain of our commercial agreements feature annual inflation adjustments, which, historically, have not had a material impact on our results of operations, including our results of operations for the years ended December 31, 2021, 2020 and 2019, respectively. Given the recent rise in inflation, we anticipate the Inflation Rate Increase for the upcoming year to be higher than that of past years. Despite this anticipated increase, we do not anticipate the Inflation Rate Increase for 2022 to have a material impact on our results of operations.
Environmental and Other Matters
Environmental Regulations
Our operations are subject to extensive and frequently changing federal, state and local laws, regulations and ordinances relating to the protection of the environment. Among other things, these laws and regulations govern the emission or discharge of pollutants into or onto the land, air and water, the handling and disposal of solid and hazardous wastes and the remediation of contamination. As with the industry generally, compliance with existing and anticipated environmental laws and regulations increases our overall cost of business, including our capital costs to develop, maintain, operate and upgrade equipment and facilities. While these laws and regulations affect our maintenance and regulatory capital expenditures and net income, we believe they do not necessarily affect our competitive position, as the operations of our competitors are similarly affected. We believe our facilities are in substantial compliance with applicable environmental laws and regulations. However, these laws and regulations, as well as the interpretation of such laws and regulations, are subject to changes by regulatory authorities, and continued and future compliance with such laws and regulations may require us to incur significant expenditures. Additionally, violation of environmental laws, regulations and permits can result in the imposition of significant administrative, civil and criminalpenalties, injunctions limiting our operations, investigatory or remedial liabilities or construction bans or delays in the development of additional facilities or equipment. Furthermore, a release of hydrocarbons or hazardous substances into the environment could, to the extent the event is not insured, subject us to substantial expenses, including costs to comply with applicable laws and regulations and to resolveclaims by third parties for personal injury or property damage or by the U.S. federal government or state governments for natural resources damages. These impacts could directly and indirectly affect our business and have an adverse impact on our financial position, results of operations and liquidity. We cannot currently determine the amounts of such future impacts.
Environmental Liabilities
Contaminations resulting from spills of crude oil or petroleum products are not unusual within the petroleum terminaling or transportation industries, and, historically, spills at truck and rail racks and terminals have resulted in contamination of the environment, including soils and groundwater.
Pursuant to the Contribution Agreements entered into in connection with the IPO and the Acquisitions from PBF, PBF Energy has agreed to indemnify us for certain known and unknown environmental liabilities that are based on conditions in existence at our Predecessor’s properties and associated with the ownership or operation of the Contributed Assets and arising from the conditions that existed prior to the closings of the IPO and the Acquisitions from PBF. In addition, we have agreed to indemnify PBF Energy for (i) certain events and conditions associated with the ownership or operation of our assets that occur, as applicable, after the closing of each Acquisition from PBF (including the IPO) and (ii) environmental liabilities related to our assets if the environmental liability is the result of the negligence, willful misconduct or criminal conduct of us or our employees, including those seconded to us. As a result, we may incur environmental expenses in the future, which may be substantial.
As of December 31, 2021, we have recorded a total liability related to environmental remediation costs of $1.7 million related to existing environmental liabilities. Refer to Note 12 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K for additional information.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 2 “Summary of Accounting Policies” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K. We prepare our Consolidated Financial Statements in conformity with GAAP, and, in the process of applying these principles, we must make judgments, assumptions and estimates based on the best available information at the time. To aid a reader’s understanding, management has identified our critical accounting policies. These policies are considered critical because they are both most important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments. Often they require judgments and estimation about matters which are inherently uncertain and involve measuring, at a specific point in time, events which are continuous in nature. Actual results may differ based on the accuracy of the information utilized and subsequent events, some of which we may have little or no control over. The following accounting policies involve estimates that are considered critical due to the level of subjectivity and judgment involved, as well as the impact on our financial position and results of operations. We believe that all of our estimates are reasonable. Unless otherwise noted, estimates of the sensitivity to earnings that would result from changes in the assumptions used in determining our estimates is not practicable due to the number of assumptions and contingencies involved and the wide range of possible outcomes.
Business Combinations
We use the acquisition method of accounting for third-party acquisitions for the recognition of assets acquired and liabilities assumed in business combinations at their estimated fair values as of the date of acquisition. Any excess consideration transferred over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is required in estimating the fair value of assets acquired. As a result, in the case of significant acquisitions, we obtain the assistance of third-party valuation specialists in estimating fair values of tangible and intangible assets based on available historical information and on expectations and assumptions about the future, considering the perspective of marketplace participants. While our management believes those expectations and assumptions are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.
Certain of our acquisitions may include earn-out provisions or other forms of contingent consideration. As of the acquisition date, we record contingent consideration, as applicable, at the estimated fair value of expected future payments associated with the earn-out. Any changes to the recorded fair value of contingent consideration, subsequent to the measurement period, will be recognized as earnings in the period in which it occurs. Such contingent consideration liabilities are based on best estimates of future expected payment obligations, which are subject to change due to many factors outside of our control. Changes to the estimate of expected future payments may occur, from time to time, due to various reasons, including actual results differing from estimates and adjustments to the revenue or earnings assumptions used as the basis for the liability based on historical experience. While we believe that our current estimate of the fair value of our contingent consideration liability is reasonable, it is possible that the actual future settlement of our earn-out obligation could materially differ.
The Acquisitions from PBF were transfers between entities under common control. Accordingly, we record the net assets that were acquired from PBF Energy on its consolidated balance sheets at PBF Energy’s historical carrying value rather than fair value.
Environmental Matters
Liabilities for future remediation costs are recorded when environmental assessments and/or remediation efforts are probable and the costs can be reasonably estimated. Other than for periodic assessments, the timing and magnitude of these accruals generally are based on the completion of investigations or other studies or a commitment to a formal plan of action. Environmental liabilities are based on best estimates of probable future costs using currently available technology and the impact that current regulations may have on our remediation plans. The actual settlement of our liability for environmental matters could materially differ from our estimates due to a number of uncertainties such as the extent of contamination, changes in environmental laws and regulations, potential improvements in remediation technologies and the participation of other responsible parties.
Supplemental Guarantor Financial Information
The following consolidated subsidiaries serve as guarantors of the obligations under the 2023 Notes:
• Delaware City Logistics Company LLC;
• Delaware Pipeline Company LLC;
• Delaware City Terminaling Company LLC;
• Toledo Terminaling Company LLC;
• PBF Logistics Products Terminals LLC;
• PBFX Operating Company LLC;
• Torrance Valley Pipeline Company LLC;
• Paulsboro Natural Gas Pipeline Company LLC;
• Toledo Rail Logistics Company LLC;
• Chalmette Logistics Company LLC;
• Paulsboro Terminaling Company LLC;
• DCR Storage and Loading Company LLC;
• CPI Operations LLC; and
• PBFX Ace Holdings LLC.
These guarantees are full and unconditional and joint and several.
PBF Logistics LP serves as “Issuer,” with PBF Finance as “Co-Issuer.” The indenture dated May 12, 2015, as supplemented, among us, PBF Finance, the guarantors party thereto and Deutsche Bank Trust Company Americas, as Trustee, governs subsidiaries designated as “Guarantor Subsidiaries.”
In addition, PBF LLC provides a limited guarantee of collection of the principal amount of the 2023 Notes but is not otherwise subject to restrictions included in the indenture. Refer to PBF LLC’s consolidated financial statements, which are included in its Annual Report on Form 10-K for the period ended December 31, 2021.
The Co-Issuer has no independent assets or operations and we do not have any subsidiaries designated as “Non-Guarantor Subsidiaries.” As such, the consolidated results of the Issuer and Guarantor Subsidiaries are reflected in our Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). The amendments in ASU 2020-04 provide optional guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying GAAP to contracts, hedging relationships and other transactions affected by the expected market transition from the London Interbank Offering Rate (“LIBOR”) and other interbank rates if certain criteria are met. The amendments in ASU 2020-04 are effective for all entities at any time beginning on March 12, 2020 through December 31, 2022 and may be applied from the beginning of an interim period that includes the issuance date of ASU 2020-04. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements and related disclosures.
Refer to Note 2 “Summary of Accounting Policies” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K for additional Recently Adopted Accounting Guidance and Recently Issued Accounting Pronouncements.
