Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The historical consolidated financial statements included in this Annual Report reflect all of the assets, liabilities and results of operations of Calumet Specialty Products Partners, L.P. and its consolidated subsidiaries (“Calumet,” the “Company,” “we,” “our,” or “us”). The following discussion analyzes the financial condition and results of operations of the Company for the years ended December 31, 2020 and 2019. In addition, as discussed in Note 5 to the Consolidated Financial Statements, we closed the San Antonio Transaction on November 10, 2019. The historical results of operations of the San Antonio Refinery are contained in our financial position and results through November 10, 2019. Unitholders should read the following discussion and analysis of the financial condition and results of operations of the Company in conjunction with the historical consolidated financial statements and notes of the Company included elsewhere in this Annual Report.
Overview
We are a leading independent producer of high-quality, specialty hydrocarbon products in North America. We are headquartered in Indianapolis, Indiana, and own specialty and fuel products facilities primarily located in northwest Louisiana, northern Montana, western Pennsylvania, Texas and eastern Missouri. We own and lease additional facilities, primarily related to production and distribution of our products throughout the United States (“U.S.”). Our business is organized into three segments: our core specialty products segment, fuel products segment and corporate segment. In our specialty products segment, we process crude oil and other feedstocks into a wide variety of customized lubricating oils, solvents, waxes, synthetic lubricants, and other products. Our specialty products are sold to domestic and international customers who purchase them primarily as raw material components for various industrial and consumer-facing applications. We also blend, package, and market specialty products through our Royal Purple, Bel-Ray, and TruFuel brands. In our fuel products segment, we process crude oil into a variety of fuel and fuel-related products, including gasoline, diesel, jet fuel, asphalt and other products, and from time to time resell purchased crude oil to third-party customers. Our corporate segment primarily consists of general and administrative expenses not allocated to the specialty products or fuel products segments. Please read Note 20 - “Segments and Related Information” under Part II, Item 8 “Financial Statements and Supplementary Data” for further information. On February 16, 2021, the Company announced plans to re-segment its financial reporting starting in 2021. Please read Note 21 - “Subsequent Events” in Part II, Item 8 “Financial Statements and Supplementary Data” for additional information.
2020 Update
Outlook and Trends
The COVID-19 pandemic negatively impacted the global economy, creating significant volatility and disruption of markets that directly impacted Calumet. At Calumet, safety comes first and we have developed and successfully executed a plan to manage health and safety risks and business continuity to protect our workforce and business during the COVID-19 pandemic. In addition to the impacts from COVID-19, dramatic fluctuations in international oil production contributed to a sharp drop in prices for crude oil and refined products in the first half of 2020. As local state governments began to lift COVID-19 related restrictions in the second half of 2020, economic conditions began to recover. Below are factors that impacted our results of operations during 2020:
•Reduction in demand for our fuels products as the domestic and global economies are adversely affected by the
global pandemic and the significant governmental measures being implemented to control the
spread of the virus.
•Reduction in demand for certain specialty products as a variety of customers and industries are adversely affected by the COVID-19 pandemic. Our broad range of applications and diversification of end-use markets has allowed our specialty products business to maintain margin despite the pandemic.
•Availability and pricing of crude oil and other feedstocks as producers and sellers of those products are adversely affected by the global pandemic and the global oversupply of crude oil.
•The average price per barrel of New York Mercantile Exchange West Texas Intermediate (“NYMEX WTI”) crude oil decreased approximately 31% in 2020 as compared to 2019.
•In 2020, Canadian sour crude traded at a tighter spread to NYMEX WTI as compared to 2019. Processing crude oils based on Western Canadian Select (“WCS”) and other cost-advantaged crude continues to be an advantage.
•Our average feedstock runs were 84,829 barrels per day (“bpd”) in 2020, compared to 103,603 bpd in 2019. The decrease is primarily attributed to the divestment of the San Antonio refinery with a capacity of 21,000 bpd, termination of third-party naphthenic lubricating oils production in the fourth quarter of 2019, and general economic optimization given narrow fuels margins. We intend to improve utilization rates by minimizing unplanned downtime at our facilities, while optimizing economics.
•Our specialty product margins have remained relatively stable but certain of our end markets are susceptible to changes in Gross Domestic Product. Over the long term, we continue to consider our specialty products segment our core business and subject to economic conditions and available liquidity, we plan to seek appropriate ways to further invest in our specialty products segment.
•It is not possible to predict what future Renewable Identification Numbers (“RINs”) costs may be given the volatile price of RINs but we continue to anticipate that RINs have the potential to remain a significant expense for our fuel products segment (exclusive of the favorable impact of exemptions received). The average 2020 RINs market price increased more than 200% relative to the average 2019 RINs price, negatively impacting our financial results. Please read Item 7 “Management’s Discussion and Analysis - Renewable Fuels Standard Update” below for additional information.
•We continue to evaluate opportunities to divest non-core businesses and assets in line with our strategy of deleveraging and focusing more directly on specialty products. In addition, we may also consider the disposition of certain core assets or businesses, to the extent such a transaction would improve our capital structure or otherwise be accretive to the Company. There can be no assurance as to the timing or success of any such potential transaction, or any other transaction, or that we will be able to sell such assets or businesses on satisfactory terms, if at all. In addition, as economic conditions improve, we may seek acquisitions of assets that management believes will be financially accretive and consistent with our strategic goals.
To meet the economic challenges of 2020, we reduced our fixed and variable costs associated with cost of sales, restructured our organization to match activity where necessary, and reduced our planned capital investment program by more than 30%, keeping our focus on prudent replacement, maintenance and turnaround projects.
Contingencies
For a summary of litigation and other contingencies, please read Note 8 — “Commitments and Contingencies” under Part II, Item 8 “Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements.” Based on information available to us at the present time, we do not believe that any liabilities beyond the amounts already accrued, which may result from these contingencies, will have a material adverse effect on our liquidity, financial condition or results of operations.
Financial Results
We reported a net loss of $149.0 million in 2020, versus a net loss of $43.6 million in 2019. We reported Adjusted EBITDA (as defined in Item 7 “Management’s Discussion and Analysis — Non-GAAP Financial Measures”) of $141.5 million in 2020, versus $262.8 million in 2019. We generated cash from operating activities of $62.8 million in 2020, versus $191.9 million in 2019.
Please read Item 7 “Management’s Discussion and Analysis — Non-GAAP Financial Measures” for a reconciliation of EBITDA and Adjusted EBITDA to Net Loss, our most directly comparable financial performance measure calculated and presented in accordance with GAAP.
Specialty products segment Adjusted EBITDA was $238.0 million in 2020 compared to $207.9 million in the prior year, representing growth in the most challenging of conditions. Specialty products segment Adjusted EBITDA Margin grew to 21.2% in 2020 from 15.4% in 2019. Segment results were impacted by softer demand due to the COVID-19 pandemic in 2020, but the impact was largely offset from stronger margins in both the specialty oils and waxes business and the finished lubricants and chemicals business. Continued focus on cost improvements in fixed operating, transportation and SG&A contributed to the segment’s performance. Results were also impacted by a $7.8 million unfavorable LCM inventory adjustment in 2020 compared to a $9.5 million favorable LCM inventory adjustment in 2019, as well as $3.9 million of losses related to the liquidation of LIFO inventory layers in 2020 compared to $2.8 million of gains in 2019. Specialty products represented approximately 26% of total production in 2020, compared to 24% in 2019.
Fuel products segment Adjusted EBITDA was negative $30.3 million in 2020 compared to positive $152.5 million in 2019. Fuel products segment results for fiscal year 2020 were impacted by decreased sales volumes, weaker U.S. Gulf Coast crack spreads, a tightening in the average pricing discount between WCS and NYMEX WTI of $3 per barrel when compared to the prior year, and increasing RINs prices. Results were also impacted by a $16.2 million unfavorable LCM inventory adjustment in 2020 compared to a $26.3 million favorable LCM inventory adjustment in 2019, as well as $0.6 million of losses related to the liquidation of LIFO inventory layers in 2020 compared to $3.2 million of gains in 2019. Fuel products represented approximately 74% of total production during the year, compared to 76% in 2019.
Corporate segment Adjusted EBITDA was negative $66.2 million in 2020 versus negative $97.6 million in 2019, due primarily to cost reductions in outside services and corporate staffing.
Acquisitions
On March 2, 2020, we acquired a 100% ownership interest in Paralogics, LLC, a producer of candle and industrial wax
blends, using cash on hand. This investment expanded Calumet’s presence in the specialty wax blending and packaging market
while adding new capabilities into Calumet's existing wax business value chain, adding approximately 20 million pounds of
annual blending and formulating capabilities.
Business Divestitures
In March 2019, we sold our interest in Biosyn Holdings, LLC (“Biosyn”) to The Heritage Group, a related party, for total proceeds of $5.0 million which was recorded in the “other” component of other income (expense) in the consolidated statements of operations.
In November 2019, we completed the sale of all of the issued and outstanding membership interests in Calumet San Antonio Refining, LLC, which owned the San Antonio Refinery. The sale included the refinery and related assets, including associated hydrocarbon inventories, a crude oil terminal and pipeline to Starlight Relativity Acquisition Company LLC (“Starlight”), a Delaware limited liability company (the “San Antonio Transaction”). Total consideration received was $59.1 million, which consisted of a base sales price of $63.0 million minus an adjustment of $3.9 million for net working capital, inventories and reimbursement of certain transaction costs. The San Antonio refinery was included in the Company’s fuel products segment. The Company recognized a net loss of $8.7 million in gain (loss) on sale of business in the consolidated statements of operations for the year ended December 31, 2019, related to the San Antonio Transaction. In February 2020, the Company and Starlight agreed to the final purchase price adjustment payment related to net working capital and inventory to Starlight of $6.9 million, which is reflected in the net loss recognized by the Company for the year ended December 31, 2019.
In connection with the San Antonio Transaction, the Partnership, Calumet San Antonio, TexStar Midstream Logistics, L.P. (“TexStar”), TexStar Midstream Logistics Pipeline, LP and Tailwater Capital, LLC entered into a Settlement and Release Agreement (the “Settlement Agreement”), pursuant to which the Partnership agreed to pay TexStar and its affiliates a cash payment of $1.0 million and the parties mutually agreed to dismiss the litigation and release each other with respect to the legal dispute relating to the termination of the Throughput and Deficiency Agreement (the “Pipeline Agreement”). As a result of the Settlement Agreement, we derecognized the $38.1 million liability related to the Pipeline Agreement, which was included in the Gain (loss) on sale of business calculation for the San Antonio Transaction.
Liquidity Update
As of December 31, 2020, we had total liquidity of $263.8 million comprised of $109.4 million of cash and $154.4 million of availability under our revolving credit facility. As of December 31, 2020, our revolving credit facility had a $286.1 million borrowing base, $23.7 million in outstanding standby letters of credit and $108.0 million outstanding borrowings. We believe we will continue to have sufficient liquidity from cash on hand, cash flow from operations, borrowing capacity and other means by which to meet our financial commitments, debt service obligations, anticipated capital expenditures and contingencies. Please read Item 7 “Management’s Discussion and Analysis - Liquidity and Capital Resources” and Part I, Item 1A. “Risk Factors” for additional information.
In 2020, we consummated a transaction whereby we exchanged approximately $200.0 million aggregate principal amount of our outstanding 2022 Notes for $200.0 million aggregate principal amount of newly issued 2024 Secured Notes (the “Exchange Transaction”).
In 2019, we redeemed $900 million in aggregate principal amount of our 6.50% Notes due April 2021 (“2021 Notes”) with the net proceeds from the issuance of $550.0 million of 11.00% senior notes due 2025 (“2025 Notes”), together with borrowings under our revolving credit facility and cash on hand. In conjunction with the redemption, we incurred net, debt extinguishment costs of $2.2 million.
Renewable Fuel Standard Update
Along with the broader refining industry, we remain subject to compliance costs under the Renewable Fuel Standard (“RFS”). Under the regulation of the EPA, the RFS provides annual requirements for the total volume of renewable transportation fuels which are mandated to be blended into finished petroleum fuels. If a refiner does not meet its required annual Renewable Volume Obligation, the refiner can purchase blending credits in the open market, referred to as RINs.
For the year ended December 31, 2020, our non-cash RINs expense was $100.9 million, as compared to a RINs gain for the year ended December 31, 2019 of $6.0 million. Our annual gross RINs Obligation, which includes RINs that are required to be secured through either our own blending or through the purchase of RINs in the open market, is approximately 80 million RINs spread across four compliance categories (D3, D4, D5 and D6). The gross RINs obligations exclude our own renewables blending as well as the potential for any subsequent hardship waivers.
In August 2019, the EPA granted our fuel product refineries a “small refinery exemption” under the RFS for the compliance year 2018, as provided for under the Clean Air Act (“CAA”), as amended. In granting those exemptions, the EPA, in consultation with the Department of Energy, determined that for the compliance year 2018, compliance with the RFS would represent a “disproportionate economic hardship” for these small refineries. The RINs exemption resulted in a decrease in the RINs Obligation and was recorded as a reduction to cost of sales in the consolidated statements of operations for the year ended December 31, 2019.
We continue to anticipate that expenses related to RFS compliance have the potential to remain a significant expense for our fuel products segment. If legal or regulatory changes occur that have the effect of increasing our RINs Obligation or eliminating or narrowing the availability of the “small refinery exemption” under the RFS program, we could be required to purchase additional RINs in the open market, which may materially increase our costs related to RFS compliance and could have a material adverse effect on our results of operations and liquidity.
Key Performance Measures
Our sales and net loss are principally affected by demand for specialty products and fuel products, price of raw materials, prevailing crack spreads for fuel products, the price of natural gas used as fuel in our operations and our results from derivative instrument activities.
Our primary raw materials are crude oil and other specialty feedstocks, and our primary outputs are specialty petroleum products and fuel products. The prices of crude oil, specialty products and fuel products are subject to fluctuations in response to changes in supply, demand, market uncertainties and a variety of factors beyond our control. We monitor these risks and from time-to-time enter into derivative instruments designed to help mitigate the impact of commodity price fluctuations on our business. The primary purpose of our commodity risk management activities is to economically hedge our cash flow exposure to commodity price changes so that we can meet our debt service and capital expenditure requirements despite fluctuations in crude oil and fuel products prices. We also may hedge when market conditions exist that we believe to be out of the ordinary and particularly supportive of our financial goals. We enter into derivative contracts for future periods for quantities that do not exceed our projected purchases of crude oil and sales of fuel products. Please read Note 11 — “Derivatives” under Part II, Item 8 “Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements.”
Our management uses several financial and operational measurements to analyze our performance. These measurements include the following:
•sales volumes;
•segment gross profit;
•segment Adjusted EBITDA; and
•selling, general and administrative expenses.
Sales volumes. We view the volumes of specialty products and fuel products sold as an important measure of our ability to effectively utilize our operating assets. Our ability to meet the demands of our customers is driven by the volumes of crude oil and feedstocks that we run through our facilities. Higher volumes improve profitability both through the spreading of fixed costs over greater volumes and the additional gross profit achieved on the incremental volumes.
Segment gross profit. Specialty products and fuel products gross profit are important measures of our ability to maximize the profitability of our specialty products and fuel products segments. We define gross profit as sales less the cost of crude oil and other feedstocks and other production-related expenses, the most significant portion of which includes labor, plant fuel, utilities, contract services, maintenance, depreciation and processing materials. We use gross profit as an indicator of our ability to manage our business during periods of crude oil and natural gas price fluctuations, as the prices of our specialty products and fuel products generally do not change immediately with changes in the price of crude oil and natural gas. The increase or decrease in selling prices typically lags behind the rising or falling costs, respectively, of crude oil feedstocks for specialty products. Other than plant fuel, production-related expenses generally remain stable across broad ranges of specialty products and fuel products throughput volumes but can fluctuate depending on maintenance activities performed during a specific period.
Our fuel products segment gross profit per barrel may differ from standard U.S. Gulf Coast, PADD 4 Billings, Montana or 3/2/1 and 2/1/1 market crack spreads due to many factors, including our fuel products mix as shown in our production table being different than the ratios used to calculate such market crack spreads, LCM and LIFO inventory adjustments reflected in gross profit, operating costs including fixed costs, actual crude oil costs differing from market indices and our local market pricing differentials for fuel products in the Shreveport, Louisiana and Great Falls, Montana vicinities as compared to U.S. Gulf Coast and PADD 4 Billings, Montana postings.
Segment Adjusted EBITDA. We believe that specialty products and fuel products segment Adjusted EBITDA measures are useful as they exclude transactions not related to our core cash operating activities and provide metrics to analyze our ability to pay distributions to our unitholders and pay interest to our noteholders as Adjusted EBITDA is a component in the calculation of Distributable Cash Flow and allows us to meaningfully analyze the trends and performance of our core cash operations as well as to make decisions regarding the allocation of resources to segments. The corporate segment Adjusted EBITDA primarily reflects general and administrative costs not related to our core cash operating activities.
Results of Operations
The following table sets forth information about our continuing operations. Facility production volume differs from sales volume due to changes in inventories and the sale of purchased fuel product blendstocks, such as ethanol and biodiesel, and the resale of crude oil in our fuel products segment. The historical results of operations of the San Antonio Refinery are included through the effective date of its disposition, November 10, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
(In bpd)
|
Total sales volume (1)
|
86,727
|
|
|
104,734
|
|
Total feedstock runs (2)
|
84,829
|
|
|
103,603
|
|
Total facility production: (3)
|
|
|
|
Specialty products:
|
|
|
|
Lubricating oils
|
10,143
|
|
|
11,506
|
|
Solvents
|
6,819
|
|
|
7,526
|
|
Waxes
|
1,318
|
|
|
1,315
|
|
Packaged and synthetic specialty products (4)
|
1,381
|
|
|
1,540
|
|
Other
|
1,697
|
|
|
1,764
|
|
Total specialty products
|
21,358
|
|
|
23,651
|
|
Fuel products:
|
|
|
|
Gasoline
|
18,074
|
|
|
22,877
|
|
Diesel
|
24,054
|
|
|
28,709
|
|
Jet fuel
|
3,645
|
|
|
4,506
|
|
Asphalt, heavy fuel oils and other
|
14,324
|
|
|
20,286
|
|
Total fuel products
|
60,097
|
|
|
76,378
|
|
Total facility production (3)
|
81,455
|
|
|
100,029
|
|
(1)Total sales volume includes sales from the production at our facilities and certain third-party facilities pursuant to supply and/or processing agreements, sales of inventories and the resale of crude oil to third-party customers. Total sales volume also includes the sale of purchased fuel product blendstocks, such as ethanol and biodiesel, as components of finished fuel products in our fuel products segment sales.
The decrease in total sales volume in 2020 compared to 2019, is due primarily to the sale of the San Antonio refinery, the terminated third-party naphthenic lubricating oil production arrangement, intentional Stock-Keeping Unit (“SKU”) rationalization and elimination of low margin toll processing, and softened demand due to the COVID-19 pandemic.
(2)Total feedstock runs represent the barrels per day of crude oil and other feedstocks processed at our facilities and at certain third-party facilities pursuant to supply and/or processing agreements.
The decrease in total feedstock runs in 2020 compared to 2019 is due primarily to the sale of the San Antonio refinery, the terminated third-party naphthenic lubricating oil production arrangement, terminated low margin tolling of packaged and synthetic products, and softened demand due to the COVID-19 pandemic.
(3)Total facility production represents the barrels per day of specialty products and fuel products yielded from processing feedstocks at our facilities and at certain third-party facilities pursuant to supply and/or processing agreements. The difference between total facility production and total feedstock runs is primarily a result of the time lag between the input of feedstocks and the production of finished products, intermediates transferred to internal sites for further processing, and volume loss.
The changes in total facility production in 2020 over 2019 are due primarily to the sale of the San Antonio refinery and the operational items discussed above.
(4)Represents production of finished lubricants and specialty chemicals products, including the products from our Royal Purple, Bel-Ray and Calumet Packaging facilities.
The following table reflects our consolidated results of operations and includes the non-GAAP financial measures EBITDA, Adjusted EBITDA and Distributable Cash Flow. For a reconciliation of EBITDA, Adjusted EBITDA and Distributable Cash Flow to Net loss and Net cash provided by operating activities, our most directly comparable financial performance and liquidity measures calculated and presented in accordance with GAAP, please read “Non-GAAP Financial Measures.”
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
(In millions)
|
Sales
|
$
|
2,268.2
|
|
|
$
|
3,452.6
|
|
Cost of sales
|
2,058.1
|
|
|
3,000.9
|
|
Gross profit
|
210.1
|
|
|
451.7
|
|
Operating costs and expenses:
|
|
|
|
Selling
|
47.8
|
|
|
53.1
|
|
General and administrative
|
91.1
|
|
|
136.7
|
|
Transportation
|
111.0
|
|
|
122.9
|
|
Taxes other than income taxes
|
9.8
|
|
|
20.5
|
|
Loss on impairment and disposal of assets
|
6.8
|
|
|
37.0
|
|
(Gain) loss on sale of business, net
|
(1.0)
|
|
|
8.7
|
|
Other operating (income) expense
|
16.5
|
|
|
(3.5)
|
|
Operating income (loss)
|
(71.9)
|
|
|
76.3
|
|
Other income (expense):
|
|
|
|
Interest expense
|
(125.9)
|
|
|
(134.6)
|
|
Debt extinguishment costs
|
—
|
|
|
(2.2)
|
|
Gain on derivative instruments
|
52.4
|
|
|
9.0
|
|
Gain from unconsolidated affiliates
|
—
|
|
|
3.8
|
|
Gain on sale of unconsolidated affiliates
|
—
|
|
|
1.2
|
|
Other income (expense)
|
(2.5)
|
|
|
3.4
|
|
Total other expense
|
(76.0)
|
|
|
(119.4)
|
|
Net loss before income taxes
|
(147.9)
|
|
|
(43.1)
|
|
Income tax expense
|
1.1
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(149.0)
|
|
|
$
|
(43.6)
|
|
EBITDA
|
$
|
83.1
|
|
|
$
|
201.6
|
|
Adjusted EBITDA
|
$
|
141.5
|
|
|
$
|
262.8
|
|
Distributable Cash Flow
|
$
|
(34.7)
|
|
|
$
|
62.2
|
|
Non-GAAP Financial Measures
We include in this Annual Report the non-GAAP financial measures EBITDA, Adjusted EBITDA and Distributable Cash Flow. We provide reconciliations of EBITDA, Adjusted EBITDA and Distributable Cash Flow to Net loss, our most directly comparable financial performance measure. We also provide a reconciliation of Distributable Cash Flow, Adjusted EBITDA and EBITDA to Net cash provided by operating activities, our most directly comparable liquidity measure. Both Net loss and Net cash provided by operating activities are calculated and presented in accordance with GAAP.
EBITDA, Adjusted EBITDA and Distributable Cash Flow are used as supplemental financial measures by our management and by external users of our financial statements, such as investors, commercial banks, research analysts and others, to assess:
•the financial performance of our assets without regard to financing methods, capital structure or historical cost basis;
•the ability of our assets to generate cash sufficient to pay interest costs and support our indebtedness;
•our operating performance and return on capital as compared to those of other companies in our industry, without regard to financing or capital structure; and
•the viability of acquisitions and capital expenditure projects and the overall rates of return on alternative investment opportunities.
Management believes that these non-GAAP measures are useful to analysts and investors as they exclude transactions not related to our core cash operating activities and provide metrics to analyze our ability to pay interest costs and distributions. However, the indentures governing our senior notes contain covenants that, among other things, restrict our ability to pay distributions. We believe that excluding these transactions allows investors to meaningfully analyze trends and performance of our core cash operations.
We define EBITDA for any period as net loss plus interest expense (including amortization of debt issuance costs), income taxes and depreciation and amortization.
During the first quarter of 2020, the CODM changed the definition and calculation of Adjusted EBITDA, which we use for evaluating performance, allocating resources and managing the business. The revised definition and calculation of Adjusted EBITDA now includes LCM inventory adjustments and LIFO adjustments, see items (g) and (h) below, which were previously excluded. This revised definition and calculation better reflects the performance of our Company’s business segments including cash flows. Adjusted EBITDA has been revised for all periods presented to consistently reflect this change.
We define Adjusted EBITDA for any period as EBITDA adjusted for (a) impairment; (b) unrealized gains and losses from mark-to-market accounting for hedging activities; (c) realized gains and losses under derivative instruments excluded from the determination of net income (loss); (d) non-cash equity-based compensation expense and other non-cash items (excluding items such as accruals of cash expenses in a future period or amortization of a prepaid cash expense) that were deducted in computing net income (loss); (e) debt refinancing fees, premiums and penalties; (f) any net gain or loss realized in connection with an asset sale that was deducted in computing net income (loss), (g) LCM inventory adjustments; (h) the impact of liquidation of inventory layers calculated using the LIFO method; and (i) all extraordinary, unusual or non-recurring items of gain or loss, or revenue or expense.
We define Distributable Cash Flow for any period as Adjusted EBITDA less replacement and environmental capital expenditures, turnaround costs, cash interest expense (consolidated interest expense less non-cash interest expense), gain (loss) from unconsolidated affiliates, net of cash distributions and income tax expense (benefit).
We define Adjusted EBITDA Margin as Adjusted EBITDA divided by sales.
The definition of Adjusted EBITDA presented in this Annual Report is consistent with the calculation of “Consolidated Cash Flow” contained in the indentures governing our 2022, 2023, 2024 and 2025 Notes (as defined in this Annual Report). We are required to report Consolidated Cash Flow to the holders of our 2022, 2023, 2024 and 2025 Notes and Adjusted EBITDA to the lenders under our revolving credit facility, and these measures are used by them to determine our compliance with certain covenants governing those debt instruments. Please read “Liquidity and Capital Resources — Debt and Credit Facilities” for additional details regarding the covenants governing our debt instruments.
EBITDA, Adjusted EBITDA and Distributable Cash Flow should not be considered alternatives to Net loss, Operating income (loss), Net cash provided by operating activities or any other measure of financial performance presented in accordance with GAAP. In evaluating our performance as measured by EBITDA, Adjusted EBITDA and Distributable Cash Flow, management recognizes and considers the limitations of these measurements. EBITDA and Adjusted EBITDA do not reflect our liabilities for the payment of income taxes, interest expense or other obligations such as capital expenditures. Accordingly, EBITDA, Adjusted EBITDA and Distributable Cash Flow are only three of several measurements that management utilizes. Moreover, our EBITDA, Adjusted EBITDA and Distributable Cash Flow may not be comparable to similarly titled measures of another company because all companies may not calculate EBITDA, Adjusted EBITDA and Distributable Cash Flow in the same manner.
The following tables present a reconciliation of Net loss to EBITDA, Adjusted EBITDA and Distributable Cash Flow; Distributable Cash Flow, Adjusted EBITDA and EBITDA to Net cash provided by operating activities and Segment Adjusted EBITDA to EBITDA and Net loss, and our most directly comparable GAAP financial performance and liquidity measures, for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Reconciliation of Net loss to EBITDA, Adjusted EBITDA and Distributable Cash Flow:
|
|
|
|
|
|
|
Net loss
|
$
|
(149.0)
|
|
|
$
|
(43.6)
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
Interest expense
|
125.9
|
|
|
134.6
|
|
|
|
|
|
Depreciation and amortization
|
105.1
|
|
|
110.1
|
|
|
|
|
|
Income tax expense
|
1.1
|
|
|
0.5
|
|
|
|
|
|
EBITDA
|
$
|
83.1
|
|
|
$
|
201.6
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
LCM / LIFO (gain) loss
|
$
|
28.5
|
|
|
$
|
(41.8)
|
|
|
|
|
|
Unrealized (gain) loss on derivative instruments
|
(2.8)
|
|
|
26.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt extinguishment costs
|
—
|
|
|
2.2
|
|
|
|
|
|
Amortization of turnaround costs
|
14.6
|
|
|
19.3
|
|
|
|
|
|
Loss on impairment and disposal of assets (3)
|
6.8
|
|
|
37.0
|
|
|
|
|
|
Gain on sale of unconsolidated affiliate
|
—
|
|
|
(1.2)
|
|
|
|
|
|
(Gain) loss on sale of business, net
|
(1.0)
|
|
|
8.7
|
|
|
|
|
|
Other non-recurring expenses
|
2.4
|
|
|
3.5
|
|
|
|
|
|
Equity based compensation and other items
|
9.9
|
|
|
7.4
|
|
|
|
|
|
Adjusted EBITDA (4)
|
$
|
141.5
|
|
|
$
|
262.8
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
Replacement and environmental capital expenditures (1)
|
$
|
31.8
|
|
|
$
|
50.0
|
|
|
|
|
|
Cash interest expense (2)
|
119.9
|
|
|
128.5
|
|
|
|
|
|
Turnaround costs
|
23.4
|
|
|
17.8
|
|
|
|
|
|
Gain from unconsolidated affiliates
|
—
|
|
|
3.8
|
|
|
|
|
|
Income tax expense
|
1.1
|
|
|
0.5
|
|
|
|
|
|
Distributable Cash Flow
|
$
|
(34.7)
|
|
|
$
|
62.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Reconciliation of Distributable Cash Flow, Adjusted EBITDA and EBITDA to Net cash provided by operating activities:
|
|
|
|
|
Distributable Cash Flow
|
$
|
(34.7)
|
|
|
$
|
62.2
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
Replacement and environmental capital expenditures (1)
|
31.8
|
|
|
50.0
|
|
|
|
|
|
Cash interest expense (2)
|
119.9
|
|
|
128.5
|
|
|
|
|
|
Turnaround costs
|
23.4
|
|
|
17.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from unconsolidated affiliates
|
—
|
|
|
3.8
|
|
|
|
|
|
Income tax expense
|
1.1
|
|
|
0.5
|
|
|
|
|
|
Adjusted EBITDA (4)
|
$
|
141.5
|
|
|
$
|
262.8
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
LCM / LIFO (gain) loss
|
$
|
28.5
|
|
|
$
|
(41.8)
|
|
|
|
|
|
Unrealized (gain) loss on derivative instruments
|
(2.8)
|
|
|
26.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt extinguishment costs
|
—
|
|
|
2.2
|
|
|
|
|
|
Amortization of turnaround costs
|
14.6
|
|
|
19.3
|
|
|
|
|
|
Loss on impairment and disposal of assets (3)
|
6.8
|
|
|
37.0
|
|
|
|
|
|
Gain on sale of unconsolidated affiliate
|
—
|
|
|
(1.2)
|
|
|
|
|
|
(Gain) loss on sale of business, net
|
(1.0)
|
|
|
8.7
|
|
|
|
|
|
Other non-recurring expenses
|
2.4
|
|
|
3.5
|
|
|
|
|
|
Equity based compensation and other items
|
9.9
|
|
|
7.4
|
|
|
|
|
|
EBITDA
|
$
|
83.1
|
|
|
$
|
201.6
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
Unrealized (gain) loss on derivative instruments
|
$
|
(2.8)
|
|
|
$
|
26.1
|
|
|
|
|
|
Cash interest expense (2)
|
(119.9)
|
|
|
(128.5)
|
|
|
|
|
|
(Gain) loss on sale of business, net
|
(1.0)
|
|
|
8.7
|
|
|
|
|
|
Other non-recurring expenses
|
2.4
|
|
|
3.5
|
|
|
|
|
|
Loss on impairment and disposal of assets (3)
|
6.8
|
|
|
37.0
|
|
|
|
|
|
Lower of cost or market inventory adjustment
|
24.0
|
|
|
(35.6)
|
|
|
|
|
|
Equity-based compensation
|
5.5
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from unconsolidated affiliates
|
—
|
|
|
(3.8)
|
|
|
|
|
|
Gain on sale of unconsolidated affiliate
|
—
|
|
|
(1.2)
|
|
|
|
|
|
Amortization of turnaround costs
|
14.6
|
|
|
19.3
|
|
|
|
|
|
Income tax expense
|
(1.1)
|
|
|
(0.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt extinguishment costs
|
—
|
|
|
2.2
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
25.5
|
|
|
(37.0)
|
|
|
|
|
|
Inventories
|
14.0
|
|
|
16.3
|
|
|
|
|
|
Other current assets
|
0.6
|
|
|
4.5
|
|
|
|
|
|
Turnaround costs
|
(23.4)
|
|
|
(17.8)
|
|
|
|
|
|
Derivative activity
|
—
|
|
|
(0.3)
|
|
|
|
|
|
Other assets
|
—
|
|
|
(0.1)
|
|
|
|
|
|
Accounts payable
|
(38.1)
|
|
|
71.3
|
|
|
|
|
|
Accrued interest payable
|
(1.0)
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
77.1
|
|
|
22.6
|
|
|
|
|
|
Other
|
(3.5)
|
|
|
(3.8)
|
|
|
|
|
|
Net cash provided by operating activities
|
$
|
62.8
|
|
|
$
|
191.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
(In millions)
|
Reconciliation of Segment Adjusted EBITDA to EBITDA and Net loss:
|
|
|
Segment Adjusted EBITDA:
|
|
|
|
Corporate Adjusted EBITDA
|
$
|
(66.2)
|
|
|
$
|
(97.6)
|
|
Specialty products Adjusted EBITDA
|
238.0
|
|
|
207.9
|
|
Fuel products Adjusted EBITDA
|
(30.3)
|
|
|
152.5
|
|
|
|
|
|
Total segment Adjusted EBITDA(4)
|
$
|
141.5
|
|
|
$
|
262.8
|
|
Less:
|
|
|
|
LCM / LIFO (gain) loss
|
$
|
28.5
|
|
|
$
|
(41.8)
|
|
Unrealized (gain) loss on derivative instruments
|
(2.8)
|
|
|
26.1
|
|
|
|
|
|
Debt extinguishment costs
|
—
|
|
|
2.2
|
|
Amortization of turnaround costs
|
14.6
|
|
|
19.3
|
|
Loss on impairment and disposal of assets (3)
|
6.8
|
|
|
37.0
|
|
Gain on sale of unconsolidated affiliate
|
—
|
|
|
(1.2)
|
|
(Gain) loss on sale of business, net
|
(1.0)
|
|
|
8.7
|
|
Other non-recurring expenses
|
2.4
|
|
|
3.5
|
|
Equity based compensation and other items
|
9.9
|
|
|
7.4
|
|
EBITDA
|
$
|
83.1
|
|
|
$
|
201.6
|
|
Less:
|
|
|
|
Interest expense
|
$
|
125.9
|
|
|
$
|
134.6
|
|
Depreciation and amortization
|
105.1
|
|
|
110.1
|
|
Income tax expense
|
1.1
|
|
|
0.5
|
|
Net loss
|
$
|
(149.0)
|
|
|
$
|
(43.6)
|
|
(1)Replacement capital expenditures are defined as those capital expenditures which do not increase operating capacity or reduce operating costs and exclude turnaround costs. Environmental capital expenditures include asset additions to meet or exceed environmental and operating regulations.
(2)Represents consolidated interest expense less non-cash interest expense.
(3)Impairment charges for 2019 primarily relate to $25.4 million of impairment charges related to an cost method investment.
(4)Total segment Adjusted EBITDA includes the non-cash impact of the following LCM inventory adjustments and gains (losses) related to the liquidation of LIFO inventory layers.
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
(In millions)
|
LCM gain (loss) impact
|
$
|
(24.0)
|
|
|
$
|
35.8
|
|
Liquidation of LIFO layers gain (loss) impact
|
$
|
(4.5)
|
|
|
$
|
6.0
|
|
Year Ended December 31, 2020, Compared to Year Ended December 31, 2019
Sales. Sales decreased $1,184.4 million, or 34.3%, to $2,268.2 million in 2020 from $3,452.6 million in 2019. Sales for each of our principal product categories in these periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
% Change
|
|
(In millions, except barrel and per barrel data)
|
Sales by segment:
|
|
|
|
|
|
Specialty products:
|
|
|
|
|
|
Lubricating oils
|
$
|
473.4
|
|
|
$
|
593.1
|
|
|
(20.2)
|
%
|
Solvents
|
236.2
|
|
|
325.9
|
|
|
(27.5)
|
%
|
Waxes
|
129.1
|
|
|
119.3
|
|
|
8.2
|
%
|
Packaged and synthetic specialty products (1)
|
234.2
|
|
|
230.8
|
|
|
1.5
|
%
|
Other (2)
|
51.4
|
|
|
85.0
|
|
|
(39.5)
|
%
|
Total specialty products
|
$
|
1,124.3
|
|
|
$
|
1,354.1
|
|
|
(17.0)
|
%
|
Total specialty products sales volume (in barrels)
|
8,183,000
|
|
|
9,087,000
|
|
|
(9.9)
|
%
|
Average specialty products sales price per barrel
|
$
|
137.39
|
|
|
$
|
149.02
|
|
|
(7.8)
|
%
|
|
|
|
|
|
|
Fuel products:
|
|
|
|
|
|
Gasoline
|
$
|
379.8
|
|
|
$
|
679.6
|
|
|
(44.1)
|
%
|
Diesel
|
475.8
|
|
|
859.1
|
|
|
(44.6)
|
%
|
Jet fuel
|
70.2
|
|
|
134.6
|
|
|
(47.8)
|
%
|
Asphalt, heavy fuel oils and other (3)
|
218.1
|
|
|
425.2
|
|
|
(48.7)
|
%
|
|
|
|
|
|
|
Total fuel products
|
$
|
1,143.9
|
|
|
$
|
2,098.5
|
|
|
(45.5)
|
%
|
Total fuel products sales volume (in barrels)
|
23,559,000
|
|
|
29,141,000
|
|
|
(19.2)
|
%
|
Average fuel products sales price per barrel
|
$
|
48.55
|
|
|
$
|
72.01
|
|
|
(32.6)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
$
|
2,268.2
|
|
|
$
|
3,452.6
|
|
|
(34.3)
|
%
|
Total specialty and fuel products sales volume (in barrels)
|
31,742,000
|
|
|
38,228,000
|
|
|
(17.0)
|
%
|
(1)Represents packaged and synthetic specialty products at our Royal Purple, Bel-Ray and Calumet Packaging facilities.
(2)Represents (a) by-products, including fuels and asphalt, produced in connection with the production of specialty products at the Princeton and Cotton Valley refineries and Dickinson and Karns City facilities and (b) polyolester synthetic lubricants produced at the Missouri facility.
(3)Represents asphalt, heavy fuel oils and other products produced in connection with the production of fuels at the Shreveport, Great Falls and formerly owned San Antonio refineries and crude oil sales to third-party customers.
The components of the $229.8 million specialty products segment sales decrease in 2020 were as follows:
|
|
|
|
|
|
|
Dollar Change
|
|
(In millions)
|
Sales price
|
$
|
(95.2)
|
|
Volume
|
(134.6)
|
|
Total Specialty Products segment sales decrease
|
$
|
(229.8)
|
|
Specialty products segment sales for 2020 decreased $229.8 million, or 17.0%, primarily due to a decrease in the average selling price per barrel as well as lower sales volumes. The decrease in volume was a result of softened demand due to the COVID-19 pandemic, planned turnaround activity at our Princeton refinery, unplanned downtime at multiple third party facilities in the third quarter of 2020 due to Hurricane Laura, and the intentional reduction of low margin SKUs, including the termination of a third-party naphthenic lubricating oil production agreement. The average selling price per barrel decreased by $11.63 per barrel primarily due to the 31% reduction in average crude oil prices year over year.
The components of the $954.6 million fuel products segment sales decrease in 2020 were as follows:
|
|
|
|
|
|
|
Dollar Change
|
|
(In millions)
|
Sales price
|
$
|
(553.1)
|
|
Divestiture impact
|
(389.9)
|
|
|
|
Volume
|
(11.6)
|
|
Total Fuel Products segment sales decrease
|
$
|
(954.6)
|
|
Fuel products segment sales for 2020 decreased $954.6 million, or 45.5%, due to the divestiture of the San Antonio refinery in the fourth quarter of 2019, a decrease in the average selling price per barrel, and a decrease in sales volumes. The decrease in the average selling price per barrel was primarily due to the 31% reduction in average crude oil prices year over year resulting from the COVID-19 pandemic.
Gross Profit. Gross profit decreased $241.6 million, or 53.5%, to $210.1 million in 2020 from $451.7 million in 2019. Gross profit for our specialty and fuel products segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
% Change
|
|
(Dollars in millions, except per barrel data)
|
Gross profit by segment:
|
|
|
|
|
|
Specialty products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
$
|
329.2
|
|
|
$
|
324.8
|
|
|
1.4
|
%
|
Percentage of sales
|
29.3
|
%
|
|
24.0
|
%
|
|
5.3
|
%
|
|
|
|
|
|
|
Specialty products gross profit per barrel
|
$
|
40.23
|
|
|
$
|
35.74
|
|
|
12.6
|
%
|
Fuel products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
$
|
(119.1)
|
|
|
$
|
126.9
|
|
|
(193.9)
|
%
|
Percentage of sales
|
(10.4)
|
%
|
|
6.0
|
%
|
|
(16.4)
|
%
|
Fuel products gross profit (loss) per barrel
|
$
|
(5.06)
|
|
|
$
|
4.35
|
|
|
(216.3)
|
%
|
|
|
|
|
|
|
Total gross profit
|
$
|
210.1
|
|
|
$
|
451.7
|
|
|
(53.5)
|
%
|
Percentage of sales
|
9.3
|
%
|
|
13.1
|
%
|
|
(3.8)
|
%
|
The components of the $4.4 million increase in the specialty products segment gross profit for 2020, as compared to 2019, were as follows:
|
|
|
|
|
|
|
Dollar Change
|
|
(In millions)
|
2019 reported gross profit
|
$
|
324.8
|
|
Sales price
|
(95.2)
|
|
Operating costs
|
15.4
|
|
LCM / LIFO inventory adjustments
|
(24.0)
|
|
Volume
|
(52.8)
|
|
Cost of materials
|
161.0
|
|
2020 reported gross profit
|
$
|
329.2
|
|
The increase in specialty products segment gross profit of $4.4 million year over year was primarily due to a $65.8 million favorable net impact of increased product margins and lower operating costs of $15.4 million. The increase in gross profit was partially offset by a $52.8 million negative impact from decreased volumes as a result of the softened demand and the termination of third-party naphthenic lubricating oils production, as well as a $24.0 million unfavorable impact of non-cash LCM and LIFO inventory adjustments for the year ended 2020 in comparison to 2019.
The components of the $246.0 million decrease in the fuel products segment gross profit (loss) for 2020, as compared to 2019, were as follows:
|
|
|
|
|
|
|
Dollar Change
|
|
(In millions)
|
2019 reported gross profit
|
$
|
126.9
|
|
Sales price
|
(553.1)
|
|
RINs
|
(104.0)
|
|
Operating costs
|
12.4
|
|
Divestiture impact
|
(12.0)
|
|
Volume
|
(2.4)
|
|
LCM / LIFO inventory adjustments
|
(45.0)
|
|
Cost of materials
|
458.1
|
|
|
|
|
|
2020 reported gross profit (loss)
|
$
|
(119.1)
|
|
The decrease in fuel products segment gross profit (loss) of $246.0 million year over year was primarily due to an increase in RINs expense of $104.0 million, a $95.0 million unfavorable net impact of lower margins, the absence of the gross profit generated by the San Antonio refinery in the prior year, which was divested in fourth quarter of 2019, and a $45.0 million unfavorable impact of non-cash LCM and LIFO inventory adjustments. The unfavorable change in gross profit (loss) was partially offset by a $12.4 million decrease in operating costs in 2020 in comparison to 2019.
General and administrative. General and administrative expenses decreased $45.6 million, or 33.4%, to $91.1 million in 2020 from $136.7 million in 2019. The decrease was due primarily to a $35.9 million decrease in professional services fees, a $12.0 million decrease labor and benefits, and a $2.1 million decrease in travel and entertainment expenses, partially offset by a $0.6 million increase in insurance expense. The overall decrease in general and administrative expenses was driven by the cost reduction plan implemented at the beginning of 2020, which was designed to right-size general and administrative spending consistent with Phase II of our previously announced self-help program.
Transportation. Transportation decreased $11.9 million, or 9.7%, to $111.0 million in 2020 from $122.9 million in 2019. The decrease was primarily due to outbound freight expense decreasing in line with the overall decrease in sales volumes.
Taxes other than income taxes. Taxes other than income taxes decreased $10.7 million, or 52.2%, to $9.8 million in 2020 from $20.5 million in 2019. The decrease is primarily due to lower property taxes resulting from refunds on our Great Falls refinery for years 2017, 2018 and 2019 and a lower assessment for 2020.
Loss on impairment and disposal of assets. Loss on impairment and disposal of assets decreased $30.2 million, to $6.8 million in 2020. Loss on impairment and disposal of assets in the current year primarily consisted of a $5.1 million write-off of an other receivable for the remaining payment related to the sale of Anchor Drilling Fluids USA, LLC in 2017. Loss on impairment and disposal of assets in the prior year primarily consisted of $10.7 million for the Company’s cease of use of the assets associated with the TexStar Midstream Logistics, L.P. Throughput and Deficiency Agreement and $25.4 million in impairment charges for the Company’s investment in FHC.
(Gain) loss on sale of business, net. (Gain) loss on sale of business, net increased $9.7 million, or 111.5%, to a gain of $1.0 million in 2020, compared to a loss of $8.7 million in 2019. The gain in the current year is the result of certain post-closing adjustments related to the sale of the San Antonio refinery. The loss in 2019 is the result of our divestment of the refinery in San Antonio, Texas.
Other operating (income) expense. Other operating (income) expense decreased $20.0 million to expense of $16.5 million in 2020 compared to income of $3.5 million in 2019. The change was primarily due to $10.4 million of RINs expense associated with the San Antonio refinery for the 2019 compliance period as well as increased environmental expenses of $1.2 million.
Interest expense. Interest expense decreased $8.7 million, or 6.5%, to $125.9 million in 2020 from $134.6 million in 2019. The decrease is due primarily to lower financing costs related to our Supply and Offtake Agreements, partially offset by higher interest related to our 2025 Notes.
Gain on derivative instruments. There was a $52.4 million gain on derivative instruments in 2020, compared to a $9.0 million gain in the same period in 2019. The increase in the gain on derivative instruments was largely driven by WCS crude oil basis swaps (both realized and unrealized) that locked in WCS/WTI differentials greater than the average market differential during 2020 in comparison to 2019.
Liquidity and Capital Resources
Our principal sources of cash have historically included cash flow from operations, proceeds from public equity offerings, proceeds from notes offerings and bank borrowings. Principal uses of cash have included capital expenditures, acquisitions, distributions to our limited partners and general partner and debt service. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. In addition, in May 2018 The Heritage Group disclosed in a Schedule 13D filing that it is considering various alternatives with respect to its investment in us, including potential consolidation, acquisitions or sales of our assets or common units, as well as potential changes to our capital structure. The Heritage Group also disclosed that it may make formal proposals to us, holders of our common units or other third parties regarding such strategic alternatives.
In general, we expect that our short-term liquidity needs, including debt service, working capital, replacement and environmental capital expenditures and capital expenditures related to internal growth projects, will be met primarily through projected cash flow from operations, borrowings under our revolving credit facility and asset sales.
In 2020, we consummated a transaction whereby we exchanged approximately $200.0 million aggregate principal amount of our outstanding 2022 Notes for $200.0 million aggregate principal amount of newly issued 2024 Secured Notes (the “Exchange Transaction”).
In 2019, we redeemed all of the 2021 Notes with the net proceeds from the issuance of the 2025 Notes, together with borrowings under the Company’s revolving credit facility and cash on hand. In conjunction with the redemption, the Company incurred debt extinguishment costs of $2.2 million, net. Also in 2019, we sold our interest in Biosyn to The Heritage Group, a related party, for total proceeds of $5.0 million. Lastly, in 2019, we received $59.1 million in cash for the San Antonio Transaction.
We expect to fund planned capital expenditures in 2021 of approximately $60 million to $70 million primarily with cash on hand and cash flows from operations. Future internal growth projects or acquisitions may require expenditures in excess of our then-current cash flow from operations and borrowing availability under our revolving credit facility and may require us to issue debt or equity securities in public or private offerings or incur additional borrowings under bank credit facilities to meet those costs.
The borrowing base on our revolving credit facility decreased from approximately $401.9 million as of December 31, 2019, to approximately $286.1 million at December 31, 2020, resulting in a corresponding decrease in our borrowing availability from approximately $359.4 million at December 31, 2019, to approximately $154.4 million at December 31, 2020. Total liquidity, consisting of unrestricted cash and available funds under our revolving credit facility, decreased from $378.5 million at December 31, 2019 to $263.8 million at December 31, 2020.
Cash Flows from Operating, Investing and Financing Activities
We believe that we have sufficient liquid assets, cash flow from operations, borrowing capacity and adequate access to capital markets to meet our financial commitments, debt service obligations and anticipated capital expenditures. We continue to seek to lower our operating costs, selling expenses and general and administrative expenses as a means to further improve our cash flow from operations with the objective of having our cash flow from operations support all of our capital expenditures and interest payments. However, we are subject to business and operational risks that could materially adversely affect our cash flows. A material decrease in our cash flow from operations including a significant, sudden decrease in crude oil prices would likely produce a corollary effect on our borrowing capacity under our revolving credit facility and potentially our ability to comply with the covenants under our revolving credit facility. A significant, sudden increase in crude oil prices, if sustained, would likely result in increased working capital requirements which would be funded by borrowings under our revolving credit facility. In addition, our cash flow from operations may be impacted by the timing of settlement of our derivative activities. Gains and losses from derivative instruments that do not qualify as cash flow hedges are recorded in unrealized gain (loss) on derivative instruments until settlement and will impact operating cash flow in the period settled.
The following table summarizes our primary sources and uses of cash in each of the most recent two years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
(In millions)
|
Net Cash provided by operating activities
|
$
|
62.8
|
|
|
$
|
191.9
|
|
|
|
Net Cash provided by (used in) investing activities
|
(46.3)
|
|
|
14.5
|
|
|
|
Net Cash provided by (used in) financing activities
|
73.8
|
|
|
(343.0)
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
$
|
90.3
|
|
|
$
|
(136.6)
|
|
|
|
Operating Activities. Operating activities provided cash of $62.8 million during 2020 compared to providing cash of $191.9 million during 2019. The change was impacted by decreased net income of $105.4 million and an increase in working capital requirements of $6.4 million from the comparative period.
Investing Activities. Cash provided by (used) in investing activities decreased to cash used in investing activities of $46.3 million in 2020 compared to cash provided by investing activities of $14.5 million in 2019. The decrease is primarily due to absence of the $55.1 million proceeds we received for the sale of the San Antonio refinery in 2019, as well as decreased proceeds from the sale of property, plant and equipment of $3.6 million in 2020 vs. 2019.
Financing Activities. Financing activities provided cash of $73.8 million during 2020 compared to using cash of $343.0 million during 2019. The increase is primarily due to an increase in net proceeds from borrowing under our revolving credit facility of $108.0 million, as well as a decrease in repayments for borrowings on our senior note of $898.5 million, partially offset by a $49.1 million change in our net position for proceeds made and payments received in the current year in comparison to the prior year as it relates to our Supply and Offtake Agreements.
Capital Expenditures
Our property, plant and equipment capital expenditure requirements consist of capital improvement expenditures, replacement capital expenditures, environmental capital expenditures and turnaround capital expenditures. Capital improvement expenditures include expenditures to acquire assets to grow our business, to expand existing facilities, such as projects that increase operating capacity, or to reduce operating costs. Replacement capital expenditures replace worn out or obsolete equipment or parts. Environmental capital expenditures include asset additions to meet or exceed environmental and operating regulations. Turnaround capital expenditures represent capitalized costs associated with our periodic major maintenance and repairs.
The following table sets forth our capital improvement expenditures, replacement capital expenditures, environmental capital expenditures and turnaround capital expenditures in each of the periods shown (including capitalized interest):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
(In millions)
|
Capital improvement expenditures
|
$
|
10.8
|
|
|
$
|
15.1
|
|
|
|
Replacement capital expenditures
|
19.9
|
|
|
34.9
|
|
|
|
Environmental capital expenditures
|
6.1
|
|
|
15.1
|
|
|
|
Turnaround capital expenditures
|
17.1
|
|
|
24.1
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
53.9
|
|
|
$
|
89.2
|
|
|
|
2021 Capital Spending Forecast
We are forecasting total capital expenditures of approximately $60 million to $70 million in 2021. We anticipate that capital expenditure requirements will be provided primarily through cash flow from operations, cash on hand, available borrowings under our revolving credit facility and by accessing capital markets as necessary. If future capital expenditures require expenditures in excess of our then-current cash flow from operations and borrowing availability under our revolving credit facility, we may be required to issue debt or equity securities in public or private offerings or incur additional borrowings under bank credit facilities to meet those costs.
Debt and Credit Facilities
As of December 31, 2020, our primary debt and credit instruments consisted of:
•$600.0 million senior secured revolving credit facility maturing in February 2023, subject to borrowing base limitations, with a maximum letter of credit sub-limit equal to $300.0 million, which amount may be increased to 90% of revolver commitments in effect with the consent of the Agent (as defined in the Credit Agreement) (“revolving credit facility”);
•$150.0 million of 7.625% Senior Notes due 2022 (“2022 Notes”);
•$325.0 million of 7.75% Senior Notes due 2023 (“2023 Notes”);
•$200.0 million of 9.25% Senior Secured First Lien Notes due 2024 (“2024 Secured Notes”); and
•$550.0 million of 11.00% Senior Notes due 2025 (“2025 Notes”).
We were in compliance with all covenants under our debt instruments in place as of December 31, 2020, and believe we have adequate liquidity to conduct our business.
Inventory Financing
Please refer to Note 9 - “Inventory Financing Agreements” in Part II, Item 8 “Financial Statements and Supplementary Data” for additional information regarding our Supply and Offtake Agreements.
Short-Term Liquidity
As of December 31, 2020, our principal sources of short-term liquidity were (i) approximately $154.4 million of availability under our revolving credit facility, (ii) inventory financing agreements related to our Great Falls and Shreveport refineries and (iii) $109.4 million of cash on hand. Borrowings under our revolving credit facility can be used for, among other things, working capital, capital expenditures, and other lawful partnership purposes including acquisitions. For additional information regarding our revolving credit facility, please read Note 10 “Long-Term Debt” in Part II, Item 8 “Financial Statements and Supplementary Data.”
Long-Term Financing
In addition to our principal sources of short-term liquidity listed above, subject to market conditions, we may meet our cash requirements (other than distributions of Available Cash (as defined in our partnership agreement) to our common unitholders) through the issuance of long-term notes or additional common units.
From time to time, we issue long-term debt securities referred to as our senior notes. All of our outstanding senior notes, other than the 2024 Secured Notes, are unsecured obligations that rank equally with all of our other senior debt obligations to the extent they are unsecured. As of December 31, 2020, we had $150.0 million in 2022 Notes, $325.0 million in 2023 Notes, $200.0 million in 2024 Secured Notes, and $550.0 million in 2025 Notes outstanding. On December 31, 2019, we had $350.0 million in 2022 Notes, $325.0 million in 2023 Notes, and $550.0 million in 2025 Notes outstanding.
To date, our debt balances have not adversely affected our operations, our ability to repay or refinance our indebtedness. Based on our historical record, we believe that our capital structure will continue to allow us to achieve our business objectives.
For more information regarding our senior notes, please read Note 10 — “Long-Term Debt” under Part II, Item 8 “Financial Statements and Supplementary Data” in this Annual Report.
On February 12, 2021, we entered into a sale and leaseback transaction with Stonebriar Commercial Finance LLC (“Stonebriar”), whereby we sold and leased back certain of our fuels terminal assets at the Shreveport refinery. Please read Note 21 - “Subsequent Events” in Part II, Item 8 “Financial Statements and Supplementary Data” for additional information.
Master Derivative Contracts and Collateral Trust Agreement
Under our credit support arrangements, our payment obligations under all of our master derivatives contracts for commodity hedging generally are secured by a first priority lien on our and our subsidiaries’ real property, plant and equipment, fixtures, intellectual property, certain financial assets, certain investment property, commercial tort claims, chattel paper, documents, instruments and proceeds of the foregoing (including proceeds of hedge arrangements). We had no additional letters of credit or cash margin posted with any hedging counterparty as of December 31, 2020. Our master derivatives contracts and Collateral Trust Agreement (as defined below) continue to impose a number of covenant limitations on our operating and financing activities, including limitations on liens on collateral, limitations on dispositions of collateral and collateral maintenance and insurance requirements. For financial reporting purposes, we do not offset the collateral provided to a counterparty against the fair value of our obligation to that counterparty. Any outstanding collateral is released to us upon settlement of the related derivative instrument liability.
Our various hedging agreements contain language allowing our hedge counterparties to request additional collateral if a specified credit support threshold is exceeded. However, these credit support thresholds are set at levels that would require a substantial increase in hedge exposure to require us to post additional collateral. As a result, we do not expect further increases in fuel products crack spreads or interest rates to significantly impact our liquidity due to requirements to post additional collateral.
Additionally, we have a collateral trust agreement (the “Collateral Trust Agreement”) which governs how secured hedging counterparties and holders of the 2024 Notes share collateral pledged as security for the payment obligations owed by us to the secured hedging counterparties under their respective master derivatives contracts and the holders of the 2024 Notes. The Collateral Trust Agreement limits to $150.0 million the extent to which forward purchase contracts for physical commodities are covered by, and secured under, the Collateral Trust Agreement and the Parity Lien Security Documents (as defined in the Collateral Trust Agreement). There is no such limit on financially settled derivative instruments used for commodity hedging. Subject to certain conditions set forth in the Collateral Trust Agreement, we have the ability to add secured hedging counterparties from time to time.
Credit Ratings
The ratings on our senior unsecured notes by S&P of B- remained unchanged from the prior year. In July 2019, Moody’s upgraded our Company rating from Caa1 to B3, and our senior unsecured bond rating from Caa2 to Caa1, with a stable outlook. The ratings on our senior unsecured notes by Fitch of B- remained unchanged from the prior year. Our 2024 Secured Notes issued in 2020 are rated B1 by Moody’s, B+ by S&P, and BB- by Fitch.
Equity Transactions
In April 2016, the board of directors of our general partner suspended payment of our quarterly cash distribution. The board of directors of our general partner will continue to evaluate our ability to reinstate the distribution.
Seasonality Impacts on Liquidity
The operating results for the fuel products segment, including the asphalt products we produce, generally follow seasonal demand trends. Asphalt demand is generally lower in the first and fourth quarters of the year, as compared to the second and third quarters, due to the seasonality of the road construction and roofing industries we supply. Demand for gasoline and diesel is generally higher during the summer months than during the winter months due to seasonal increases in highway traffic. In addition, our natural gas costs can be higher during the winter months, as demand for natural gas as a heating fuel increases during the winter. As a result, our operating results for the first and fourth calendar quarters may be lower than those for the second and third calendar quarters of each year due to seasonality related to these and other products that we produce and sell.
Off-Balance Sheet Arrangements
We did not enter into any material off-balance sheet transactions during fiscal year 2020.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with GAAP requires us to use estimates and make judgements and assumptions about future events that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. Considerable judgement is often involved in making these determinations. Critical estimates are those that require the most difficult, subjective or complex judgements in the preparation of the financial statements and the accompanying notes. We evaluate these estimates and judgements on a regular basis. We believe our assumptions and estimates are reasonable and appropriate. However, the use of different assumptions could result in significantly different results and actual results could differ from those estimates. The following discussion of accounting estimates is intended to supplement the Summary of Significant Accounting Policies presented in Note 2 to our consolidated financial statements in Part II, Item 8.
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements for the years ended December 31, 2020 and 2019. These consolidated financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions and conditions given the level of complexity and subjectivity involved in forming these estimates.
We consider an accounting estimate to be critical if:
•The accounting estimate requires us to make assumptions about matters that are highly uncertain at the time the accounting estimate is made; and
•We reasonably could have used different estimates in the current period, or changes in these estimates are reasonably likely to occur from period to period as new information becomes available, and a change in these estimates would have a material impact on our financial condition or results from operations.
Valuation of Goodwill
We assess goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable. The Company tests goodwill either quantitatively or qualitatively for impairment.
In assessing the qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we assess relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve significant judgment and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and Company specific events and the assessment on whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such impact.
In the first step of the quantitative assessment, our assets and liabilities, including existing goodwill and other intangible assets, are assigned to the identified reporting units to determine the carrying value of the reporting units. If the carrying value of a reporting unit is in excess of its fair value, an impairment may exist, and we must perform an impairment analysis, in which the implied fair value of the goodwill is compared to its carrying value to determine the impairment charge, if any.
When performing the quantitative assessment, as required in the impairment test, the fair value of the reporting unit is determined using the income approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, corporate tax structure and product offerings. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the reporting unit. If the carrying value of a reporting unit is in excess of its fair value, an impairment would be recognized in an amount equal to the excess that the carrying value exceeded the estimated fair value, limited to the carrying value of goodwill.
Inputs used to estimate the fair value of the Company’s reporting units are considered Level 3 inputs of the fair value hierarchy and include the following:
•The Company’s financial projections for its reporting units are based on its analysis of various supply and demand factors which include, among other things, industry-wide capacity, planned utilization rates, end-user demand, crack spreads, capital expenditures and economic conditions. Such estimates are consistent with those used in the Company’s planning and capital investment reviews and include recent historical prices and published forward prices.
•The discount rate used to measure the present value of the projected future cash flows is based on a variety of factors, including market and economic conditions, operational risk, regulatory risk and political risk. This discount rate is also compared to recent observable market transactions, if possible.
For Level 3 measurements, significant increases or decreases in long-term growth rates or discount rates in isolation or in combination could result in a significantly lower or higher fair value measurement.
Fair values calculated for the purpose of testing our goodwill for impairment are estimated using the expected present value of future cash flows method and comparative market prices when appropriate. Significant judgment is involved in performing these fair value estimates since the results are based on forecasted assumptions.
The most likely factors that would significantly impact our financial projections are changes in customer demand levels and loss of significant portions of our business. We believe that the assumptions and estimates used in the assessment of our goodwill as of October 1, 2020 were reasonable.
Valuation of Definite Long-Lived Assets
Property, plant and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the estimated undiscounted future cash flows related to the asset are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the estimated fair value, usually determined by the estimated discounted future cash flows of the asset. When a decision has been made to dispose of property, plant and equipment prior to the end of the previously estimated useful life, depreciation estimates are revised to reflect the use of the asset over the shortened estimated useful life.
Estimated undiscounted future cash flows are used for the purpose of testing our definite long-lived assets for impairment. Fair values calculated for the purpose of measuring impairments on definite long-lived assets are estimated using the expected present value of future cash flows method and comparative market prices when appropriate. Significant judgment is involved in estimating undiscounted future cash flows and performing these fair value estimates since the results are based on forecasted assumptions.
We base our estimated undiscounted future cash flows and fair value estimates on projected financial information which we believe to be reasonable. However, actual results may differ from these projections.
Recent Accounting Pronouncements
For a summary of recently issued and adopted accounting standards applicable to us, please read Note 2 “Summary of Significant Accounting Policies” in Part II, Item 8 “Financial Statements and Supplementary Data.”
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined in Rule 12b-2 under the Exchange Act. As a result, pursuant to Item 301(c) of Regulation S-K, we are not required to provide the information required by this item.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Calumet GP, LLC
General Partner and the Partners of Calumet Specialty Products Partners, L.P.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Calumet Specialty Products Partners, L.P. (“the Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive loss, partners' capital (deficit) and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 3, 2021 expressed an adverse opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matters or on the account or disclosure to which they relate.
|
|
|
|
|
|
|
Valuation of Goodwill
|
|
|
Description of the Matter
|
At December 31, 2020, the Company’s goodwill was $173.0 million. As described in Notes 2 and 7 to the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level, or more frequently if events or changes in circumstances indicate the goodwill might be impaired. The Company performs its annual goodwill impairment testing on October 1 of each year.
Auditing management’s annual goodwill impairment test was complex and highly judgmental because the estimates underlying the determination of fair value of the reporting units involves management’s judgments on significant assumptions. In particular, management estimates fair value using the income approach which is sensitive to certain significant assumptions, such as forecasted revenue and related revenue growth rate, earnings before interest, taxes, depreciation and amortization (EBITDA), the discount rate commensurate with the risks involved and future capital requirements.
|
How We Addressed the Matter in Our Audit
|
To test the estimated fair value of the Company’s reporting units, our audit procedures included, among others, assessing the valuation methodology and testing the significant assumptions discussed herein. For example, we compared the significant assumptions in the prospective financial data used by management to current industry and economic trends and historical performance. We assessed the reasonableness of the forecasted future revenue growth rate and EBITDA by comparing the forecasts to historical results. We performed sensitivity analyses of certain significant assumptions to evaluate the change in the fair value resulting from changes in the significant assumptions. We also involved our valuation specialists to assist in the evaluation of the fair value methodology and significant assumptions in the fair value estimate. We further tested the completeness and accuracy of the underlying data used in the fair value estimate.
|
We have served as the Company’s auditor since 2002.
/s/ Ernst & Young LLP
Indianapolis, Indiana
March 3, 2021
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
(In millions, except unit data)
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
109.4
|
|
|
$
|
19.1
|
|
|
|
|
|
Accounts receivable, net:
|
|
|
|
Trade, less allowance for credit losses of $0.8 million and $0.9 million, respectively
|
152.4
|
|
|
175.0
|
|
Other
|
8.0
|
|
|
13.5
|
|
|
160.4
|
|
|
188.5
|
|
Inventories
|
254.9
|
|
|
292.6
|
|
Derivative assets
|
—
|
|
|
0.9
|
|
Prepaid expenses and other current assets
|
10.2
|
|
|
11.0
|
|
|
|
|
|
Total current assets
|
534.9
|
|
|
512.1
|
|
Property, plant and equipment, net
|
919.8
|
|
|
973.5
|
|
|
|
|
|
Goodwill
|
173.0
|
|
|
171.4
|
|
Other intangible assets, net
|
57.6
|
|
|
71.2
|
|
Operating lease right-of-use assets
|
85.8
|
|
|
93.1
|
|
Other noncurrent assets, net
|
37.2
|
|
|
36.5
|
|
|
|
|
|
Total assets
|
$
|
1,808.3
|
|
|
$
|
1,857.8
|
|
LIABILITIES AND PARTNERS’ CAPITAL (DEFICIT)
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
179.3
|
|
|
$
|
230.2
|
|
Accrued interest payable
|
31.7
|
|
|
32.0
|
|
Accrued salaries, wages and benefits
|
27.6
|
|
|
35.7
|
|
Other taxes payable
|
9.5
|
|
|
11.8
|
|
Obligations under inventory financing agreements
|
98.8
|
|
|
134.3
|
|
Other current liabilities
|
152.0
|
|
|
58.6
|
|
Current portion of operating lease liabilities
|
41.4
|
|
|
60.6
|
|
Current portion of long-term debt
|
2.9
|
|
|
1.8
|
|
Derivative liabilities
|
1.3
|
|
|
—
|
|
|
|
|
|
Total current liabilities
|
544.5
|
|
|
565.0
|
|
|
|
|
|
Pension and postretirement benefit obligations
|
9.3
|
|
|
7.9
|
|
Other long-term liabilities
|
18.9
|
|
|
20.8
|
|
Long-term operating lease liabilities
|
44.8
|
|
|
33.0
|
|
Long-term debt, less current portion
|
1,319.4
|
|
|
1,209.5
|
|
Total liabilities
|
1,936.9
|
|
|
1,836.2
|
|
Commitments and contingencies
|
|
|
|
Partners’ capital (deficit):
|
|
|
|
Limited partners’ interest (78,062,346 units and 77,560,355 units, issued and outstanding at December 31, 2020 and 2019, respectively)
|
(125.3)
|
|
|
20.2
|
|
General partners’ interest
|
9.0
|
|
|
12.0
|
|
Accumulated other comprehensive loss
|
(12.3)
|
|
|
(10.6)
|
|
Total partners’ capital (deficit)
|
(128.6)
|
|
|
21.6
|
|
Total liabilities and partners’ capital (deficit)
|
$
|
1,808.3
|
|
|
$
|
1,857.8
|
|
See accompanying notes to consolidated financial statements.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
(In millions, except unit and per unit data)
|
Sales
|
$
|
2,268.2
|
|
|
$
|
3,452.6
|
|
|
|
Cost of sales
|
2,058.1
|
|
|
3,000.9
|
|
|
|
Gross profit
|
210.1
|
|
|
451.7
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
Selling
|
47.8
|
|
|
53.1
|
|
|
|
General and administrative
|
91.1
|
|
|
136.7
|
|
|
|
Transportation
|
111.0
|
|
|
122.9
|
|
|
|
Taxes other than income taxes
|
9.8
|
|
|
20.5
|
|
|
|
Loss on impairment and disposal of assets
|
6.8
|
|
|
37.0
|
|
|
|
(Gain) loss on sale of business, net
|
(1.0)
|
|
|
8.7
|
|
|
|
Other operating (income) expense
|
16.5
|
|
|
(3.5)
|
|
|
|
Operating income (loss)
|
(71.9)
|
|
|
76.3
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
Interest expense
|
(125.9)
|
|
|
(134.6)
|
|
|
|
Debt extinguishment costs
|
—
|
|
|
(2.2)
|
|
|
|
Gain on derivative instruments
|
52.4
|
|
|
9.0
|
|
|
|
Gain from unconsolidated affiliates
|
—
|
|
|
3.8
|
|
|
|
Gain on sale of unconsolidated affiliates
|
—
|
|
|
1.2
|
|
|
|
Other income (expense)
|
(2.5)
|
|
|
3.4
|
|
|
|
Total other expense
|
(76.0)
|
|
|
(119.4)
|
|
|
|
Net loss before income taxes
|
(147.9)
|
|
|
(43.1)
|
|
|
|
Income tax expense
|
1.1
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(149.0)
|
|
|
$
|
(43.6)
|
|
|
|
Allocation of net loss:
|
|
|
|
|
|
Net loss
|
$
|
(149.0)
|
|
|
$
|
(43.6)
|
|
|
|
Less:
|
|
|
|
|
|
General partners’ interest in net loss
|
(3.0)
|
|
|
(0.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to limited partners
|
$
|
(146.0)
|
|
|
$
|
(42.7)
|
|
|
|
Weighted average limited partner units outstanding:
|
|
|
|
|
|
Basic and diluted
|
78,369,091
|
|
|
78,212,136
|
|
|
|
|
|
|
|
|
|
Limited partners’ interest basic and diluted net loss per unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners’ interest
|
$
|
(1.86)
|
|
|
$
|
(0.55)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
(In millions)
|
Net loss
|
$
|
(149.0)
|
|
|
$
|
(43.6)
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
Cash flow hedge gain (loss)
|
(0.2)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Defined benefit pension and retiree health benefit plans
|
(1.5)
|
|
|
(3.3)
|
|
|
|
Foreign currency translation adjustment
|
—
|
|
|
1.2
|
|
|
|
Total other comprehensive loss
|
(1.7)
|
|
|
(1.9)
|
|
|
|
Comprehensive loss attributable to partners’ capital
|
$
|
(150.7)
|
|
|
$
|
(45.5)
|
|
|
|
See accompanying notes to consolidated financial statements.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
Comprehensive
Loss
|
|
Partners’ Capital (Deficit)
|
|
Total
|
|
|
General
Partner
|
|
Limited Partners
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
$
|
(8.7)
|
|
|
$
|
12.8
|
|
|
$
|
61.6
|
|
|
$
|
65.7
|
|
Other comprehensive loss
|
(1.9)
|
|
|
—
|
|
|
—
|
|
|
(1.9)
|
|
Net loss
|
—
|
|
|
(0.9)
|
|
|
(42.7)
|
|
|
(43.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of tax withholdings on equity-based incentive compensation
|
—
|
|
|
—
|
|
|
(0.5)
|
|
|
(0.5)
|
|
|
|
|
|
|
|
|
|
Amortization of phantom units
|
—
|
|
|
—
|
|
|
1.8
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
Contributions from Calumet GP, LLC
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
$
|
(10.6)
|
|
|
$
|
12.0
|
|
|
$
|
20.2
|
|
|
$
|
21.6
|
|
Other comprehensive loss
|
(1.7)
|
|
|
—
|
|
|
—
|
|
|
(1.7)
|
|
Net loss
|
—
|
|
|
(3.0)
|
|
|
(146.0)
|
|
|
(149.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of tax withholdings on equity-based incentive compensation
|
—
|
|
|
—
|
|
|
(0.5)
|
|
|
(0.5)
|
|
|
|
|
|
|
|
|
|
Amortization of phantom units
|
—
|
|
|
—
|
|
|
1.0
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
$
|
(12.3)
|
|
|
$
|
9.0
|
|
|
$
|
(125.3)
|
|
|
$
|
(128.6)
|
|
See accompanying notes to consolidated financial statements.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
(In millions)
|
Operating activities
|
|
|
|
|
|
Net loss
|
$
|
(149.0)
|
|
|
$
|
(43.6)
|
|
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
105.1
|
|
|
110.1
|
|
|
|
Amortization of turnaround costs
|
14.6
|
|
|
19.3
|
|
|
|
Non-cash interest expense
|
6.0
|
|
|
6.1
|
|
|
|
Debt extinguishment costs
|
—
|
|
|
2.2
|
|
|
|
Unrealized (gain) loss on derivative instruments
|
(2.8)
|
|
|
26.1
|
|
|
|
Loss on impairment and disposal of assets
|
6.8
|
|
|
37.0
|
|
|
|
Operating lease expense
|
56.7
|
|
|
78.2
|
|
|
|
Operating lease payments
|
(56.8)
|
|
|
(78.2)
|
|
|
|
Equity based compensation
|
5.5
|
|
|
5.9
|
|
|
|
Lower of cost or market inventory adjustment
|
24.0
|
|
|
(35.6)
|
|
|
|
Gain from unconsolidated affiliates
|
—
|
|
|
(3.8)
|
|
|
|
Gain on sale of unconsolidated affiliates
|
—
|
|
|
(1.2)
|
|
|
|
(Gain) loss on sale of business, net
|
(1.0)
|
|
|
8.7
|
|
|
|
Other non-cash activities
|
(1.0)
|
|
|
(0.4)
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
25.5
|
|
|
(37.0)
|
|
|
|
Inventories
|
14.0
|
|
|
16.3
|
|
|
|
Prepaid expenses and other current assets
|
0.6
|
|
|
4.5
|
|
|
|
Derivative activity
|
—
|
|
|
(0.3)
|
|
|
|
Turnaround costs
|
(23.4)
|
|
|
(17.8)
|
|
|
|
Other assets
|
—
|
|
|
(0.1)
|
|
|
|
Accounts payable
|
(38.1)
|
|
|
71.3
|
|
|
|
Accrued interest payable
|
(1.0)
|
|
|
1.5
|
|
|
|
Accrued salaries, wages and benefits
|
(12.5)
|
|
|
5.3
|
|
|
|
Other taxes payable
|
(2.3)
|
|
|
2.5
|
|
|
|
Other liabilities
|
91.9
|
|
|
14.8
|
|
|
|
Pension and postretirement benefit obligations
|
—
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
62.8
|
|
|
191.9
|
|
|
|
Investing activities
|
|
|
|
|
|
Additions to property, plant and equipment
|
(44.0)
|
|
|
(54.9)
|
|
|
|
Acquisition of businesses, net of cash acquired
|
(3.3)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of unconsolidated affiliates
|
—
|
|
|
5.0
|
|
|
|
Proceeds from sale of property, plant and equipment
|
0.1
|
|
|
3.7
|
|
|
|
Proceeds from sale of business, net
|
—
|
|
|
55.1
|
|
|
|
Net cash provided by discontinued operations
|
0.9
|
|
|
5.6
|
|
|
|
Net cash provided by (used in) investing activities
|
(46.3)
|
|
|
14.5
|
|
|
|
Financing activities
|
|
|
|
|
|
Proceeds from borrowings — revolving credit facility
|
1,130.7
|
|
|
508.5
|
|
|
|
Repayments of borrowings — revolving credit facility
|
(1,022.7)
|
|
|
(508.5)
|
|
|
|
Proceeds from borrowings — senior notes
|
—
|
|
|
550.0
|
|
|
|
Repayments of borrowings — senior notes
|
—
|
|
|
(898.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on finance lease obligations
|
(0.5)
|
|
|
(0.9)
|
|
|
|
Proceeds from inventory financing
|
756.1
|
|
|
1,076.5
|
|
|
|
Payments on inventory financing
|
(786.0)
|
|
|
(1,057.3)
|
|
|
|
Proceeds from other financing obligations
|
31.4
|
|
|
—
|
|
|
|
Payments on other financing obligations
|
(33.4)
|
|
|
(1.9)
|
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
(1.8)
|
|
|
(11.0)
|
|
|
|
Contributions from Calumet GP, LLC
|
—
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
73.8
|
|
|
(343.0)
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
90.3
|
|
|
(136.6)
|
|
|
|
Cash and cash equivalents at beginning of period
|
19.1
|
|
|
155.7
|
|
|
|
Cash and cash equivalents at end of period
|
$
|
109.4
|
|
|
$
|
19.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash property, plant and equipment additions
|
$
|
4.6
|
|
|
$
|
11.8
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Business
Calumet Specialty Products Partners, L.P. (the “Company”) is a publicly-traded Delaware limited partnership listed on the NASDAQ Global Select Market (“NASDAQ”) under the ticker symbol “CLMT.” The general partner of the Company is Calumet GP, LLC, a Delaware limited liability company. As of December 31, 2020, the Company had 78,062,346 limited partner common units and 1,593,107 general partner equivalent units outstanding. The general partner owns 2% of the Company and all of the incentive distribution rights (as defined in the Company’s partnership agreement, “IDRs”), while the remaining 98% is owned by limited partners.
The Company is engaged in the production and marketing of crude oil-based specialty products including lubricating oils, white mineral oils, solvents, petrolatums, waxes, and fuel and fuel related products including gasoline, diesel, jet fuel, asphalt and heavy fuel oils. The Company is based in Indianapolis, Indiana and owns specialty and fuel products facilities. The Company owns and leases additional facilities, primarily related to production and marketing of specialty and fuel products, throughout the United States.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements reflect the accounts of the Company and its wholly-owned subsidiaries. All intercompany profits, transactions and balances have been eliminated.
Reclassifications
Certain amounts in the prior years’ consolidated financial statements have been reclassified to conform to the current year presentation.
Use of Estimates
The Company’s consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with a maturity of three months or less at the time of purchase.
Accounts Receivable
The Company performs periodic credit evaluations of customers’ financial condition and generally does not require collateral. Accounts receivable are carried at their face amounts. The Company maintains an allowance for credit losses for estimated losses in the collection of accounts receivable. The Company makes estimates regarding the future ability of its customers to make required payments based on historical experience, the age of the accounts receivable balances, credit quality of its customers, current economic conditions, expected future trends and other factors that may affect customers’ ability to pay. Individual accounts are written off against the allowance for credit losses after all reasonable collection efforts have been exhausted.
The activity in the allowance for credit losses was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
|
|
Beginning balance
|
$
|
0.9
|
|
|
$
|
1.5
|
|
|
|
Provision
|
(0.1)
|
|
|
(0.5)
|
|
|
|
Write-offs, net
|
—
|
|
|
(0.1)
|
|
|
|
Ending balance
|
$
|
0.8
|
|
|
$
|
0.9
|
|
|
|
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventories
The cost of inventory is recorded using the last-in, first-out (“LIFO”) method. Costs include crude oil and other feedstocks, labor, processing costs and refining overhead costs. Inventories are valued at the lower of cost or market value. The replacement cost of these inventories, based on current market values, would have been $6.7 million lower and $17.7 million higher as of December 31, 2020 and 2019, respectively. At December 31, 2020 and 2019, the Company had $1.5 million and $1.9 million, respectively, of inventory consigned to others.
On March 31, 2017 and June 19, 2017, the Company sold inventory comprised of crude oil and refined products to Macquarie Energy North America Trading Inc. (“Macquarie”) under Supply and Offtake Agreements as described in Note 9 — “Inventory Financing Agreements” related to the Great Falls and Shreveport refineries, respectively.
Inventories consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Titled
Inventory
|
|
Supply & Offtake
Agreements (1)
|
|
Total
|
|
Titled
Inventory
|
|
Supply & Offtake
Agreements (1)
|
|
Total
|
Raw materials
|
$
|
30.8
|
|
|
$
|
11.5
|
|
|
$
|
42.3
|
|
|
$
|
48.3
|
|
|
$
|
11.6
|
|
|
$
|
59.9
|
|
Work in process
|
31.8
|
|
|
27.4
|
|
|
59.2
|
|
|
35.0
|
|
|
29.1
|
|
|
64.1
|
|
Finished goods
|
114.0
|
|
|
39.4
|
|
|
153.4
|
|
|
124.8
|
|
|
43.8
|
|
|
168.6
|
|
|
$
|
176.6
|
|
|
$
|
78.3
|
|
|
$
|
254.9
|
|
|
$
|
208.1
|
|
|
$
|
84.5
|
|
|
$
|
292.6
|
|
(1)Amounts represent LIFO value and do not necessarily represent the value at which the inventory was sold. Please read Note 9 - “Inventory Financing Agreements” for further information.
Under the LIFO inventory method, the most recently incurred costs are charged to cost of sales and inventories are valued at the earliest acquisition costs. For the year ended December 31, 2020, the Company recorded an increase (exclusive of lower of cost or market (“LCM”) adjustments) of $4.5 million in cost of sales in the consolidated statements of operations due to the liquidation of inventory layers. For the year ended December 31, 2019, the Company recorded a decrease (exclusive of LCM adjustments) of $6.0 million in cost of sales in the consolidated statements of operations due to the liquidation of inventory layers.
In addition, the use of the LIFO inventory method may result in increases or decreases to cost of sales in years that inventory volumes decline as the result of charging cost of sales with LIFO inventory costs generated in prior periods. In periods of rapidly declining prices, LIFO inventories may have to be written down to market value due to the higher costs assigned to LIFO layers in prior periods. During the year ended December 31, 2020, the Company recorded an increase in cost of sales in the consolidated statements of operations of $24.0 million due to the LCM valuation. During the year ended December 31, 2019, the Company recorded a decrease in cost of sales in the consolidated statements of operations of $35.6 million due to the sale of inventory previously adjusted through the LCM valuation.
Derivatives
The Company is exposed to fluctuations in the price of numerous commodities, such as crude oil (its principal raw material), as well as the sales prices of gasoline, diesel, natural gas and jet fuel. Given the historical volatility of commodity prices, these fluctuations can significantly impact sales, gross profit and net income. Therefore, the Company utilizes derivative instruments primarily to minimize its price risk and volatility of cash flows associated with the purchase of crude oil, natural gas, and the sale of fuel products. The Company employs various hedging strategies and does not hold or issue derivative instruments for trading purposes. For further information, please read Note 11 - “Derivatives.”
On a regular basis, the Company enters into commodity contracts with counterparties for the purchase or sale of crude oil, blendstocks and various finished products. These contracts usually qualify for the normal purchase / normal sale exemption under ASC 815 and, as such, are not measured at fair value.
Property, Plant and Equipment
Property, plant and equipment are stated on the basis of cost. Depreciation is calculated using the straight-line method over the estimated useful lives. Assets under finance leases are amortized over the lesser of the useful life of the asset or the term of the lease.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property, plant and equipment, including depreciable lives, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Land
|
$
|
8.7
|
|
|
$
|
8.3
|
|
Buildings and improvements (10 to 40 years)
|
35.5
|
|
|
37.4
|
|
Machinery and equipment (10 to 20 years)
|
1,625.9
|
|
|
1,607.3
|
|
Furniture, fixtures and software (5 to 10 years)
|
49.1
|
|
|
47.9
|
|
Assets under finance leases (1 to 7 years) (1)
|
7.4
|
|
|
10.3
|
|
Construction-in-progress
|
28.2
|
|
|
19.9
|
|
|
1,754.8
|
|
|
1,731.1
|
|
Less accumulated depreciation
|
(835.0)
|
|
|
(757.6)
|
|
|
$
|
919.8
|
|
|
$
|
973.5
|
|
(1)Assets under finance leases consist of buildings and machinery and equipment. As of December 31, 2020 and 2019, finance lease assets are recorded net of accumulated amortization of $3.4 million and $7.1 million, respectively.
Under the composite depreciation method, the cost of partial retirements of a group is charged to accumulated depreciation. However, when there are dispositions of complete groups or significant portions of groups, the cost and related accumulated depreciation are retired, and any gain or loss is reflected in earnings.
During 2020 and 2019, the Company incurred $126.3 million and $135.1 million, respectively, of interest expense of which $0.4 million and $0.5 million, respectively, was capitalized as a component of property, plant and equipment.
The Company periodically assesses its operations and legal requirements to determine if recognition of an asset retirement obligation is necessary. The Company has not recorded an asset retirement obligation as of December 31, 2020 or 2019 given the timing of any retirement and related costs are currently indeterminable.
During the years ended December 31, 2020 and 2019, the Company recorded $91.1 million and $92.4 million, respectively, of depreciation expense on its property, plant and equipment. Depreciation expense included $0.6 million and $1.4 million for the years ended 2020 and 2019, respectively, related to the Company’s finance lease assets.
The Company capitalizes the cost of computer software developed or obtained for internal use. Capitalized software is amortized using the straight-line method over five years. As of December 31, 2020 and 2019, the Company had $44.1 million and $42.5 million, respectively, of capitalized software costs. As of December 31, 2020 and 2019, the Company had $30.5 million and $23.1 million, respectively, of accumulated depreciation related to the capitalized software costs. During the years ended December 31, 2020 and 2019, the Company recorded $7.4 million and $7.4 million, respectively, of amortization expense on capitalized computer software.
Goodwill
Goodwill represents the excess of purchase price over fair value of the net assets acquired in various acquisitions. Please read Note 7 - “Goodwill and Other Intangible Assets” for more information. The Company assesses goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable in accordance with ASC 350, Intangibles — Goodwill and Other (Topic 350) and ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Under ASC 350, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the impairment test is unnecessary. The Company tests goodwill either quantitatively or qualitatively for impairment.
In assessing the qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company assesses relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve significant judgment and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and Company specific events and making the assessment on whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such impact.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In the first step of the quantitative assessment, the Company’s assets and liabilities, including existing goodwill and other intangible assets, are assigned to the identified reporting units to determine the carrying value of the reporting units. Under ASU 2017-04, goodwill impairment testing is done by comparing the fair value of the reporting unit to its carrying value. If the carrying amount exceeds the fair value, the Company would recognize an impairment charge for the amount that the reporting unit's carrying value exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
When performing the quantitative assessment, the fair value of the reporting units is determined using the income approach. The income approach focuses on the income-producing capability of the reporting unit, measuring the current value of the reporting unit by calculating the present value of its future economic benefits such as cash earnings, cost savings, corporate tax structure and product offerings. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the reporting unit. For more information, please read Note 7 - “Goodwill and Other Intangible Assets.”
Definite-Lived Intangible Assets
Definite-lived intangible assets consist of intangible assets associated with customer relationships, tradenames, trade secrets, patents and royalty agreements that were acquired in various acquisitions. The majority of these assets are being amortized using undiscounted estimated future cash flows over the term of the related agreements. Intangible assets associated with customer relationships are being amortized using the undiscounted estimated future cash flows method based upon assumed rates of annual customer attrition. For more information, please read Note 7 - “Goodwill and Other Intangible Assets.”
Other Noncurrent Assets
Other noncurrent assets include turnaround costs. Turnaround costs represent capitalized costs associated with the Company’s periodic major maintenance and repairs and the net carrying value of turnaround costs included in other noncurrent assets in the consolidated balance sheets were $34.2 million and $31.7 million as of December 31, 2020 and 2019, respectively. The Company capitalizes these costs and amortizes the costs on a straight-line basis over the lives of the turnaround assets which is generally two to five years. These amounts are net of accumulated amortization of $60.5 million and $51.9 million at December 31, 2020 and 2019, respectively.
Other Current Liabilities
Other current liabilities consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
RINs Obligation
|
$
|
129.4
|
|
|
$
|
13.0
|
|
Transition Services Agreement Payable
|
—
|
|
|
19.8
|
|
Net working capital adjustment liabilities
|
—
|
|
|
6.9
|
|
Other
|
22.6
|
|
|
18.9
|
|
Total other current liabilities
|
$
|
152.0
|
|
|
$
|
58.6
|
|
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s Renewable Identification Numbers (“RINs”) obligation (“RINs Obligation”) represents a liability for the purchase of RINs in order to satisfy the U.S. Environmental Protection Agency’s (“EPA”) requirement to blend biofuels into the fuel products it produces pursuant to the EPA’s Renewable Fuel Standard (“RFS”). RINs are assigned to biofuels produced in the U.S. as required by the EPA. The EPA sets annual quotas for the percentage of biofuels that must be blended into transportation fuels consumed in the U.S. and, as a producer of motor fuels from petroleum, the Company is required to blend biofuels into the fuel products it produces at a rate that will meet the EPA’s annual quota. To the extent the Company is unable to blend biofuels at that rate, it may purchase RINs in the open market to satisfy the annual requirement. The Company’s net RINs Obligation is based on the amount of RINs it must purchase and the price of those RINs as of the balance sheet date.
The Company uses the inventory model to account for RINs, measuring acquired RINs at weighted-average cost. The cost of RINs used each period is charged to cost of sales with cash inflows and outflows recorded in the operating cash flow section of the consolidated statements of cash flows. The liability is calculated by multiplying the RINs shortage (based on actual results) by the period end RINs spot price. The Company recognizes an asset at the end of each reporting period in which it has generated RINs in excess of its RINs Obligation. The asset is initially recorded at cost at the time the Company acquires them and is subsequently revalued at the lower of cost or market as of the last day of each accounting period and the resulting adjustments are reflected in cost of sales for the period in the consolidated statements of operations, with the exception of the RINs for compliance year 2019 related to the San Antonio Refinery, which is reflected in other operating (income) expense in the consolidated statements of operations. The value of RINs in excess of the RINs Obligation, if any, would be reflected in other current assets on the consolidated balance sheet. RINs generated in excess of the Company’s current RINs Obligation may be sold or held to offset future RINs Obligations. Any such sales of excess RINs are recorded in cost of sales in the consolidated statement of operations. The liabilities associated with the Company’s RINs Obligation are considered recurring fair value measurements. Please read Note 8 - “Commitments and Contingencies” for further information on the Company’s RINs Obligation.
The Company’s 2019 and 2020 RFS hardship exemption applications remain pending. On January 19, 2021, the Company sued Mr. Andrew Wheeler, Administrator of the Environmental Protection Agency, in federal court in the Western District of Louisiana and in the District of Montana seeking an order that the EPA cannot enforce the RINs compliance deadline until the EPA has taken action on the Company’s hardship exemption applications. The lawsuits are currently pending.
The Company entered into a Transaction Service Agreement (“TSA”) as a result of the San Antonio Transaction (read Note 5 - “Divestitures”). Under the terms of the agreement, the Company continued to support many functions of the San Antonio facility including but not limited to purchasing, information technology, accounts receivable and accounts payable support. Under the TSA, the Company continued to collect from customers and pay vendors. The Company would net settle the cash activity with the buyer on a regular basis. At December 31, 2019, the Company owed the buyer $19.8 million as a result of supporting cash activity for the buyer, which was settled in the first quarter of 2020.
Impairment of Long-Lived Assets
The Company periodically evaluates the carrying value of long-lived assets to be held and used, including definite-lived intangible assets, when events or circumstances warrant such a review. The carrying value of a long-lived asset to be held and used is considered impaired when the anticipated separately identifiable undiscounted cash flows from such an asset are less than the carrying value of the asset. In such an event, a write-down of the asset would be recorded through a charge to operations, based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using anticipated cash flows assumed by a market participant discounted at a rate commensurate with the risk involved. Long-lived assets to be disposed of other than by sale are considered held and used until disposal.
During the years ended December 31, 2020 and 2019, the Company did not identify any impairment indicators that suggested the carrying values of its long-lived assets are not recoverable at the asset groups within the specialty products, fuel products and corporate segments. As a result of the long-lived asset impairment assessment performed, no impairment charges were recorded for the years ended December 31, 2020 and 2019.
During the year ended December 31, 2019, the Company determined the fair value of the investment in Fluid Holding Company (“FHC”) was less than the carrying value of $25.4 million after evaluating indicators of impairment and valuing the investment using projected future cash flows and other Level 3 inputs. As a result, the Company recorded an impairment charge of $25.4 million in loss on impairment and disposal of assets in the consolidated statements of operations for the year ended December 31, 2019. In May 2020, FHC became the subject of a Canadian receivership under the Bankruptcy & Insolvency Act. The Company expects that the investment in FHC is now worthless. For the year ended December 31, 2020, the Company recorded a loss on impairment of $5.1 million for the write-off of an other receivable for the remaining payment related to the sale of Anchor Drilling Fluids USA, LLC in 2017.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue Recognition, which states that revenue is recognized when control of the promised goods are transferred to the customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods. Please read Note 3 - “Revenue Recognition” for additional information on our revenue recognition accounting policies and elections.
Revenues associated with transactions commonly called buy/sell contracts, in which the purchase and sale of inventory with the same counterparty are entered into “in contemplation” of one another, are combined and reported as a net purchase in cost of sales in the consolidated statements of operations.
Concentrations of Credit Risk
The Company performs periodic credit evaluations of its customers’ financial condition and in some instances requires cash in advance or letters of credit prior to shipment for domestic orders. For international orders, letters of credit are generally required, and the Company maintains insurance policies which cover certain export orders. The Company maintains an allowance for credit losses accounts for estimated losses resulting from the inability of its customers to make required payments. The allowance for credit losses is developed based on several factors including historical experience, the age of the accounts receivable balances, credit quality of the Company’s customers, current economic conditions, expected future trends and other factors that may affect customers’ ability to pay, which exist as of the balance sheet dates. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company has derivative positions with a limited number of counterparties. The evaluation of these counterparties is performed quarterly in connection with the Company’s ASC 820-10, Fair Value Measurements and Disclosures, valuations to determine the impact of the counterparty credit risk on the valuation of its derivative instruments.
Earnings per Unit
The Company calculates earnings per unit under ASC 260-10, Earnings per Share. The Company treats incentive distribution rights (“IDRs”) as participating securities for the purposes of computing earnings per unit in the period that the general partner becomes contractually obligated to receive IDRs. Also, the undistributed earnings are allocated to the partnership interests based on the allocation of earnings to the Company’s partners’ capital accounts as specified in the Company’s partnership agreement. When distributions exceed earnings, net income is reduced by the actual distributions with the resulting net loss being allocated to capital accounts as specified in the Company’s partnership agreement.
Unit-Based Compensation
For unit-based compensation equity awards granted, compensation expense is recognized in the Company’s consolidated financial statements on a straight-line basis over the awards’ vesting periods based on their fair values on the dates of grant. The unit-based compensation awards vest over a period not exceeding four years. The amount of compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is vested at that date. For more information, please read Note 14 - “Unit-Based Compensation.”
Unit-based compensation liability awards are awards that are currently expected to be settled in cash on their vesting dates, rather than in equity units (“Liability Awards”). Liability Awards are recorded in accrued salaries, wages and benefits based on the vested portion of the fair value of the awards on the balance sheet date. The fair value of Liability Awards is updated at each balance sheet date and changes in the fair value of the vested portions of the Liability Awards are recorded as increases or decreases to compensation expense. The Company recognizes forfeitures as they occur. Please read Note 14 - “Unit-Based Compensation” for more information on Liability Awards.
Shipping and Handling Costs
The Company complies with ASC 606, Revenue Recognition. ASC 606 requires the classification of shipping and handling costs billed to customers in sales and the classification of shipping and handling costs incurred in cost of sales, or to be disclosed if classified elsewhere. The Company has reflected $111.0 million and $122.9 million, respectively, for the years ended December 31, 2020 and 2019 in transportation expense in the consolidated statements of operations, the majority of which is billed to customers.
Advertising Expenses
The Company expenses advertising costs as incurred which totaled $4.3 million and $4.1 million for the years ended December 31, 2020 and 2019, respectively. Advertising expenses are reported as selling expenses in the consolidated statements of operations.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recently Adopted Accounting Pronouncements
On January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) and all the related amendments to its lease contracts using the modified retrospective method. The effective date was used as the Company’s date of initial application with no restatement of prior periods. As such, prior periods continue to be reported under the accounting standards in effect for those periods. Please read Note 6 - “Leases” for further information.
On January 1, 2019, the Company adopted ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better align risk management activities in financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. Given the Company’s current risk management strategy of not designating any of its derivative positions as hedges, the adoption of this guidance had no effect on our consolidated financial statements. If, in the future, the Company decides to modify its hedging strategies, this new accounting guidance would become applicable and will be applied at that time.
On January 1, 2019, the Company adopted ASU No. 2018-07, Compensation — Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting (“ASU 2018-07”). This update simplifies the guidance related to non-employee share-based payments by superseding ASC 505-50 and expanding the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both non-employees and employees. Prior to the issuance of this standard update, non-employee share-based payments were subject to ASC 505-50 requirements while employee share-based payments were subject to ASC 718 requirements. ASU 2018-07 is effective for fiscal years (including interim periods) beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2018-07 had no impact on the Company’s consolidated financial statements.
On January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which changed the impairment model for most financial instruments. Previous guidance required the recognition of credit losses based on an incurred loss impairment methodology that reflects losses once the losses are probable. Under ASU 2016-13, the Company is required to use a current expected credit loss (“CECL”) model that immediately recognizes an estimate of credit losses that are expected to occur over the life of the financial instruments that are in the scope of the update, including trade receivables. The CECL model uses a broader range of reasonable and supportable information in the development of credit loss estimates. The result of the adoption of ASU 2016-13 was de-minimis and did not result in an adjustment to beginning partners’ capital (deficit). The allowance for credit losses for accounts receivable was $0.8 million at December 31, 2020 and $0.9 million at January 1, 2020, respectively.
3. Revenue Recognition
The following is a description of principal activities from which the Company generates revenue. Revenues are recognized when control of the promised goods are transferred to the customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods promised within each contract and determines the performance obligations and assesses whether each promised good is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Products
The Company is engaged in the production and marketing of specialty products including lubricating oils, solvents, waxes, synthetic lubricants and other products which comprise the specialty products segment. The Company is also engaged in the production of fuel and fuel related products including gasoline, diesel, jet fuel, asphalt and other products which comprise the fuel products segment.
The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. For each contract, the Company considers the promise to transfer products, each of which are distinct, to be the identified performance obligations. In determining the transaction price, the Company evaluates whether the price is subject to variable consideration such as product returns, rebates or other discounts to determine the net consideration to which the Company expects to be entitled. The Company transfers control and recognizes revenue upon shipment to the customer or, in certain cases, upon receipt by the customer in accordance with contractual terms.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Excise and Sales Taxes
The Company assesses, collects and remits excise taxes associated with the sale of certain of its fuel products. Furthermore, the Company collects and remits sales taxes associated with certain sales of its products to non-exempt customers. The Company excludes excise taxes and sales taxes that are collected from customers from the transaction price in its contracts with customers. Accordingly, revenue from contracts with customers is net of sales-based taxes that are collected from customers and remitted to taxing authorities.
Shipping and Handling Costs
Shipping and handling costs are deemed to be fulfillment activities rather than a separate distinct performance obligation.
Cost of Obtaining Contracts
The Company may incur incremental costs to obtain a sales contract, which under ASC 606 should be capitalized and amortized over the life of the contract. The Company has elected to apply the practical expedient in ASC 340-40-50-5 allowing the Company to expense these costs since the contracts are short-term in nature with a contract term of one year or less.
Disaggregation of Revenue
The following table reflects the disaggregation of revenue by major source (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
Sales by major source
|
|
|
|
|
|
Standard specialty products
|
$
|
890.1
|
|
|
$
|
1,123.2
|
|
|
|
Packaged and synthetic specialty products
|
234.2
|
|
|
230.9
|
|
|
|
Total specialty products
|
1,124.3
|
|
|
1,354.1
|
|
|
|
Fuel and fuel related products
|
$
|
973.2
|
|
|
$
|
1,864.7
|
|
|
|
Asphalt
|
170.7
|
|
|
233.8
|
|
|
|
Total fuel products
|
1,143.9
|
|
|
2,098.5
|
|
|
|
Total sales
|
$
|
2,268.2
|
|
|
$
|
3,452.6
|
|
|
|
Revenue is recognized when obligations under the terms of a contract with a customer are satisfied; recognition generally occurs with the transfer of control at a point in time. The contract with the customer states the final terms of the sale, including the description, quantity and price of each product or service purchased. For fuel products, payment is typically due in full between 2 to 30 days of delivery or the start of the contract term, such that payment is typically collected 2 to 30 days subsequent to the satisfaction of performance obligations. For specialty products, payment is typically due in full between 30 to 90 days of delivery or the start of the contract term, such that payment is typically collected 30 to 90 days subsequent to the satisfaction of performance obligations. In the normal course of business, the Company does not accept product returns unless the item is defective as manufactured. The expected costs associated with a product assurance warranty continues to be recognized as expense when products are sold. The Company does not offer promised services that could be considered warranties that are sold separately or provide a service in addition to assurance that the related product complies with agreed upon specifications. The Company establishes provisions based on the methods described in ASC 606 for estimated returns and warranties as variable consideration when determining the transaction price.
Contract Balances
Under product sales contracts, the Company invoices customers for performance obligations that have been satisfied, at which point payment is unconditional. Accordingly, a product sales contract does not give rise to contract assets or liabilities under ASC 606. The Company’s receivables, net of allowance for expected credit losses from contracts with customers as of December 31, 2020 and 2019 was $152.4 million and $175.0 million, respectively.
Transaction Price Allocated to Remaining Performance Obligations
The Company’s product sales are short-term in nature with a contract term of one year or less. The Company has utilized the practical expedient in ASC 606-10-50-14 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. Additionally, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. Restructuring
On January 21, 2020, the Company committed to a cost reduction plan to reduce overall operating expenses, including the reduction of outside services, facility fixed costs, and corporate staffing costs (the “Cost Reduction Plan”). These cost reductions are designed to right-size general and administrative spending and are consistent with Phase II of the Company’s previously announced self-help program.
The Company eliminated 50 general and administrative, primarily corporate positions as part of the Cost Reduction Plan for the year ended December 31, 2020. The Company offered one-time termination benefits to the affected employees including cash severance payments, health care, and outplacement services. The Company incurred $0.9 million for these costs for the year ended December 31, 2020.
On February 2, 2020, the Company announced to its employees at the Bel-Ray facility in Wall Township, New Jersey, which was included in our Specialty Products segment that it would cease production and close the facility in the second quarter of 2020. Actual production at the Bel-Ray facility ceased in March 2020. This action resulted in the elimination of 49 positions. For the year ended December 31, 2020, the Company incurred $3.7 million in total exit costs, fixed asset impairments, termination benefits, and severance costs associated with the closure.
Charges related to restructuring are reflected in the Cost of sales, Selling, and General and administrative lines of the consolidated statements of operations. For the year ended December 31, 2020, the Company recorded $3.7 million to Cost of sales and $0.9 million primarily within General and administrative expenses in the consolidated statements of operations. Fixed asset impairments are reflected in the Loss on impairment and disposal of assets line in the consolidated statements of operations.
The following table displays the reconciliation of the beginning and ending liability balances (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Termination Benefits
|
|
Exit Costs
|
|
Total
|
Balance at December 31, 2019
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges to restructuring
|
$
|
2.0
|
|
|
$
|
2.6
|
|
|
$
|
4.6
|
|
Cash payments and other
|
$
|
(2.0)
|
|
|
$
|
(2.3)
|
|
|
$
|
(4.3)
|
|
Balance at December 31, 2020
|
$
|
—
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
5. Divestitures
On November 10, 2019, Calumet Refining, LLC, a Delaware limited liability company (“Calumet Refining”) and a wholly-owned subsidiary of the Company, completed the sale of all of the issued and outstanding membership interests in Calumet San Antonio Refining, LLC, a Delaware limited liability company (“Calumet San Antonio”), which owned a refinery located in San Antonio, Texas and associated net working capital, and related assets, including associated hydrocarbon inventories and a crude oil terminal and pipeline to Starlight Relativity Acquisition Company LLC, a Delaware limited liability company (“Starlight”) (the “San Antonio Transaction”). Total consideration received was $59.1 million, which consisted of a base sales price of $63.0 million minus an adjustment of $3.9 million for net working capital, inventories and reimbursement of certain transaction costs. In February 2020 the Company and Starlight agreed to the final purchase price adjustment payment related to net working capital and inventory to Starlight of $6.9 million, which is reflected in the net loss recognized by the Company for the year ended December 31, 2019. Additionally, in connection with the San Antonio Transaction, the Company, Calumet San Antonio, TexStar Midstream Logistics, L.P. (“TexStar”), TexStar Midstream Logistics Pipeline, LP and Tailwater Capital, LLC entered into a Settlement and Release Agreement (the “Settlement Agreement”), pursuant to which the Company agreed to pay TexStar and its affiliates a cash payment of $1.0 million and the parties mutually agreed to dismiss the litigation and release each other with respect to the legal dispute relating to the termination of the Throughput and Deficiency Agreement (the “Pipeline Agreement”). As a result of the Settlement Agreement, the Company derecognized the $38.1 million liability related to the Pipeline Agreement, which was included in the gain (loss) on sale of business calculation for the San Antonio Transaction. The San Antonio refinery was included in the Company’s fuel products segment. The Company recognized a net loss of $8.7 million in gain (loss) on sale of business, net in the consolidated statements of operations for the year ended December 31, 2019, related to the San Antonio Transaction.
In conjunction with the sale, the Company considered other qualitative and quantitative factors and concluded the San Antonio Transaction did not represent a strategic shift in the business. However, the Company considered the San Antonio asset group to be an individually significant component of its operations.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the net loss before income taxes for Calumet San Antonio for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
Sales
|
$
|
—
|
|
|
$
|
403.4
|
|
|
|
Gross profit
|
—
|
|
|
16.2
|
|
|
|
Net loss before income taxes
|
$
|
—
|
|
|
$
|
(3.9)
|
|
|
|
6. Leases
The Company has various operating and finance leases primarily for the use of land, storage tanks, railcars, equipment, precious metals and office facilities that have remaining lease terms of greater than one year to fourteen years, some of which include options to extend the lease for up to 35 years, and some of which include options to terminate the lease within one year. Effective January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective transition approach that applied the new standard to all leases existing at the effective date of the standard with no restatement of prior periods. Given the adoption of ASU 2016-02, the Company’s operating leases have been included in operating lease right-of-use (“ROU”) assets, current portion of operating lease liabilities and long-term portion of operating lease liabilities in the consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. The Company applies a discount rate based on the remaining lease term and lease payments rather than the original lease term and lease payments. As a majority of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate base on information available at the date of transition to determine the present value of lease payments. The Company does not separate lease components from non-lease components for all classes of underlying assets. The Company’s finance leases are included in property, plant and equipment, current portion of long-term debt and long-term debt, less current portion in the consolidated balance sheets.
Supplemental balance sheet information related to the Company’s leases for the periods presented were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
December 31, 2019
|
Assets:
|
Classification:
|
|
|
Operating lease assets
|
Operating lease right-of-use assets
|
$
|
85.8
|
|
$
|
93.1
|
|
Finance lease assets
|
Property, plant and equipment, net (1)
|
4.0
|
|
3.2
|
|
Total leased assets
|
|
$
|
89.8
|
|
$
|
96.3
|
|
Liabilities:
|
|
|
|
Current
|
|
|
|
Operating
|
Current portion of operating lease liabilities
|
$
|
41.4
|
|
$
|
60.6
|
|
Finance
|
Current portion of long-term debt
|
0.6
|
|
0.3
|
|
Non-current
|
|
|
|
Operating
|
Long-term operating lease liabilities
|
44.8
|
|
33.0
|
|
Finance
|
Long term debt, less current portion
|
3.1
|
|
2.4
|
|
Total lease liabilities
|
|
$
|
89.9
|
|
$
|
96.3
|
|
(1)As of December 31, 2020 and 2019, finance lease assets are recorded net of accumulated amortization of $3.4 million and $7.1 million, respectively.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Lease expense for lease payments is recognized on a straight-line basis over the lease term. The components of lease expense related to the Company’s leases for the periods presented were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Lease Costs:
|
Classification:
|
2020
|
2019
|
|
|
|
|
Fixed operating lease cost
|
Cost of Sales; SG&A Expenses
|
$
|
46.2
|
|
$
|
67.0
|
|
|
|
|
|
Short-term operating lease cost (1)
|
Cost of Sales; SG&A Expenses
|
8.6
|
|
8.0
|
|
|
|
|
|
Variable operating lease cost (2) (3)
|
Cost of Sales; SG&A Expenses
|
1.9
|
|
3.2
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
Amortization of finance lease assets
|
Cost of Sales
|
0.6
|
|
1.2
|
|
|
|
|
|
Interest on lease liabilities
|
Interest expense
|
0.4
|
|
1.4
|
|
|
|
|
|
Total lease cost
|
|
$
|
57.7
|
|
$
|
80.8
|
|
|
|
|
|
(1)The Company’s leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets.
(2)Approximately $0.8 million of the Company’s variable operating lease cost for the year ended December 31, 2020 relates to its lease agreement with Phillips 66 related to the LVT unit at its Lake Charles, Louisiana refinery (“the LVT Agreement”).
(3)The Company’s railcar leases typically include a mileage limit the railcar can travel over the life of the lease. For any mileage incurred over this limit, the Company is obligated to pay an agreed upon dollar value for each mile that is traveled over the limit.
As of December 31, 2020, the Company had estimated minimum commitments for the payment of rentals under leases which, at inception, had a noncancelable term of more than one year, as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity of Lease Liabilities
|
Operating Leases (1)
|
|
Finance
Leases (2)
|
|
Total
|
2021
|
$
|
45.9
|
|
|
$
|
0.9
|
|
|
$
|
46.8
|
|
2022
|
15.9
|
|
|
0.9
|
|
|
16.8
|
|
2023
|
12.3
|
|
|
0.9
|
|
|
13.2
|
|
2024
|
8.8
|
|
|
0.9
|
|
|
9.7
|
|
2025
|
6.3
|
|
|
0.5
|
|
|
6.8
|
|
Thereafter
|
10.0
|
|
|
0.6
|
|
|
10.6
|
|
Total
|
$
|
99.2
|
|
|
$
|
4.7
|
|
|
$
|
103.9
|
|
Less: Interest
|
13.0
|
|
|
1.0
|
|
|
14.0
|
|
Present value of lease liabilities
|
$
|
86.2
|
|
|
$
|
3.7
|
|
|
$
|
89.9
|
|
Less obligations due within one year
|
41.4
|
|
|
0.6
|
|
|
42.0
|
|
Long-term lease obligations
|
$
|
44.8
|
|
|
$
|
3.1
|
|
|
$
|
47.9
|
|
(1)As of December 31, 2020, the Company’s operating lease payments included no material options to extend lease terms that are reasonably certain of being exercised. The Company has no legally binding minimum lease payments for leases signed but not yet commenced as of December 31, 2020.
(2)As of December 31, 2020, the Company’s finance lease payments included no material options to extend lease terms that are reasonably certain of being exercised. In addition, the Company has no legally binding minimum lease payments for leases that have been signed but not yet commenced as of December 31, 2020.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Weighted-Average Lease Term and Discount Rate
The weighted-average remaining lease term and weighted-average discount rate for the Company’s operating and finance leases for the periods presented were as follows:
|
|
|
|
|
|
|
|
|
Lease Term and Discount Rate:
|
December 31, 2020
|
December 31, 2019
|
Weighted-average remaining lease term (years):
|
|
|
Operating leases
|
3.8
|
2.5
|
Finance leases
|
5.4
|
7.1
|
Weighted-average discount rate:
|
|
|
Operating leases
|
7.3
|
%
|
7.3
|
%
|
Finance leases
|
8.3
|
%
|
8.8
|
%
|
7. Goodwill and Other Intangible Assets
For the years ended December 31, 2020 and 2019, the Company updated its financial projections in connection with its annual goodwill assessment for each of the years then ended, respectively, and determined that the fair value of each of its reporting units with goodwill exceeded its carrying value. Thus, no impairment charge for goodwill related to the specialty products segment was recorded in the consolidated statements of operations within asset impairment for the years ended December 31, 2020 and 2019, respectively. There is no goodwill within the reporting units for the fuel products segment or the corporate segment.
The Company tests goodwill either quantitatively or qualitatively for impairment. During 2020 and 2019, under the Company’s quantitative assessment to derive the fair value of the reporting units, as required in step one of the impairment test, the Company used the income approach, specifically the discounted cash flow method, to determine the fair value of each reporting unit. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, corporate tax structure and product offerings. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the reporting unit.
Inputs used to estimate the fair value of the Company’s reporting units are considered Level 3 inputs of the fair value hierarchy and include the following:
•The Company’s financial projections for its reporting units are based on its analysis of various supply and demand factors which include, among other things, industry-wide capacity, its planned utilization rate, end-user demand, crack spreads, capital expenditures and economic conditions. Such estimates are consistent with those used in the Company’s planning and capital investment reviews and include recent historical prices and published forward prices.
•The discount rate used to measure the present value of the projected future cash flows is based on a variety of factors, including market and economic conditions, operational risk, regulatory risk and political risk. This discount rate is also compared to recent observable market transactions, if possible.
For Level 3 measurements, significant increases or decreases in long-term growth rates or discount rates in isolation or in combination could result in a significantly lower or higher fair value measurement.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in goodwill balances for the periods indicated below are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Specialty
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of December 31, 2018
|
$
|
171.4
|
|
|
|
|
|
Impairment (1)
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of December 31, 2019
|
$
|
171.4
|
|
|
|
|
|
Additions
|
1.6
|
|
|
|
|
|
Impairment (1)
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of December 31, 2020
|
$
|
173.0
|
|
|
|
|
|
(1) Total accumulated goodwill impairment as of December 31, 2020 and 2019, is $35.5 million.
Other intangible assets consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Life (Years)
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
Gross Amount
|
|
Accumulated Amortization
|
|
Gross Amount
|
|
Accumulated Amortization
|
Customer relationships
|
22
|
|
$
|
181.8
|
|
|
$
|
(139.7)
|
|
|
$
|
181.3
|
|
|
$
|
(130.6)
|
|
Tradenames
|
11
|
|
26.8
|
|
|
(20.7)
|
|
|
26.8
|
|
|
(18.7)
|
|
Trade secrets
|
13
|
|
52.9
|
|
|
(46.3)
|
|
|
52.7
|
|
|
(43.4)
|
|
Patents
|
12
|
|
1.6
|
|
|
(1.6)
|
|
|
1.6
|
|
|
(1.6)
|
|
Royalty agreements
|
20
|
|
6.1
|
|
|
(3.3)
|
|
|
6.1
|
|
|
(3.0)
|
|
|
19
|
|
$
|
269.2
|
|
|
$
|
(211.6)
|
|
|
$
|
268.5
|
|
|
$
|
(197.3)
|
|
Tradenames, trade secrets, patents and royalty agreements are being amortized to properly match expenses with the undiscounted estimated future cash flows over the terms of the related agreements or the period expected to be benefited. The costs of agreements with terms allowing for the potential extension of such agreements are being amortized based on the initial term only. Customer relationships are being amortized to properly match expenses with the undiscounted estimated future cash flows based upon assumed rates of annual customer attrition. For the years ended December 31, 2020 and 2019, the Company recorded amortization expense of intangible assets of $14.3 million and $16.8 million, respectively.
As of December 31, 2020, the Company estimates that amortization of intangible assets for the next five years will be as follows (in millions):
|
|
|
|
|
|
Year
|
Amortization Amount
|
2021
|
$
|
11.8
|
|
2022
|
$
|
9.5
|
|
2023
|
$
|
7.8
|
|
2024
|
$
|
6.5
|
|
2025
|
$
|
4.9
|
|
8. Commitments and Contingencies
Contingencies
From time to time, the Company is a party to certain claims and litigation incidental to its business, including claims made by various taxation and regulatory authorities, such as the Internal Revenue Service, the EPA and the U.S. Occupational Safety and Health Administration (“OSHA”), as well as various state environmental regulatory bodies and state and local departments of revenue, as the result of audits or reviews of the Company’s business. In addition, the Company has property, business interruption, general liability and various other insurance policies that may result in certain losses or expenditures being reimbursed to the Company.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Environmental
Many of the Company’s activities are subject to stringent federal, regional, state and local laws and regulations governing worker health and safety, the discharge of materials into the environment and environmental protection. These laws and regulations impose legal standards and obligations that are applicable to the Company’s operations, such as requiring the acquisition of permits to conduct regulated activities, restricting the manner in which the Company may release materials into the environment, requiring remedial activities to mitigate pollution from former or current operations that may include incurring capital expenditures to limit or prevent unauthorized releases from our equipment and facilities, requiring the application of specific health and safety criteria addressing worker protection and imposing substantial liabilities for pollution resulting from its operations. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil and criminal penalties; the imposition of investigatory, remedial or corrective action obligations or the incurrence of capital expenditures; the occurrence of restrictions, delays or cancellations in the permitting, development or expansion of projects; and the issuance of injunctive relief limiting or prohibiting Company activities. Moreover, certain of these laws impose joint and several strict liability for costs required to remediate and restore sites where petroleum hydrocarbons, wastes or other materials have been released or disposed. In addition, new laws and regulations, new interpretations of existing laws and regulations, reinterpretation of legal requirements, increased governmental enforcement or other developments, some of which legal requirements are discussed below, could significantly increase the Company’s operational or compliance expenditures.
Remediation of subsurface contamination continues at certain of the Company’s refinery sites and is being overseen by the appropriate state agencies. Based on current investigative and remedial activities, the Company believes that the soil and groundwater contamination at these refineries can be controlled or remediated without having a material adverse effect on the Company’s financial condition. However, such costs are often unpredictable and, therefore, there can be no assurance that the future costs of these remedial projects will not become material. As of December 31, 2020 and 2019, the Company had accrued $2.5 million and $2.4 million, respectively, for environmental liabilities recorded in the other current liabilities in the consolidated balance sheets.
Renewable Identification Numbers Obligation
As of December 31, 2020 and 2019, the Company had a RINs Obligation recorded as an other current liability on the consolidated balance sheets of $129.4 million and $13.0 million, respectively. Please read Note 2 - “Summary of Significant Accounting Policies” for additional information.
Occupational Health and Safety
The Company is subject to various laws and regulations relating to occupational health and safety, including the federal Occupational Safety and Health Act, as amended, and comparable state laws. These laws and regulations strictly govern the protection of the health and safety of employees. In addition, OSHA’s hazard communication standard, the EPA’s community right-to-know regulations under Title III of the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and similar state statutes require the Company to maintain information about hazardous materials used or produced in the Company’s operations and provide this information to employees, contractors, state and local government authorities and customers. The Company maintains safety and training programs as part of its ongoing efforts to promote compliance with applicable laws and regulations. The Company conducts periodic audits of Process Safety Management systems at each of its locations subject to this standard. The Company’s compliance with applicable health and safety laws and regulations has required, and continues to require, substantial expenditures. Changes in occupational safety and health laws and regulations or a finding of non-compliance with current laws and regulations could result in additional capital expenditures or operating expenses, as well as civil penalties and, in the event of a serious injury or fatality, criminal charges.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Labor Matters
The Company has approximately 500 employees covered by various collective bargaining agreements, or approximately 36% of its total workforce of approximately 1,400 employees. These agreements have expiration dates of December 12, 2021, April 30, 2022, July 31, 2022, January 15, 2023, January 31, 2023 and August 20, 2024. The Company has approximately 19 employees, or 1% of its total workforce, who are covered by a collective bargaining agreement which will expire in less than one year and does not expect any work stoppages.
Other Matters, Claims and Legal Proceedings
On October 31, 2018, the Company received an indemnity claim notice (the “Claim Notice”) from Husky Superior Refining Holding Corp. (“Husky”) under the Membership Interest Purchase Agreement, dated August 11, 2017 (“MIPA”), which was entered into in connection with the Superior Transaction. The Claim Notice relates to alleged losses Husky incurred in connection with a fire at the Husky Superior refinery on April 26, 2018, over five months after Calumet sold Husky 100% of the membership interests in the entity that owns the Husky Superior refinery. Based on public reports, Calumet understands the fire occurred during a turnaround of the Husky Superior refinery at a time when Husky owned, operated, and supervised the refinery. Calumet was not involved with the turnaround. The U.S. Chemical Safety and Hazard Investigation Board (“CSB”) is currently investigating the fire, but has not contacted Calumet in connection with that investigation or suggested that Calumet is responsible for the fire. Husky’s Claim Notice alleges that Husky “has become aware of facts which may give rise to losses” for which it reserved the right to seek indemnification at a later date. The Claim Notice further alleges breaches of certain representations, warranties, and covenants contained in the MIPA. The information currently available about the fire and the CSB investigation does not support Husky’s threatened claims, and Husky has not filed a lawsuit against Calumet. If Husky were to assert such claims, they would be subject to certain limits on indemnification liability under the MIPA that may reduce or eliminate any potential indemnification liability.
Beginning in 2017, the Company initiated the first of several claims in Cascade County Circuit Court against the Montana Department of Revenue to recover overpaid taxes resulting from the county’s excessive property tax assessment of the Company’s Great Falls refinery for the 2017, 2018, and 2019 tax years. As of December 31, 2020, the county has refunded, as the result of various court decisions, $6.0 million in excessive taxes and interest to the Company. The claims arising from the 2017, 2018, and 2019 tax years are closed. The $6.0 million was recorded as a reduction of taxes other than income taxes in the consolidated statements of operations for the year ended December 31, 2020.
The Company is subject to other matters, claims and litigation incidental to its business. The Company has recorded accruals with respect to certain of its matters, claims and litigation where appropriate, that are reflected in the audited consolidated financial statements but are not individually considered material. For other matters, claims and litigation, the Company has not recorded accruals because it has not yet determined that a loss is probable or because the amount of loss cannot be reasonably estimated. While the ultimate outcome of matters, claims and litigation currently pending cannot be determined, the Company currently does not expect these outcomes, individually or in the aggregate (including matters for which the Company has recorded accruals), to have a material adverse effect on its financial position, results of operations or cash flows. The outcome of any matter, claim or litigation is inherently uncertain, however, and if decided adversely to the Company, or if the Company determines that settlement of particular litigation is appropriate, the Company may be subject to liability that could have a material adverse effect on its financial position, results of operations or cash flows.
Standby Letters of Credit
The Company has agreements with various financial institutions for standby letters of credit which have been issued primarily to vendors. As of December 31, 2020 and 2019, the Company had outstanding standby letters of credit of $23.7 million and $42.5 million, respectively, under its senior secured revolving credit facility (the “revolving credit facility”). Please read Note 10 - “Long-Term Debt” for additional information regarding the Company’s revolving credit facility. At December 31, 2020 and 2019, the maximum amount of letters of credit the Company could issue under its revolving credit facility was subject to borrowing base limitations, with a maximum letter of credit sublimit equal to $300.0 million, which may be increased with consent of the Agent (as defined in the Credit Agreement) to 90% of revolver commitments then in effect ($600.0 million at December 31, 2020 and 2019).
As of December 31, 2020 and 2019, the Company had availability to issue letters of credit of approximately $154.4 million and approximately $359.4 million, respectively, under its revolving credit facility.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Crude Oil Supply, Other Feedstocks and Finished Products
Purchase commitments consist primarily of obligations to purchase fixed volumes of crude oil, other feedstocks and finished products for resale from various suppliers based on current market prices at the time of delivery. The Company is currently purchasing a majority of its crude oil under month-to-month evergreen contracts or on a spot basis. Certain other feedstocks are purchased under long-term supply contracts.
As of December 31, 2020, the estimated minimum purchase commitments under the Company’s crude oil, other feedstock supply and finished product agreements were as follows (in millions):
|
|
|
|
|
|
Year
|
Commitment
|
2021
|
$
|
153.3
|
|
2022
|
30.2
|
|
2023
|
21.0
|
|
2024
|
21.1
|
|
2025
|
21.0
|
|
Thereafter
|
21.0
|
|
Total
|
$
|
267.6
|
|
Throughput Contract
Prior to 2020, the Company entered into a long-term agreement to transport crude oil at a minimum of 5,000 bpd through a pipeline, which commenced service in the second quarter of 2020. The agreement also contains a capital recovery charge that increases 2% per annum. The agreement is for seven years.
As of December 31, 2020, the estimated minimum unconditional purchase commitments, including the capital recovery charge, under the agreement were as follows (in millions):
|
|
|
|
|
|
Year
|
Commitment (1)
|
2021
|
$
|
3.9
|
|
2022
|
3.9
|
|
2023
|
3.9
|
|
2024
|
4.0
|
|
2025
|
4.0
|
|
Thereafter
|
6.0
|
|
Total (1)
|
$
|
25.7
|
|
(1)As of December 31, 2020, the estimated minimum payments for the unconditional purchase commitments have been accrued and are included in other current liabilities and other long-term liabilities in the consolidated balance sheets. This liability was accrued due to the fact that the contract was entered into to supply crude to a divested facility.
9. Inventory Financing Agreements
On March 31, 2017, the Company entered into several agreements with Macquarie to support the operations of the Great Falls refinery (the “Great Falls Supply and Offtake Agreements”). On July 27, 2017, the Company amended the Great Falls Supply and Offtake Agreements to provide Macquarie the option to terminate the Great Falls Supply and Offtake Agreements effective nine months after the end of the applicable calendar quarter in which Macquarie elects to terminate and the Company has the option to terminate with ninety days’ notice at any time. On May 9, 2019, the Company entered into an amendment to the Great Falls Supply and Offtake Agreements to, among other things, extend the Expiration Date (as defined in the Great Falls Supply and Offtake Agreements) from September 30, 2019 to June 30, 2023.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On June 19, 2017, the Company entered into several agreements with Macquarie to support the operations of the Shreveport refinery (the “Shreveport Supply and Offtake Agreements,” and together with the Great Falls Supply and Offtake Agreements, the “Supply and Offtake Agreements”). Since inception, the Shreveport Supply and Offtake Agreements were set to expire on June 30, 2020; however, Macquarie has the option to terminate the Shreveport Supply and Offtake Agreements effective nine months after the end of the applicable calendar quarter in which Macquarie elects to terminate and the Company has the option to terminate with ninety days’ notice at any time. On May 9, 2019, the Company entered into an amendment to the Shreveport Supply and Offtake Agreements to, among other things, extend the Expiration Date (as defined in the Shreveport Supply and Offtake Agreements) from June 30, 2020 to June 30, 2023.
The Supply and Offtake Agreements allow the Company to purchase crude oil from Macquarie or one of its affiliates. Per the Supply and Offtake Agreements, Macquarie will provide up to 30,000 barrels per day of crude oil to the Great Falls refinery and 60,000 barrels per day of crude oil to the Shreveport refinery. The Company agreed to purchase the crude oil on a just-in-time basis to support the production operations at the Great Falls and Shreveport refineries. Additionally, the Company agreed to sell, and Macquarie agreed to buy, at market prices, refined products produced at the Great Falls and Shreveport refineries. For Shreveport, finished products consisting of finished fuel products (other than jet fuel), lubricants and waxes, Macquarie may (but is not required to) sell such products to the sales intermediation party (“SIP”), and the SIP may (but is not required to) sell such products to Shreveport, as applicable, for sale in turn to third parties. For jet fuel and certain intermediate products, Macquarie may (but is not required to) sell such products to Shreveport for sale thereby to third parties. The Company will then repurchase the refined products from Macquarie or the SIP prior to selling the refined products to third parties.
The Supply and Offtake Agreements are subject to minimum and maximum inventory levels. The agreements also provide for the lease to Macquarie of crude oil and certain refined product storage tanks located at the Great Falls and Shreveport refineries and certain offsite locations. Following expiration or termination of the agreements, Macquarie has the option to require the Company to purchase the crude oil and refined product inventories then owned by Macquarie and located at the leased storage tanks at then current market prices. In addition, barrels owned by the Company are pledged as collateral to support the Deferred Payment Arrangement (defined below) obligations under these agreements.
While title to certain inventories will reside with Macquarie, the Supply and Offtake Agreements are accounted for by the Company similar to a product financing arrangement; therefore, the inventories sold to Macquarie will continue to be included in the Company’s consolidated balance sheets until processed and sold to a third party. Each reporting period, the Company will record liabilities in an amount equal to the amount the Company expects to pay to repurchase the inventory held by Macquarie based on market prices at the termination date included in obligations under inventory financing agreements in the consolidated balance sheets. The Company has determined that the redemption feature on the initially recognized liabilities related to the Supply and Offtake Agreements is an embedded derivative indexed to commodity prices. As such, the Company has accounted for these embedded derivatives at fair value with changes in the fair value, if any, recorded in gain (loss) on derivative instruments in the Company’s consolidated statements of operations. For more information on the valuation of the associated derivatives, please read Note 11 — “Derivatives” and Note 12 — “Fair Value Measurements.” The embedded derivatives will be recorded in obligations under inventory financing agreements on the consolidated balance sheets. The cash flow impact of the embedded derivatives will be classified as a change in unrealized (gain) loss on derivative instruments in the operating activities section in the consolidated statements of cash flows.
For the years ended December 31, 2020 and 2019, the Company received a $1.1 million benefit and incurred a $15.3 million expense, respectively, for financing costs related to the Supply and Offtake Agreements, which are included in interest expense in the Company’s consolidated statements of operations.
The Company has provided cash collateral of $11.3 million related to the initial purchase of the Great Falls and Shreveport inventory to cover credit risk for future crude oil deliveries and potential liquidation risk if Macquarie exercises its rights and sells the inventory to third parties. The collateral was recorded as a reduction to the obligations.
The Supply and Offtake Agreements also include a deferred payment arrangement (“Deferred Payment Arrangement”) whereby the Company can defer payments on just-in-time crude oil purchases from Macquarie owed under the agreements up to the value of the collateral provided (90% of the collateral is inventory). The deferred amounts under the Deferred Payment Arrangement will bear interest at a rate equal to the London Interbank Offered Rate (“LIBOR”) plus 3.25% per annum for both Shreveport and Great Falls. Amounts outstanding under the Deferred Payment Arrangement are included in obligations under inventory financing agreements in the Company’s consolidated balance sheets. Changes in the amount outstanding under the Deferred Payment Arrangement are included within cash flows from financing activities in the consolidated statements of cash flows. As of December 31, 2020 and December 31, 2019, the Company had $15.0 million and $26.3 million of deferred payments outstanding, respectively. In addition to the Deferred Payment Arrangement, Macquarie has advanced the Company an additional $5.0 million which remains outstanding as of December 31, 2020.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. Long-Term Debt
Long-term debt consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020
|
|
December 31,
2019
|
Borrowings under amended and restated senior secured revolving credit agreement with third-party lenders, interest payments quarterly, borrowings due February 2023, weighted average interest rates of 2.4% and 4.3% at December 31, 2020 and 2019, respectively
|
$
|
108.0
|
|
|
$
|
—
|
|
|
|
|
|
Borrowings under 2022 Notes, interest at a fixed rate of 7.625%, interest payments semiannually, borrowings due January 2022, effective interest rate of 8.1% for the years ended December 31, 2020 and December 31, 2019, respectively (1)
|
150.6
|
|
|
351.1
|
|
Borrowings under 2023 Notes, interest at a fixed rate of 7.75%, interest payments semiannually, borrowings due April 2023, effective interest rate of 8.1% for the years ended December 31, 2020 and December 31, 2019, respectively
|
325.0
|
|
|
325.0
|
|
Borrowings under the 2024 Secured Notes, interest at a fixed rate of 9.25%, interest payments semiannually, borrowings due July 2024, effective interest rate of 9.4% for the year ended December 31, 2020.
|
200.0
|
|
|
—
|
|
Borrowings under 2025 Notes, interest at a fixed rate of 11.0%, interest payments semiannually, borrowings due April 2025, effective interest rate of 11.3% and 11.2% for the year ended December 31, 2020 and December 31, 2019, respectively.
|
550.0
|
|
|
550.0
|
|
|
|
|
|
Other
|
2.3
|
|
|
3.8
|
|
Finance lease obligation, at a fixed interest rate, interest and principal payments monthly through January 2027
|
3.7
|
|
|
2.7
|
|
Less unamortized debt issuance costs (2)
|
(14.2)
|
|
|
(18.4)
|
|
Less unamortized discounts
|
(3.1)
|
|
|
(2.9)
|
|
Total debt
|
1,322.3
|
|
|
1,211.3
|
|
|
|
|
|
Less current portion of long-term debt
|
2.9
|
|
|
1.8
|
|
Total long-term debt
|
$
|
1,319.4
|
|
|
$
|
1,209.5
|
|
(1)The balance includes a fair value interest rate hedge adjustment, which increased the debt balance by $0.6 million and $1.1 million as of December 31, 2020 and 2019, respectively.
(2)Deferred debt issuance costs are being amortized by the effective interest rate method over the lives of the related debt instruments. These amounts are net of accumulated amortization of $20.5 million and $15.7 million at December 31, 2020 and 2019, respectively.
Senior Notes
11.00% Senior Notes (the “2025 Notes”)
On October 11, 2019, the Company issued and sold $550.0 million in aggregate principal amount of 11.00% Senior Notes due April 15, 2025, in a private placement pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), to eligible purchasers at par. The Company received net proceeds of $539.9 million net of initial purchasers’ fees and estimated expenses, which it used, along with revolver borrowings and cash on hand, to fund the redemption of $761.2 million in aggregate principal amount of outstanding 6.50% Notes due 2021. In conjunction with the redemption, the Company incurred debt extinguishment costs of $2.2 million, net. Interest on the 2025 Notes is paid semiannually in arrears on April 15 and October 15 of each year, beginning on April 15, 2020.
On July 6, 2020, the Company commenced a consent solicitation to holders of the 2025 Notes for amendments to the indenture governing the 2025 Notes to allow for the consummation of the 2024 Notes Exchange Transaction. On August 5, 2020, the Company executed the First Supplemental Indenture to the indenture governing the 2025 Notes to allow the 2024 Notes Exchange Transaction.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9.25% Senior Notes (the “2024 Notes”)
On August 5, 2020, we consummated a transaction whereby we exchanged approximately $200.0 million aggregate principal amount of our outstanding 2022 Notes for $200.0 million aggregate principal amount of newly issued 2024 Secured Notes, approximately at par (the “2024 Notes Exchange Transaction”). Interest on the 2024 Notes is paid semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2021. The 2024 Notes are secured by a first priority lien (subject to certain exceptions) on all the fixed assets that secure the Company’s obligations under their secured hedge agreements, as governed by the Collateral Trust Agreement.
7.75% Senior Notes (the “2023 Notes”)
On March 27, 2015, the Company issued and sold $325.0 million in aggregate principal amount of 7.75% Senior Notes due April 15, 2023 in a private placement pursuant to Section 4(a)(2) of the Securities Act, to eligible purchasers at a discounted price of 99.257 percent of par. The Company received net proceeds of approximately $317.0 million net of discount, initial purchasers’ fees and expenses, which the Company used to fund the redemption of $178.8 million in aggregate principal amount of outstanding 9.625% senior notes due 2020 on April 28, 2015, to repay borrowings outstanding under its revolving credit facility and for general partnership purposes, including planned capital expenditures at the Company’s facilities and working capital. Interest on the 2023 Notes is paid semiannually in arrears on April 15 and October 15 of each year, beginning on October 15, 2015.
On March 27, 2015, in connection with the issuance and sale of the 2023 Notes, the Company entered into a registration rights agreement with the initial purchasers of the 2023 Notes obligating the Company to use reasonable best efforts to file an exchange offer registration statement with the SEC, so that holders of the 2023 Notes can offer to exchange the 2023 Notes for registered notes having substantially the same terms as the 2023 Notes and evidencing the same indebtedness as the 2023 Notes. On December 11, 2015, the Company filed an exchange offer registration statement for the 2023 Notes with the SEC, which was declared effective on January 28, 2016. The exchange offer was completed on March 7, 2016, thereby fulfilling all of the requirements of the 2023 Notes registration rights agreement.
7.625% Senior Notes (the “2022 Notes”)
On November 26, 2013, the Company issued and sold $350.0 million in aggregate principal amount of 7.625% Senior Notes due January 15, 2022, in a private placement pursuant to Section 4(a)(2) of the Securities Act, to eligible purchasers at a discounted price of 98.494 percent of par. The Company received net proceeds of approximately $337.4 million, net of discount, initial purchasers’ fees and expenses, which the Company used for general partnership purposes, to fund previously announced organic growth projects, the purchase price of the Bel-Ray acquisition and the redemption of $100.0 million in aggregate principal amount outstanding of 9.375% Senior Notes due 2019. Interest on the 2022 Notes is paid semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2014.
On November 26, 2013, in connection with the issuance and sale of the 2022 Notes, the Company entered into a registration rights agreement with the initial purchasers of the 2022 Notes obligating the Company to use reasonable best efforts to file an exchange offer registration statement with the SEC, so that holders of the 2022 Notes can offer to exchange the 2022 Notes for registered notes having substantially the same terms as the 2022 Notes and evidencing the same indebtedness as the 2022 Notes. On November 27, 2013, the Company filed an exchange offer registration statement for the 2022 Notes with the SEC, which was declared effective on December 10, 2013. The exchange offer was completed on January 13, 2014, thereby fulfilling all of the requirements of the 2022 Notes registration rights agreement.
On August 5, 2020, the Company consummated a transaction whereby it exchanged approximately $200.0 million
aggregate principal amount of its outstanding 7.625% Senior Notes due 2022 (the “2022 Notes”) for $200.0 million aggregate
principal amount of newly issued 9.25% Senior Secured First Lien Notes due 2024 (the “2024 Secured Notes”) (the “2024 Notes Exchange Transaction”). In connection with the 2024 Notes Exchange Transaction, the Company incurred $5.4 million of fees.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2022 Notes, 2023 Notes, 2024 Notes and 2025 Notes
In accordance with SEC Rule 3-10 of Regulation S-X, consolidated financial statements of non-guarantors are not required. The Company has no material assets or operations independent of its subsidiaries. Obligations under its 2022, 2023 and 2025 Notes are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis, and the 2024 Notes on a senior secured basis, by the Company’s current 100%-owned operating subsidiaries and certain of the Company’s future operating subsidiaries, with the exception of the Company’s “minor” subsidiaries (as defined by Rule 3-10 of Regulation S-X), including Calumet Finance Corp. (100%-owned Delaware corporation that was organized for the sole purpose of being a co-issuer of certain of the Company’s indebtedness, including the 2022, 2023, 2024 and 2025 Notes). The 2024 Notes and the guarantees of the 2024 Notes are secured by a first priority lien (subject to certain exceptions) on all the fixed assets that secure the Company’s obligations under their secured hedge agreements, as governed by the Collateral Trust Agreement. There are no significant restrictions on the ability of the Company or subsidiary guarantors for the Company to obtain funds from its subsidiary guarantors by dividend or loan. None of the subsidiary guarantors’ assets represent restricted assets pursuant to SEC Rule 4-08(e)(3) of Regulation S-X.
On September 27, 2019, the Company executed supplemental indentures to the indentures governing the 2022 and 2023 Notes, naming its wholly-owned subsidiaries Calumet Mexico, LLC, Calumet Specialty Oils de Mexico, S. de R.L. de C.V., and Calumet Specialty Products Canada, ULC as additional Guarantors (as defined in the indentures). Following the execution of these supplemental indentures, the Company no longer has material subsidiaries that do not guarantee the 2022, 2023, 2024 and 2025 Notes.
The 2022, 2023, 2024 and 2025 Notes are subject to certain automatic customary releases, including the sale, disposition, or transfer of capital stock or substantially all of the assets of a subsidiary guarantor, designation of a subsidiary guarantor as unrestricted in accordance with the applicable indenture, exercise of legal defeasance option or covenant defeasance option, liquidation or dissolution of the subsidiary guarantor and a subsidiary guarantor ceases to both guarantee other Company debt and to be an obligor under the revolving credit facility. The Company’s operating subsidiaries may not sell or otherwise dispose of all or substantially all of their properties or assets to, or consolidate with or merge into, another company if such a sale would cause a default under the indentures governing the 2022, 2023, 2024 and 2025 Notes.
The indentures governing the 2022, 2023, 2024 and 2025 Notes contain covenants that, among other things, restrict the Company’s ability and the ability of certain of the Company’s subsidiaries to: (i) sell assets; (ii) pay distributions on, redeem or repurchase the Company’s common units or redeem or repurchase its subordinated debt; (iii) make investments; (iv) incur or guarantee additional indebtedness or issue preferred units; (v) create or incur certain liens; (vi) enter into agreements that restrict distributions or other payments from the Company’s restricted subsidiaries to the Company; (vii) consolidate, merge or transfer all or substantially all of the Company’s assets; (viii) engage in transactions with affiliates and (ix) create unrestricted subsidiaries. These covenants are subject to important exceptions and qualifications. At any time when the 2022, 2023, 2024 and 2025 Notes are rated investment grade by either Moody’s Investors Service, Inc. (“Moody’s”) or S&P Global Ratings (“S&P”) and no Default or Event of Default, each as defined in the indentures governing the 2022, 2023, 2024 and 2025 Notes, has occurred and is continuing, many of these covenants will be suspended. As of December 31, 2020, the Company’s Fixed Charge Coverage Ratio (as defined in the indentures governing the 2022, 2023, 2024 and 2025 Notes) was 1.1. As of December 31, 2020, the Company was in compliance with all covenants under the indentures governing the 2022, 2023, 2024 and 2025 Notes.
Third Amended and Restated Senior Secured Revolving Credit Facility
On February 23, 2018, the Company entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”) governing its senior secured revolving credit facility maturing in February 2023, which provides maximum availability of credit under the revolving credit facility of $600.0 million, subject to borrowing base limitations, and includes a $500.0 million incremental uncommitted expansion feature. Lenders under the revolving credit facility have a first priority lien on, among other things, the Company’s accounts receivable and inventory and substantially all of its cash (collectively, the “Credit Agreement Collateral”).
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On September 4, 2019, the Company entered into the First Amendment to the Credit Agreement. The amendment expands the borrowing base by $99.6 million on the Effective Date of October 11, 2019, by adding the fixed assets of the Company’s Great Falls, MT refinery as collateral to the borrowing base. The $99.6 million expansion amortizes to zero on a straight-line basis over ten quarters starting in the first quarter of 2020. Additionally, while the fixed assets of the Great Falls, MT refinery are included in the borrowing base, the first amendment provides for a 25 basis points increase in the applicable margin for loans, as well as increases the minimum availability under the revolving credit facility required for the company to be able to perform certain actions, including to make restricted payments of other distributions, sell or dispose of certain assets, make acquisitions or investments, or prepay other indebtedness. Among other conditions precedent that were required to be satisfied before the Effective Date, the Company was required to consummate an offering of at least $450.0 million aggregate principal amount of senior unsecured notes. The conditions precedent were satisfied on October 11, 2019.
The revolving credit facility, which is the Company’s primary source of liquidity for cash needs in excess of cash generated from operations bears interest at a rate equal to prime plus a basis points margin or LIBOR plus a basis points margin, at the Company’s option as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Average Availability Percentage
|
Base Loans
|
|
FILO Loans
|
Prime Rate Margin
|
|
LIBOR Rate Margin
|
|
Prime Rate Margin
|
|
LIBOR Rate Margin
|
≥ 66%
|
0.50%
|
|
1.50%
|
|
1.50%
|
|
2.50%
|
≥ 33% and < 66%
|
0.75%
|
|
1.75%
|
|
1.75%
|
|
2.75%
|
< 33%
|
1.00%
|
|
2.00%
|
|
2.00%
|
|
3.00%
|
The Credit Agreement provides for a 25 basis point reduction in the applicable margin rates beginning in the quarter after our Leverage Ratio (as defined in the Credit Agreement) is less than 5.5 to 1.0. The Company has met this test consistently since the fiscal quarter ended June 30, 2019. As of December 31, 2020, the margin was 50 basis points for prime rate based revolver loans and 150 basis points for LIBOR based rate revolver loans. The margin can fluctuate quarterly based on our average availability for additional borrowings under the revolving credit facility in the preceding calendar quarter. Following the October 11, 2019 Effective Date of the first amendment to the Credit Agreement, the applicable margin rates are increased by 25 basis points for as long as the Great Falls, MT refinery assets are contributing to the borrowing base. Letters of credit issued under the revolving credit facility accrue fees at a rate equal to the rate margin applicable to LIBOR revolver loans.
In addition to paying interest quarterly on outstanding borrowings under the revolving credit facility, the Company is required to pay a commitment fee to the lenders under the revolving credit facility with respect to the unutilized commitments thereunder at a rate equal to 0.250% or 0.375% per annum depending on the average daily available unused borrowing capacity for the preceding month. The Company also pays a customary letter of credit fee, including a fronting fee of 0.125% per annum of the stated amount of each outstanding letter of credit, and customary agency fees.
The borrowing capacity at December 31, 2020, under the revolving credit facility was approximately $286.1 million. As of December 31, 2020, the Company had $108.0 million outstanding borrowings under the revolving credit facility and outstanding standby letters of credit of $23.7 million, leaving approximately $154.4 million of unused capacity.
The revolving credit facility contains various covenants that limit, among other things, the Company’s ability to: incur indebtedness; grant liens; dispose of certain assets; make certain acquisitions and investments; redeem or prepay other debt or make other restricted payments such as distributions to unitholders; enter into transactions with affiliates; and enter into a merger, consolidation or sale of assets. Further, the revolving credit facility contains one springing financial covenant which provides that only if the Company’s availability to borrow loans under the revolving credit facility falls below the greater of (i) 10.0% of the Borrowing Base (as defined in the Credit Agreement) then in effect, or 15% while the Great Falls, MT refinery is included in the borrowing base, and (ii) $35.0 million (which amount is subject to increase in proportion to revolving commitment increases), then the Company will be required to maintain as of the end of each fiscal quarter a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of at least 1.0 to 1.0. As of December 31, 2020, the Company was in compliance with all covenants under the revolving credit facility.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Master Derivative Contracts
The Company’s payment obligations under all of the Company’s master derivatives contracts for commodity hedging generally are secured by a first priority lien on the Company’s real property, plant and equipment, fixtures, intellectual property, certain financial assets, certain investment property, commercial tort claims, chattel paper, documents, instruments and proceeds of the foregoing (including proceeds of hedge arrangements). The Company had no additional letters of credit or cash margin posted with any hedging counterparty as of December 31, 2020. The Company’s master derivatives contracts and Collateral Trust Agreement (as defined below) continue to impose a number of covenant limitations on the Company’s operating and financing activities, including limitations on liens on collateral, limitations on dispositions of collateral and collateral maintenance and insurance requirements.
Collateral Trust Agreement
The Company has a collateral trust agreement (“The Collateral Trust Agreement”) which governs how various secured Company creditors, including secured hedging counterparties, our creditor on a forward purchase contract for physical commodities, and holders of our 2024 Secured Notes share collateral pledged as security for the payment of respective payment obligations to them. The Collateral Trust Agreement limits to $150.0 million the extent to which forward purchase contracts for physical commodities are covered by, and secured under, the Collateral Trust Agreement and the Parity Lien Security Documents (as defined in the Collateral Trust Agreement). There is no such limit on financially settled derivative instruments used for commodity hedging. Subject to certain conditions set forth in the Collateral Trust Agreement, the Company has the ability to add secured parties from time to time.
Maturities of Long-Term Debt
As of December 31, 2020, principal payments on debt obligations and future minimum rentals on finance lease obligations are as follows (in millions):
|
|
|
|
|
|
Year
|
Maturity
|
2021
|
$
|
2.9
|
|
2022
|
150.6
|
|
2023
|
433.7
|
|
2024
|
200.8
|
|
2025
|
550.5
|
|
Thereafter
|
0.5
|
|
Total
|
$
|
1,339.0
|
|
11. Derivatives
The Company is exposed to price risks due to fluctuations in the price of crude oil, refined products (primarily in the Company’s fuel products segment) and precious metals. The Company uses various strategies to reduce its exposure to commodity price risk. The strategies to reduce the Company’s risk utilize both physical forward contracts and financially settled derivative instruments, such as swaps, to attempt to reduce the Company’s exposure with respect to:
•crude oil purchases and sales;
•fuel product sales and purchases;
•natural gas purchases;
•precious metals purchases; and
•fluctuations in the value of crude oil between geographic regions and between the different types of crude oil such as New York Mercantile Exchange West Texas Intermediate (“NYMEX WTI”), Light Louisiana Sweet, Western Canadian Select (“WCS”), WTI Midland, Mixed Sweet Blend, Magellan East Houston and ICE Brent.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company manages its exposure to commodity markets, credit, volumetric and liquidity risks to manage its costs and volatility of cash flows as conditions warrant or opportunities become available. These risks may be managed in a variety of ways that may include the use of derivative instruments. Derivative instruments may be used for the purpose of mitigating risks associated with an asset, liability and anticipated future transactions and the changes in fair value of the Company’s derivative instruments will affect its earnings and cash flows; however, such changes should be offset by price or rate changes related to the underlying commodity or financial transaction that is part of the risk management strategy. The Company does not speculate with derivative instruments or other contractual arrangements that are not associated with its business objectives. Speculation is defined as increasing the Company’s natural position above the maximum position of its physical assets or trading in commodities, currencies or other risk bearing assets that are not associated with the Company’s business activities and objectives. The Company’s positions are monitored routinely by a risk management committee to ensure compliance with its stated risk management policy and documented risk management strategies. All strategies are reviewed on an ongoing basis by the Company’s risk management committee, which will add, remove or revise strategies in anticipation of changes in market conditions and/or its risk profiles. Such changes in strategies are to position the Company in relation to its risk exposures in an attempt to capture market opportunities as they arise.
The Company is obligated to repurchase crude oil and refined products from Macquarie at the termination of the Supply and Offtake Agreements in certain scenarios. The Company has determined that the redemption feature on the initially recognized liability related to the Supply and Offtake Agreements is an embedded derivative indexed to commodity prices. As such, the Company has accounted for this embedded derivative at fair value with changes in the fair value, if any, recorded in gain (loss) on derivative instruments in the Company’s consolidated statements of operations please read Note 9 - “Inventory Financing Agreements" for additional information.
The Company recognizes all derivative instruments at their fair values as either current assets or current liabilities in the consolidated balance sheets (please read Note 12 - “Fair Value Measurements”). Fair value includes any premiums paid or received and unrealized gains and losses. Fair value does not include any amounts receivable from or payable to counterparties, or collateral provided to counterparties. Derivative asset and liability amounts with the same counterparty are netted against each other for financial reporting purposes in accordance with the provisions of our master netting arrangements.
The following tables summarize the Company’s gross fair values of its derivative instruments, presenting the impact of offsetting derivative assets in the Company’s consolidated balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Balance Sheet Location
|
Gross Amounts of Recognized Assets
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Amounts of Assets Presented in the Consolidated Balance Sheets
|
|
Gross Amounts of Recognized Assets
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Amounts of Assets Presented in the Consolidated Balance Sheets
|
Derivative instruments not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel products segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WCS crude oil basis swaps
|
Derivative assets
|
$
|
0.4
|
|
|
$
|
(0.4)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1.3)
|
|
|
$
|
(1.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline crack spread swaps
|
Derivative assets
|
—
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
|
(0.5)
|
|
|
1.3
|
|
Diesel crack spread swaps
|
Derivative assets
|
—
|
|
|
—
|
|
|
—
|
|
|
0.9
|
|
|
(0.5)
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/1/1 Crack spread swap
|
Derivative assets
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
0.5
|
|
Total derivative instruments
|
|
$
|
0.4
|
|
|
$
|
(0.4)
|
|
|
$
|
—
|
|
|
$
|
3.2
|
|
|
$
|
(2.3)
|
|
|
$
|
0.9
|
|
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables summarize the Company’s gross fair values of its derivative instruments, presenting the impact of offsetting derivative liabilities in the Company’s consolidated balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Balance Sheet Location
|
Gross Amounts of Recognized Liabilities
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Amounts of Liabilities Presented in the Consolidated Balance Sheets
|
|
Gross Amounts of Recognized Liabilities
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Amounts of Liabilities Presented in the Consolidated Balance Sheets
|
Derivative instruments not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel products segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory financing obligation
|
Obligations under inventory financing agreements
|
$
|
(2.2)
|
|
|
$
|
—
|
|
|
$
|
(2.2)
|
|
|
$
|
(7.2)
|
|
|
$
|
—
|
|
|
$
|
(7.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WCS crude oil basis swaps
|
Derivative liabilities
|
(1.7)
|
|
|
0.4
|
|
|
(1.3)
|
|
|
(1.3)
|
|
|
1.3
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline crack spread swaps
|
Derivative liabilities
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.5)
|
|
|
0.5
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel crack spread swaps
|
Derivative liabilities
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.5)
|
|
|
0.5
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative instruments
|
|
$
|
(3.9)
|
|
|
$
|
0.4
|
|
|
$
|
(3.5)
|
|
|
$
|
(9.5)
|
|
|
$
|
2.3
|
|
|
$
|
(7.2)
|
|
The Company is exposed to credit risk in the event of nonperformance by its counterparties on these derivative transactions. The Company does not expect nonperformance on any derivative instruments, however, no assurances can be provided. The Company’s credit exposure related to these derivative instruments is represented by the fair value of contracts reported as derivative assets. As of December 31, 2020, the Company had no counterparty relationships in which the derivatives held were in net assets. As of December 31, 2019, the Company had three counterparty relationships in which the derivatives held were in net assets totaling $0.9 million. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings. The Company primarily executes its derivative instruments with large financial institutions that have ratings of at least A3 and BBB+ by Moody’s and S&P, respectively. In the event of default, the Company would potentially be subject to losses on derivative instruments with mark-to-market gains. The Company requires collateral from its counterparties when the fair value of the derivatives exceeds agreed-upon thresholds in its master derivative contracts with these counterparties. No such collateral was held by the Company as of December 31, 2020 or 2019. Collateral received from counterparties is reported in other current liabilities, and collateral held by counterparties is reported in prepaid expenses and other current assets on the Company’s consolidated balance sheets and is not netted against derivative assets or liabilities. Any outstanding collateral is released to the Company upon settlement of the related derivative instrument liability. As of December 31, 2020 and 2019, the Company had provided its counterparties with no collateral.
Certain of the Company’s outstanding derivative instruments are subject to credit support agreements with the applicable counterparties which contain provisions setting certain credit thresholds above which the Company may be required to post agreed-upon collateral, such as cash or letters of credit, with the counterparty to the extent that the Company’s mark-to-market net liability, if any, on all outstanding derivatives exceeds the credit threshold amount per such credit support agreement. The majority of the credit support agreements covering the Company’s outstanding derivative instruments also contain a general provision stating that if the Company experiences a material adverse change in its business, in the reasonable discretion of the counterparty, the Company’s credit threshold could be lowered by such counterparty. The Company does not expect that it will experience a material adverse change in its business.
The cash flow impact of the Company’s derivative activities is classified primarily as a change in derivative activity in the operating activities section in the consolidated statements of cash flows.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Derivative Instruments Not Designated as Hedges
For derivative instruments not designated as hedges, the change in fair value of the asset or liability for the period is recorded to unrealized gain (loss) on derivative instruments in the consolidated statements of operations. Upon the settlement of a derivative not designated as a hedge, the gain or loss at settlement is recorded to realized gain (loss) on derivative instruments in the consolidated statements of operations. The Company has entered into gasoline swaps, diesel swaps and certain other crude oil swaps that are not designated as cash flow hedges for accounting purposes. However, these instruments provide economic hedges of the Company’s crude oil, gasoline and diesel sales.
The Company recorded the following gains (losses) in its consolidated statements of operations related to its derivative instruments not designated as hedges (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
Recognized in Realized
Gain on Derivative
Instruments
|
|
Amount of Gain (Loss)
Recognized in Unrealized
Gain (Loss) on Derivative Instruments
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
Type of Derivative
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Specialty products segment:
|
|
|
|
|
|
|
|
Natural gas swaps
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Midland crude oil basis swaps
|
—
|
|
|
1.6
|
|
|
—
|
|
|
(1.0)
|
|
|
|
|
|
|
|
|
|
Fuel products segment:
|
|
|
|
|
|
|
|
Inventory financing obligation
|
—
|
|
|
—
|
|
|
5.1
|
|
|
(8.7)
|
|
|
|
|
|
|
|
|
|
WCS crude oil basis swaps
|
19.5
|
|
|
14.7
|
|
|
(0.1)
|
|
|
(16.2)
|
|
WCS crude oil percentage basis swaps
|
—
|
|
|
1.0
|
|
|
—
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
Midland crude oil basis swaps
|
—
|
|
|
11.3
|
|
|
—
|
|
|
(7.1)
|
|
|
|
|
|
|
|
|
|
Gasoline swaps
|
8.9
|
|
|
—
|
|
|
(1.3)
|
|
|
—
|
|
Gasoline crack spread swaps
|
—
|
|
|
0.1
|
|
|
—
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
Diesel crack spread swaps
|
17.7
|
|
|
6.3
|
|
|
(0.4)
|
|
|
(6.9)
|
|
Diesel-MEH crack spread swaps
|
1.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diesel percentage basis crack spread swaps
|
—
|
|
|
—
|
|
|
—
|
|
|
6.0
|
|
2/1/1 crack spread swaps
|
2.0
|
|
|
0.1
|
|
|
(0.5)
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
Natural gas swaps
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
49.6
|
|
|
$
|
35.1
|
|
|
$
|
2.8
|
|
|
$
|
(26.1)
|
|
Derivative Positions
As of December 31, 2020, the Company had the following notional contract volumes related to outstanding derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Contract Volumes by Year of Maturity
|
|
Total Outstanding Notional
|
|
2021(1)
|
|
Unit of Measure
|
Derivative instruments not designated as hedges:
|
|
|
|
|
|
WCS crude oil basis swaps - purchases
|
1,350,000
|
|
|
1,350,000
|
|
|
Barrels
|
(1)The volumes include 217,000 barrels of WCS crude oil basis purchases that settled at $(13.34)/Bbl average differential to NYMEX WTI in the quarter ended December 2020.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. Fair Value Measurements
The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. Observable inputs are from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. These tiers include the following:
•Level 1 — inputs include observable unadjusted quoted prices in active markets for identical assets or liabilities
•Level 2 — inputs include other than quoted prices in active markets that are either directly or indirectly observable
•Level 3 — inputs include unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions
In determining fair value, the Company uses various valuation techniques and prioritizes the use of observable inputs. The availability of observable inputs varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded and other characteristics particular to the instrument. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants and the valuation does not require significant management judgment. For other financial instruments, pricing inputs are less observable in the marketplace and may require management judgment.
Recurring Fair Value Measurements
Derivative Assets and Liabilities
Derivative instruments are reported in the accompanying consolidated financial statements at fair value. The Company’s derivative instruments consist of over-the-counter (“OTC”) contracts, which are not traded on a public exchange. Substantially all of the Company’s derivative instruments are with counterparties that have long-term credit ratings of at least A3 and BBB+ by Moody’s and S&P, respectively.
To estimate the fair values of the Company’s commodity derivative instruments, the Company uses the forward rate, the strike price, contractual notional amounts, the risk free rate of return and contract maturity. Various analytical tests are performed to validate the counterparty data. The fair values of the Company’s derivative instruments are adjusted for nonperformance risk and creditworthiness of the hedging entities through the Company’s credit valuation adjustment (“CVA”). The CVA is calculated at the counterparty level utilizing the fair value exposure at each payment date and applying a weighted probability of the appropriate survival and marginal default percentages. The Company uses the counterparty’s marginal default rate and the Company’s survival rate when the Company is in a net asset position at the payment date and uses the Company’s marginal default rate and the counterparty’s survival rate when the Company is in a net liability position at the payment date. As a result of applying the applicable CVA at December 31, 2020 and 2019, the Company’s net assets and liabilities changed by an immaterial amount.
Observable inputs utilized to estimate the fair values of the Company’s derivative instruments were based primarily on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Based on the use of various unobservable inputs, principally non-performance risk, creditworthiness of the hedging entities and unobservable inputs in the forward rate, the Company has categorized these derivative instruments as Level 3. Significant increases (decreases) in any of those unobservable inputs in isolation would result in a significantly lower (higher) fair value measurement. The Company believes it has obtained the most accurate information available for the types of derivative instruments it holds. Please read Note 11 - “Derivatives” for further information on derivative instruments.
Pension Assets
Pension assets are reported at fair value in the accompanying consolidated financial statements. At December 31, 2020 and 2019, the Company’s investments associated with its Pension Plan (as such term is hereinafter defined) consisted of (i) cash and cash equivalents, (ii) fixed income bond funds, (iii) mutual equity funds, and (iv) mutual balanced funds. The fixed income bond funds, mutual equity funds, and mutual balanced funds are measured at fair value using a market approach based on quoted prices from national securities exchanges and are categorized in Level 1 of the fair value hierarchy.
Liability Awards
Unit-based compensation liability awards are awards that are currently expected to be settled in cash on their vesting dates, rather than in equity units (“Liability Awards”). The Liability Awards are categorized as Level 1 because the fair value of the Liability Awards is based on the Company’s quoted closing unit price as of each balance sheet date.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Renewable Identification Numbers Obligation
The Company’s RINs Obligation is categorized as Level 2 and is measured at fair value using the market approach based on quoted prices from an independent pricing service. Please read Note 2 - “Summary of Significant Accounting Policies” for further information on the Company’s RINs Obligation.
Precious Metals Obligations
The fair value of precious metals obligations is based upon unadjusted exchange-quoted prices and is, therefore, classified within Level 1 of the fair value hierarchy.
Hierarchy of Recurring Fair Value Measurements
The Company’s recurring assets and liabilities measured at fair value were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WCS crude oil basis swaps
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1.3)
|
|
|
$
|
(1.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline crack spread swaps
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.3
|
|
|
1.3
|
|
Diesel crack spread swaps
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/1/1 Crack spread swaps
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.9
|
|
|
0.9
|
|
Pension Plan investments
|
34.4
|
|
|
—
|
|
|
—
|
|
|
34.4
|
|
|
32.5
|
|
|
—
|
|
|
—
|
|
|
32.5
|
|
Total recurring assets at fair value
|
$
|
34.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34.4
|
|
|
$
|
32.5
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
|
$
|
33.4
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory financing obligation
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2.2)
|
|
|
$
|
(2.2)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(7.2)
|
|
|
$
|
(7.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WCS crude oil basis swaps
|
—
|
|
|
—
|
|
|
(1.3)
|
|
|
(1.3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities
|
—
|
|
|
—
|
|
|
(3.5)
|
|
|
(3.5)
|
|
|
—
|
|
|
—
|
|
|
(7.2)
|
|
|
(7.2)
|
|
RINs obligation
|
—
|
|
|
(129.4)
|
|
|
—
|
|
|
(129.4)
|
|
|
—
|
|
|
(13.0)
|
|
|
—
|
|
|
(13.0)
|
|
Precious metals obligations
|
(7.9)
|
|
|
—
|
|
|
—
|
|
|
(7.9)
|
|
|
(5.8)
|
|
|
—
|
|
|
—
|
|
|
(5.8)
|
|
Liability Awards
|
(14.2)
|
|
|
—
|
|
|
—
|
|
|
(14.2)
|
|
|
(7.4)
|
|
|
—
|
|
|
—
|
|
|
(7.4)
|
|
Total recurring liabilities at fair value
|
$
|
(22.1)
|
|
|
$
|
(129.4)
|
|
|
$
|
(3.5)
|
|
|
$
|
(155.0)
|
|
|
$
|
(13.2)
|
|
|
$
|
(13.0)
|
|
|
$
|
(7.2)
|
|
|
$
|
(33.4)
|
|
The table below sets forth a summary of net changes in fair value of the Company’s Level 3 financial assets and liabilities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2020
|
|
2019
|
Fair value at January 1,
|
$
|
(6.3)
|
|
|
$
|
19.8
|
|
Realized gain on derivative instruments
|
(49.6)
|
|
|
(35.1)
|
|
Unrealized gain (loss) on derivative instruments
|
2.8
|
|
|
(26.1)
|
|
|
|
|
|
Settlements
|
49.6
|
|
|
35.1
|
|
|
|
|
|
Fair value at December 31,
|
$
|
(3.5)
|
|
|
$
|
(6.3)
|
|
Total gain (loss) included in net loss attributable to changes in unrealized gain (loss) relating to financial assets and liabilities held as of December 31,
|
$
|
2.8
|
|
|
$
|
(26.1)
|
|
All settlements from derivative instruments not designated as hedges are recorded in gain on derivative instruments in the consolidated statements of operations. Please read Note 11 - “Derivatives” for further information on derivative instruments.
Nonrecurring Fair Value Measurements
Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company assesses goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable. The fair value of the reporting units is determined using the income approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, corporate tax structure and product offerings. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation and risks associated with the reporting unit. These assets would generally be classified within Level 3, in the event that the Company were required to measure and record such assets at fair value within its consolidated financial statements. Please read Note 7 - “Goodwill and Other Intangible Assets” for further information on goodwill impairment.
The Company periodically evaluates the carrying value of long-lived assets to be held and used, including definite-lived intangible assets and property plant and equipment, when events or circumstances warrant such a review. Fair value is determined primarily using anticipated cash flows assumed by a market participant discounted at a rate commensurate with the risk involved and these assets would generally be classified within Level 3, in the event that the Company was required to measure and record such assets at fair value within its consolidated financial statements. Please read Note 2 - “Summary of Significant Accounting Policies” for further information on long-lived asset impairment.
The Company’s investment in FHC is a non-marketable equity security without a readily determinable fair value. The Company records this investment using a measurement alternative which measures the security at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes with a same or similar security from the same issuer. The investment in FHC is recorded at fair value only if an impairment or observable price adjustment is recognized in the current period. If an observable price adjustment or impairment is recognized, the Company would classify this asset as Level 3 within the fair value hierarchy based on the nature of the fair value inputs. In 2019, the Company recorded an impairment charge of $25.4 million on the investment in FHC and the categorization of the framework used to value the assets is considered Level 3. Please read Note 2 - “Summary of Significant Accounting Policies” for further information.
Estimated Fair Value of Financial Instruments
Cash and cash equivalents
The carrying value of cash and cash equivalents are each considered to be representative of their fair value.
Debt
The estimated fair value of long-term debt at December 31, 2020 and 2019, consists primarily of senior notes. The estimated aggregate fair value of the Company’s senior notes defined as Level 1 was based upon quoted market prices in an active market. The estimated fair value of the Company’s senior notes defined as Level 2 was based upon quoted prices for identical or similar liabilities in markets that are not active. The carrying value of borrowings, if any, under the Company’s revolving credit facility, finance lease obligations and other obligations approximate their fair values as determined by discounted cash flows and are classified as Level 3. Please read Note 10 - “Long-Term Debt” for further information on long-term debt.
The Company’s carrying value and estimated fair value of the Company’s financial instruments, carried at adjusted historical cost, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Level
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
Financial Instrument:
|
|
|
|
|
|
|
|
|
2022 Notes and 2023 Notes
|
1
|
$
|
468.6
|
|
|
$
|
471.9
|
|
|
$
|
676.4
|
|
|
$
|
668.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2024 Secured Notes and 2025 Notes
|
2
|
$
|
780.8
|
|
|
$
|
739.6
|
|
|
$
|
598.8
|
|
|
$
|
540.5
|
|
Revolving credit facility
|
3
|
$
|
108.0
|
|
|
$
|
104.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Finance leases and other obligations
|
3
|
$
|
6.0
|
|
|
$
|
6.0
|
|
|
$
|
6.5
|
|
|
$
|
6.5
|
|
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. Partners’ Capital (Deficit)
Units Authorized
As of December 31, 2020 and 2019, the Company has 91,073,023 of common units authorized for issuance.
Units Outstanding
Of the 78,062,346 common units outstanding at December 31, 2020, 61,548,740 common units were held by the public, with the remaining 16,513,606 common units held by the Company’s affiliates (including members of the Company’s general partner and their families).
Significant information regarding rights of the limited partners includes the following:
•Rights to receive distributions of available cash within 45 days after the end of each quarter, to the extent the Company has sufficient cash from operations after the establishment of cash reserves.
•Limited partners have limited voting rights on matters affecting the Company’s business. The general partner may consider only the interests and factors that it desires and has no duty or obligation to give any consideration of any interests of the Company’s limited partners. Limited partners have no right to elect the board of directors of the Company’s general partner.
•The vote of the holders of at least 66 2/3% of all outstanding units voting together as a single class is required to remove the general partner. Any holder, other than the general partner or the general partner’s affiliates, that owns 20% or more of any class of units outstanding cannot vote on any matter.
•The Company may issue an unlimited number of limited partner interests without the approval of the limited partners.
•Limited partners may be required to sell their units to the general partner if at any time the general partner owns more than 80% of the issued and outstanding common units.
Distributions and Incentive Distribution Rights
The Company’s general partner is entitled to incentive distributions if the amount it distributes to unitholders with respect to any quarter exceeds specified target levels shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Quarterly
Distribution Per Common Unit
|
|
Marginal Percentage
Interest in Distributions
|
|
Target Amount
|
|
Unitholders
|
|
General Partner
|
Minimum Quarterly Distribution
|
$0.45
|
|
98
|
%
|
|
2
|
%
|
First Target Distribution
|
up to $0.495
|
|
98
|
%
|
|
2
|
%
|
Second Target Distribution
|
above $0.495 up to $0.563
|
|
85
|
%
|
|
15
|
%
|
Third Target Distribution
|
above $0.563 up to $0.675
|
|
75
|
%
|
|
25
|
%
|
Thereafter
|
above $0.675
|
|
50
|
%
|
|
50
|
%
|
The Company’s ability to make distributions is limited by its debt instruments. The revolving credit facility generally permits the Company to make cash distributions to unitholders as long as immediately after giving effect to such a cash distribution the Company has availability under the revolving credit facility at least the greater of (i) 15% of the Aggregate Borrowing Base (as defined in the credit agreement) then in effect, or 25% while the Great Falls, MT refinery is included in the borrowing base, and (ii) $60.0 million (which amount is subject to increase in proportion to revolving commitment increases). Further, the revolving credit facility contains one springing financial covenant which provides that only if the Company’s availability under the revolving credit facility falls below the greater of (a) 10.0% of the Borrowing Base (as defined in the credit agreement) then in effect, or 15% while the Great Falls, MT refinery is included in the borrowing base, and (b) $35.0 million (which amount is subject to increase in proportion to revolving commitment increases), the Company will be required to maintain as of the end of each fiscal quarter a Fixed Charge Coverage Ratio (as defined in the credit agreement) of at least 1.0 to 1.0. The indentures governing the Company’s various senior notes restrict the Company’s ability to make cash distributions. Under the indentures governing the 2022 Notes and 2023 Notes, the Company may pay distributions to its unitholders in an amount equal to available cash from operating surplus (as defined in the Company’s partnership agreement) with respect to its preceding fiscal quarter, subject to certain customary adjustments described in the indentures, if the Company’s fixed charge coverage ratio (as defined in the indentures) for the most recently ended four full fiscal quarters is not less than 1.75 to 1.0. If the Company’s fixed charge coverage ratio is less than 1.75 to 1.0, the Company will be able to pay distributions to its unitholders up to an amount equal to (i) a $210.0 million basket for the 2022 Notes and (ii) a $225.0 million basket for the 2023 Notes, subject to certain customary adjustments described in the indentures. The indentures governing the 2024 Secured Notes and 2025 Notes increase this minimum fixed charge coverage ratio to 3.0 to 1.0, with a basket of $25.0 million if the minimum is not met, also subject to certain customary adjustments described in the indentures.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s distribution policy is as defined in its partnership agreement. In April 2016, the board of directors of the Company’s general partner determined to suspend payment of the Company’s quarterly cash distribution to unitholders. The board of directors of the Company’s general partner will continue to evaluate the Company’s ability to reinstate the quarterly cash distribution. The Company made no distributions to its partners for the years ended December 31, 2020 and 2019. For the years ended December 31, 2020 and 2019, the general partner was allocated no incentive distribution rights.
14. Unit-Based Compensation
The Company’s general partner originally adopted a Long-Term Incentive Plan on January 24, 2006, which was amended and restated effective December 10, 2015 (the “LTIP”), for its employees, consultants and directors and its affiliates who perform services for the Company. The LTIP provides for the grant of restricted units, phantom units, unit options and substitute awards and, with respect to unit options and phantom units, the grant of distribution equivalent rights (“DERs”). Subject to adjustment for certain events, an aggregate of 3,883,690 common units may be delivered pursuant to awards under the LTIP. Units withheld to satisfy the Company’s general partner’s tax withholding obligations are available for delivery pursuant to other awards. The LTIP is administered by the compensation committee of the Company’s general partner’s board of directors.
Liability Awards are awards that are currently expected to be settled in cash on their vesting dates, rather than in equity units. Phantom unit Liability Awards are recorded in accrued salaries, wages and benefits in the consolidated balance sheets based on the vested portion of the fair value of the awards on the balance sheet date. The fair value of Liability Awards are updated at each balance sheet date and changes in the fair values of the vested portions of the awards are recorded as increases or decreases to compensation expense within general and administrative expense in the consolidated statements of operations.
Phantom Units
Non-employee directors of the Company’s general partner have been granted phantom units under the terms of the LTIP as part of their director compensation package related to fiscal years 2020 and 2019. The phantom units granted related to fiscal year 2020 have a three-year cliff vest on the third December 31 following the grant date. The phantom units granted related to fiscal year 2019 have a three-year service period with the 25% vesting on the Grant Date and an additional 25% vesting on each subsequent December 31 with final vesting occurring on the third December 31 following the grant date. Although ownership of common units related to the vesting of such LTIP phantom units does not transfer to the recipients until the phantom units vest, the recipients have DERs on these phantom units from the date of grant.
Non-employee directors of the Company’s general partner are eligible to defer their fees earned into the Deferred Compensation Plan. When directors elect to defer any portion of their compensation into the plans, these deferred amounts are credited to the participant in the form of phantom units. The compensation committee may recommend a matching contribution for the deferred fees at its discretion.
For the year ended December 31, 2019, certain named executive officers were awarded phantom units as partial settlement of our annual incentive bonus program, which was based on the Company’s achievement of specified levels of financial performance for the fiscal year 2019, which were deferred into our Deferred Compensation Plan as fully vested phantom units.
For unit-based compensation equity awards granted, the Company uses the market price of its common units on the grant date to calculate the fair value and related compensation cost of the phantom units. The Company amortizes this compensation cost to partners’ capital (deficit) and general and administrative expense in the consolidated statements of operations using the straight-line method over the service period, as it expects these units to fully vest.
Unit-based compensation liability awards are recorded in accrued salaries, wages and benefits based on the fair value of the vested portion of the awards on the balance sheet date. The fair value of liability awards is updated at each balance sheet date and changes in the fair value of the vested portions of the liability awards are recorded as increases or decreases to compensation expense recorded in general and administrative expense in the consolidated statements of operations.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the Company’s non-vested phantom units and performance units as of December 31, 2020, and the changes during the years ended December 31, 2020 and 2019, are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Phantom Units
|
|
Weighted-Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2018
|
2,270,507
|
|
|
$
|
5.71
|
|
Granted
|
1,653,340
|
|
|
3.01
|
|
Vested
|
(883,511)
|
|
|
4.28
|
|
Forfeited
|
(139,048)
|
|
|
4.10
|
|
Non-vested at December 31, 2019
|
2,901,288
|
|
|
$
|
5.21
|
|
Granted
|
3,210,041
|
|
|
2.87
|
|
Vested
|
(2,191,846)
|
|
|
3.11
|
|
Forfeited
|
(1,548,615)
|
|
|
4.28
|
|
Non-vested at December 31, 2020
|
2,370,868
|
|
|
$
|
2.21
|
|
For the year ended December 31, 2020, compensation expense of $5.5 million was recognized in the consolidated statements of operations related to phantom unit grants, including $4.5 million attributable to Liability Awards for the year ended December 31, 2020. For the year ended December 31, 2019, compensation expense of $5.9 million was recognized in the consolidated statements of operations related to phantom unit grants, including $4.1 million attributable to Liability Awards for the year ended December 31, 2019. As of December 31, 2020 and 2019, there was a total of $5.2 million and $7.1 million, respectively, of unrecognized compensation costs related to non-vested phantom unit grants, including $5.0 million attributable to Liability Awards for the year ended December 31, 2020. These costs are expected to be recognized over a weighted-average period of approximately two years. The total fair value of phantom units vested during the years ended December 31, 2020 and 2019, was $5.3 million and $3.2 million, respectively.
15. Employee Benefit Plans
Defined Contribution Plan
The Company has a domestic defined contribution plan administered by its general partner for (i) all full-time employees that are eligible to participate in the plan (the “401(k) Plan”). Participants in the 401(k) Plan are allowed to contribute 1% to 70% of their pre-tax earnings to the plan, subject to government imposed limitations. The Company matches 100% of each 1% of eligible compensation contributed by the participant up to 4% and 50% of each additional 1% of eligible compensation contributed up to 6%, for a maximum contribution by the Company of 5% of eligible compensation contributed per participant. The plan also includes a profit-sharing component for eligible employees. Contributions under the profit-sharing component are determined by the board of directors of the Company’s general partner and are discretionary. The funding policy is consistent with funding requirements of applicable laws and regulations.
The Company recorded the following 401(k) Plan matching contribution expense in the consolidated statements of operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
401(k) Plan matching contribution expense
|
$
|
5.6
|
|
|
$
|
5.9
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plan
The Company has domestic noncontributory defined benefit plans for those salaried employees as well as those employees represented by either the United Steelworkers (the “USW”) or the International Union of Operating Engineers (the “IUOE”); who (i) were formerly employees of Penreco and became employees of the Company as a result of the acquisition of Penreco on January 3, 2008 (the “Penreco Pension Plan”) or (ii) were formerly employees of Montana Refining Company, Inc. and who became employees of the Company as a result of the acquisition of the Great Falls refinery on October 1, 2012 (the “Great Falls Pension Plan” and together with the Penreco Pension Plan, the “Pension Plan”).
Both the Penreco Pension Plan and the Great Falls Pension Plans were last amended in 2009 and 2015 respectively, which curtailed employees covered by the plans from accumulating additional benefits in subsequent years following the amendment date.
During 2020, the Company made an immaterial amount of contributions to its Pension Plan and expects to contribute less than $0.1 million to its Pension Plan in 2021.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The accumulated and projected benefit obligations for the Pension Plan were $43.6 million and $40.2 million as of December 31, 2020 and 2019, respectively. The discount rates used to determine the benefit obligations were 2.34% for the Penreco Pension Plan and 2.35% for the Great Falls Pension Plan for the years ended December 31, 2020 and 2019. The expected return on plan assets for the Penreco Pension Plan and Great Falls Pension plan was 5.0% for the years ended December 31, 2020 and 2019. The fair value of plan assets was $34.4 million and $32.5 million as of December 31, 2020 and 2019, respectively. The estimated benefit payments for the Pension Plan, which reflect expected future service, as appropriate, are expected to be less than $2.5 million in each of the next five years.
16. Accumulated Other Comprehensive Loss
The table below sets forth a summary of changes in accumulated other comprehensive loss by component for the years ended December 31, 2020 and 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
Defined Benefit Pension And Retiree Health Benefit Plans
|
|
Foreign Currency Translation Adjustment
|
|
Total
|
Accumulated other comprehensive loss at December 31, 2018
|
$
|
—
|
|
|
$
|
(7.5)
|
|
|
$
|
(1.2)
|
|
|
$
|
(8.7)
|
|
Other comprehensive loss before reclassifications
|
0.2
|
|
|
(3.5)
|
|
|
—
|
|
|
(3.3)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
0.2
|
|
|
1.2
|
|
|
1.4
|
|
Net current period other comprehensive loss
|
0.2
|
|
|
(3.3)
|
|
|
1.2
|
|
|
(1.9)
|
|
Accumulated other comprehensive loss at December 31, 2019
|
$
|
0.2
|
|
|
$
|
(10.8)
|
|
|
$
|
—
|
|
|
$
|
(10.6)
|
|
Other comprehensive loss before reclassifications
|
(0.2)
|
|
|
(1.5)
|
|
|
—
|
|
|
(1.7)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net current period other comprehensive loss
|
(0.2)
|
|
|
(1.5)
|
|
|
—
|
|
|
(1.7)
|
|
Accumulated other comprehensive loss at December 31, 2020
|
$
|
—
|
|
|
$
|
(12.3)
|
|
|
$
|
—
|
|
|
$
|
(12.3)
|
|
The table below sets forth a summary of reclassification adjustments out of accumulated other comprehensive loss in the Company’s consolidated statements of operations for the years ended December 31, 2020 and 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Accumulated Other Comprehensive Loss
|
2020
|
|
2019
|
|
Location of Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of defined benefit pension plan net loss
|
$
|
—
|
|
|
$
|
(0.2)
|
|
|
(1)
|
Realized loss on foreign currency translation adjustment
|
—
|
|
|
(1.2)
|
|
|
Other (income) expense
|
|
$
|
—
|
|
|
$
|
(1.4)
|
|
|
Total
|
(1)This accumulated other comprehensive loss component is included in the computation of net periodic pension cost.
17. Income Taxes
The Company, as a partnership, is generally not liable for federal and state income taxes on the earnings of Calumet Specialty Products Partners, L.P. and its wholly-owned subsidiaries. However, the Company conducts certain activities through immaterial, wholly-owned subsidiaries that are corporations, which in certain circumstances are subject to federal, state and local income taxes. Additionally, the Company is subject to franchise taxes in certain states. Income taxes on the earnings of the Company, with the exception of the above-mentioned taxes, are the responsibility of its partners, with earnings of the Company included in partners’ earnings.
For the years ended December 31, 2020 and 2019, the Company recognized income tax expense of $1.1 million and $0.5 million, respectively.
As a result of the Company’s analysis, management has determined that the Company does not have any material uncertain tax positions.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
18. Earnings per Unit
The following table sets forth the computation of basic and diluted earnings per limited partner unit (in millions, except unit and per unit data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
Numerator for basic and diluted earnings per limited partner unit:
|
|
|
|
|
|
Net loss
|
$
|
(149.0)
|
|
|
$
|
(43.6)
|
|
|
|
Less:
|
|
|
|
|
|
General partner’s interest in net loss
|
(3.0)
|
|
|
(0.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to limited partners
|
$
|
(146.0)
|
|
|
$
|
(42.7)
|
|
|
|
Denominator for basic and diluted earnings per limited partner unit:
|
|
|
|
|
|
Weighted average limited partner units outstanding (1)
|
78,369,091
|
|
|
78,212,136
|
|
|
|
|
|
|
|
|
|
Limited partners’ interest basic and diluted net loss per unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners’ interest
|
$
|
(1.86)
|
|
|
$
|
(0.55)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Total diluted weighted average limited partner units outstanding includes a de-minimus amount of potentially dilutive phantom units which would have been anti-dilutive for the year ended December 31, 2020 and 0.1 million potentially dilutive phantom units which would have been anti-dilutive for the year ended December 31, 2019.
19. Transactions with Related Parties
During the years ended December 31, 2020 and 2019, the Company had product sales to related parties, excluding the transactions discussed below, of $16.4 million and $40.2 million, respectively. Trade accounts and other receivables from related parties at December 31, 2020 and 2019 were $0.9 million and $1.9 million, respectively. The Company also had purchases from related parties, excluding the transactions discussed below, during the years ended December 31, 2020 and 2019 of $16.3 million and $14.2 million, respectively. Accounts payable to related parties, excluding accounts payable related to the transactions discussed below, were $1.6 million and $3.1 million, at December 31, 2020 and 2019, respectively.
The general partner employs all of the Company’s employees and the Company reimburses the general partner for certain of its expenses.
During the year ended December 31, 2019, the Company entered into a Master Reimbursement Agreement with The Heritage Group, whereby The Heritage Group may incur or pay certain fees, expenses or obligations on behalf of the Company, and the Company shall reimburse The Heritage Group for such incurrence or payment in either cash or common units of the Company, subject to a limit of 4.0 million units valued at $3.60 per unit. As of December 31, 2019, the Company accrued approximately $3.8 million for expenses incurred by The Heritage Group and its affiliated entities on behalf of the Company in accounts payable in the consolidated balance sheets. Effective December 31, 2019, The Heritage Group elected cash reimbursement, with no further payment obligations in regard to the Master Reimbursement Agreement. Consistent with The Heritage Group’s election, this triggered the obligation to be settled based upon the terms of the agreement in January 2020.
20. Segments and Related Information
Segment Reporting
The Company determines its reportable segments based on how the business is managed internally for the products sold to customers, including how results are reviewed and resources are allocated by the chief operating decision makers (“CODM”).
The Company’s operations are managed by the CODM using the following reportable segments:
•Specialty Products. The specialty products segment produces a variety of lubricating oils, solvents, waxes, synthetic lubricants and other products which are sold to customers who purchase these products primarily as raw material components for basic automotive, industrial and consumer goods. Specialty products also include synthetic lubricants used in manufacturing, mining and automotive applications.
•Fuel Products. The fuel products segment produces primarily gasoline, diesel, jet fuel and asphalt which are primarily sold to customers located in the PADD 3 and PADD 4 areas within the U.S.
•Corporate. The corporate segment primarily consists of general and administrative expenses not allocated to the specialty products or fuel products segments.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the first quarter of 2020, the CODM changed the definition and calculation of Adjusted EBITDA, which is used by
the Company for evaluating performance, allocating resources and managing the business. The revised definition and
calculation of Adjusted EBITDA now includes LCM inventory adjustments and LIFO adjustments, (see items (g) and (h)
below,) which were previously excluded. This revised definition and calculation better reflects the performance of the
Company’s business segments including cash flows. Adjusted EBITDA has been revised for all periods presented to
consistently reflect this change.
The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies as disclosed in Note 2 - “Summary of Significant Accounting Policies,” except that the disaggregated financial results for the reporting segments have been prepared using a management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for the purposes of assisting internal operating decisions. The Company accounts for inter-segment sales and transfers at cost plus a specified mark-up. The Company will periodically refine its expense allocation methodology for its segment reporting as more refined information becomes available and the industry or market changes. The Company evaluates performance based upon Adjusted EBITDA (a non-GAAP financial measure). The Company defines Adjusted EBITDA for any period as EBITDA adjusted for (a) impairment; (b) unrealized gains and losses from mark-to-market accounting for hedging activities; (c) realized gains and losses under derivative instruments excluded from the determination of net income (loss); (d) non-cash equity-based compensation expense and other non-cash items (excluding items such as accruals of cash expenses in a future period or amortization of a prepaid cash expense) that were deducted in computing net income (loss); (e) debt refinancing fees, premiums and penalties; (f) any net gain or loss realized in connection with an asset sale that was deducted in computing net income (loss), (g) LCM inventory adjustments; (h) the impact of liquidation of inventory layers calculated using the LIFO method; and (i) all extraordinary, unusual or non-recurring items of gain or loss, or revenue or expense.
The Company manages its assets on a total company basis, not by segment. Therefore, management does not review any asset information by segment and, accordingly, the Company does not report asset information by segment.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reportable segment information is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
Specialty
Products
|
|
Fuel
Products (1)
|
|
Corporate
|
|
|
|
Eliminations
|
|
Consolidated
Total
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
External customers
|
$
|
1,124.3
|
|
|
$
|
1,143.9
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
$
|
2,268.2
|
|
Inter-segment sales
|
57.4
|
|
|
32.2
|
|
|
—
|
|
|
|
|
(89.6)
|
|
|
—
|
|
Total sales
|
$
|
1,181.7
|
|
|
$
|
1,176.1
|
|
|
$
|
—
|
|
|
|
|
$
|
(89.6)
|
|
|
$
|
2,268.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
238.0
|
|
|
$
|
(30.3)
|
|
|
$
|
(66.2)
|
|
|
|
|
$
|
—
|
|
|
$
|
141.5
|
|
Reconciling items to net loss:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
43.7
|
|
|
68.3
|
|
|
7.7
|
|
|
|
|
—
|
|
|
119.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LCM / LIFO loss
|
11.7
|
|
|
16.8
|
|
|
—
|
|
|
|
|
—
|
|
|
28.5
|
|
Loss on impairment and disposal of assets
|
1.5
|
|
|
0.1
|
|
|
5.2
|
|
|
|
|
—
|
|
|
6.8
|
|
Gain on sale of business, net
|
—
|
|
|
(1.0)
|
|
|
—
|
|
|
|
|
—
|
|
|
(1.0)
|
|
Interest (income) expense
|
(0.2)
|
|
|
1.0
|
|
|
125.1
|
|
|
|
|
—
|
|
|
125.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on derivatives
|
(0.6)
|
|
|
(2.2)
|
|
|
—
|
|
|
|
|
—
|
|
|
(2.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-recurring expenses
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
Equity based compensation and other items
|
|
|
|
|
|
|
|
|
|
|
9.9
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
1.1
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
$
|
(149.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
Specialty
Products
|
|
Fuel
Products
|
|
Corporate
|
|
|
|
Eliminations
|
|
Consolidated
Total
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
External customers
|
$
|
1,354.1
|
|
|
$
|
2,098.5
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
$
|
3,452.6
|
|
Inter-segment sales
|
93.2
|
|
|
47.7
|
|
|
—
|
|
|
|
|
(140.9)
|
|
|
—
|
|
Total sales
|
$
|
1,447.3
|
|
|
$
|
2,146.2
|
|
|
$
|
—
|
|
|
|
|
$
|
(140.9)
|
|
|
$
|
3,452.6
|
|
Income from unconsolidated affiliates
|
$
|
3.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
$
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
207.9
|
|
|
$
|
152.5
|
|
|
$
|
(97.6)
|
|
|
|
|
$
|
—
|
|
|
$
|
262.8
|
|
Reconciling items to net loss:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
47.1
|
|
|
74.7
|
|
|
7.6
|
|
|
|
|
—
|
|
|
129.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LCM / LIFO gain
|
(12.3)
|
|
|
(29.5)
|
|
|
—
|
|
|
|
|
—
|
|
|
(41.8)
|
|
Loss on impairment and disposal of assets
|
—
|
|
|
11.6
|
|
|
25.4
|
|
|
|
|
|
|
37.0
|
|
Loss on sale of business, net
|
—
|
|
|
8.7
|
|
|
—
|
|
|
|
|
—
|
|
|
8.7
|
|
Interest expense
|
—
|
|
|
16.3
|
|
|
118.3
|
|
|
|
|
—
|
|
|
134.6
|
|
Debt extinguishment costs
|
—
|
|
|
—
|
|
|
2.2
|
|
|
|
|
—
|
|
|
2.2
|
|
Unrealized loss on derivatives
|
1.0
|
|
|
25.1
|
|
|
—
|
|
|
|
|
—
|
|
|
26.1
|
|
Gain on sale of unconsolidated affiliate
|
(1.2)
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
(1.2)
|
|
Other non-recurring expenses
|
|
|
|
|
|
|
|
|
|
|
3.5
|
|
Equity-based compensation and other items
|
|
|
|
|
|
|
|
|
|
|
7.4
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
$
|
(43.6)
|
|
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(1)Adjusted EBITDA for the Fuel Products segment for the year ended December 31, 2019 included a $6.5 million gain recorded in cost of sales in the consolidated statements of operations for proceeds received under the Company’s business interruption insurance policy. The Company incurred business losses due to increased costs arising from a 2012 pipeline rupture in northwest Louisiana. As a result, the Company filed a contingent business interruption claim. Specifically, the losses included a loss of throughput at the Shreveport refinery and additional crude transportation expenses.
Geographic Information
International sales accounted for less than 10% of consolidated sales in each of the years ended December 31, 2020 and 2019, respectively. Substantially all of the Company’s long-lived assets are domestically located.
Product Information
The Company offers specialty products primarily in categories consisting of lubricating oils, solvents, waxes, packaged and synthetic specialty products and other. Fuel products categories primarily consist of gasoline, diesel, jet fuel, asphalt, heavy fuel oils and other. The following table sets forth the major product category sales for each segment (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
|
Specialty products:
|
|
|
|
|
|
|
|
|
|
|
|
Lubricating oils
|
$
|
473.4
|
|
|
20.9
|
%
|
|
$
|
593.1
|
|
|
17.2
|
%
|
|
|
|
|
Solvents
|
236.2
|
|
|
10.4
|
%
|
|
325.9
|
|
|
9.4
|
%
|
|
|
|
|
Waxes
|
129.1
|
|
|
5.7
|
%
|
|
119.3
|
|
|
3.4
|
%
|
|
|
|
|
Packaged and synthetic specialty products
|
234.2
|
|
|
10.3
|
%
|
|
230.8
|
|
|
6.7
|
%
|
|
|
|
|
Other
|
51.4
|
|
|
2.3
|
%
|
|
85.0
|
|
|
2.5
|
%
|
|
|
|
|
Total
|
1,124.3
|
|
|
49.6
|
%
|
|
1,354.1
|
|
|
39.2
|
%
|
|
|
|
|
Fuel products:
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline
|
379.8
|
|
|
16.7
|
%
|
|
679.6
|
|
|
19.7
|
%
|
|
|
|
|
Diesel
|
475.8
|
|
|
21.0
|
%
|
|
859.1
|
|
|
24.9
|
%
|
|
|
|
|
Jet fuel
|
70.2
|
|
|
3.1
|
%
|
|
134.6
|
|
|
3.9
|
%
|
|
|
|
|
Asphalt, heavy fuel oils and other
|
218.1
|
|
|
9.6
|
%
|
|
425.2
|
|
|
12.3
|
%
|
|
|
|
|
Total
|
1,143.9
|
|
|
50.4
|
%
|
|
2,098.5
|
|
|
60.8
|
%
|
|
|
|
|
Consolidated sales
|
$
|
2,268.2
|
|
|
100.0
|
%
|
|
$
|
3,452.6
|
|
|
100.0
|
%
|
|
|
|
|
Major Customers
During the years ended December 31, 2020 and 2019, the Company had no customer that represented 10% or greater of consolidated sales.
Major Suppliers
During the years ended December 31, 2020 and 2019, the Company had two suppliers that supplied approximately 56.8% and 62.3%, respectively, of its crude oil supply.
21. Subsequent Events
As of March 1, 2021, the fair value of the Company’s derivative liabilities have increased by approximately $7.1 million subsequent to December 31, 2020.
On February 12, 2021, the Company executed a sale leaseback transaction of its fuels terminal assets at its Shreveport refinery. The Company received gross proceeds of $70 million from the sale, with the leaseback having a term of 7 years. The Lease Agreement provides that, subject to certain conditions, Calumet Shreveport may terminate the lease and repurchase the leased assets after a term of six years for consideration of approximately $23.1 million. In connection with the transaction, the Company also executed various amendments to the Shreveport Supply and Offtake Agreement, including the Fourth Amendment to Supply and Offtake Agreement and Amendment to Storage Facilities Agreements. Also in connection with the transaction, the Company executed the Seventh Supplemental Indenture to the 2022 Notes and the Third Supplemental Indenture to the 2023 Notes, making conforming changes to bring those indentures’ sale leaseback language in line with that of the 2024 Secured Notes and 2025 Notes.
CALUMET SPECIALTY PRODUCTS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On February 16, 2021, the Company announced plans to re-segment its financial reporting to allow each business strategy and performance to be presented transparently to investors. Starting in the first quarter of 2021, the Company’s reportable segments will be composed of: (i) Montana / Renewables, (ii) Specialty Products & Solutions, (iii) Performance Brands (previously Finished Lubes and Chemicals), and (iv) Corporate.