Wed 01/05/2022 13:53 PM
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Relevant Items:
Dec. 7, 2021, Proposed RVO Rule
Nov. 18 Proposed Compliance Deadlines Rule
Carryover RIN Bank Calculation Memo
Link to Excel Download on Data Page

The Environmental Protection Agency’s Dec. 7, 2021, proposed renewable fuel volume targets, which include a retroactive cut to the 2020 finalized rule, are largely similar to the Sept. 22 “leaked” volumes cited in multiple reports that coincided with significant renewable identification number, or RIN, market price relief. In combination with the EPA’s Nov. 17 proposed rule, which extends certain renewable fuel standard, or RFS, deadlines, the rules afford PBF additional flexibility in addressing its over $700 million of accrued Sept. 30 and future-incurred RFS liabilities for compliance years 2020 and 2021.

To the extent that the meaningfully higher proposed 2022 compliance-year targets represent the floor for future standards and that RIN pricing remains consistent with recent trading levels, however, PBF must generate greater cash going forward through pre-RFS adjusted EBITDA and/or parent distributions.

Reorg estimates that the 2022 proposed volumes at Dec. 30 RIN prices would cost the company $767 million to $804 million annually, resulting in negative free cash flow when including cash interest and capital expenditures unless the company can increase total long-term pre-RFS adjusted EBITDA and parent contributions to above approximately $1.5 billion.

PBF’s recent pre-RFS adjusted EBITDA and parent contributions are shown below:

As further detailed below, the two proposed rules combined require PBF to fulfill its 2021 obligations no earlier than Sept. 1, 2022, and would reduce the 2020 RVO to a level that potentially provides the company with the ability to carry over 2020 RIN credits obtained in fourth-quarter fixed-price purchase commitments. Reorg estimates that the proposed rule, based on PBF’s previous 750 million gallon guidance midpoint, would result in 21.4 million to 77.1 million fewer aggregate RIN obligations in the combined 2020 and 2021 period.

If PBF fulfills its 2020 and 2021 obligations in full by the 2021 deadline, which would be no sooner than Sept. 1, 2022, under the November proposed rule, the company would have the flexibility to defer fulfillment of the 2022 compliance year obligations, which are meaningfully higher than prior years, until at least March 31, 2024, the date that 2023 compliance year obligations are also due.

This date follows PBF Holding’s RCF May 2023 maturity and PBF Logistics’ 6.875% senior notes and RCF maturities in May 2023 and July 2023, respectively. The PBF Holding secured and unsecured notes are due subsequent to this date in 2025 and 2028.

PBF’s Sept. 30, 2021, capital structure is shown below:

(Click HERE to enlarge.)

A comparison of the proposed 2020, 2021 and 2022 renewable volume obligations, or RVOs, and percentage standards with the 2019 and prior “final” 2020 RVOs and percentage standards is shown below. Under the proposed rule, the low-end percentage standards in 2020, 2021 and 2022 are calculated assuming no small refinery volumes are exempted from the RVO. The high-end percentage standards in the same years are calculated assuming that 4.8 billion and 3.39 billion gallons of small refinery gasoline and diesel, respectively, are exempted and reallocated to the remaining obligated refineries.

(Click HERE to enlarge.)

In a virtual EPA public hearing yesterday, Tuesday, Jan. 4, PBF urged the EPA to reduce the implied 2022 volume target for conventional renewable fuel in the proposed rule by 1.2 billion gallons. Written statements and supporting materials addressing the Dec. 7 rule must be submitted to the EPA by Feb. 4.

The Dec. 7 proposed volumes are very similar to the September leaked volumes. The most significant differences include:

  • Decreases in each of the proposed biomass-based diesel annual volumes;

  • The introduction of the low-end and high-end percentage standards noted above; and

  • The introduction of the 500 gallon 2016 remand supplemental standard, which effectively increases the 2022 and 2023 conventional renewable fuel standard by 250 million in each year.

A comparison of the Dec. 7 proposed volumes with the September “leaked” volumes is shown below:

Following the Dec. 7 release of the proposed RFS volumes, as shown below in a common-sized comparison of RIN prices by D-code, RIN prices declined immediately before ending the year above pre-release levels.

Source: Starfuels Inc. via Bloomberg

The EPA explains in its Dec. 7 proposed rule that protection of the carryover RIN bank drives its decision to retroactively decrease 2020 RVO volumes. In light of its projected 2019 RIN generation shortfall and “uneven holding of carryover RINs among obligated parties,” it argues that “further increasing the standards with the intent to draw down the carryover RIN bank would lead to significant deficit carryovers and potential non-compliance by some obligated parties that own relatively few or no carryover RINs.” The EPA concludes, “We do not believe this is an appropriate outcome.”

The agency expects a carryover RIN bank of approximately 1.85 billion RINs following 2019 compliance. The EPA states that if the 2020 standards are not modified and small refinery exemptions are not granted, the higher required volumes “would result in a significant drawdown of the total number of carryover RINs, to a volume (630 million RINs) that would represent less than 4 percent of the proposed 2021 and 2022 total renewable fuel standards.”

The EPA argues that “the RFS program should drive increases in renewable fuel volumes over time.” However, it said it believes “that retrospective volumes have limited ability to affect biofuel use” and that driving increased renewable volumes is more effective via 2022 volume requirements. The agency said it expects that “conventional ethanol use will fall short of the implied 15 billion gallon volume in 2022 by roughly 1.2 billion gallons” and that the shortfall will be met with greater volumes of biodiesel and renewable diesel production and imports.

In this report, Reorg discusses the proposed rules’ affects on PBF’s:

  • Accrued and future RFS obligations;

  • RFS compliance timing; and

  • Overall non-operating obligations fulfillment.

Dec. 7 Proposed Rule Impact on PBF Obligations

PBF reported $1.309 billion of renewable energy credit and emissions obligations accrued expenses as of Sept. 30. CFO Erik Young explained on the third-quarter call that approximately $700 million of this balance represented RIN obligations related to the 2020 and 2021 compliance years, and that the remaining $600 million related to current and future California environmental credit obligations.

Young stated that PBF plans to spend approximately $185 million in the fourth quarter to settle “fixed price purchase commitments for RINs,” and added that the purchases should satisfy its “2020 obligation plus a portion” of PBF’s “2021 program.”

Additionally, Young guided to “about $15 million left” to purchase credits in “the early part of 2022.” This $200 million of combined RIN purchase obligations, which would have extinguished the 2020 obligation at the previous RVO and a portion of the 2021 RVO, implies that PBF had approximately $509 million in floating 2021 RFS-related accrued expenses on its balance sheet as of Sept. 30.

Based on the assumption that PBF’s $508.8 million floating 2021 RFS-related obligation was composed of RIN D-code liabilities proportionally consistent with the prior 2020 “final” percentage standards at Sept. 30 prices, Reorg estimates a 410.7 million gallon RIN obligation liability, consisting of 12.1 million D3, 74.6 million D4, 17.4 million D5 and 306.6 million D6 RINs.

As previously discussed, based on RFS percentage standards consistent with the EPA’s 2020 prior “final” rule, PBF guided to a 2021 net RIN obligation of “between 550 million and 600 million net RIN gallons” on the first-quarter 2021 call. Reorg assumes that a quarter of the 575 million RIN gallon obligation midpoint, or 143.8 million RIN gallons, would be incurred in the fourth quarter proportional to the initial “final” percentage standards if those standards were in effect for 2021.

Based on the initial “final” percentage standards and the estimated accrued Sept. 30 RIN gallon obligation, Reorg estimates that PBF would have had an approximately 523.6 million remaining 2021 RIN gallon obligation through year-end.

Since the Dec. 7 proposed rule retroactively decreases the 2020 percentage standards and decreases the 2021 percentage standards below the level of the initial “final” 2020 percentage standard rule, PBF’s fixed-price purchase obligations and estimated remaining 2021 RIN obligations above, which are based on percentage standards in prior “final” rule, would generate excess 2020 and 2021 RINs.

Reorg estimates the reduced aggregate RIN obligations in the low and high case Dec. 7 proposed percentage standards result in approximately 77.1 million and 21.4 million fewer aggregate RIN obligations in 2020 and 2021, respectively, in comparison with applying the prior 2020 final rule estimated midpoint to both years.

Based on management’s commentary above, PBF will fulfill its 2020 obligations under the prior rule with its fourth-quarter fixed-price purchase commitments. Consistent with the RFS’ 20% annual RIN carryover flexibility, Reorg assumes that the PBF will carry over its excess 2020 RINs to the 2021 obligation year to reduce its combined remaining 2021 floating RIN obligation liability and any RIN obligations incurred in the fourth quarter.

As shown below, Reorg estimates that this would result in an aggregate year-to-date Sept. 30 floating and fourth quarter-incurred RIN liability of approximately 477.3 million or 533 million RIN gallons based on the low and high case percentage standards, respectively. Applying Dec. 30 RIN market prices to these estimated RIN obligations implies a $621 million to $693.4 million remaining 2021 obligations for PBF.

2022 Obligation Year

The Dec. 7 proposed rule, including the proposed 250 million gallon 2016 remand supplemental standard, increases the aggregate 2022 RVO 2.94% or 7.96% from the prior “final” rule for 2020 under the low and high cases, respectively. The Dec. 7 proposed rule states that the “supplemental standard would have the same practical effect as increasing the 2022 total renewable fuel volume requirement by 250 million gallons, as compliance would be demonstrated using the same RINs as used for the 2022 standard.”

The table below shows PBF’s 2020 obligation by RIN code assuming PBF’s initial midpoint net RVO obligation of 575 million gallons and a distribution by D-code proportionally consistent with the prior “final” 2020 RVO. Applying the percentage increases from the prior 2020 “final” RVO to the 2022 RVO results in an estimated PBF 2022 net RIN liability of 591.9 million gallon or 620.8 million gallon RIN liability under the low and high cases, respectively. Finally, assuming RIN pricing as of Dec. 30, 2021, results in a $767 million or $804.1 million 2022 obligation year net RIN cost under the low and high cases, respectively.

RFS Compliance Timing

The EPA on Nov. 18 proposed a rule extending the compliance deadline for all obligated RFS parties’ 2020 and 2021 obligations. The proposed rule provides for cascading compliance deadlines starting with small refineries’ 2019 compliance year obligations, followed by all obligated parties’ 2020 compliance year obligations, then finally all obligated parties’ 2021 compliance year obligations. Under the proposed rule, the compliance deadlines for these groups are set forth as follows:

  • Small refiners’ 2019 obligations: “[T]he next quarterly reporting deadline that is at least 60 days after publication of the 2021 RFS percentage standards in the Federal Register”;

  • All obligated parties’ 2020 obligations: “[T]he next quarterly reporting deadline after the 2019 compliance reporting deadline for small refineries”; and

  • All obligated parties’ 2021 obligations: “[T]he next quarterly reporting deadline that is after the 2020 compliance reporting deadline.”

In other words, under the proposed rule, at the soonest, PBF’s 2020 and 2021 compliance year RFS obligations would be due two and three quarterly reporting deadlines after publication of the 2021 RFS in the Federal Register, respectively. If the 2021 rule is published within 60 days or less of the next quarterly reporting deadline, PBF’s 2020 and 2021 compliance year RFS obligations would be due three and four quarterly reporting deadlines after publication of the 2021 RFS in the Federal Register, respectively.

In addition to the flexibility to carry over up to 20% of a compliance year’s RINs to the next year, as previously detailed by Reorg, the RFS affords obligated parties, including PBF, the ability to carry a deficit into a subsequent compliance year. However, if a deficit is carried into a subsequent compliance year, the obligated party is required to satisfy the compliance for the subsequent year’s renewable fuel volume requirement and purchase or generate enough credits to satisfy the deficit from the previous year.

Under the Nov. 18 proposed rule, 2022 compliance obligations would be due March 31, 2023, at the earliest, subject to the publish date of the 2023 rule and the finalization of the 2021 compliance deadline. Further, under the proposed rule, 2023 compliance obligations would be due March 31, 2024, at the earliest, subject to the publish date of the 2024 rule and the finalization of the 2022 compliance deadline.

Altogether under the Nov. 18 proposed rule, if PBF fulfills its 2020 and 2021 obligations in full by the 2021 deadline, which would be no sooner than Sept. 1, 2022, the company would have the flexibility to defer fulfillment of the 2022 compliance year obligations until at least March 31, 2024, the date that 2023 compliance year obligations are also due.

Refining Cash Obligations Model Update

On the basis of the Dec. 7 proposed rule’s impact on PBF as detailed above, PBF’s updated fourth-quarter capital expenditures guidance and other assumptions detailed below, Reorg has updated its non-operating cash obligations model. As previously discussed, under the non-operating cash obligations model, Reorg assumes PBF has full access to its $2.6 billion of “operational liquidity” less $500 million of minimum liquidity, and solves for the minimum amount of cash the company must generate from annualized pre-RFS adjusted EBITDA, working capital and parent distributions the company must generate to fulfill its obligations during the specified period.

PBF refining’s recent pre-RFS adjusted EBITDA performance is shown below:

(Click HERE to enlarge.)

The non-operating obligations model includes $250 million spent in October 2021 to fulfill obligations related to California’s AB 32 greenhouse gas emission control regulations. Beyond these payments, the go-forward cadence and magnitude of PBF’s payments for emission credits related to these regulations is unclear. After PBF’s $250 million October payment, Reorg assumes that a $240 million Sept. 30, 2021, pro forma stub accrued expense related to AB 32 costs remains on the balance sheet. The model assumes that the charges are paid as incurred and are accounted for in the implied pre-RFS adjusted EBITDA figures.

On the third-quarter call, CFO Young noted that PBF “continued to be active” in the October RINs market after the close of the quarter. However, he did not quantify the activity level.

Reorg estimates PBF’s cash obligations under both the EPA’s low-case and high-case proposed rules. For simplicity, Reorg assumes that PBF’s 2023 RFS obligations remain constant with its 2022 obligations.

To illustrate the flexibility of the RFS obligations, Reorg models the payment of the obligations under three deferral scenarios:

  1. No deferral of annual obligation compliance;

  2. A deferral of the 2021 compliance year obligations followed by compliance with the 2022 compliance year at the normal deadline;

  3. Compliance with the 2021 compliance year at the normal deadline followed by a deferral of the 2022 compliance year obligations.

The company’s decision to defer or not defer any given compliance year could be driven by a number of factors, including liquidity preservation and the relative pricing of various RIN vintages. Prior-year RINs trading at a premium to subsequent periods could drive such a deferral.

Under the first scenario, which assumes that PBF does not defer any RFS compliance obligations, is shown below. PBF must generate annualized pre-RFS adjusted EBITDA and parent contributions of $180 million to $253 million through the first quarter of 2023, which is the estimated deadline for the 2022 obligations. This would provide the company with the flexibility to defer the 2023 obligations if it chooses to do so. As shown above, PBF generated approximately $250 million of quarterly EBITDA in each of the second and third quarters.

(Click HERE to enlarge.)

Under scenario two, the 2021 obligations are deferred and the 2022 obligations are paid at the 2022 deadline, as required after the 2021 deferral. Following the fulfillment of the 2021 and 2022 obligations at the estimated March 31, 2023, 2022 obligation year deadline, PBF would have the ability to defer its 2023 obligation year fulfillment.

(Click HERE to enlarge.)

Under the third scenario, PBF fulfills its 2021 obligations at the 2021 deadline and defers its 2022 obligations to the 2023 deadline. Under this scenario, PBF would have the ability to defer its 2024 obligations.

(Click HERE to enlarge.)

--Adam Rhodes
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